Tax 1 Cases Pages 1-2

TAXATION LAW 1 CASES (PAGE 1-PAGE 2)
1. COMMISIONER VS ALGUE
G.R. No. L-28896 February 17, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the
other hand, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good,
may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18, 1965,
Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day
in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced
his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April
7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was
only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with
the Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule
the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted
doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it
filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was
issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara
gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and
was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it
was filed, the reglementary period which started on the date the assessment was received, viz., January 14,
1965. The period started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not
an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently.
Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for
actual services rendered. The payment was in the form of promotional fees. These were collected by the
Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting this
assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the persons
among whom it was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell,
and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it.14 Ultimately, after its incorporation largely through the promotion of the said persons, this
new corporation purchased the PSEDC properties.15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns
and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved.18
The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made,
whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner
suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum
but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was
a family corporation where strict business procedures were not applied and immediate issuance of receipts
was not required. Even so, at the end of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly,
everything seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the
respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses
paid or incurred in carrying on any trade or business may be included a reasonable allowance
for salaries or other compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are reasonable and are, in
fact, payments purely for service. This test and deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service. This test
and its practical application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services,
is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a
dividend on stock. This is likely to occur in the case of a corporation having few stockholders,
Practically all of whom draw salaries. If in such a case the salaries are in excess of those
ordinarily paid for similar services, and the excessive payment correspond or bear a close
relationship to the stockholdings of the officers of employees, it would seem likely that the
salaries are not paid wholly for services rendered, but the excessive payments are a distribution
of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed
for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part
of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in
the running of the government. The government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and material values.
This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law
has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the
private respondent was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
2. OSMENA VS ORBOS
G.R. No. 99886 March 31, 1993
JOHN H. OSMEA, petitioner,

vs.
OSCAR ORBOS, in his capacity as Executive Secretary; JESUS ESTANISLAO, in his capacity as
Secretary of Finance; WENCESLAO DELA PAZ, in his capacity as Head of the Office of Energy Affairs;
REX V. TANTIONGCO, and the ENERGY REGULATORY BOARD, respondents.
Nachura & Sarmiento for petitioner.
The Solicitor General for public respondents.
NARVASA, C.J.:
The petitioner seeks the corrective,1 prohibitive and coercive remedies provided by Rule 65 of the Rules of
Court,2upon the following posited grounds, viz.:3
1) the invalidity of the "TRUST ACCOUNT" in the books of account of the Ministry of Energy (now, the Office of
Energy Affairs), created pursuant to 8, paragraph 1, of P.D. No. 1956, as amended, "said creation of a trust
fund being contrary to Section 29 (3), Article VI of the . . Constitution;4
2) the unconstitutionality of 8, paragraph 1 (c) of P.D. No. 1956, as amended by Executive Order No. 137, for
"being an undue and invalid delegation of legislative power . . to the Energy Regulatory Board;"5
3) the illegality of the reimbursements to oil companies, paid out of the Oil Price Stabilization Fund,6 because it
contravenes 8, paragraph 2 (2) of
P. D. 1956, as amended; and
4) the consequent nullity of the Order dated December 10, 1990 and the necessity of a rollback of the pump
prices and petroleum products to the levels prevailing prior to the said Order.
It will be recalled that on October 10, 1984, President Ferdinand Marcos issued P.D. 1956 creating a Special
Account in the General Fund, designated as the Oil Price Stabilization Fund (OPSF). The OPSF was designed
to reimburse oil companies for cost increases in crude oil and imported petroleum products resulting from
exchange rate adjustments and from increases in the world market prices of crude oil.
Subsequently, the OPSF was reclassified into a "trust liability account," in virtue of E.O. 1024, 7 and ordered
released from the National Treasury to the Ministry of Energy. The same Executive Order also authorized the
investment of the fund in government securities, with the earnings from such placements accruing to the fund.
President Corazon C. Aquino, amended P.D. 1956. She promulgated Executive Order No. 137 on February
27, 1987, expanding the grounds for reimbursement to oil companies for possible cost underrecovery incurred
as a result of the reduction of domestic prices of petroleum products, the amount of the underrecovery being
left for determination by the Ministry of Finance.
Now, the petition alleges that the status of the OPSF as of March 31, 1991 showed a "Terminal Fund Balance
deficit" of some P12.877 billion;8 that to abate the worsening deficit, "the Energy Regulatory Board . . issued an
Order on December 10, 1990, approving the increase in pump prices of petroleum products," and at the rate of
recoupment, the OPSF deficit should have been fully covered in a span of six (6) months, but this
notwithstanding, the respondents Oscar Orbos, in his capacity as Executive Secretary; Jesus Estanislao, in
his capacity as Secretary of Finance; Wenceslao de la Paz, in his capacity as Head of the Office of Energy
Affairs; Chairman Rex V. Tantiongco and the Energy Regulatory Board "are poised to accept, process and
pay claims not authorized under P.D. 1956."9
The petition further avers that the creation of the trust fund violates
29(3), Article VI of the Constitution, reading as follows:
(3) All money collected on any tax levied for a special purpose shall be treated as a special fund
and paid out for such purposes only. If the purpose for which a special fund was created has
been fulfilled or abandoned, the balance, if any, shall be transferred to the general funds of the
Government.
The petitioner argues that "the monies collected pursuant to . . P.D. 1956, as amended, must be treated as a
'SPECIAL FUND,' not as a 'trust account' or a 'trust fund,' and that "if a special tax is collected for a specific
purpose, the revenue generated therefrom shall 'be treated as a special fund' to be used only for the purpose
indicated, and not channeled to another government objective." 10 Petitioner further points out that since "a
'special fund' consists of monies collected through the taxing power of a State, such amounts belong to the
State, although the use thereof is limited to the special purpose/objective for which it was created." 11
He also contends that the "delegation of legislative authority" to the ERB violates 28 (2). Article VI of the
Constitution, viz.:
(2) The Congress may, by law, authorize the President to fix, within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the Government;
and, inasmuch as the delegation relates to the exercise of the power of taxation, "the limits, limitations
and restrictions must be quantitative, that is, the law must not only specify how to tax, who (shall) be
taxed (and) what the tax is for, but also impose a specific limit on how much to tax." 12
The petitioner does not suggest that a "trust account" is illegal per se, but maintains that the monies collected,
which form part of the OPSF, should be maintained in a special account of the general fund for the reason that
the Constitution so provides, and because they are, supposedly, taxes levied for a special purpose. He
assumes that the Fund is formed from a tax undoubtedly because a portion thereof is taken from collections
of ad valorem taxes and the increases thereon.
It thus appears that the challenge posed by the petitioner is premised primarily on the view that the powers
granted to the ERB under P.D. 1956, as amended, partake of the nature of the taxation power of the State.
The Solicitor General observes that the "argument rests on the assumption that the OPSF is a form of revenue
measure drawing from a special tax to be expended for a special purpose." 13 The petitioner's perceptions are,
in the Court's view, not quite correct.
To address this critical misgiving in the position of the petitioner on these issues, the Court recalls its holding
in Valmonte v. Energy Regulatory Board, et al. 14
The foregoing arguments suggest the presence of misconceptions about the nature and
functions of the OPSF. The OPSF is a "Trust Account" which was established "for the purpose
of minimizing the frequent price changes brought about by exchange rate adjustment and/or
changes in world market prices of crude oil and imported petroleum products." 15 Under P.D.
No. 1956, as amended by Executive Order No. 137 dated 27 February 1987, this Trust Account
may be funded from any of the following sources:
a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
consultation with the Board of Energy;
b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy:
c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the
Board of Energy requiring payment of persons or companies engaged in the
business of importing, manufacturing and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the
Board of Energy.
xxx xxx xxx
The fact that the world market prices of oil, measured by the spot market in Rotterdam, vary
from day to day is of judicial notice. Freight rates for hauling crude oil and petroleum products
from sources of supply to the Philippines may also vary from time to time. The exchange rate of
the peso vis-a-vis the U.S. dollar and other convertible foreign currencies also changes from
day to day. These fluctuations in world market prices and in tanker rates and foreign exchange
rates would in a completely free market translate into corresponding adjustments in domestic
prices of oil and petroleum products with sympathetic frequency. But domestic prices which vary
from day to day or even only from week to week would result in a chaotic market with
unpredictable effects upon the country's economy in general. The OPSF was established
precisely to protect local consumers from the adverse consequences that such frequent oil price
adjustments may have upon the economy. Thus, the OPSF serves as a pocket, as it were, into
which a portion of the purchase price of oil and petroleum products paid by consumers as well
as some tax revenues are inputted and from which amounts are drawn from time to time to
reimburse oil companies, when appropriate situations arise, for increases in, as well as
underrecovery of, costs of crude importation. The OPSF is thus a buffer mechanism through
which the domestic consumer prices of oil and petroleum products are stabilized, instead of
fluctuating every so often, and oil companies are allowed to recover those portions of their costs
which they would not otherwise recover given the level of domestic prices existing at any given
time. To the extent that some tax revenues are also put into it, the OPSF is in effect a device
through which the domestic prices of petroleum products are subsidized in part. It appears to
the Court that the establishment and maintenance of the OPSF is well within that pervasive and
non-waivable power and responsibility of the government to secure the physical and economic
survival and well-being of the community, that comprehensive sovereign authority we designate
as the police power of the State. The stabilization, and subsidy of domestic prices of petroleum
products and fuel oil clearly critical in importance considering, among other things, the
continuing high level of dependence of the country on imported crude oil are appropriately
regarded as public purposes.
Also of relevance is this Court's ruling in relation to the sugar stabilization fund the nature of which is not far
different from the OPSF. In Gaston v. Republic Planters Bank, 16 this Court upheld the legality of the sugar
stabilization fees and explained their nature and character, viz.:
The stabilization fees collected are in the nature of a tax, which is within the power of the State
to impose for the promotion of the sugar industry (Lutz v. Araneta, 98 Phil. 148). . . . The tax
collected is not in a pure exercise of the taxing power. It is levied with a regulatory purpose, to
provide a means for the stabilization of the sugar industry. The levy is primarily in the exercise
of the police power of the State (Lutz v. Araneta, supra).
xxx xxx xxx
The stabilization fees in question are levied by the State upon sugar millers, planters and
producers for a special purpose that of "financing the growth and development of the sugar
industry and all its components, stabilization of the domestic market including the foreign
market." The fact that the State has taken possession of moneys pursuant to law is sufficient to
constitute them state funds, even though they are held for a special purpose (Lawrence v.
American Surety Co. 263 Mich. 586, 249 ALR 535, cited in 42 Am Jur Sec. 2, p. 718). Having
been levied for a special purpose, the revenues collected are to be treated as a special fund, to
be, in the language of the statute, "administered in trust" for the purpose intended. Once the
purpose has been fulfilled or abandoned, the balance if any, is to be transferred to the general
funds of the Government. That is the essence of the trust intended (SEE 1987 Constitution,
Article VI, Sec. 29(3), lifted from the 1935 Constitution, Article VI, Sec. 23(1). 17
The character of the Stabilization Fund as a special kind of fund is emphasized by the fact that
the funds are deposited in the Philippine National Bank and not in the Philippine Treasury,
moneys from which may be paid out only in pursuance of an appropriation made by law (1987)
Constitution, Article VI, Sec. 29 (3), lifted from the 1935 Constitution, Article VI, Sec. 23(1).
(Emphasis supplied).
Hence, it seems clear that while the funds collected may be referred to as taxes, they are exacted in the
exercise of the police power of the State. Moreover, that the OPSF is a special fund is plain from the special
treatment given it by E.O. 137. It is segregated from the general fund; and while it is placed in what the law
refers to as a "trust liability account," the fund nonetheless remains subject to the scrutiny and review of the
COA. The Court is satisfied that these measures comply with the constitutional description of a "special fund."
Indeed, the practice is not without precedent.
With regard to the alleged undue delegation of legislative power, the Court finds that the provision conferring
the authority upon the ERB to impose additional amounts on petroleum products provides a sufficient standard
by which the authority must be exercised. In addition to the general policy of the law to protect the local
consumer by stabilizing and subsidizing domestic pump rates, 8(c) of P.D. 1956 18 expressly authorizes the
ERB to impose additional amounts to augment the resources of the Fund.
What petitioner would wish is the fixing of some definite, quantitative restriction, or "a specific limit on how
much to tax." 19 The Court is cited to this requirement by the petitioner on the premise that what is involved
here is the power of taxation; but as already discussed, this is not the case. What is here involved is not so
much the power of taxation as police power. Although the provision authorizing the ERB to impose additional
amounts could be construed to refer to the power of taxation, it cannot be overlooked that the overriding
consideration is to enable the delegate to act with expediency in carrying out the objectives of the law which
are embraced by the police power of the State.
The interplay and constant fluctuation of the various factors involved in the determination of the price of oil and
petroleum products, and the frequently shifting need to either augment or exhaust the Fund, do not
conveniently permit the setting of fixed or rigid parameters in the law as proposed by the petitioner. To do so
would render the ERB unable to respond effectively so as to mitigate or avoid the undesirable consequences
of such fluidity. As such, the standard as it is expressed, suffices to guide the delegate in the exercise of the
delegated power, taking account of the circumstances under which it is to be exercised.
For a valid delegation of power, it is essential that the law delegating the power must be (1) complete in itself,
that is it must set forth the policy to be executed by the delegate and (2) it must fix a standard limits of which
are sufficiently determinate or determinable to which the delegate must conform. 20
. . . As pointed out in Edu v. Ericta: "To avoid the taint of unlawful delegation, there must be a
standard, which implies at the very least that the legislature itself determines matters of principle
and lays down fundamental policy. Otherwise, the charge of complete abdication may be hard
to repel. A standard thus defines legislative policy, marks its limits, maps out its boundaries and
specifies the public agency to apply it. It indicates the circumstances under which the legislative
command is to be effected. It is the criterion by which the legislative purpose may be carried
out. Thereafter, the executive or administrative office designated may in pursuance of the above
guidelines promulgate supplemental rules and regulations. The standard may either be express
or implied. If the former, the non-delegation objection is easily met. The standard though does
not have to be spelled out specifically. It could be implied from the policy and purpose of the act
considered as a whole. 21
It would seem that from the above-quoted ruling, the petition for prohibition should fail.
The standard, as the Court has already stated, may even be implied. In that light, there can be no ground upon
which to sustain the petition, inasmuch as the challenged law sets forth a determinable standard which guides
the exercise of the power granted to the ERB. By the same token, the proper exercise of the delegated power
may be tested with ease. It seems obvious that what the law intended was to permit the additional imposts for
as long as there exists a need to protect the general public and the petroleum industry from the adverse
consequences of pump rate fluctuations. "Where the standards set up for the guidance of an administrative
officer and the action taken are in fact recorded in the orders of such officer, so that Congress, the courts and
the public are assured that the orders in the judgment of such officer conform to the legislative standard, there
is no failure in the performance of the legislative functions." 22
This Court thus finds no serious impediment to sustaining the validity of the legislation; the express purpose for
which the imposts are permitted and the general objectives and purposes of the fund are readily discernible,
and they constitute a sufficient standard upon which the delegation of power may be justified.
In relation to the third question respecting the illegality of the reimbursements to oil companies, paid out of
the Oil Price Stabilization Fund, because allegedly in contravention of 8, paragraph 2 (2) of P.D. 1956,
amended 23 the Court finds for the petitioner.
The petition assails the payment of certain items or accounts in favor of the petroleum companies (i.e.,
inventory losses, financing charges, fuel oil sales to the National Power Corporation, etc.) because not
authorized by law. Petitioner contends that "these claims are not embraced in the enumeration in 8 of P.D.
1956 . . since none of them was incurred 'as a result of the reduction of domestic prices of petroleum
products,'" 24 and since these items are reimbursements for which the OPSF should not have responded, the
amount of the P12.877 billion deficit "should be reduced by P5,277.2 million." 25 It is argued "that under the
principle of ejusdem generis . . . the term 'other factors' (as used in 8 of P.D. 1956) . . can only include such
'other factors' which necessarily result in the reduction of domestic prices of petroleum products." 26
The Solicitor General, for his part, contends that "(t)o place said (term) within the restrictive confines of the rule
of ejusdem generis would reduce (E.O. 137) to a meaningless provision."
This Court, in Caltex Philippines, Inc. v. The Honorable Commissioner on Audit, et al., 27 passed upon the
application of ejusdem generis to paragraph 2 of 8 of P.D. 1956, viz.:
The rule of ejusdem generis states that "[w]here words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to be
construed in their widest extent, but are held to be as applying only to persons or things of the
same kind or class as those specifically mentioned." 28 A reading of subparagraphs (i) and (ii)
easily discloses that they do not have a common characteristic. The first relates to price
reduction as directed by the Board of Energy while the second refers to reduction in internal ad
valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these
subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows the
cost underrecovery only if such were incurred as a result of the reduction of domestic prices of
petroleum products.
The Court thus holds, that the reimbursement of financing charges is not authorized by paragraph 2 of 8 of
P.D. 1956, for the reason that they were not incurred as a result of the reduction of domestic prices of
petroleum products. Under the same provision, however, the payment of inventory losses is upheld as valid,
being clearly a result of domestic price reduction, when oil companies incur a cost underrecovery for yet unsold
stocks of oil in inventory acquired at a higher price.
Reimbursement for cost underrecovery from the sales of oil to the National Power Corporation is equally
permissible, not as coming within the provisions of P.D. 1956, but in virtue of other laws and regulations as
held in Caltex 29 and which have been pointed to by the Solicitor General. At any rate, doubts about the
propriety of such reimbursements have been dispelled by the enactment of R.A. 6952, establishing the
Petroleum Price Standby Fund, 2 of which specifically authorizes the reimbursement of "cost underrecovery
incurred as a result of fuel oil sales to the National Power Corporation."
Anent the overpayment refunds mentioned by the petitioner, no substantive discussion has been presented to
show how this is prohibited by P.D. 1956. Nor has the Solicitor General taken any effort to defend the propriety
of this refund. In fine, neither of the parties, beyond the mere mention of overpayment refunds, has at all
bothered to discuss the arguments for or against the legality of the so-called overpayment refunds. To be sure,
the absence of any argument for or against the validity of the refund cannot result in its disallowance by the
Court. Unless the impropriety or illegality of the overpayment refund has been clearly and specifically shown,
there can be no basis upon which to nullify the same.
Finally, the Court finds no necessity to rule on the remaining issue, the same having been rendered moot and
academic. As of date hereof, the pump rates of gasoline have been reduced to levels below even those prayed
for in the petition.
WHEREFORE, the petition is GRANTED insofar as it prays for the nullification of the reimbursement of
financing charges, paid pursuant to E.O. 137, and DISMISSED in all other respects.
SO ORDERED.
3. PAL VS EDU
G.R. No. L- 41383 August 15, 1988
PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in
his capacity as National Treasurer, defendants-appellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

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

notwithstanding, all corporate taxpayers not specifically exempt under Sections
24 (c) (1) of this Code shall pay the rates provided in this section. All
corporations, agencies, or instrumentalities owned or controlled by the
government, including the Government Service Insurance System and the Social
Security System but excluding educational institutions, shall pay such rate of tax
upon their taxable net income as are imposed by this section upon associations
or corporations engaged in a similar business or industry. "
An examination of Section 24 of the Tax Code as amended shows clearly that the law intended
all corporate taxpayers to pay income tax as provided by the statute. There can be no doubt as
to the power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the
1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expressly
provide that no franchise shall be granted to any individual, firm, or corporation except under the
condition that it shall be subject to amendment, alteration, or repeal by the legislature when the
public interest so requires. There is no question as to the public interest involved. The country
needs increased revenues. The repealing clause is clear and unambiguous. There is a listing of
entities entitled to tax exemption. The petitioner is not covered by the provision. Considering the
foregoing, the Court Resolved to DENY the petition for lack of merit. The decision of the
respondent court is affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the
tax exemption in the franchise of PAL was repealed during the period. However, an amended franchise was
given to PAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:
In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the lifetime of this franchise whichever of subsections (a) and (b)
hereunder will result in a lower taxes.)
(a) The basic corporate income tax based on the grantee's annual net taxable
income computed in accordance with the provisions of the Internal Revenue
Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues. derived by the
grantees from all specific. without distinction as to transport or nontransport
corporations; provided that with respect to international airtransport service, only
the gross passengers, mail, and freight revenues. from its outgoing flights shall
be subject to this law.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other
taxes, duties, royalties, registration, license and other fees and charges of any kind, nature or
description imposed, levied, established, assessed, or collected by any municipal, city,
provincial, or national authority or government, agency, now or in the future, including but not
limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license, acquisition, and transfer of
airtransport equipment, motor vehicles, and all other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier law. PAL is now
exempt from the payment of any tax, fee, or other charge on the registration and licensing of motor vehicles.
Such payments are already included in the basic tax or franchise tax provided in Subsections (a) and (b) of
Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration fees paid in
1971 is DENIED. The Land Transportation Franchising and Regulatory Board (LTFRB) is enjoined functions-
the collecting any tax, fee, or other charge on the registration and licensing of the petitioner's motor vehicles
from April 9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
4. REPUBLIC VS MURCIA
G.R. Nos. L-19824, L-19825 and 19826 July 9, 1966
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
BACOLOD-MURCIA MILLING CO., INC., MA-AO SUGAR CENTRAL CO., INC., and TALISAY-SILAY
MILLING COMPANY, defendants-appellants.
Meer, Meer and Meer, Enrique M. Fernando and Emma Quisumbing-Fernando for defendants-appellants.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio Torres and Solicitor
Ceferino Padua, for plaintiff-appellee.
REGALA, J.:
This is a joint appeal by three sugar centrals, Bacolod Murcia Milling Co., Inc., Ma-ao Sugar Central Co., Inc.,
and Talisay-Silay Milling Co., sister companies under one controlling ownership and management, from a
decision of the Court of First Instance of Manila finding them liable for special assessments under Section 15
of Republic Act No. 632.
Republic Act No. 632 is the charter of the Philippine Sugar Institute, Philsugin for short, a semi-public
corporation created for the following purposes and objectives:
(a) To conduct research work for the sugar industry in all its phases, either agricultural or industrial, for
the purpose of introducing into the sugar industry such practices or processes that will reduce the cost
of production, increase and improve the industrialization of the by-products of sugar cane, and achieve
greater efficiency in the industry;
(b) To improve existing methods of raising sugar cane and of sugar manufacturing;
(c) To insure a permanent, sufficient and balanced production of sugar and its by-products for local
consumption and exportation;
(d) To establish and maintain such balanced relation between production and consumption of sugar
and its by-products, and such marketing conditions therefor, as well insure stabilized prices at a level
sufficient to cover the cost of production plus a reasonable profit;
(e) To promote the effective merchandising of sugar and its by-products in the domestic and foreign
markets so that those engaged in the sugar industry will be placed on a basis of economic security; and
(f) To improve the living and economic conditions of laborers engaged in the sugar industry by the
gradual and effective correction of the inequalities existing in the industry. (Section 2, Rep. Act 632)
To realize and achieve these ends, Sections 15 and 16 of the aforementioned law provide:
Sec. 15. Capitalization. To raise the necessary funds to carry out the provisions of this Act and the
purposes of the corporation, there shall be levied on the annual sugar production a tax of TEN
CENTAVOS [P0.10] per picul of sugar to be collected for a period of five (5) years beginning the crop
year 1951-1952. The amount shall be borne by the sugar cane planters and the sugar centrals in the
proportion of their corresponding milling share, and said levy shall constitute a lien on their sugar
quedans and/or warehouse receipts.
Sec. 16. Special Fund. The proceeds of the foregoing levy shall be set aside to constitute a special
fund to be known as the "Sugar Research and Stabilization Fund," which shall be available exclusively
for the use of the corporation. All the income and receipts derived from the special fund herein created
shall accrue to, and form part of the said fund to be available solely for the use of the corporation.
The specific and general powers of the Philsugin are set forth in Section 8 of the same law, to wit:
Sec. 3. Specific and General Powers. For carrying out the purposes mentioned in the preceding
section, the PHILSUGIN shall have the following powers:
(a) To establish, keep, maintain and operate, or help establish, keep, maintain, and operate one central
experiment station and such number of regional experiment stations in any part of the Philippines as
may be necessary to undertake extensive research in sugar cane culture and manufacture, including
studies as to the feasibility of merchandising sugar cane farms, the control and eradication of pests, the
selected and propagation of high-yielding varieties of sugar cane suited to Philippine climatic
conditions, and such other pertinent studies as will be useful in adjusting the sugar industry to a
position independent of existing trade preference in the American market;
(b) To purchase such machinery, materials, equipment and supplies as may be necessary to prosecute
successfully such researches and experimental work;
(c) To explore and expand the domestic and foreign markets for sugar and its by-products to assure
mutual benefits to consumers and producers, and to promote and maintain a sufficient general
production of sugar and its by-products by an efficient coordination of the component elements of the
sugar industry of the country;
(d) To buy, sell, assign, own, operate, rent or lease, subject to existing laws, machineries, equipment,
materials, merchant vessels, rails, railroad lines, and any other means of transportation, warehouses,
buildings, and any other equipment and material to the production, manufacture, handling,
transportation and warehousing of sugar and its by-products;
(e) To grant loans, on reasonable terms, to planters when it deems such loans advisable;
(f) To enter, make and execute contracts of any kind as may be necessary or incidental to the
attainment of its purposes with any person, firm, or public or private corporation, with the Government
of the Philippines or of the United States, or any state, territory, or persons therefor, or with any foreign
government and, in general, to do everything directly or indirectly necessary or incidental to, or in
furtherance of, the purposes of the corporation;
(g) To do all such other things, transact all such business and perform such functions directly or
indirectly necessary, incidental or conducive to the attainment of the purposes of the corporation; and
(h) Generally, to exercise all the powers of a Corporation under the Corporation Law insofar as they are
not inconsistent with the provisions of this Act.
The facts of this case bearing relevance to the issue under consideration, as recited by the lower court and
accepted by the appellants, are the following:
x x x during the 5 crop years mentioned in the law, namely 1951-1952, 1952-1953, 1953-1954, 1954-
1955 and 1955-1956, defendant Bacolod-Murcia Milling Co., Inc., has paid P267,468.00 but left an
unpaid balance of P216,070.50; defendant Ma-ao Sugar Central Co., Inc., has paid P117,613.44 but
left unpaid balance of P235,800.20; defendant Talisay-Silay Milling Company has paid P251,812.43 but
left unpaid balance of P208,193.74; and defendant Central Azucarera del Danao made a payment of
P49,897.78 but left unpaid balance of P48,059.77. There is no question regarding the correctness of
the amounts paid and the amounts that remain unpaid.
From the evidence presented, on which there is no controversy, it was disclosed that on September 3,
1951, the Philippine Sugar Institute, known as the PHILSUGIN for short, acquired the Insular Sugar
Refinery for a total consideration of P3,070,909.60 payable, in accordance with the deed of sale Exhibit
A, in 3 installments from the process of the sugar tax to be collected, under Republic Act 632. The
evidence further discloses that the operation of the Insular Sugar Refinery for the years, 1954, 1955,
1956 and 1957 was disastrous in the sense that PHILSUGIN incurred tremendous losses as shown by
an examination of the statements of income and expenses marked Exhibits 5, 6, 7 and 8. Through the
testimony of Mr. Cenon Flor Cruz, former acting general manager of PHILSUGIN and at present
technical consultant of said entity, presented by the defendants as witnesses, it has been shown that
the operation of the Insular Sugar Refinery has consumed 70% of the thinking time and effort of the
PHILSUGIN management. x x x .
Contending that the purchase of the Insular Sugar Refinery with money from the Philsugin Fund was not
authorized by Republic Act 632 and that the continued operation of the said refinery was inimical to their
interests, the appellants refused to continue with their contributions to the said fund. They maintained that their
obligation to contribute or pay to the said Fund subsists only to the limit and extent that they are benefited by
such contributions since Republic Act 632 is not a revenue measure but an Act which establishes a "Special
assessments." Adverting to the finding of the lower court that proceeds of the said Fund had been used or
applied to absorb the "tremendous losses" incurred by Philsugin in its "disastrous operation" of the said
refinery, the appellants herein argue that they should not only be released from their obligation to pay the said
assessment but be refunded, besides, of all that they might have previously paid thereunder.
The appellants' thesis is simply to the effect that the "10 centavos per picul of sugar" authorized to be collected
under Sec. 15 of Republic 632 is a special assessment. As such, the proceeds thereof may be devoted only to
the specific purpose for which the assessment was authorized, a special assessment being a levy upon
property predicated on the doctrine that the property against which it is levied derives some special benefit
from the improvement. It is not a tax measure intended to raise revenues for the Government. Consequently,
once it has been determined that no benefit accrues or inures to the property owners paying the assessment,
or that the proceeds from the said assessment are being misapplied to the prejudice of those against whom it
has been levied, then the authority to insist on the payment of the said assessment ceases.
On the other hand, the lower court adjudged the appellants herein liable under the aforementioned law,
Republic Act 632, upon the following considerations:
First, Subsection d) of Section 3 of Republic Act 632 authorizes Philsugin to buy and operate machineries,
equipment, merchant vessels, etc., and any other equipment and material for the production, manufacture,
handling, transportation and warehousing of sugar and its by-products. It was, therefore, authorized to
purchase and operate a sugar refinery.
Secondly, the corporate powers of the Philsugin are vested in and exercised by a board of directors composed
of 5 members, 3 of whom shall be appointed upon recommendation of the National Federation of Sugar Cane
Planters and 2 upon recommendation of the Philippine Sugar Association. (Sec. 4, Rep. Act 632). It has not
been shown that this particular provision was not observed in this case. Therefore, the appellants herein may
not rightly claim that there had been a misapplication of the Philsugin funds when the same was used to
procure the Insular Sugar Refinery because the decision to purchase the said refinery was made by a board in
which the applicants were fully and duly represented, the appellants being members of the Philippine Sugar
Association.
Thirdly, all financial transactions of the Philsugin are audited by the General Auditing Office, which must be
presumed to have passed upon the legality and prudence of the disbursements of the Fund. Additionally, other
offices of the Government review such transactions as reflected in the annual report obliged of the Philsugin to
prepare. Among those offices are the Office of the President of the Philippines, the Administrator of Economic
Coordination and the Presiding Officers of the two chambers of Congress. With all these safeguards against
any imprudent or unauthorized expenditure of Philsugin Funds, the acquisition of the Insular Sugar Refinery
must be upheld in its legality and propriety.
Fourthly, it would be dangerous to sanction the unilateral refusal of the appellants herein to continue with their
contribution to the Fund for that conduct is no different "from the case of an ordinary taxpayer who refuses to
pay his taxes on the ground that the money is being misappropriated by Government officials." This is taking
the law into their own hands.
Against the above ruling of the trial court, the appellants contend:
First. It is fallacious to argue that no mismanagement or abuse of corporate power could have been committed
by Philsugin solely because its charter incorporates so many devices or safeguards to preclude such abuse.
This reasoning of the lower court does not reconcile with that actually happened in this case.
Besides, the appellants contend that the issue on hand is not whether Philsugin abused or not its powers when
it purchased the Insular Sugar Refinery. The issue, rather, is whether Philsugin had any power or authority at
all to acquire the said refinery. The appellants deny that Philsugin is possessed of any such authority because
what it is empowered to purchase is not a "sugar refinery but a central experiment station or perhaps at the
most a sugar central to be used for that purpose." (Sec. 3[a], Rep. Act 632) For this distinction, the appellants
cite the case of Collector vs. Ledesma, G.R. No. L-12158, May 27, 1959, in which this Court ruled that
We are of the opinion that a "sugar central," as that term is used in Section 189, applies to "a large mill
that makes sugar out of the cane brought from a wide surrounding territory," or a sugar mill which
manufactures sugar for a number of plantations. The term "sugar central" could not have been intended
by Congress to refer to all sugar mills or sugar factories as contended by respondent. If respondent's
interpretation is to be followed, even sugar mills run by animal power (trapiche) would be considered
sugar central. We do not think Congress ever intended to place owners of (trapiches) in the same
category as operators of sugar centrals.
That sugar mills are not the same as sugar centrals may also be gleaned from Commonwealth Act No.
470 (Assessment Law). In prescribing the principle governing valuation and assessment of real
property. Section 4 of said Act provides
"Machinery permanently used or in stalled in sugar centrals, mills, or refineries shall be assessed."
This clearly indicates that "Sugar centrals" are not the same as "sugar mills" or "sugar refineries."
Second. The appellants' refusal to continue paying the assessment under Republic Act 632 may not rightly be
equated with a taxpayer's refusal to pay his ordinary taxes precisely because there is a substantial distinction
between a "special assessment" and an ordinary tax. The purpose of the former is to finance the improvement
of particular properties, with the benefits of the improvement accruing or inuring to the owners thereof who,
after all, pay the assessment. The purpose of an ordinary tax, on the other hand, is to provide the Government
with revenues needed for the financing of state affairs. Thus, while the refusal of a citizen to pay his ordinary
taxes may not indeed be sanctioned because it would impair government functions, the same would not hold
true in the case of a refusal to comply with a special assessment.
Third. Upon a host of decisions of the United States Supreme Court, the imposition or collection of a special
assessment upon property owners who receive no benefit from such assessment amounts to a denial of due
process. Thus, in the case of Norwood vs. Baer, 172 US 269, the ruling was laid down that
As already indicated, the principle underlying special assessments to meet the cost of public
improvements is that the property upon which they are imposed is peculiarly benefited, and therefore,
the panels do not, in fact, pay anything in excess of what they received by reason of such improvement.
unless a corresponding benefit is realized by the property owner, the exaction of a special assessment would
be "manifestly unfair" (Seattle vs. Kelleher 195 U.S. 351) and "palpably arbitrary or plain abuse" (Gast Realty
Investment Co. vs. Schneider Granite Co., 240 U.S. 57). In other words, the assessment is violative of the due
process guarantee of the constitution (Memphis vs. Charleston Ry v. Pace, 282 U.S. 241).
We find for the appellee.
The nature of a "special assessment" similar to the case at bar has already been discussed and explained by
this Court in the case of Lutz vs. Araneta, 98 Phil. 148. For in this Lutz case, Commonwealth Act 567,
otherwise known as the Sugar Adjustment Act, levies on owners or persons in control of lands devoted to the
cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration collected and
the amount representing 12 per centum of the assessed value of such land. (Sec. 3).1wph1.t
Under Section 6 of the said law, Commonwealth Act 567, all collections made thereunder "shall accrue to a
special fund in the Philippine Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and
shall be paid out only for any or all of the following purposes or to attain any or all of the following objectives,
as may be provided by law." It then proceeds to enumerate the said purposes, among which are "to place the
sugar industry in a position to maintain itself; ... to readjust the benefits derived from the sugar industry ... so
that all might continue profitably to engage therein; to limit the production of sugar to areas more economically
suited to the production thereof; and to afford laborers employed in the industry a living wage and to improve
their living and working conditions.
The plaintiff in the above case, Walter Lutz, contended that the aforementioned tax or special assessment was
unconstitutional because it was being "levied for the aid and support of the sugar industry exclusively," and
therefore, not for a public purpose. In rejecting the theory advanced by the said plaintiff, this Court said:
The basic defect in the plaintiff's position in his assumption that the tax provided for in Commonwealth
Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly Section 6, will
show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and
stabilization of the threatened sugar industry. In other words, the act is primarily an exercise of the
police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of our
nation, sugar occupying a leading position among its export products; that it gives employment to
thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one, of the
important sources to foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore
redounds greatly to the general welfare. Hence, it was competent for the Legislature to find that the
general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of
its police power, the law-making body could provide that the distribution of benefits therefrom be
readjusted among its components, to enable it to resist the added strain of the increase in taxes that it
had to sustain (Sligh vs. Kirkwood, 237 U.S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla.
1311, 128 So. 853; Marcy Inc. vs. Mayo, 103 Fla. 552, 139 So. 121)
As stated in Johnson vs. State ex rel. Marcy, with reference to the citrus industry in Florida
"The protection of a large industry constituting one of the great source of the state's wealth and
therefore directly or indirectly affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be within the police power of the
sovereign." (128 So. 857).
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 full 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. (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U.S. 412, 81 L.
Ed. 1193; U.S. vs. Butler, 297 U.S. 1, 80 L. Ed. 477; M'cullock vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).
On the authority of the above case, then, We hold that the special assessment at bar may be considered as
similarly as the above, that is, that the levy for the Philsugin Fund is not so much an exercise of the power of
taxation, nor the imposition of a special assessment, but, the exercise of the police power for the general
welfare of the entire country. It is, therefore, an exercise of a sovereign power which no private citizen may
lawfully resist.
Besides, under Section 2(a) of the charter, the Philsugin is authorized "to conduct research work for the sugar
industry in all its phases, either agricultural or industrial, for the purpose of introducing into the sugar industry
such practices or processes that will reduce the cost of production, ..., and achieve greater efficiency in the
industry." This provision, first of all, more than justifies the acquisition of the refinery in question. The case
dispute that the operation of a sugar refinery is a phase of sugar production and that from such operation may
be learned methods of reducing the cost of sugar manufactured no less than it may afford the opportunity to
discover the more effective means of achieving progress in the industry. Philsugin's experience alone of
running a refinery is a gain to the entire industry. That the operation resulted in a financial loss is by no means
an index that the industry did not profit therefrom, as other farms of a different nature may have been realized.
Thus, from its financially unsuccessful venture, the Philsugin could very well have advanced in its appreciation
of the problems of management faced by sugar centrals. It could have understood more clearly the difficulties
of marketing sugar products. It could have known with better intimacy the precise area of the industry in need
of the more help from the government. The view of the appellants herein, therefore, that they were not
benefited by the unsuccessful operation of the refinery in question is not entirely accurate.
Furthermore, Section 2(a) specifies a field of research which, indeed, would be difficult to carry out save
through the actual operation of a refinery. Quite obviously, the most practical or realistic approach to the
problem of what "practices or processes" might most effectively cut the cost of production is to experiment on
production itself. And yet, how can such an experiment be carried out without the tools, which is all that a
refinery is?
In view of all the foregoing, the decision appealed from is hereby affirmed, with costs.
SO ORDERED.
5. TIO VS VIDEOGRAM REGULATORY BOARD
G.R. No. L-75697
VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY
MAYOR and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.
MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on behalf of other
videogram operators adversely affected. It assails the constitutionality of Presidential Decree No. 1987 entitled
"An Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the videogram
industry (hereinafter briefly referred to as the BOARD). The Decree was promulgated on October 5, 1985 and
took effect on April 10, 1986, fifteen (15) days after completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential Decree No.
1994 amended the National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette, ready for
playback, regardless of length, an annual tax of five pesos; Provided, That locally manufactured or
imported blank video tapes shall be subject to sales tax.
On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers, Importers and
Distributors Association of the Philippines, and Philippine Motion Pictures Producers Association, hereinafter
collectively referred to as the Intervenors, were permitted by the Court to intervene in the case, over
petitioner's opposition, upon the allegations that intervention was necessary for the complete protection of their
rights and that their "survival and very existence is threatened by the unregulated proliferation of film piracy."
The Intervenors were thereafter allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms including, among others,
videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly prejudiced
the operations of moviehouses and theaters, and have caused a sharp decline in theatrical attendance
by at least forty percent (40%) and a tremendous drop in the collection of sales, contractor's specific,
amusement and other taxes, thereby resulting in substantial losses estimated at P450 Million annually
in government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum from
rentals, sales and disposition of videograms, and such earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have also affected the viability of
the movie industry, particularly the more than 1,200 movie houses and theaters throughout the country,
and occasioned industry-wide displacement and unemployment due to the shutdown of numerous
moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government to
create an environment conducive to growth and development of all business industries, including the
movie industry which has an accumulated investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments will not only alleviate the
dire financial condition of the movie industry upon which more than 75,000 families and 500,000
workers depend for their livelihood, but also provide an additional source of revenue for the
Government, and at the same time rationalize the heretofore uncontrolled distribution of videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram features constitutes a
clear and present danger to the moral and spiritual well-being of the youth, and impairs the mandate of
the Constitution for the State to support the rearing of the youth for civic efficiency and the development
of moral character and promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these
blatant malpractices which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people and
betraying the national economic recovery program, bold emergency measures must be adopted with
dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:
1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation of
the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast powers conferred
upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which shall be expressed in
the title thereof" 1 is sufficiently complied with if the title be comprehensive enough to include the general
purpose which a statute seeks to achieve. It is not necessary that the title express each and every end that the
statute wishes to accomplish. The requirement is satisfied if all the parts of the statute are related, and are
germane to the subject matter expressed in the title, or as long as they are not inconsistent with or foreign to
the general subject and title. 2An act having a single general subject, indicated in the title, may contain any
number of provisions, no matter how diverse they may be, so long as they are not inconsistent with or foreign
to the general subject, and may be considered in furtherance of such subject by providing for the method and
means of carrying out the general object." 3 The rule also is that the constitutional requirement as to the title of
a bill should not be so narrowly construed as to cripple or impede the power of legislation. 4 It should be given
practical rather than technical construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is
without merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of law
to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental
rate, as the case may be, for every sale, lease or disposition of a videogram containing a reproduction
of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of the tax collected
shall accrue to the province, and the other fifty percent (50%) shall acrrue to the municipality where the
tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be shared equally by the
City/Municipality and the Metropolitan Manila Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of, the
general object of the DECREE, which is the regulation of the video industry through the Videogram Regulatory
Board as expressed in its title. The tax provision is not inconsistent with, nor foreign to that general subject and
title. As a tool for regulation 6 it is simply one of the regulatory and control mechanisms scattered throughout
the DECREE. The express purpose of the DECREE to include taxation of the video industry in order to
regulate and rationalize the heretofore uncontrolled distribution of videograms is evident from Preambles 2 and
5, supra. Those preambles explain the motives of the lawmaker in presenting the measure. The title of the
DECREE, which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to express all
those objectives in the title or that the latter be an index to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive, confiscatory, and
in restraint of trade. However, it is beyond serious question that a tax does not cease to be valid merely
because it regulates, discourages, or even definitely deters the activities taxed. 8 The power to impose taxes is
one so unlimited in force and so searching in extent, that the courts scarcely venture to declare that it is subject
to any restrictions whatever, except such as rest in the discretion of the authority which exercises it. 9 In
imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient security against
erroneous and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments of around P600 million per annum have not been
subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax,
imposed on retailers for every videogram they make available for public viewing. It is similar to the 30%
amusement tax imposed or borne by the movie industry which the theater-owners pay to the government, but
which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the
viewing public. It is a tax that is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property
rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose
the tax was to favor one industry over another. 11
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 "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". 12 Taxation has been made the implement of the state's
police power.13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by the
former President under Amendment No. 6 of the 1973 Constitution providing that "whenever in the judgment of
the President ... , there exists a grave emergency or a threat or imminence thereof, or whenever the interim
Batasang Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for
any reason that in his judgment requires immediate action, he may, in order to meet the exigency, issue the
necessary decrees, orders, or letters of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause sufficiently
summarizes the justification in that grave emergencies corroding the moral values of the people and betraying
the national economic recovery program necessitated bold emergency measures to be adopted with dispatch.
Whatever the reasons "in the judgment" of the then President, considering that the issue of the validity of the
exercise of legislative power under the said Amendment still pends resolution in several other cases, we
reserve resolution of the question raised at the proper time.
4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative power.
The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance of other
agencies and units of the government and deputize, for a fixed and limited period, the heads or personnel of
such agencies and units to perform enforcement functions for the Board" is not a delegation of the power to
legislate but merely a conferment of authority or discretion as to its execution, enforcement, and
implementation. "The true distinction is between the delegation of power to make the law, which necessarily
involves a discretion as to what it shall be, and conferring authority or discretion as to its execution to be
exercised under and in pursuance of the law. The first cannot be done; to the latter, no valid objection can be
made." 14 Besides, in the very language of the decree, the authority of the BOARD to solicit such assistance is
for a "fixed and limited period" with the deputized agencies concerned being "subject to the direction and
control of the BOARD." That the grant of such authority might be the source of graft and corruption would not
stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved parties will not be
without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other categories,
one which "alters the legal rules of evidence, and authorizes conviction upon less or different testimony than
the law required at the time of the commission of the offense." It is petitioner's position that Section 15 of the
DECREE in providing that:
All videogram establishments in the Philippines are hereby given a period of forty-five (45) days after
the effectivity of this Decree within which to register with and secure a permit from the BOARD to
engage in the videogram business and to register with the BOARD all their inventories of videograms,
including videotapes, discs, cassettes or other technical improvements or variations thereof, before
they could be sold, leased, or otherwise disposed of. Thereafter any videogram found in the possession
of any person engaged in the videogram business without the required proof of registration by the
BOARD, shall be prima facie evidence of violation of the Decree, whether the possession of such
videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required proof of registration
of any videogram cannot be presented and thus partakes of the nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the passage of a law providing that
the presumption of innocence may be overcome by a contrary presumption founded upon the
experience of human conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the "legislature may enact that
when certain facts have been proved that they shall be prima facie evidence of the existence of the guilt
of the accused and shift the burden of proof provided there be a rational connection between the facts
proved and the ultimate facts presumed so that the inference of the one from proof of the others is not
unreasonable and arbitrary because of lack of connection between the two in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE, besides
the fact that the prima facie presumption of violation of the DECREE attaches only after a forty-five-day period
counted from its effectivity and is, therefore, neither retrospective in character.
6. We do not share petitioner's fears that the video industry is being over-regulated and being eased out of
existence as if it were a nuisance. Being a relatively new industry, the need for its regulation was apparent.
While the underlying objective of the DECREE is to protect the moribund movie industry, there is no question
that public welfare is at bottom of its enactment, considering "the unfair competition posed by rampant film
piracy; the erosion of the moral fiber of the viewing public brought about by the availability of unclassified and
unreviewed video tapes containing pornographic films and films with brutally violent sequences; and losses in
government revenues due to the drop in theatrical attendance, not to mention the fact that the activities of
video establishments are virtually untaxed since mere payment of Mayor's permit and municipal license fees
are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video industry. On
the contrary, video establishments are seen to have proliferated in many places notwithstanding the 30% tax
imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of the
DECREE. These considerations, however, are primarily and exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis for
declaring a statute invalid. This is as it ought to be. The principle of separation of powers has in the
main wisely allocated the respective authority of each department and confined its jurisdiction to such a
sphere. There would then be intrusion not allowable under the Constitution if on a matter left to the
discretion of a coordinate branch, the judiciary would substitute its own. If there be adherence to the
rule of law, as there ought to be, the last offender should be courts of justice, to which rightly litigants
submit their controversy precisely to maintain unimpaired the supremacy of legal norms and
prescriptions. The attack on the validity of the challenged provision likewise insofar as there may be
objections, even if valid and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a challenged statute. We find
no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
6. CALTEX VS COMMISIONER
G.R. No. 92585 May 8, 1992
CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.
DAVIDE, JR., J.:
This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the
Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization
Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery of
financing charges from the Fund and reimbursement of underrecovery arising from sales to the National Power
Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the
Office of Energy Affairs (OEA) and the Department of Finance (DOF).
Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be
brought to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof.
The certiorari referred to is the special civil action for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and
rulings of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the
OEA level, and (b) "grave abuse of discretion and completely without jurisdiction" 5 in declaring that petitioner
cannot avail of the right to offset any amount that it may be required under the law to remit to the OPSF against
any amount that it may receive by way of reimbursement therefrom are sufficient to bring this petition within
Rule 65 of the Rules of Court, and, considering further the importance of the issues raised, the error in the
designation of the remedy pursued will, in this instance, be excused.
The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956,
as amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:
Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of
Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or changes in world
market prices of crude oil and imported petroleum products. The Oil Price Stabilization Fund
may be sourced from any of the following:
a) Any increase in the tax collection from ad valorem tax or customs duty
imposed on petroleum products subject to tax under this Decree arising from
exchange rate adjustment, as may be determined by the Minister of Finance in
b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the
Board of Energy requiring payment by persons or companies engaged in the
business of importing, manufacturing and/or marketing petroleum products;
d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the
Board of Energy.
The Fund herein created shall be used for the following:
1) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in
world market prices of crude oil;
2) To reimburse the oil companies for possible cost under-recovery incurred as a

result of the reduction of domestic prices of petroleum products. The magnitude
of the underrecovery, if any, shall be determined by the Ministry of Finance.
"Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time of
the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance

to result in cost underrecovery.
The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.
The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.
On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986
and 1988, of the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No.
1956 which, as of 31 December 1987, amounted to P335,037,649.00 and informing it that, pending such
remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. 6
On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA
showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down
as follows:
1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the
letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the
OPSF; and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989
and subsequent periods. 7
In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates
from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in
support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national
government agencies and government-owned or controlled corporations. 8
In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward payment of
the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. 9
By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment
of the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the
OEA as a prerequisite for the processing of said claims against the OPSF will cause a very serious impairment
of its cash position. 10 The proposal reads:
We, therefore, very respectfully propose the following:
(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.
(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in cash
reimbursement from OPSF.
(3) The COA audit will commence immediately and will be conducted
expeditiously.
(4) The review of current claims (1989) will be conducted expeditiously to

preclude further accumulation of reimbursement from OPSF.
On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the
above-stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the
current and ensuing years. 11 Decision No. 921 reads:
This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc.,
for reconsideration of this Commission's adverse action embodied in its letters dated February
2, 1989 and March 9, 1989, the former directing immediate remittance to the Oil Price
Stabilization Fund of collections made by the firms pursuant to P.D. 1956, as amended by E.O.
No. 137, S. 1987, and the latter reiterating the same directive but further advising the firms to
desist from offsetting collections against their claims with the notice that "this Commission will
hold in abeyance the audit of all . . . claims for reimbursement from the OPSF."
It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization
Fund against their outstanding claims from the said Fund for the calendar years 1987 and 1988,
pending with the then Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the propriety of the
offsetting of all types of reimbursements from the OPSF against all categories of remittances,
advised these oil companies that such offsetting was bereft of legal basis. Aggrieved thereby,
these companies now seek reconsideration and in support thereof clearly manifest their intent to
make arrangements for the remittance to the Office of Energy Affairs of the amount of
collections equivalent to what has been previously offset, provided that this Commission
authorizes the Office of Energy Affairs to prepare the corresponding checks representing
reimbursement from the OPSF. It is alleged that the implementation of such an arrangement,
whereby the remittance of collections due to the OPSF and the reimbursement of claims from
the Fund shall be made within a period of not more than one week from each other, will benefit
the Fund and not unduly jeopardize the continuing daily cash requirements of these firms.
Upon a circumspect evaluation of the circumstances herein obtaining, this Commission

perceives no further objectionable feature in the proposed arrangement, provided that 15% of
whatever amount is due from the Fund is retained by the Office of Energy Affairs, the same to
be answerable for suspensions or disallowances, errors or discrepancies which may be noted in
the course of audit and surcharges for late remittances without prejudice to similar future
retentions to answer for any deficiency in such surcharges, and provided further that no
offsetting of remittances and reimbursements for the current and ensuing years shall be
allowed.
Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director
Wenceslao R. De la Paz of the Office of Energy Affairs: 12
Dear Atty. dela Paz:
Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our
initial verification of documents submitted to us by your Office in support of Caltex (Philippines),
Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the
Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office
that Caltex (Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906,
representing remittances to the OPSF which were offset against its claims reimbursements (net
of unsubmitted claims). In addition, the Commission hereby authorize (sic) the Office of Energy
Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially
allowed in audit, the details of which are presented hereunder: . . .
As presented in the foregoing computation the disallowances totalled P387,683,535, which

included P130,420,235 representing those claims disallowed by OEA, details of which is (sic)
shown in Schedule 1 as summarized as follows:
Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558

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

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

RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE
ENERGY REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.
xxx xxx xxx
B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE

POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE
LEGAL AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND
VOID BY COURTS OR REPEALED BY LEGISLATION.
xxx xxx xxx
C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY

THE EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.
xxx xxx xxx
14
On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration.
On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez
dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing
charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product
sales or those arising from export sales. 15 Decision No. 1171 reads as follows:
Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular
1-87, dated February 18, 1987, which allowed oil companies to "recover cost of financing
working capital associated with crude oil shipments," and provided a schedule of reimbursement
in terms of peso per barrel. It appears that on November 6, 1989, the DOF issued a
memorandum to the President of the Philippines explaining the nature of these financing
charges and justifying their reimbursement as follows:
As part of your program to promote economic recovery, . . . oil companies (were

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

CHARGES FROM THE OPSF.
II
RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO
NPC.
III
RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT

ON SALES TO ATLAS AND MARCOPPER.
IV
RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS

LEGAL RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-
VIS THE OPSF.
RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.
In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10)
days from notice. 18
On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of
the Solicitor General, filed their Comment. 19
This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their
respective Memoranda within twenty (20) days from notice. 20
In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6
September 1990 be considered as the Memorandum for respondents. 21
Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:
(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second
purpose, to wit:
2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:
i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of
the oil companies at the time of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance
may include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of
crude oil incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President
of the Department of Finance; they "directly translate to cost underrecovery in cases where the money market
placement rates decline and at the same time the tax on interest income increases. The relationship is such
that the presence of underrecovery or overrecovery is directly dependent on the amount and extent of
financing charges."
(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:
To allow oil companies to recover the costs of financing working capital associated with crude
oil shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund
pertaining to the payment of the foregoing (sic) exchange risk premium and recovery of
financing charges will be implemented:
1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1)
percent for the first (6) months and 1/32 of one percent per month thereafter up
to a maximum period of one year, to be applied on crude oil' shipments from
January 1, 1987. Shipments with outstanding financing as of January 1, 1987
shall be charged on the basis of the fee applicable to the remaining period of
financing.
2. In addition, for shipments loaded after January 1987, oil companies shall be
allowed to recover financing charges directly from the OPSF per barrel of crude
oil based on the following schedule:
Financing
Period
Reimburseme
nt Rate
Pesos per
Barrel
Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
The above rates shall be subject to review every sixty

days. 22
Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of
Energy Affairs as follows:
HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila
Dear Sir:
This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and
subsequent discussions held by the Price Review committee on February 6, 1987.
On the basis of the representations made, the Department of Finance recognizes the necessity
to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund
(OPSF). Such a reduction would allow the industry to recover partly associated financing
charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced
to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month thereafter up to a
maximum period of one year, effective January 1, 1987. In addition, since the prevailing
company take would still leave unrecovered financing charges, reimbursement may be secured
from the OPSF in accordance with the provisions of the attached Department of Finance
circular. 23
Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the
computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:
B. FINANCE CHARGES
1. Oil companies shall be allowed to recover financing charges directly from the
OPSF for both crude and product shipments loaded after January 1, 1987 based
on the following rates:
Financing
Period
Reimburseme
nt Rate
(PBbl.)
Less than 180 days None

240 days to 229 (sic) days 4.02
360 days to more 8.28
24
2. The above rates shall be subject to review every sixty days.
Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines
on the recoverability of financing charges, to wit:
Following are the supplemental rules to Department of Finance Circular No. 1-87 dated
February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price
Stabilization Fund. (OPSF):
1. The Claim for reimbursement shall be on a per shipment basis.
2. The claim shall be filed with the Office of Energy Affairs together with the claim
on peso cost differential for a particular shipment and duly certified supporting
documents providedfor under Ministry of Finance No. 11-85.
3. The reimbursement shall be on the form of reimbursement certificate (Annex

A) to be issued by the Office of Energy Affairs. The said certificate may be used
to offset against amounts payable to the OPSF. The oil companies may also
redeem said certificates in cash if not utilized, subject to availability of funds. 25
The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26
The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the
determination of executive agencies. The determination by the Department of Finance and the OEA that
financing charges are recoverable from the OPSF is entitled to great weight and consideration. 27 The function
of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28
(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner
is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by expert
analysis.
In impeaching the validity of petitioner's assertions, the respondents argue that:
1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the
COA acted within its jurisdiction in denying them;
2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the
OPSF;
3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose
of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or
analogous to those enumerated;"
4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and
5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing
charges. 29
We find no merit in the first assigned error.
As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner
that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties, but only to the promulgation of
accounting and auditing rules for, among others, such disallowance to be untenable in the light of the
provisions of the 1987 Constitution and related laws.
Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:
Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit,
and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned and controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are necessary and appropriate to
correct the deficiencies. It shall keep the general accounts, of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers
pertaining thereto.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for the
prevention and disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.
These present powers, consistent with the declared independence of the Commission, 30 are broader and
more extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was
empowered to:
Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the
revenues, and receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities including government-owned or controlled corporations, keep the general
accounts of the Government and, for such period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations
including those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31
Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the
General Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI
thereofprovided:
Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the
revenues and receipts from whatever source, including trust funds derived from bond issues;
and audit, in accordance with law and administrative regulations, all expenditures of funds or
property pertaining to or held in trust by the Government or the provinces or municipalities
thereof. He shall keep the general accounts of the Government and the preserve the vouchers
pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of the
proper administrative officer expenditures of funds or property which, in his opinion, are
irregular, unnecessary, excessive, or extravagant. He shall also perform such other functions as
may be prescribed by law.
As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to
prevent the same. His was merely to bring that matter to the attention of the proper administrative officer.
The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos
vs.Aquino, 33 are no longer controlling as the two (2) were decided in the light of the 1935 Constitution.
There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and
the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds
or uses of funds and property. Our present Constitution retains that same power and authority, further
strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code
of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and
auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the
COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by one
of the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37
It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution
the Auditor General could not correct "irregular, unnecessary, excessive or extravagant"
expenditures of public funds but could only "bring [the matter] to the attention of the proper
administrative officer," under the 1987 Constitution, as also under the 1973 Constitution, the
Commission on Audit can "promulgate accounting and auditing rules and regulations including
those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures or uses of government funds and properties." Hence, since the
Commission on Audit must ultimately be responsible for the enforcement of these rules and
regulations, the failure to comply with these regulations can be a ground for disapproving the
payment of a proposed expenditure.
Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and
invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless
tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government.
The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87,
Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to
Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement from the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not
included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8
of P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It
merely states what it includes. Thus:
. . . "Cost underrecovery" shall include the following:
i. Reduction in oil company takes as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time
of the price change;
ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;
iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.
These "other factors" can include only those which are of the same class or nature as the two specifically
enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of
government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration,
or which could qualify as a cost underrecovery, must be of the same class or nature as those specifically
enumerated.
Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and
unrestricted authority to determine or define "other factors."
Both views are unacceptable to this Court.
The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by
words of a particular and specific meaning, such general words are not to be construed in their widest extent,
but are held to be as applying only to persons or things of the same kind or class as those specifically
mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in
these subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum products.
Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that
such were incurred as a result of the inability to fully offset financing expenses from yields in money market
placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because
the same did not result from the reduction of the domestic price of petroleum products. Until paragraph (2),
Section 8 of the decree, as amended, is further amended by Congress, this Court can do nothing. The duty of
this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize
that as the facts in this case have shown, it was at the behest of the Government that petitioner refinanced its
oil import payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct
in its assertion that owing to the extended period for payment, the financial institution which refinanced said
payments charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would
appear then that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request of the
Government. Although under Section 29 of the National Internal Revenue Code such losses may be deducted
from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some positive measures to help petitioner and others
similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in order.
Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly
appearing that the subject provision does not provide any standard for the exercise of the authority. It is a
fundamental rule that delegation of legislative power may be sustained only upon the ground that some
standard for its exercise is provided and that the legislature, in making the delegation, has prescribed the
manner of the exercise of the delegated authority. 39
Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of
the foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it
had in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss.
Such being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too.
II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that underrecovery arising from sales to NPC are
reimbursable because NPC was granted full exemption from the payment of taxes; to prove this, respondents
trace the laws providing for such exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's
Resolution No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of
the National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products . . . are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987
by the Office of the President, NPC's tax exemption was confirmed and approved.
Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is
evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to
support the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952 provides:
Sec. 2. Application of the Fund shall be subject to the following conditions:
(1) That the Fund shall be used to reimburse the oil companies for (a) cost
increases of imported crude oil and finished petroleum products resulting from
foreign exchange rate adjustments and/or increases in world market prices of
crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the
National Power Corporation (NPC); and (c) other cost underrecoveries incurred
as may be finally decided by the Supreme
Court; . . .
Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power
Corporation.
III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on
Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes,
duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies in
distress to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco,
issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining
Corporation and Marcopper Mining Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to
Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171,
it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is
evident that OPSF was not created to aid distressed mining companies but rather to help the domestic oil
industry by stabilizing oil prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt
said distressed mining companies from the payment of OPSF dues for the following reasons:
a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the
OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued
on February 25, 1987.
b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended,
was issued for the purpose of minimizing frequent price changes brought about by exchange
rate adjustments and/or changes in world market prices of crude oil and imported petroleum
product's; and
c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by the copper mining companies in distress to the
Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by (sic)
distressed copper companies but by oil companies. It is to be noted that the copper mining
companies do not pay OPSF dues. Rather, such imposts are built in or already incorporated in
the prices of oil products. 44
Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining
companies, it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.
We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI
1416 was never published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:
Laws shall take effect after fifteen days following the completion of their publication in the
Official Gazette, unless it is otherwise provided. . . .
In applying said provision, this Court ruled in the case of Taada vs. Tuvera: 46
WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published
they shall have no binding force and effect.
Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29
December 1986, 47 ruled:
We hold therefore that all statutes, including those of local application and private laws, shall be
published as a condition for their effectivity, which shall begin fifteen days after publication
unless a different effectivity date is fixed by the legislature.
Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated by the
legislature or, at present, directly conferred by the Constitution. Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.
xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their
approval, or as soon thereafter as possible, be published in full in the Official Gazette, to
become effective only after fifteen days from their publication, or on another date specified by
the legislature, in accordance with Article 2 of the Civil Code.
LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its
issuance or at any time after the decision in the abovementioned cases.
Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987.
As amended, the said provision now reads:
Laws shall take effect after fifteen days following the completion of their publication either in the
Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive
Order No. 200.
Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing
authority. 48The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by
the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the
exempting law or at least be within its purview by clear legislative intent.
In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and
MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the
payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the
payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of
Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow
it. By doing so, the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend that said
amount was already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the
claims of petitioner for pre-audit, the abovementioned amount was already excluded.
An examination of the records of this case shows that petitioner failed to prove or substantiate its contention
that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no
reason to doubt the submission of respondents that said amount has already been passed upon by the OEA.
Hence, the ruling of respondent COA disapproving said claim must be upheld.
V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner
may be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be
allowed to offset its claims from the OPSF against its contributions to the fund as this has been allowed in the
past, particularly in the years 1987 and 1988. 51
Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation
and Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money
for Satisfaction of Indebtedness to Government." 52 Petitioner also mentions communications from the Board of
Energy and the Department of Finance that supposedly authorize compensation.
Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no
offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not arise
from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that
petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because
"while this provision empowers the COA to withhold payment of a government indebtedness to a person who is
also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of
the person to the government, like authority or right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money
due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative
Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of
taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special
fund . . .," 56 and that the OPSF contributions do not go to the general fund of the state and are not used for
public purpose, i.e., not for the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.
Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said
law provides in part that:
Sec. 2. Application of the fund shall be subject to the following conditions:
xxx xxx xxx
(3) That no amount of the Petroleum Price Standby Fund shall be used to pay
any oil company which has an outstanding obligation to the Government without
said obligation being offset first, subject to the requirements of compensation or
offset under the Civil Code.
We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because
they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of the government; taxes may be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened industry which is affected with public interest as to
be within the police power of the state. 57 There can be no doubt that the oil industry is greatly imbued with
public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could hurt the lives
of a majority of the people and cause economic crisis of untold proportions. It would have a chain reaction in
terms of, among others, demands for wage increases and upward spiralling of the cost of basic commodities.
The stabilization then of oil prices is of prime concern which the state, via its police power, may properly
address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No
amount of semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. 59
We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act
as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users
the consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation
to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from the
fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In respect,
therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise
legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and creditors
of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under Article
1279 of the Civil Code, in order that compensation may be proper, it is necessary that:
(1) each one of the obligors be bound principally, and that he be at the same time a principal
creditor of the other;
(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the
same kind, and also of the same quality if the latter has been stated;
(3) the two (2) debts be due;
(4) they be liquidated and demandable;
(5) over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal
basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF
contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price Standby
Fund to oil companies which have outstanding obligations with the government, without said obligation being
offset first subject to the rules on compensation in the Civil Code.
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of
the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of
underrecovery arising from sales to the National Power Corporation, which is hereby allowed.
With costs against petitioner.
SO ORDERED.
7. CHAVEZ VS ONGPIN
FRANCISCO I. CHAVEZ, petitioner,

vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance and FIDELINA CRUZ, in her capacity as
Acting Municipal Treasurer of the Municipality of Las Pias, respondents, REALTY OWNERS
ASSOCIATION OF THE PHILIPPINES, INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to Combat Injustice and Oppression (Bonifacio) for
petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant Realty Owners Association.
MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25, 1986, which We
quote in full, as follows (78 O.G. 5861):
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
WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;
WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people;
NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby order:
SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection.
SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to
implement this Executive Order.
SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.
SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of Executive
Order No. 73 until June 30, 1987.
The petitioner, Francisco I. Chavez, 1 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 to declare unconstitutional Executive Order No. 73, but additionally
alleges the following: that Presidential Decree No. 464 is unconstitutional insofar as it imposes an additional
one percent (1%) tax on all property owners to raise funds for education, as real property tax is admittedly a
local tax for local governments; that the General Revision of Assessments does not meet the requirements of
due process as regards publication, notice of hearing, opportunity to be heard and insofar as it authorizes
"replacement cost" of buildings (improvements) which is not provided in Presidential Decree No. 464, but only
in an administrative regulation of the Department of Finance; and that the Joint Local Assessment/Treasury
Regulations No. 2-86 2 is even more oppressive and unconstitutional as it imposes successive increase of
150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No. 73 insofar as the
revision of the assessments and the effectivity thereof are concerned. It should be emphasized that Executive
Order No. 73 merely directs, in Section 1 thereof, that:
SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection. (emphasis supplied)
The general revision of assessments completed in 1984 is based on Section 21 of Presidential Decree No. 464
which provides, as follows:
SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a
calendar year 1978, the provincial or city general revision of real property assessments in the
province or city to take effect January 1, 1979, and once every five years thereafter: Provided;
however, That if property values in a province or city, or in any municipality, have greatly
changed since the last general revision, the provincial or city assesor may, with the approval of
the Secretary of Finance or upon bis direction, undertake a general revision of assessments in
the province or city, or in any municipality before the fifth year from the effectivity of the last
general revision.
Thus, We agree with the Office of the Solicitor General that 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. Furthermore, Presidential Decree No. 464 furnishes the procedure by which a tax
assessment may be questioned:
SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the action
of the provincial or city assessor in the assessment of his property may, within sixty days from
the date of receipt by him of the written notice of assessment as provided in this Code, appeal
to the Board of Assessment Appeals of the province or city, by filing with it a petition under oath
using the form prescribed for the purpose, together with copies of the tax declarations and such
affidavit or documents submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of Assessment
Appeals shall decide the appeal within one hundred and twenty days from the date of receipt of
such appeal. The decision rendered must be based on substantial evidence presented at the
hearing or at least contained in the record and disclosed to the parties or such relevant
evidence as a reasonable mind might accept as adequate to support the conclusion.
In the exercise of its appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoena duces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the truth without-necessarily adhering to technical rules applicable in
judicial proceedings.
The Secretary of the Board shall furnish the property owner and the Provincial or City Assessor
with a copy each of the decision of the Board. In case the provincial or city assessor concurs in
the revision or the assessment, it shall be his duty to notify the property owner of such fact using
the form prescribed for the purpose. The owner or administrator of the property or the assessor
who is not satisfied with the decision of the Board of Assessment Appeals, may, within thirty
days after receipt of the decision of the local Board, appeal to the Central Board of Assessment
Appeals by filing his appeal under oath with the Secretary of the proper provincial or city Board
of Assessment Appeals using the prescribed form stating therein the grounds and the reasons
for the appeal, and attaching thereto any evidence pertinent to the case. A copy of the appeal
should be also furnished the Central Board of Assessment Appeals, through its Chairman, by
the appellant.
Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment
Appeals concerned shall forward the same and all papers related thereto, to the Central Board
of Assessment Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall
have jurisdiction over appealed assessment cases decided by the Local Board of Assessment
Appeals. The said Board shall decide cases brought on appeal within twelve (12) months from
the date of receipt, which decision shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of a copy of the decision by the appellant.
In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.
The Central Board of assessment Appeals shall adopt and promulgate rules of procedure
relative to the conduct of its business.
Simply stated, within sixty days from the date of receipt of the, written notice of assessment, any owner who
doubts the assessment of his property, may appeal to the Local Board of Assessment Appeals. In case the,
owner or administrator of the property or the assessor is not satisfied with the decision of the Local Board of
Assessment Appeals, he may, within thirty days from the receipt of the decision, appeal to the Central Board of
Assessment Appeals. The decision of the Central Board of Assessment Appeals shall become final and
executory after the lapse of fifteen days from the date of receipt of the decision.
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 (G.R. No. L-24693, July 31, 1967, 20
SCRA 849) and Sison v. Ancheta, et al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).
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.
Indeed, the government recognized the financial burden to the taxpayers that will result from an increase in
real property taxes. Hence, Executive Order No. 1019 was issued on April 18, 1985, deferring the
implementation of the increase in real property taxes resulting from the revised real property assessments,
from January 1, 1985 to January 1, 1988. Section 5 thereof is quoted herein as follows:
SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as amended by
Presidential Decree No. 1621, shall be collected beginning January 1, 1988 instead of January
1, 1985 in order to enable the Ministry of Finance and the Ministry of Local Government to
establish the new systems of tax collection and assessment provided herein and in order to
alleviate the condition of the people, including real property owners, as a result of temporary
economic difficulties. (emphasis supplied)
The issuance of Executive Order No. 73 which changed the date of implementation of the increase in real
property taxes from January 1, 1988 to January 1, 1987 and therefore repealed Executive Order No. 1019,
also finds ample justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;
WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not proper to be resolved
in the present petition. As stated at the outset, the issue here is limited to the constitutionality of Executive
Order No. 73. Intervention is not an independent proceeding, but an ancillary and supplemental one which, in
the nature of things, unless otherwise provided for by legislation (or Rules of Court), must be in subordination
to the main proceeding, and it may be laid down as a general rule that an intervention is limited to the field of
litigation open to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor General that without Executive Order No. 73, the
basis for collection of real property taxes win 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.
ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.
SO ORDERED.
8. PH GUARANTEE CO VS CIR
THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.

Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on
various dates, with foreign insurance companies not doing business in the Philippines namely: Imperio
Compaia de Seguros, La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de
Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede
to the foreign reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines,
in consideration for the assumption by the latter of liability on an equivalent portion of the risks insured. Said
reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers
outside the Philippines, except the contract with Swiss Reinsurance Company, which was signed by both
parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of
Philippine Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a
register in Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original
assured were to be paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for
managing or administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in
an amount equal to 5% of the reinsurance premiums. Conflicts and/or differences between the parties under
the reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company stipulated that their contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers
the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated
April 13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc.
withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00

==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00

==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was
denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954,
plus the statutory delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the
Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have
office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were
performed in the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability
of Philippine Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a
register of the risks ceded to the foreign reinsurers. Entries made in such register bound the foreign
resinsurers, localizing in the Philippines the actual cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on premiums imposed by Section 259 of the Tax
Code for the privilege of doing insurance business in the Philippines were payable by the foreign reinsurers
when the same were not recoverable from the original assured. The foreign reinsurers paid Philippine
Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the Philippines in regard to their reinsurance activities
here. Disputes and differences between the parties were subject to arbitration in the City of Manila. All the
reinsurance contracts, except that with Swiss Reinsurance Company, were signed by Philippine Guaranty Co.,
Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the contract between
Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in Switzerland, the
same specifically provided that its provision shall be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the
Philippines. The word "sources" has been interpreted as the activity, property or service giving rise to the
income. 1 The reinsurance premiums were income created from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such
undertaking, as explained above, took place in the Philippines. These insurance premiums, therefore, came
from sources within the Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of activity. Business should not
be continuity and progression of transactions 2 while activity may consist of only a single transaction. An activity
may occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to
engage in business in the Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the place of business but
the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines
because they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive
enumeration, for it merely directs that the kinds of income mentioned therein should be treated as income from
sources within the Philippines but it does not require that other kinds of income should not be considered
likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden
to preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy
to defend its shores from invasion, a corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's territory, and facilities and protection which
a government is supposed to provide. Considering that the reinsurance premiums in question were afforded
protection by the government and the recipient foreign reinsurers exercised rights and privileges guaranteed by
our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal
Revenue requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty
to pay the corresponding withholding tax thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not
exculpate if from liability to pay such withholding tax The Government is not estopped from collecting taxes by
the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under Section 53 and 54 of the Tax Code, suffice it to
state that this question has already been answered in the affirmative in Alexander Howden & Co., Ltd. vs.
Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually remitted to
the foreign reinsurers instead of from the total amount ceded. And since it did not remit any amount to its
foreign insurers in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the Philippines and not having any
office or place of business therein, there shall be deducted and withheld at the source in the same
manner and upon the same items as is provided in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in the same manner and subject to the same
conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships (compaias colectivas),
in what ever capacity acting, including lessees or mortgagors of real or personal property, trustees
acting in any trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers,
and all officers and employees of the Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents, salaries, wages, premiums, annuities,
compensation, remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income of any nonresident alien individual, not engaged in trade or business within the
Philippines and not having any office or place of business therein, shall (except in the case provided for
in subsection [a] of this section) deduct and withhold from such annual or periodical gains, profits, and
income a tax equal to twelve per centum thereof: Provided That no deductions or withholding shall be
required in the case of dividends paid by a foreign corporation unless (1) such corporation is engaged
in trade or business within the Philippines or has an office or place of business therein, and (2) more
than eighty-five per centum of the gross income of such corporation for the three-year period ending
with the close of its taxable year preceding the declaration of such dividends (or for such part of such
period as the corporation has been in existence)was derived from sources within the Philippines as
determined under the provisions of section thirty-seven: Provided, further, That the Collector of Internal
Revenue may authorize such tax to be deducted and withheld from the interest upon any securities the
owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining the
amount to be withheld. According, in computing the withholding tax due on the reinsurance premium in
question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to
pay to the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a total amount of
P375,345.00, as withholding tax for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not
paid within 30 days from the date this judgement becomes final, there shall be collected a surcharged of 5% on
the amount unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of
payment, provided that the maximum amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. With costs againsts petitioner.
9. COMMISIONER VS ALGUE (CASE #1)
10. GOMEZ VS PALOMAR
BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R. VALENCIA, in his
capacity as Secretary of Public Works and Communications, and DOMINGO GOPEZ, in his capacity as
Acting Postmaster of San Fernando, Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C. Zaballero and Solicitor
Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635,1 as amended by Republic Act 2631,2 which
provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order for the
period from August nineteen to September thirty every year the printing and issue of semi-postal
stamps of different denominations with face value showing the regular postage charge plus the
additional amount of five centavos for the said purpose, and during the said period, no mail matter shall
be accepted in the mails unless it bears such semi-postal stamps: Provided, That no such additional
charge of five centavos shall be imposed on newspapers. The additional proceeds realized from the
sale of the semi-postal stamps shall constitute a special fund and be deposited with the National
Treasury to be expended by the Philippine Tuberculosis Society in carrying out its noble work to
prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued four (4) administrative
orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these
administrative orders were issued with the approval of the respondent Secretary of Public Works and
Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19 to September
30, 1957, for lack of time. However, two denominations of such stamps, one at "5 + 5" centavos and
another at "10 + 5" centavos, will soon be released for use by the public on their mails to be posted
during the same period starting with the year 1958.
xxx xxx xxx
During the period from August 19 to September 30 each year starting in 1958, no mail matter of
whatever class, and whether domestic or foreign, posted at any Philippine Post Office and addressed
for delivery in this country or abroad, shall be accepted for mailing unless it bears at least one such
semi-postal stamp showing the additional value of five centavos intended for the Philippine
Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or impressions of
postage meters, each piece of such mail shall bear at least one such semi-postal stamp if posted
during the period above stated starting with the year 1958, in addition to being charged the usual
postage prescribed by existing regulations. In the case of business reply envelopes and cards mailed
during said period, such stamp should be collected from the addressees at the time of delivery. Mails
entitled to franking privilege like those from the office of the President, members of Congress, and other
offices to which such privilege has been granted, shall each also bear one such semi-postal stamp if
posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or post-office mail boxes
without the required semi-postal stamp, shall be returned to the sender, if known, with a notation calling
for the affixing of such stamp. If the sender is unknown, the mail matter shall be treated as nonmailable
and forwarded to the Dead Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking privilege which are
not exempted from the payment of the five centavos intended for the Philippine Tuberculosis Society,
such extra charge may be collected in cash, for which official receipt (General Form No. 13, A) shall be
issued, instead of affixing the semi-postal stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra charge of five
centavos for the Philippine Tuberculosis Society shall be collected on each separately-addressed piece
of second-class mail matter, and the total sum thus collected shall be entered in the same official
receipt to be issued for the postage at the second-class rate. In making such entry, the total number of
pieces of second-class mail posted shall be stated, thus: "Total charge for TB Fund on 100 pieces . ..
P5.00." The extra charge shall be entered separate from the postage in both of the official receipt and
the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed under permits
issued by this Bureau shall each be charged the usual postage, in addition to the five-centavo extra
charge intended for said society. The total extra charge thus received shall be entered in the same
official receipt to be issued for the postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter under metered mail
permit issued by this Bureau, the extra charge of five centavos for said society shall be collected in
cash and an official receipt issued for the total sum thus received, in the manner indicated in
subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and envelopes to
holders of business reply permits, the five-centavo charge intended for said society shall be collected in
cash on each reply card or envelope delivered, in addition to the required postage which may also be
paid in cash. An official receipt shall be issued for the total postage and total extra charge received, in
the manner shown in subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other persons entitled to
the franking privilege under existing laws may pay in cash such extra charge intended for said society,
instead of affixing the semi-postal stamps to their mails, provided that such mails are presented at the
post-office window, where the five-centavo extra charge for said society shall be collected on each
piece of such mail matter. In such case, an official receipt shall be issued for the total sum thus
collected, in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office window shall be
affixed with the necessary semi-postal stamps. If found in mail boxes without such stamps, they shall
be treated in the same way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its Agencies and
Instrumentalities Performing Governmental Functions." Adm. Order 10, amending Adm. Order 3, as amended,
exempts "copies of periodical publications received for mailing under any class of mail matter, including
newspapers and magazines admitted as second-class mail."
The 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.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention that declaratory
relief is unavailing because this suit was filed after the petitioner had committed a breach of the statute. While
conceding that the mailing by the petitioner of a letter without the additional anti-TB stamp was a violation of
Republic Act 1635, as amended, the trial court nevertheless refused to dismiss the action on the ground that
under section 6 of Rule 64 of the Rules of Court, "If before the final termination of the case a breach or
violation of ... a statute ... should take place, the action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before breach or violation"
of the statute has been committed. Rule 64, section 1 so provides. Section 6 of the same rule, which allows the
court to treat an action for declaratory relief as an ordinary action, applies only if the breach or violation occurs
after the filing of the action but before the termination thereof.3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before the firing of this action,
then indeed the remedy of declaratory relief cannot be availed of, much less can the suit be converted into an
ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did not constitute a
breach of the statute because the statute appears to be addressed only to postal authorities. The statute, it is
true, in terms provides that "no mail matter shall be accepted in the mails unless it bears such semi-postal
stamps." It does not follow, however, that only postal authorities can be guilty of violating it by accepting mails
without the payment of the anti-TB stamp. It is obvious that they can be guilty of violating the statute only if
there are people who use the mails without paying for the additional anti-TB stamp. Just as in bribery the mere
offer constitutes a breach of the law, so in the matter of the anti-TB stamp the mere attempt to use the mails
without the stamp constitutes a violation of the statute. It is not required that the mail be accepted by postal
authorities. That requirement is relevant only for the purpose of fixing the liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because this suit was filed not
only with respect to the letter which he mailed on September 15, 1963, but also with regard to any other mail
that he might send in the future. Thus, in his complaint, the petitioner prayed that due course be given to "other
mails without the semi-postal stamps which he may deliver for mailing ... if any, during the period covered by
Republic Act 1635, as amended, as well as other mails hereafter to be sent by or to other mailers which bear
the required postage, without collection of additional charge of five centavos prescribed by the same Republic
Act." As one whose mail was returned, the petitioner is certainly interested in a ruling on the validity of the
statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the implementing orders.
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
That legislative classifications must be reasonable is of course undenied. But what the petitioner asserts is that
statutory classification of mail users must bear some reasonable relationship to the end sought to be attained,
and that absent such relationship the selection of mail users is constitutionally impermissible. This is altogether
a different proposition. As explained in Commonwealth v. Life Assurance Co.:8
While the principle that there must be a reasonable relationship between classification made by the
legislation and its purpose is undoubtedly true in some contexts, it has no application to a measure
whose sole purpose is to raise revenue ... So long as the classification imposed is based upon some
standard capable of reasonable comprehension, be that standard based upon ability to produce
revenue or some other legitimate distinction, equal protection of the law has been afforded. See Allied
Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v.
Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).
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
Granted the power to select the subject of taxation, the State's power to grant exemption must likewise be
conceded as a necessary corollary. Tax exemptions are too common in the law; they have never been thought
of as raising issues under the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted from the levy the
law and administrative officials have sanctioned an invidious discrimination offensive to the Constitution. The
application of the lower courts theory would require all mail users to be taxed, a conclusion that is hardly
tenable in the light of differences in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of the tax in order to
foster what it conceives to be a beneficent enterprise.11 This is the case of newspapers which, under the
amendment introduced by Republic Act 2631, are exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's sovereign immunity from
taxation. The State cannot be taxed without its consent and such consent, being in derogation of its
sovereignty, is to be strictly construed.12 Administrative Order 9 of the respondent Postmaster General, which
lists the various offices and instrumentalities of the Government exempt from the payment of the anti-TB
stamp, is but a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to the exclusion of
other diseases which, it is said, are equally a menace to public health. But it is never a requirement of equal
protection that all evils of the same genus be eradicated or none at all.13 As this Court has had occasion to say,
"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."14
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 and safeguarded by the devotion of taxes to public purposes. Any other view would
preclude the levying of taxes except as they are used to compensate for the burden on those who pay them
and would involve the abandonment of the most fundamental principle of government that it exists primarily
to provide for the common good.15
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.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act which imposed a flat rate of two
cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The inequality of
the tax, so far as actual values are concerned, is manifest. But, here again equality in this sense has to
yield to practical considerations and usage. There must be a fixed and indisputable mode of
ascertaining a stamp tax. In another sense, moreover, there is equality. When the taxes on two sales
are equal, the same number of shares is sold in each case; that is to say, the same privilege is used to
the same extent. Valuation is not the only thing to be considered. As was pointed out by the court of
appeals, the familiar stamp tax of 2 cents on checks, irrespective of income or earning capacity, and
many others, illustrate the necessity and practice of sometimes substituting count for weight ... 17
According to the trial court, the money raised from the sales of the anti-TB stamps is spent for the benefit of the
Philippine Tuberculosis Society, a private organization, without appropriation by law. But as the Solicitor
General points out, the Society is not really the beneficiary but only the agency through which the State acts in
carrying out what is essentially a public function. The money is treated as a special fund and as such need not
be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the respondents had to issue
administrative orders far beyond their powers. Indeed, this is one of the grounds on which the lower court
invalidated Republic Act 1631, as amended, namely, that it constitutes an undue delegation of legislative
power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for certain classes of
mail matters (such as mail permits, metered mails, business reply cards, etc.), the five-centavo charge may be
paid in cash instead of the purchase of the anti-TB stamp. It further states that mails deposited during the
period August 19 to September 30 of each year in mail boxes without the stamp should be returned to the
sender, if known, otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except through the sale of
anti-TB stamps, but such authority may be implied in so far as it may be necessary to prevent a failure of the
undertaking. The authority given to the Postmaster General to raise funds through the mails must be liberally
construed, consistent with the principle that where the end is required the appropriate means are given. 19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the additional charge
but also that of the regular postage. In the case of business reply cards, for instance, it is obvious that to
require mailers to affix the anti-TB stamp on their cards would be to make them pay much more because the
cards likewise bear the amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not bear the anti-TB
stamp, but a declaration therein that "no mail matter shall be accepted in the mails unless it bears such semi-
postal stamp" is a declaration that such mail matter is nonmailable within the meaning of section 1952 of the
Administrative Code. Administrative Order 7 of the Postmaster General is but a restatement of the law for the
guidance of postal officials and employees. As for Administrative Order 9, we have already said that in listing
the offices and entities of the Government exempt from the payment of the stamp, the respondent Postmaster
General merely observed an established principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without pronouncement as
to costs.
11. LORENZO VS POSADAS

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley,
deceased, brought this action in the Court of First Instance of Zamboanga against the defendant, Juan
Posadas, Jr., then the Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by the
plaintiff as inheritance tax on the estate of the deceased, and for the collection of interst thereon at the rate of 6
per cent per annum, computed from September 15, 1932, the date when the aforesaid tax was [paid under
protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in question
and which was not included in the original assessment. From the decision of the Court of First Instance of
Zamboanga dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed
to this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit
5) and considerable amount of real and personal properties. On june 14, 1922, proceedings for the probate of
his will and the settlement and distribution of his estate were begun in the Court of First Instance of
Zamboanga. The will was admitted to probate. Said will provides, among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew Hanley.
5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of
for a period of ten (10) years after my death, and that the same be handled and managed by the
executors, and proceeds thereof to be given to my nephew, Matthew Hanley, at Castlemore,
Ballaghaderine, County of Rosecommon, Ireland, and that he be directed that the same be used only
for the education of my brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew
Hanley to be disposed of in the way he thinks most advantageous.
xxx xxx xxx
8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew
Hanley, is a son of my said brother, Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a
trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after
the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office
and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the
plaintiff herein was appointed in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the
estate left by the deceased at the time of his death consisted of realty valued at P27,920 and personalty valued
at P1,465, and allowing a deduction of P480.81, assessed against the estate an inheritance tax in the amount
of P1,434.24 which, together with the penalties for deliquency in payment consisting of a 1 per cent monthly
interest from July 1, 1931 to the date of payment and a surcharge of 25 per cent on the tax, amounted to
P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings pending before
the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff
herein, be ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On
September 15, 1932, the plaintiff paid said amount under protest, notifying the defendant at the same time that
unless the amount was promptly refunded suit would be brought for its recovery. The defendant overruled the
plaintiff's protest and refused to refund the said amount hausted, plaintiff went to court with the result herein
above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew
Hanley, from the moment of the death of the former, and that from the time, the latter became the
owner thereof.
II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of
said deceased.
III. In holding that the inheritance tax in question be based upon the value of the estate upon the death
of the testator, and not, as it should have been held, upon the value thereof at the expiration of the
period of ten years after which, according to the testator's will, the property could be and was to be
delivered to the instituted heir.
IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to
said tax, the amounts allowed by the court as compensation to the "trustees" and paid to them from the
decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:
The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27,
representing part of the interest at the rate of 1 per cent per month from April 10, 1924, to June 30,
1931, which the plaintiff had failed to pay on the inheritance tax assessed by the defendant against the
estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this appeal: (a) When does the
inheritance tax accrue and when must it be satisfied? (b) Should the inheritance tax be computed on the basis
of the value of the estate at the time of the testator's death, or on its value ten years later? (c) In determining
the net value of the estate subject to tax, is it proper to deduct the compensation due to trustees? (d) What law
governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-payer be given retroactive
effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional interest
claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by
the parties in their briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended,
of the Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest,
gift mortis causa, or advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon
transmission or the transfer or devolution of property of a decedent, made effective by his death. (61 C. J., p.
1592.) It is in reality an excise or privilege tax imposed on the right to succeed to, receive, or take property by
or under a will or the intestacy law, or deed, grant, or gift to become operative at or after death. Acording to
article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his
death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the
deceased ancestor. The property belongs to the heirs at the moment of the death of the ancestor as
completely as if the ancestor had executed and delivered to them a deed for the same before his death."
(Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong & Co., vs. Chio-Taysan, 12
Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16
Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs. Briones,
38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs.
Court of First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts
that while article 657 of the Civil Code is applicable to testate as well as intestate succession, it operates only
in so far as forced heirs are concerned. But the language of article 657 of the Civil Code is broad and makes
no distinction between different classes of heirs. That article does not speak of forced heirs; it does not even
use the word "heir". It speaks of the rights of succession and the transmission thereof from the moment of
death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of
a will as a necessary condition to effect transmission of property does not affect the general rule laid down in
article 657 of the Civil Code. The authentication of a will implies its due execution but once probated and
allowed the transmission is effective as of the death of the testator in accordance with article 657 of the Civil
Code. Whatever may be the time when actual transmission of the inheritance takes place, succession takes
place in any event at the moment of the decedent's death. The time when the heirs legally succeed to the
inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says
Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el
heredero o legatario entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco
tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que
debe considerarse como complemento del presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.)
Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay
the tax arose as of the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the
Revised Administrative Code as amended by Act No. 3031, in relation to section 1543 of the same Code. The
two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to
the trustees.
(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in
accordance with the desire of the predecessor.
In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid
by the first, the former must pay the difference.
SEC. 1544. When tax to be paid. The tax fixed in this article shall be paid:
(a) In the second and third cases of the next preceding section, before entrance into possession
of the property.
(b) In other cases, within the six months subsequent to the death of the predecessor; but if
judicial testamentary or intestate proceedings shall be instituted prior to the expiration of said
period, the payment shall be made by the executor or administrator before delivering to each
beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum
per annum shall be added as part of the tax; and to the tax and interest due and unpaid within ten days
after the date of notice and demand thereof by the collector, there shall be further added a surcharge of
twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal
Revenue by the Clerk of Court within thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should
read "fideicommissary" or "cestui que trust". There was an obvious mistake in translation from the Spanish to
the English version.
The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as
there is here no fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been
paid before the delivery of the properties in question to P. J. M. Moore as trustee on March 10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did
not and could not legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from
the death of the testator on May 27, 1922 and, that the inheritance tax should be based on the value of the
estate in 1932, or ten years after the testator's death. The plaintiff introduced evidence tending to show that in
1932 the real properties in question had a reasonable value of only P5,787. This amount added to the value of
the personal property left by the deceased, which the plaintiff admits is P1,465, would generate an inheritance
tax which, excluding deductions, interest and surcharge, would amount only to about P169.52.
If death is the generating source from which the power of the estate to impose inheritance taxes takes its being
and if, upon the death of the decedent, succession takes place and the right of the estate to tax vests instantly,
the tax should be measured by the vlaue of the estate as it stood at the time of the decedent's death,
regardless of any subsequent contingency value of any subsequent increase or decrease in value. (61 C. J.,
pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also Knowlton vs.
Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an inheritance tax
accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that
time of such property as passes to him. Subsequent appreciation or depriciation is immaterial." (Ross,
Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574,
1575) that, in the case of contingent remainders, taxation is postponed until the estate vests in possession or
the contingency is settled. This rule was formerly followed in New York and has been adopted in Illinois,
Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This rule, horever, is by no means entirely
satisfactory either to the estate or to those interested in the property (26 R. C. L., p. 231.). Realizing, perhaps,
the defects of its anterior system, we find upon examination of cases and authorities that New York has varied
and now requires the immediate appraisal of the postponed estate at its clear market value and the payment
forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E.,
782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519;
Estate of Brez, 172 N. Y., 609; 64 N. E., 958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide
also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul. Cas., 888.) California
adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the
time of the predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of
the estate by the beneficiary, and the tax measured by the value of the property transmitted at that time
regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the
estate on which the inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at
bar, the defendant and the trial court allowed a deduction of only P480.81. This sum represents the expenses
and disbursements of the executors until March 10, 1924, among which were their fees and the proven debts
of the deceased. The plaintiff contends that the compensation and fees of the trustees, which aggregate
P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of the
Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must
bear the tax, when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial
expenses of the testamentary or intestate proceedings, . . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How.,
535; 14 Law. ed., 1047). But from this it does not follow that the compensation due him may lawfully be
deducted in arriving at the net value of the estate subject to tax. There is no statute in the Philippines which
requires trustees' commissions to be deducted in determining the net value of the estate subject to inheritance
tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's
Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the
contrary, in paragraph 5 of his will, the testator expressed the desire that his real estate be handled and
managed by his executors until the expiration of the period of ten years therein provided. Judicial expenses are
expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin County Probate Court (112 N. W.,
878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the administration of the
estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within
the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no
reference to closing the estate for the purpose of a distribution thereof to those entitled to it, and are not
required or essential to the perfection of the rights of the heirs or legatees. . . . Trusts . . . of the character of
that here before the court, are created for the the benefit of those to whom the property ultimately passes, are
of voluntary creation, and intended for the preservation of the estate. No sound reason is given to support the
contention that such expenses should be taken into consideration in fixing the value of the estate for the
purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the
provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But
Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died
on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which
took effect on March 9, 1922.
It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the
decedent (26 R. C. L., p. 206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought
not to be required to guess the outcome of pending measures. Of course, a tax statute may be made
retroactive in its operation. Liability for taxes under retroactive legislation has been "one of the incidents of
social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that
a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491;
Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch
vs. Turrish, 247 U. S., 221.) "A statute should be considered as prospective in its operation, whether it enacts,
amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it
shall have a retroactive effect, . . . ." (61 C. J., P. 1602.) Though the last paragraph of section 5 of Regulations
No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised
Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No.
3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can
begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are
more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and,
therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal
Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1)
the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided
for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector of
Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state
which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense
has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts,
and establish penalties for their violation, and even those which, without expressly prohibiting certain acts,
impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes
collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although
there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington,
141 U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101
Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not
applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a
retroactive effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid
within another given time. As stated by this court, "the mere failure to pay one's tax does not render one
delinqent until and unless the entire period has eplased within which the taxpayer is authorized by law to make
such payment without being subjected to the payment of penalties for fasilure to pay his taxes within the
prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)
The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of
the decedent's property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee
was delivery to the cestui que trust, the beneficiery in this case, within the meaning of the first paragraph of
subsection (b) of section 1544 of the Revised Administrative Code. This contention is well taken and is
sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in conformity with the
wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will
but the intention to create one is clear. No particular or technical words are required to create a testamentary
trust (69 C. J., p. 711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact,
the use of these two words is not conclusive on the question that a trust is created (69 C. J., p. 714). "To
create a trust by will the testator must indicate in the will his intention so to do by using language sufficient to
separate the legal from the equitable estate, and with sufficient certainty designate the beneficiaries, their
interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1)
Sufficient words to raise a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some
jurisdictions expressly or in effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator
intended to create a trust. He ordered in his will that certain of his properties be kept together undisposed
during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in
appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation
to sec. 590, Code of Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not
remove it from the operation of our inheritance tax laws or exempt it from the payment of the inheritance tax.
The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the
penalties of the laws. This is so for the reason already stated that the delivery of the estate to the trustee
was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an
instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law.
ed., 1086). When Moore accepted the trust and took possesson of the trust estate he thereby admitted that the
estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692,
n. 63). He did not acquire any beneficial interest in the estate. He took such legal estate only as the proper
execution of the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of the testator's
wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).
The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that
the payment of the tax could be postponed or delayed by the creation of a trust of the type at hand, the result
would be plainly disastrous. Testators may provide, as Thomas Hanley has provided, that their estates be not
delivered to their beneficiaries until after the lapse of a certain period of time. In the case at bar, the period is
ten years. In other cases, the trust may last for fifty years, or for a longer period which does not offend the rule
against petuities. The collection of the tax would then be left to the will of a private individual. The mere
suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of
government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S.,
491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co.
vs. Kentucky, 199 U. S., 194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge,
11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not upon the privileges enjoyed by, or the
protection afforded to, a citizen by the government but upon the necessity of money for the support of the state
(Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct.
Rep., 340; 43 Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation
(Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon
tax laws so loose a construction as to permit evasions on merely fanciful and insubstantial distictions. (U. S. vs.
Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed. Cas. No. 16,690, followed
in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21
Phil., 300; Muoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39
Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed
to avoid the possibilities of tax evasion. Construed this way, the statute, without resulting in injustice to the
taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is
allowed to grant injunction to restrain the collection of any internal revenue tax ( sec. 1578, Revised
Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil.,
461), this court had occassion to demonstrate trenchment adherence to this policy of the law. It held that "the
fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they were
prevented from praying their internal revenue taxes on time and by mutual agreement closed their homes and
stores and remained therein, does not authorize the Collector of Internal Revenue to extend the time
prescribed for the payment of the taxes or to accept them without the additional penalty of twenty five per
cent." (Syllabus, No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted
to enforce the taxes levied should be interfered with as little as possible. Any delay in the proceedings of the
officers, upon whom the duty is developed of collecting the taxes, may derange the operations of government,
and thereby, cause serious detriment to the public." (Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66;
Churchill and Tait vs. Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and,
therefore, liable for the payment of interest and surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest
due should be computed from that date and it is error on the part of the defendant to compute it one month
later. The provisions cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the
Collector of Internal Revenuen or this court may remit or decrease such interest, no matter how heavily it may
burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the
Collector of Internal Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b),
par. 2, Revised Administrative Code). Demand was made by the Deputy Collector of Internal Revenue upon
Moore in a communiction dated October 16, 1931 (Exhibit 29). The date fixed for the payment of the tax and
interest was November 30, 1931. November 30 being an official holiday, the tenth day fell on December 1,
1931. As the tax and interest due were not paid on that date, the estate became liable for the payment of the
surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his
brief.
We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley
inaccordance with the conclusions we have reached.
At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth
P1,465, or a total of P29,385. Deducting from this amount the sum of P480.81, representing allowable
deductions under secftion 1539 of the Revised Administrative Code, we have P28,904.19 as the net value of
the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be
imposed at the rate of one per centum upon the first ten thousand pesos and two per centum upon the amount
by which the share exceed thirty thousand pesos, plus an additional two hundred per centum. One per centum
of ten thousand pesos is P100. Two per centum of P18,904.19 is P378.08. Adding to these two sums an
additional two hundred per centum, or P965.16, we have as primary tax, correctly computed by the defendant,
the sum of P1,434.24.
To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised
Administrative Code. First should be added P1,465.31 which stands for interest at the rate of twelve per
centum per annum from March 10, 1924, the date of delinquency, to September 15, 1932, the date of payment
under protest, a period covering 8 years, 6 months and 5 days. To the tax and interest thus computed should
be added the sum of P724.88, representing a surhcarge of 25 per cent on both the tax and interest, and also
P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the
estate. This last sum is P390.42 more than the amount demanded by the defendant in his counterclaim. But,
as we cannot give the defendant more than what he claims, we must hold that the plaintiff is liable only in the
sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So
ordered.
12. VILLANUEVA VS CITY OF ILOILO
EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.

Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo declaring illegal
Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License Tax On Persons Engaged
In The Business Of Operating Tenement Houses," and ordering the City to refund to the plaintiffs-appellees the
sums of collected from them under the said ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as
follows: (1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly
engaged in or dedicated to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment;
(3) tenement house, partly or wholly engaged in business in any other streets, P12.00 per apartment. The
validity and constitutionality of this ordinance were challenged by the spouses Eusebio Villanueva and
Remedies Sian Villanueva, owners of four tenement houses containing 34 apartments. This Court, in City of
Iloilo vs. Remedios Sian Villanueva and Eusebio Villanueva, L-12695, March 23, 1959, declared the
ordinance ultra vires, "it not appearing that the power to tax owners of tenement houses is one among those
clearly and expressly granted to the City of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic
Act 2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an
ordinance similar to that previously declared by this Court as ultra vires, enacted Ordinance 11, series of 1960,
hereunder quoted in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE

BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of Republic Act No.
2264, otherwise known as the Autonomy Law of Local Government, that:
Section 1. A municipal license tax is hereby imposed on tenement houses in accordance with the
schedule of payment herein provided.
Section 2. Tenement house as contemplated in this ordinance shall mean any building or dwelling
for renting space divided into separate apartments or accessorias.
Section 3. The municipal license tax provided in Section 1 hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials P20.00 per door p.a.
(b) Apartment house made of mixed materials P10.00 per door p.a.
II Rooming house of strong materials P10.00 per door p.a.
Rooming house of mixed materials P5.00 per door p.a.
III. Tenement house partly or wholly engaged in or dedicated to

business in the following streets: J.M. Basa, Iznart, Aldeguer,
Guanco and Ledesma from Plazoleto Gay to Valeria. St. P30.00 per door p.a.
IV. Tenement house partly or wholly engaged in or dedicated to

business in any other street P12.00 per door p.a.
V. Tenement houses at the streets surrounding the super

market as soon as said place is declared commercial P24.00 per door p.a.
Section 4. All ordinances or parts thereof inconsistent herewith are hereby amended.
Section 5. Any person found violating this ordinance shall be punished with a fine note exceeding
Two Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months or both at the
discretion of the Court.
Section 6 This ordinance shall take effect upon approval.

ENACTED, January 15, 1960.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement
houses, aggregately containing 43 apartments, while the other appellees and the same Remedios S.
Villanueva are owners of ten apartments. Each of the appellees' apartments has a door leading to a street and
is rented by either a Filipino or Chinese merchant. The first floor is utilized as a store, while the second floor is
used as a dwelling of the owner of the store. Eusebio Villanueva owns, likewise, apartment buildings for rent in
Bacolod, Dumaguete City, Baguio City and Quezon City, which cities, according to him, do not impose
tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva and
Remedios S. Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian
Melliza, Teresita S. Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00.
Eusebio Villanueva has likewise been paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint,
respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance 11, series of 1960,
be declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact, and
unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the
equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from
them under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the grounds that (a)
"Republic Act 2264 does not empower cities to impose apartment taxes," (b) the same is "oppressive and
unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it
constitutes not only double taxation, but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged
in any occupation or business, or exercising privileges in chartered cities, municipalities or municipal
districts by requiring them to secure licences at rates fixed by the municipal board or city council of the
city, the municipal council of the municipality, or the municipal district council of the municipal district; to
collect fees and charges for services rendered by the city, municipality or municipal district; to regulate
and impose reasonable fees for services rendered in connection with any business, profession or
occupation being conducted within the city, municipality or municipal district and otherwise to levy for
public purposes, just and uniform taxes, licenses or fees; Provided, That municipalities and municipal
districts shall, in no case, impose any percentage tax on sales or other taxes in any form based thereon
nor impose taxes on articles subject to specific tax, except gasoline, under the provisions of the
National Internal Revenue Code; Provided, however, That no city, municipality or municipal district may
levy or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of any newspaper,
magazine, review or bulletin appearing at regular intervals and having fixed prices for for subscription
and sale, and which is not published primarily for the purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat
and power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses or
permits for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national government, tonnage,
and all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance
companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance shall
provide otherwise: Provided, however, That the Secretary of Finance shall have authority to suspend
the effectivity of any ordinance within one hundred and twenty days after its passage, if, in his opinion,
the tax or fee therein levied or imposed is unjust, excessive, oppressive, or confiscatory, and when the
said Secretary exercises this authority the effectivity of such ordinance shall be suspended.
In such event, the municipal board or city council in the case of cities and the municipal council or
municipal district council in the case of municipalities or municipal districts may appeal the decision of
the Secretary of Finance to the court during the pendency of which case the tax levied shall be
considered as paid under protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments broad taxing
authority which extends to almost "everything, excepting those which are mentioned therein," provided that the
tax so levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or
is not repugnant to a controlling statute.2 Thus, when a tax, levied under the authority of a city or municipal
ordinance, is not within the exceptions and limitations aforementioned, the same comes within the ambit of the
general rule, pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in
casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in section 2 of
the Local Autonomy Act? For this purpose, it is necessary to determine the true nature of the tax. The
appellees strongly maintain that it is a "property tax" or "real estate tax,"3 and not a "tax on persons engaged in
any occupation or business or exercising privileges," or a license tax, or a privilege tax, or an excise
tax.4 Indeed, the title of the ordinance designates it as a "municipal license tax on persons engaged in
the business of operating tenement houses," while section 1 thereof states that a "municipal license tax is
hereby imposed on tenement houses." It is the phraseology of section 1 on which the appellees base their
contention that the tax involved is a real estate tax which, according to them, makes the ordinance ultra
vires as it imposes a levy "in excess of the one per centum real estate tax allowable under Sec. 38 of the Iloilo
City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax. Obviously,
the appellees confuse the tax with the real estate tax within the meaning of the Assessment Law,6 which,
although not applicable to the City of Iloilo, has counterpart provisions in the Iloilo City Charter. 7 A real estate
tax is a direct tax on the ownership of lands and buildings or other improvements thereon, not specially
exempted,8 and is payable regardless of whether the property is used or not, although the value may vary in
accordance with such factor.9 The tax is usually single or indivisible, although the land and building or
improvements erected thereon are assessed separately, except when the land and building or improvements
belong to separate owners.10 It is a fixed proportion11 of the assessed value of the property taxed, and
requires, therefore, the intervention of assessors.12 It is collected or payable at appointed times,13 and it
constitutes a superior lien on and is enforceable against the property14 subject to such taxation, and not by
imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a tax on the
land on which the tenement houses are erected, although both land and tenement houses may belong to the
same owner. The tax is not a fixed proportion of the assessed value of the tenement houses, and does not
require the intervention of assessors or appraisers. It is not payable at a designated time or date, and is not
enforceable against the tenement houses either by sale or distraint. Clearly, therefore, the tax in question is not
a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court looks less
to its words and more to the context, subject-matter, consequence and effect. Accordingly, what is within the
spirit is within the ordinance although it is not within the letter thereof, while that which is in the letter, although
not within the spirit, is not within the ordinance."15 It is within neither the letter nor the spirit of the ordinance that
an additional real estate tax is being imposed, otherwise the subject-matter would have been not merely
tenement houses. On the contrary, it is plain from the context of the ordinance that the intention is to impose a
license tax on the operation of tenement houses, which is a form of business or calling. The ordinance, in both
its title and body, particularly sections 1 and 3 thereof, designates the tax imposed as a "municipal license tax"
which, by itself, means an "imposition or exaction on the right to use or dispose of property, to pursue a
business, occupation, or calling, or to exercise a privilege."16.
"The character of a tax is not to be fixed by any isolated words that may beemployed in the statute
creating it, but such words must be taken in the connection in which they are used and the true
character is to be deduced from the nature and essence of the subject."17 The subject-matter of the
ordinance is tenement houses whose nature and essence are expressly set forth in section 2 which
defines a tenement house as "any building or dwelling for renting space divided into separate
apartments or accessorias." The Supreme Court, in City of Iloilo vs. Remedios Sian Villanueva, et al.,
L-12695, March 23, 1959, adopted the definition of a tenement house18 as "any house or building, or
portion thereof, which is rented, leased, or hired out to be occupied, or is occupied, as the home or
residence of three families or more living independently of each other and doing their cooking in the
premises or by more than two families upon any floor, so living and cooking, but having a common right
in the halls, stairways, yards, water-closets, or privies, or some of them." Tenement houses, being
necessarily offered for rent or lease by their very nature and essence, therefore constitute a distinct
form of business or calling, similar to the hotel or motel business, or the operation of lodging houses or
boarding houses. This is precisely one of the reasons why this Court, in the said case of City of Iloilo
vs. Remedios Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires, because, although the
municipal board of Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license
fee for, and regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding
houses, livery garages, public warehouses, pawnshops, theaters, cinematographs," tenement
houses, which constitute a different business enterprise,19 are not mentioned in the aforestated section
of the City Charter of Iloilo. Thus, in the aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one among those clearly and
expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot be assumed and
hence the ordinance in question is ultra vires insofar as it taxes a tenement house such as those
belonging to defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax or an apartment tax.
Called by either name, it is not among the exceptions listed in section 2 of the Local Autonomy Act. On the
other hand, the imposition by the ordinance of a license tax on persons engaged in the business of operating
tenement houses finds authority in section 2 of the Local Autonomy Act which provides that chartered cities
have the authority to impose municipal license taxes or fees upon persons engaged in any occupation or
business, or exercising privileges within their respective territories, and "otherwise to levy for public purposes,
just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but treble at that,"
because "buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of the
National Internal Revenue Code, besides the tenement tax under the said ordinance." Obviously, what the trial
court refers to as "income taxes" are the fixed taxes on business and occupation provided for in section 182,
Title V, of the National Internal Revenue Code, by virtue of which persons engaged in "leasing or renting
property, whether on their account as principals or as owners of rental property or properties," are considered
"real estate dealers" and are taxed according to the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National Internal
Revenue Code as real estate dealers, and still taxable under the ordinance in question, the argument against
double taxation may not be invoked. The same tax may be imposed by the national government as well as by
the local government. There is nothing inherently obnoxious in the exaction of license fees or taxes with
respect to the same occupation, calling or activity by both the State and a political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate taxes and
the tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-settled rule that a
license tax may be levied upon a business or occupation although the land or property used in connection
therewith is subject to property tax. The State may collect an ad valorem tax on property used in a calling, and
at the same time impose a license tax on that calling, the imposition of the latter kind of tax being in no sensea
double tax.22.
"In order to constitute double taxation in the objectionable or prohibited sense the same property must
be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or
subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the
same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or
character of tax."23 It has been shown that a real estate tax and the tenement tax imposed by the
ordinance, although imposed by the sametaxing authority, are not of the same kind or character.
At all events, there is no constitutional prohibition against double taxation in the Philippines.24 It is something
not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as
the requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only
oppressive because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both, if the
owner or owners of the tenement buildings divided into apartments do not pay the tenement or apartment tax
fixed in said ordinance," but also unconstitutional as it subjects the owners of tenement houses to criminal
prosecution for non-payment of an obligation which is purely sum of money." The lower court apparently had in
mind, when it made the above ruling, the provision of the Constitution that "no person shall be imprisoned for a
debt or non-payment of a poll tax."26 It is elementary, however, that "a tax is not a debt in the sense of an
obligation incurred by contract, express or implied, and therefore is not within the meaning of constitutional or
statutory provisions abolishing or prohibiting imprisonment for debt, and a statute or ordinance which punishes
the non-payment thereof by fine or imprisonment is not, in conflict with that prohibition."27 Nor is the tax in
question a poll tax, for the latter is a tax of a fixed amount upon all persons, or upon all persons of a certain
class, resident within a specified territory, without regard to their property or the occupations in which they may
be engaged.28 Therefore, the tax in question is not oppressive in the manner the lower court puts it. On the
other hand, the charter of Iloilo City29 empowers its municipal board to "fix penalties for violations of
ordinances, which shall not exceed a fine of two hundred pesos or six months' imprisonment, or both such fine
and imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila, supra, this Court overruled
the pronouncement of the lower court declaring illegal and void an ordinance imposing an occupation tax on
persons exercising various professions in the City of Manilabecause it imposed a penalty of fine and
imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
"... because while the owners of the other buildings only pay real estate tax and income taxes the
ordinance imposes aside from these two taxes an apartment or tenement tax. It should be noted that in
the assessment of real estate tax all parts of the building or buildings are included so that the
corresponding real estate tax could be properly imposed. If aside from the real estate tax the owner or
owners of the tenement buildings should pay apartment taxes as required in the ordinance then it will
violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue that there is "lack of uniformity" and
"relative inequality," because "only the taxpayers of the City of Iloilo are singled out to pay taxes on their
tenement houses, while citizens of other cities, where their councils do not enact a similar tax ordinance, are
permitted to escape such imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has already ruled that
tenement houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform and equal
when imposed upon all property of the same class or character within the taxing authority." 31 The fact,
therefore, that the owners of other classes of buildings in the City of Iloilo do not pay the taxes imposed by the
ordinance in question is no argument at all against uniformity and equality of the tax imposition. Neither is the
rule of equality and uniformity violated by the fact that tenement taxesare not imposed in other cities, for the
same rule does not require that taxes for the same purpose should be imposed in different territorial
subdivisions at the same time.32 So long as the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and uniformity of taxation is
accomplished.33 The plaintiffs-appellees, as owners of tenement houses in the City of Iloilo, have not shown
that the tax burden is not equally or uniformly distributed among them, to overthrow the presumption that tax
statutes are intended to operate uniformly and equally.34.
5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a mere
reproduction of Ordinance 86 of the City of Iloilo which was declared by this Court in L-12695, supra, as ultra
vires, the decision in that case should be accorded the effect of res judicata in the present case or should
constitute estoppel by judgment. To dispose of this contention, it suffices to say that there is no identity of
subject-matter in that case andthis case because the subject-matter in L-12695 was an ordinance which dealt
not only with tenement houses but also warehouses, and the said ordinance was enacted pursuant to the
provisions of the City charter, while the ordinance in the case at bar was enacted pursuant to the provisions of
the Local Autonomy Act. There is likewise no identity of cause of action in the two cases because the main
issue in L-12695 was whether the City of Iloilo had the power under its charter to impose the tax levied by
Ordinance 11, series of 1960, under the Local Autonomy Act which took effect on June 19, 1959, and therefore
was not available for consideration in the decision in L-12695 which was promulgated on March 23, 1959.
Moreover, under the provisions of section 2 of the Local Autonomy Act, local governments may now tax any
taxable subject-matter or object not included in the enumeration of matters removed from the taxing power of
local governments.Prior to the enactment of the Local Autonomy Act the taxes that could be legally levied by
local governments were only those specifically authorized by law, and their power to tax was construed
in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the complaint is
hereby dismissed. No pronouncement as to costs..
13. CITY OF BAGUIO VS DE LEON
CITY OF BAGUIO, plaintiff-appellee,

vs.
FORTUNATO DE LEON, defendant-appellant.
The City Attorney for plaintiff-appellee.
Fortunato de Leon for and in his own behalf as defendant-appellant.
FERNANDO, J.:
In this appeal, a lower court decision upholding the validity of an ordinance1 of the City of Baguio imposing a
license fee on any person, firm, entity or corporation doing business in the City of Baguio is assailed by
defendant-appellant Fortunato de Leon. He was held liable as a real estate dealer with a property therein worth
more than P10,000, but not in excess of P50,000, and therefore obligated to pay under such ordinance the
P50 annual fee. That is the principal question. In addition, there has been a firm and unyielding insistence by
defendant-appellant of the lack of jurisdiction of the City Court of Baguio, where the suit originated, a complaint
having been filed against him by the City Attorney of Baguio for his failure to pay the amount of P300 as
license fee covering the period from the first quarter of 1958 to the fourth quarter of 1962, allegedly, inspite of
repeated demands. Nor was defendant-appellant agreeable to such a suit being instituted by the City
Treasurer without the consent of the Mayor, which for him was indispensable. The lower court was of a
different mind.
In its decision of December 19, 1964, it declared the above ordinance as amended, valid and subsisting, and
held defendant-appellant liable for the fees therein prescribed as a real estate dealer. Hence, this appeal.
Assume the validity of such ordinance, and there would be no question about the liability of defendant-
appellant for the above license fee, it being shown in the partial stipulation of facts, that he was "engaged in
the rental of his property in Baguio" deriving income therefrom during the period covered by the first quarter of
1958 to the fourth quarter of 1962.
The source of authority for the challenged ordinance is supplied by Republic Act No. 329, amending the city
charter of Baguio2 empowering it to fix the license fee and regulate "businesses, trades and occupations as
may be established or practiced in the City."
Unless it can be shown then that such a grant of authority is not broad enough to justify the enactment of the
ordinance now assailed, the decision appealed from must be affirmed. The task confronting defendant-
appellant, therefore, was far from easy. Why he failed is understandable, considering that even a cursory
reading of the above amendment readily discloses that the enactment of the ordinance in question finds
support in the power thus conferred.
Nor is the question raised by him as to the validity thereof novel in character. In Medina v. City of Baguio,3 the
effect of the amendatory section insofar as it would expand the previous power vested by the city charter was
clarified in these terms: "Appellants apparently have in mind section 2553, paragraph (c) of the Revised
Administrative Code, which empowers the City of Baguio merely to impose a license fee for the purpose of
rating the business that may be established in the city. The power as thus conferred is indeed limited, as it
does not include the power to levy a tax. But on July 15, 1948, Republic Act No. 329 was enacted amending
the charter of said city and adding to its power to license the power to tax and to regulate. And it is precisely
having in view this amendment that Ordinance No. 99 was approved in order to increase the revenues of the
city. In our opinion, the amendment above adverted to empowers the city council not only to impose a license
fee but also to levy a tax for purposes of revenue, more so when in amending section 2553 (b), the phrase 'as
provided by law' has been removed by section 2 of Republic Act No. 329. The city council of Baguio, therefore,
has now the power to tax, to license and to regulate provided that the subjects affected be one of those
included in the charter. In this sense, the ordinance under consideration cannot be considered ultra
vires whether its purpose be to levy a tax or impose a license fee. The terminology used is of no
consequence."
It would be an undue and unwarranted emasculation of the above power thus granted if defendant-appellant
were to be sustained in his contention that no such statutory authority for the enactment of the challenged
ordinance could be discerned from the language used in the amendatory act. That is about all that needs to be
said in upholding the lower court, considering that the City of Baguio was not devoid of authority in enacting
this particular ordinance. As mentioned at the outset, however, defendant-appellant likewise alleged procedural
missteps and asserted that the challenged ordinance suffered from certain constitutional infirmities. To such
points raised by him, we shall now turn.
1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City Court of Baguio in the suit for
the collection of the real estate dealer's fee from him in the amount of P300. He contended before the lower
court, and it is his contention now, that while the amount of P300 sought was within the jurisdiction of the City
Court of Baguio where this action originated, since the principal issue was the legality and constitutionality of
the challenged ordinance, it is not such City Court but the Court of First Instance that has original jurisdiction.
There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction. Only recently, on
September 7, 1968 to be exact, we rejected a contention similar in character in Nemenzo v. Sabillano.4 The
plaintiff in that case filed a claim for the payment of his salary before the Justice of the Peace Court of
Pagadian, Zamboanga del Sur. The question of jurisdiction was raised; the defendant Mayor asserted that
what was in issue was the enforcement of the decision of the Commission of Civil Service; the Justice of the
Peace Court was thus without jurisdiction to try the case. The above plea was curtly dismissed by Us, as what
was involved was "an ordinary money claim" and therefore "within the original jurisdiction of the Justice of the
Peace Court where it was filed, considering the amount involved." Such is likewise the situation here.
Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendant this license fee
corresponding to the years 1951 and 1952 was filed with the Municipal Court of Manila, in view of the amount
involved. The thought that the municipal court lacked jurisdiction apparently was not even in the minds of the
parties and did not receive any consideration by this Court.
Evidently, the fear is entertained by defendant-appellant that whenever a constitutional question is raised, it is
the Court of First Instance that should have original jurisdiction on the matter. It does not admit of doubt,
however, that what confers jurisdiction is the amount set forth in the complaint. Here, the sum sought to be
recovered was clearly within the jurisdiction of the City Court of Baguio.
Nor could it be plausibly maintained that the validity of such ordinance being open to question as a defense
against its enforcement from one adversely affected, the matter should be elevated to the Court of First
Instance. For the City Court could rely on the presumption of the validity of such ordinance,6 and the mere fact,
however, that in the answer to such a complaint a constitutional question was raised did not suffice to oust the
City Court of its jurisdiction. The suit remains one for collection, the lack of validity being only a defense to such
an attempt at recovery. Since the City Court is possessed of judicial power and it is likewise axiomatic that the
judicial power embraces the ascertainment of facts and the application of the law, the Constitution as the
highest law superseding any statute or ordinance in conflict therewith, it cannot be said that a City Court is
bereft of competence to proceed on the matter. In the exercise of such delicate power, however, the
admonition of Cooley on inferior tribunals is well worth remembering. Thus: "It must be evident to any one that
the power to declare a legislative enactment void is one which the judge, conscious of the fallibility of the
human judgment, will shrink from exercising in any case where he can conscientiously and with due regard to
duty and official oath decline the responsibility."7 While it remains undoubted that such a power to pass on the
validity of an ordinance alleged to infringe certain constitutional rights of a litigant exists, still it should be
exercised with due care and circumspection, considering not only the presumption of validity but also the
relatively modest rank of a city court in the judicial hierarchy.
2. To repeat the challenged ordinance cannot be considered ultra vires as there is more than ample statutory
authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because of
the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated
the requirement of uniformity. We do not view the matter thus.
As to why double taxation is not violative of due process, Justice Holmes made clear in this language: "The
objection to the taxation as double may be laid down on one side. ... The 14th Amendment [the due process
clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or
proceedings unconstitutional on other grounds."8With that decision rendered at a time when American
sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it
delivered the coup de graceto the bogey of double taxation as a constitutional bar to the exercise of the taxing
power. It would seem though that in the United States, as with us, its ghost as noted by an eminent critic, still
stalks the juridical state. In a 1947 decision, however,9 we quoted with approval this excerpt from a leading
American decision:10 "Where, as here, Congress has clearly expressed its intention, the statute must be
sustained even though double taxation results."
At any rate, it has been expressly affirmed by us that such an "argument against double taxation may not be
invoked where one tax is imposed by the state and the other is imposed by the city ..., 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."11
The above would clearly indicate how lacking in merit is this argument based on double taxation.
Now, as to the claim that there was a violation of the rule of uniformity established by the constitution.
According to the challenged ordinance, a real estate dealer who leases property worth P50,000 or above must
pay an annual fee of P100. If the property is worth P10,000 but not over P50,000, then he pays P50 and P24 if
the value is less than P10,000. On its face, therefore, the above ordinance cannot be assailed as violative of
the constitutional requirement of uniformity. In Philippine Trust Company v. Yatco,12 Justice Laurel, speaking
for the Court, stated: "A tax is considered uniform when it operates with the same force and effect in every
place where the subject may be found."
There was no occasion in that case to consider the possible effect on such a constitutional requirement where
there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso.13 Thus: "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; ..." About two years later, Justice Tuason, speaking for this Court in Manila Race Horses Trainers
Assn. v. De la Fuente14incorporated the above excerpt in his opinion and continued: "Taking everything into
account, the differentiation against which the plaintiffs complain conforms to the practical dictates of justice and
equity and is not discriminatory within the meaning of the Constitution."
To satisfy this requirement then, all that is needed as held in another case decided two years later, 15 is that
the statute or ordinance in question "applies equally to all persons, firms and corporations placed in similar
situation." This Court is on record as accepting the view in a leading American case16 that "inequalities which
result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation." 17
It is thus apparent from the above that in much the same way that the plea of double taxation is unavailing, the
allegation that there was a violation of the principle of uniformity is inherently lacking in persuasiveness. There
is no need to pass upon the other allegations to assail the validity of the above ordinance, it being maintained
that the license fees therein imposed "is excessive, unreasonable and oppressive" and that there is a failure to
observe the mandate of equal protection. A reading of the ordinance will readily disclose their inherent lack of
plausibility.
3. That would dispose of all the errors assigned, except the last two, which would predicate a grievance on the
complaint having been started by the City Treasurer rather than the City Mayor of Baguio. These alleged
errors, as was the case with the others assigned, lack merit.
In much the same way that an act of a department head of the national government, performed within the limits
of his authority, is presumptively the act of the President unless reprobated or disapproved, 18 similarly the act
of the City Treasurer, whose position is roughly analogous, may be assumed to carry the seal of approval of
the City Mayor unless repudiated or set aside. This should be the case considering that such city official is
called upon to see to it that revenues due the City are collected. When administrative steps are futile and
unavailing, given the stubbornness and obduracy of a taxpayer, convinced in good faith that no tax was due,
judicial remedy may be resorted to by him. It would be a reflection on the state of the law if such fidelity to duty
would be met by condemnation rather than commendation.
So, much for the analytical approach. The conclusion thus reached has a reinforcement that comes to it from
the functional and pragmatic test. If a city treasurer has to await the nod from the city mayor before a municipal
ordinance is enforced, then opportunity exists for favoritism and undue discrimination to come into play.
Whatever valid reason may exist as to why one taxpayer is to be accorded a treatment denied another, the
suspicion is unavoidable that such a manifestation of official favor could have been induced by unnamed but
not unknown consideration. It would not be going too far to assert that even defendant-appellant would find no
satisfaction in such a sad state of affairs. The more desirable legal doctrine therefore, on the assumption that a
choice exists, is one that would do away with such temptation on the part of both taxpayer and public official
alike.
WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed. Costs against defendant-
appellant.
14. PEPSI COLA BOTTLING CO. VS CITY OF BUTUAN
PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees.
Sabido, Sabido and Associates for plaintiff-appellant.

The City Attorney of Butuan City for defendants-appellees.
CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan, dismissing plaintiff's
complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal
place of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its
municipal board and its City Treasurer. Plaintiff seeks to recover the sums paid by it to the City of Butuan
hereinafter referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110, as
amended by Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to
prevent the enforcement thereof. Both parties submitted the case for decision in the lower court upon a
stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola"
soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province of
Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan City
warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently
amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110,
Series of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per
case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from
August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of P14,177.03 paid
under protest and those that if may later on pay until the termination of this case on the ground that
Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax imposed is excessive and
that it is unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City, has prepared a
form to be accomplished by the plaintiff for the computation of the tax. A copy of the form is enclosed
herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961 to July 30,
1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to "D-1" to "D-5". In this
Profit and Loss Statement, the defendants claim that the plaintiff is not entitled to a depreciation of
P3,052.63 but only P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to
P3,104.52. The plaintiff differs only on the claim of depreciation which the company claims to be
P3,052.62. This is in accordance with the findings of the representative of the undersigned City
Attorney who verified the records of the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles was increased to
P1.92 which price is uniform throughout the Philippines. Said increase was made due to the increase in
the production cost of its manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality and illegality of
Ordinance No. 110, as amended of the City of Butuan in their respective memoranda.
xxx xxx x x x1wph1.t
Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview
thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer "engaged in selling
liquors, imported or local, in the City," of taxes at specified rates. Section 3 prescribes a tax of P0.10 per case
of 24 bottles of the soft drinks and carbonated beverages therein named, and "all other soft drinks or
carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the
ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar month." Pursuant to
Section 5, the taxes "shall be based and computed from the cargo manifest or bill of lading or any other record
showing the number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks received within
the month." Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes within the period
prescribed and the penalties imposable for "deliberate and willful refusal to pay the tax mentioned in Sections 2
and 3" or for failure "to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or
record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes the ordinance
applicable to soft drinks, liquors or carbonated drinks "received outside" but "sold within" the City. Section 10 of
the ordinance provides that the revenue derived therefrom "shall be alloted as follows: 40% for Roads and
Bridges Fund; 40% for the General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of the nature of an
import tax; (2) it amounts to double taxation; (3) it is excessive, oppressive and confiscatory; (4) it is highly
unjust and discriminatory; and (5) section 2 of Republic Act No. 2264, upon the authority of which it was
enacted, is an unconstitutional delegation of legislative powers.
The second and last objections are manifestly devoid of merit. Indeed independently of whether or not the
tax in question, when considered in relation to the sales tax prescribed by Acts of Congress, amounts to
double taxation, on which we need not and do not express any opinion - double taxation, in general, is not
forbidden by our fundamental law. We have not adopted, as part thereof, the injunction against double taxation
found in the Constitution of the United States and of some States of the Union.1 Then, again, the general
principle against delegation of legislative powers, in consequence of the theory of separation of powers 2 is
subject to one well-established exception, namely: legislative powers may be delegated to local governments
to which said theory does not apply3 in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of soft drinks or
carbonated drinks in the production and sale of which plaintiff is engaged or less than P0.0042 per bottle,
is manifestly too small to be excessive, oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this connection, it is noteworthy
that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers
"engaged in selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax
upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed only
upon "any agent and/or consignee of any person, association, partnership, company or corporation engaged in
selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which was inserted by said Ordinance
No. 122:
... Definition of the Term Consignee or Agent. For purposes of this Ordinance, a consignee of
agent shall mean any person, association, partnership, company or corporation who acts in the place of
another by authority from him or one entrusted with the business of another or to whom is consigned or
shipped no less than 1,000 cases of hard liquors or soft drinks every month for resale, either retail or
wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the
tax, unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be one
engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or
consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo manifest or bill of lading ... showing
the number of cases" not sold but "received" by the taxpayer, the intention to limit the application of the
ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent.
Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendant's authority
to impose by express provision of law.4
Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be
invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law
therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by
local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if
the same exceeded those made by said agents or consignees of producers or merchants established outside
the City of Butuan, would be exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or
equality under all circumstances, or negate the authority to classify the objects of taxation. 5 The classification
made in the exercise of this authority, to be valid, must, however, be reasonable6 and this requirement is not
deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are
germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present
conditions, but, also, to future conditions substantially identical to those of the present; and (4) the
classification applies equally all those who belong to the same class.7
These conditions are not fully met by the ordinance in question.8 Indeed, if its purpose were merely to levy a
burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealers
other than agents or consignees of producers or merchants established outside the City of Butuan should be
exempt from the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall be entered annulling
Ordinance No. 110, as amended by Ordinance No. 122, and sentencing the City of Butuan to refund to plaintiff
herein the amounts collected from and paid under protest by the latter, with interest thereon at the legal rate
from the date of the promulgation of this decision, in addition to the costs, and defendants herein are,
accordingly, restrained and prohibited permanently from enforcing said Ordinance, as amended. It is so
ordered.
15. DELPHER TRADERS INC VS IAC
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which sustained the private
respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a
parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale
which violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square
meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of
Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the
same property and providing that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the same to the lessee and the letter
has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6
inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title,
as per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter
the leased property (TCT No.T-4240) together with another parcel of land also located in
Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the
lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of
Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the
property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the
decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the
defendants and all persons deriving rights therefrom to convey the said property to plaintiff who
may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095
whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and
costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's
decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the
petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners
a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after
the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total
of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1
Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of
sale which, in effect, prejudiced the private respondent's right of first refusal over the leased property included
in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher
Trades Corporation is a family corporation; that the corporation was organized by the children of the two
spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles)
who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control
over the property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of
real estate, including Lot No. 1095 which had been leased to Hydro Pipes Philippines, were transferred to the
corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of
property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value
shares of stock which are equivalent to a 55% majority in the corporation because the other owners only
owned 2,000 shares; and that at the time of incorporation, he knew all about the contract of lease of Lot. No.
1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration, they refer to this scheme as
"estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the
subject parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege:
"Considering that the beneficial ownership and control of petitioner corporation remained in the hands of the
original co-owners, there was no transfer of actual ownership interests over the land when the same was
transferred to petitioner corporation in exchange for the latter's shares of stock. The transfer of ownership, if
anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or
conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the
same, there being in substance and in effect an Identity of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and
that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within
the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in
money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in
consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity
separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades
Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher
Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this
separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership
interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange
for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly
from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing
Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired
2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the
Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an
agreement to take and pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich
243, cited in Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III,
1980 Edition, p. 430) It is significant that the Pachecos took no par value shares in exchange for their
properties.
A no-par value share does not purport to represent any stated proportionate interest in the
capital stock measured by value, but only an aliquot part of the whole number of such shares of
the issuing corporation. The holder of no-par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum in money, as in the case of
par value shares. The capital stock of a corporation issuing only no-par value shares is not set
forth by a stated amount of money, but instead is expressed to be divided into a stated number
of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an
aliquot sharer in the assets of the corporation, no matter what value they may have, to the
extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons
interested in the financial condition of a corporation is focused upon the value of assets and the
amount of its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of
the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at
P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of
the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the
same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of their properties and at the same time save on
inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of
exchange on the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the
spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of
taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free from
income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-
par. (2) Exceptions regarding the provision which I quote: "No gain or loss shall
also be recognized if a person exchanges his property for stock in a corporation
of which as a result of such exchange said person alone or together with others
not exceeding four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed
of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par
value share in the defendant corporation was for the purpose of flexibility. Can
you explain flexibility in connection with the ownership of the property in
question?
A There is flexibility in using no par value shares as the value is determined by
the board of directors in increasing capitalization. The board can fix the value of
the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is
held by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular

person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does

not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by
the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or
altogether avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The
collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be
considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third
party. The Pacheco family merely changed their ownership from one form to another. The ownership remained
in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the
lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-
V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
16. YUTIVO VS CTA
YUTIVO SONS HARDWARE COMPANY, petitioner,

vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.

Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent
Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to
the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons
Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the
Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to
the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of cars and trucks from General Motors
Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business
in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on
the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no
further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the
business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided
into 10,000 shares with a par value of P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal
proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three
named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the
cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public
in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars
and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous
arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales
to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since
such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to
the public.
On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the
Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85
as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM
to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one
and the same corporation, the former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the
agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952
countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted
into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the
theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject,
however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance
to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the
assessment, returned them to the respondent Collector for reinvestigation.
After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954,
redetermined that the aforementioned tax assessment was lawfully due the government and in addition
assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand
was in the total sum of P2,215,809.27 detailed as follows:
Deficiency 75% Total Amount
Sales Tax Surcharge Due
Assessment (First) of November
7, 1950 for deficiency sales Tax
for the period from 3rd Qrtr 1947
to 4th Qrtr 1949 inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional Assessment for period
from 1st to 4th Qrtr 1950,
inclusive 234,880.13 176,160.09 411,040.22
Total amount demanded per
letter of December 16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27
This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that
there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of
petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already
paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each
vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and
sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose in the
organization of SM the apparent objective of its organization being to evade the payment of taxes and
that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals with
Judge Roman Umali not taking part disregarded its separate corporate existence and on April 27, 1957,
rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the
modification of the computation of the sales tax as determined by the respondent Collector in his decision so
as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to
P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the
decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having
been denied, Yutivo brought the case to this Court thru the present petition for review.
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporation petitions to which it may be connected. However,
"when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime," the law will regard the corporation as an association of persons, or in the case of two corporations
merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation,
Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it
may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax
Appeals was not justified in finding that SM was organized for no other purpose than to defraud the
Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it
could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than
one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During
that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or
SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not
arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The
decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to
the fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was
preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated
that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation,
which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record.
On the other hand, GM had been an importer of cars in the Philippines even before the war and had but
recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by
establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of
not merely abandoning the assembly plant project but also totally ceasing to do business as an importer.
Moreover, the newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a
rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of
the cessation of business by GM which must not be confused with the abandonment of the assembly plant
project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting
Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must
be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot
be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S
250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs.
Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr
36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37
BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea
Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous
authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain
findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co.
vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under circumstance that belied any intention to evade
sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to
lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open,
embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter
of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued
the method of distribution that it had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly
ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales
tax by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and
100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of
the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount
of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as
it did many years past in the promotion and pursuit of the business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only
on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of
the word "original" and the express provision that the tax was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the
legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr.
vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes
are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to
be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect
position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty
was not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud.
As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the
existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be
remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales
tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without
the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for
therein were less than what were legally due. Considering that respondent Collector himself with the aid of his
legal staff, and after some two years of investigation and duty of investigation and study concluded in 1952 that
Yutivo's sales tax returns were correct only to reverse himself after another two years it would seem
harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were
inaccurate.
On this point, one other consideration would show that the intent to save taxes could not have existed in the
minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee,
and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM
handled the retail, the additional tax that would have been payable by it, could have been easily passed off to
the consumer, especially since the period covered by the assessment was a "seller's market" due to the post-
war scarcity up to late 1948, and the imposition of controls in the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by
Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an
inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent
evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377,
affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small
inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small
arrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is
uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was actually owned and controlled by
petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles
at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the
petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the
Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or
affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted
that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its
incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu
Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers
are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are
respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articles
of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and
subsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without any
transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount
allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the
accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act
on the part of Yutivo, there being no showing that the former initiated the subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the
subscription of shares, employing the persons named or "charged" with corresponding account as nominal
stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of
these subscriptions, but considering that they were the principal officers and constituted the majority of the
Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's
Moreover, these persons were related to death other as brothers or first cousins. There was every reason for
them to agree in order to protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by various person's but except
Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts
of said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash
from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of
Yutivo a accounts of the virtue of its control over the individual persons charged, would necessarily exercise
preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to
pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the
majority of the stock of SM and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made
to their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters.
Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations,
the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu
Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in
both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that
there was a common ownership and interest in the two corporations.
SM is under the management and control of Yutivo by virtue of a management contract entered into between
the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority
of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In
addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of
Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business,
financial and management policies of both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets
of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and
all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to
Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM
are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in
relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence
thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books.
The payments for and charges against SM are made by Yutivo as a matter of course and without need of any
further request, the latter would advance all such cash requirements for the benefit of SM. Any and all
payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporate
officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements,
such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary
record thereof on the basis of information received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted
to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo.
SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter.
Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM
merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded
and effected by mere debit or credit entries against the reciprocal account maintained in their respective books
of accounts and indicate the dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or independently show that SM is a branch or
department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo Manila as
their "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. These
correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is
obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to
this fact, is that SM may freely use forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre
conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks
on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as
requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and
treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's
expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears
that Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mere
adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were
taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two
organizations are separate juridical entities, the corresponding receipts or receivables should have been
treated as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus"
and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently
distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing
that the management fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit
to the latter not only in the form of starting capital but also in the form of credits extended for the cars and
vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee"
payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo.
At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds,
policies, expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of
Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed
assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that
the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The
corresponding returns filed by petitioner covering the said period was made at the earliest on October 1, as
regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the
five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is
admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to
insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and
the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of
1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was
forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently
disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7,
1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently reiterated
in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made
seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March
28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive
distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the
assessment of November 7, 1950 has always been valid and subsisting.
Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16,
1954, the same was assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on
assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn,
since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the
Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under
section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has
"direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any
provision of existing law to the contrary not withstanding, repeal or modify the decision of the chief of said
Bureaus or offices when advisable in public interest."
It should here also be stated that the assessment in question was consistently protested by petitioner, making
several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have
waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute of limitations against the
government in certain instances in which the taxpayer has taken some affirmative action to prevent the
collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to
repudiate waivers of the statute of limitations upon which the government relied. The cases frequently
involve dissolved corporations. If no waiver has been given, the cases usually show come conduct
directed to a postponement of collection, such, for example, as some variety of request to apply an
overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A
definite representation of implied authority may be involved, and in many cases the taxpayer has
received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "
Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues,
but generally speaking, the cases present a strong combination of equities against the taxpayer, and
few will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal
Income Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es involving an original
assessment of more than P5,000 refers only to compromises and refunds of taxes, but not to total
withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of both
sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is
intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment
and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission
of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason
should the power of the Collector to withdraw totally an assessment be subject to such review.
We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the
5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the
deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are
in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent
return.
The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in
point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie
Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an
apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband,
who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine,
husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down
payment. The sale of this property for the price mentioned would have netted the corporation a handsome
profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940,
when the Millers and the Fines got together for the execution of the document of sale, the Millers announced
that their attorney had called their attention to the large corporate tax which would have to be paid if the sale
was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a
resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation
and surrender of all the outstanding corporate stock." The building, which as above stated was the only
property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine
for exactly the same price and under the same terms as had been previously agreed upon between the
corporation and the Fines.
The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no
taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term
capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal
Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax
avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in
substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In
requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal
Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax
and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be
liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of
Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the
fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled
principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the
Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was
legally sufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure;
and that in taking a position with respect to a question of law, the substance of which was disclosed by the
statement indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the
pertinent portion of the decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit
on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply
denying fraud and averring that the loss reported on its return was correct to the best of its knowledge
and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We
have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and
that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the
attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer may
diminish his liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory
v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the
opinion that the method by which it attempted to effect the sale in question was legally sufficient to
avoid the imposition of tax upon it, its adoption of that method is not subject to censure. Petitioner took
a position with respect to a question of law, the substance of which was disclosed by the statement
endorsed on its return. We can not say, under the record before us, that that position was taken
fraudulently. The determination of the fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only
once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent
sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was
enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those
by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales
tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax
provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or
"gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of
the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated
July 29, 1939, which implements sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred
as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal
Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor
to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling
price of an article sold by him has included an amount intended to cover the sales tax in the gross
selling price of the articles, the sales tax shall be based on the gross selling price less the amount
intended to cover the tax, if the same is billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax.
On sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed
to the purchaser as separate items in the, invoices in order that the reduction thereof from the gross
ailing price may be allowed in the computation of the merchants' percentage tax on the sales. Unless
billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax
shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not
be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not
form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax
separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been
complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision
complained of
. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of
the procedure would in certain cases elevate the bracket under which the tax is based. The late
payment is already penalized, thru the imposition of surcharges, by adopting the theory of the Collector,
we will be creating an additional penalty not contemplated by law."
If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the
total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would
amount only to P820,549.91 as shown in the following computation:
Gross Sales of Sales Taxes Due Total Gross

Rates of
Vehicles and Computed Selling Price
Sales
Exclusive of under Gen. Cir Charged to the
Tax
Sales Tax Nos. 431 & 400 Public
5% P11,912,219.57 P595,610.98 P12,507,83055
7% 909,559.50 63,669.16 973,228.66
10% 2,618,695.28 261,869.53 2,880,564.81
15% 3,602,397.65 540,359.65 4,142,757.30
20% 267,150.50 53,430.10 320,580.60
30% 837,146.97 251,114.09 1,088,291.06
50% 74,244.30 37,122.16 111,366.46
75% 8,000.00 6,000.00 14,000.00
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44
Less Taxes Paid by

Yutivo 988,655.76
Deficiency Tax still
due P820,549.91
This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would
pay, exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in
promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory
requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125,
creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a
quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on
record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his
opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling
price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an
expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part of
the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, the
case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act
1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision
is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the
Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly
with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions
of this section." The case having been brought before us on appeal, the question raised by petitioner as
become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in
that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for
late payment.
So ordered without costs.
17. REPUBLIC VS GONZALES
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
BLAS GONZALES, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.

Cesar C. Cruz for defendant-appellant.
REGALA, J.:
This is an appeal from the decision of the Court of First Instance of Manila under Civil Case No. 42912 the
dispositive portion of which provided:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the
defendant, ordering said defendant to pay plaintiff the sums of P106,226.75 and P37,849.58 as
deficiency income taxes for the years 1946 and 1947, respectively, (each inclusive of the 50%
surcharge) plus the 50% surcharge and 1% monthly interest on the aforesaid amount from June 15,
1957 until the whole amount is fully paid, and costs of this suit.
The records of this case disclose that since 1946, the defendant-appellant, Blas Gonzales, has been a private
concessionaire in the U.S. Military Base at Clark Field, Angeles City: He was engaged in the manufacture of
furniture and, per agreement with base authorities, supplied them with his manufactured articles.
On March 1, 1947 and March 1, 1948, the appellant filed his income tax returns for the years 1946 and 1947,
respectively, with the then Municipal Treasurer of Angeles, Pampanga. In the return for 1946, he declared a
net income of P9,352.84 and income tax liability of P111.17 while for the year 1947, he declared as net income
the amount of P16,829.10 and a tax liability therefor in the sum of P1,395.95. In the above two returns, he
declared the sums of P80,459.75 and P1,707,355.57 as his total sales for the said two years, respectively, or
an aggregate sales of P1,787,848.32 for both years.
Upon investigation, however, the Bureau of Internal Revenue discovered that for the years 1946 and 1947, the
appellant had been paid a total of P2,199,920.50 for furniture delivered by him to the base authorities. The
appellant do not deny the above amount which, for the record, was furnished by the Purchasing Officer of the
Clark Field Air Base on the Bureau of Internal Revenue's representation.
Compared against the sales figure provided by the base authorities, therefore, the amount of P1,787,848.32
declared by the appellant as his total sales for the two tax years in question was short or underdeclared by
some P412,072.18. Accordingly, the appellee considered this last mentioned amount as unreported item of
income of the appellant for 1946. Further investigation into the appellant's 1946 profit and loss statement
disclosed "local sales," that is, sales to persons other than the United States Army, in the amount of
P124,510.43. As a result, the appellee likewise considered the said amount as unreported income for the said
year. The full amount of P124,510.43 was considered as taxable income because the appellant could not
produce the books of account on the same upon which any deduction could be based.
Adding up the above two items considered as unreported income the appellee assessed the appellant the total
sum of P340,179.84, broken down as follows:
Net income as per return P9,352.84

Add: Sales, US Army P492,531.93
Local Sales 124,510.43 536,582.61
Net income as per investigation 545,935.45

Less: Personal & additional exemptions 4,500.00
Net taxable income P541,435.45

Tax due thereon P226,897.73
Less: Tax already assessed 111.17
Deficiency tax due P226,786.56

50% surcharge 113,393.28
TOTAL AMOUNT DUE & COLLECTIBLE P340,179.84

==========
On November 14, 1953, the Bureau of Internal Revenue sent a letter of demand to the appellant for the above
amount as deficiency income tax, the sum of P300.00 as compromise for his failure to keep the required
journal and ledger, and finally, the sum of P153.75 as additional residence tax, all for the year 1946.
On March 31, 1954, on request of the appellant, the Bureau of Internal Revenue reinvestigated the case. At
the end of this new inquest, however, the appellee, thru, the then Collector of Internal Revenue, insisted on the
payment of the original assessment of P340,179.84. It suggested, though, that if the appellant disagreed with
the said finding he could submit the same for study, review and decision by the Conference Staff of the Bureau
of Internal Revenue. In due time, the above assessment was heard before the said body which, subsequently,
recommended a reduction of the same to P249,289.26, as deficiency income tax for the year 1946. After the
recommendation was approved by the Bureau, the corresponding assessment notice for the sum of
P249,289.26 as deficiency income tax and 50% surcharge for the year 1946 and 1% monthly interest and
penalty incident to delinquency was forthwith issued to the appellant.
On May 21, 1957, the above assessment was further revised by segregating the appellant's tax liability for the
two years in question. Pursuant to a memorandum of the BIR Regional Director of San Fernando, Pampanga,
another demand was made upon the appellant for the payment of P106,226.75 and P37,849.58 as income
taxes due from him for the years 1946 and 1947, respectively, or a total of P144,076.33.
When the appellant failed to pay the above demand, the appellee instituted the present suit on April 7, 1960.
The appellant filed his answer on July 7, 1960 and amended it on July 19, 1960.
Prior to the trial of the case, the appellant filed with the court below a motion to dismiss grounded on
prescription and lack of jurisdiction. The same was, however, denied by the lower court as unmeritorious.
Moreover, for failure of the appellant or his counsel to appear at the scheduled hearing, the defendant-
appellant was declared in default. The motion for reconsideration of this last order declaring the appellant in
default for failure to appear was also denied by the trial court for lack of merit.
On November 7, 1960, after the appellee had presented its documentary evidence against the appellant, the
lower court rendered the decision under appeal.
The appellant ascribes several errors to the decision of the court a quo, the more fundamental of which is the
claim that as a concessionaire in an American Air Base, he is not subject to Philippine tax laws pursuant to the
United States-Philippine Military Bases Agreement. In support of the claim, the following provision of the above
Bases Agreement is invoked:
ARTICLE XVIII.Sales and Services within the Bases
1. It is mutually agreed that the United States shall have the right to establish on bases, free of all
license; fees; sales excise or other taxes or imposts; Government agencies including concessions,
such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the
United States military forces and authorized civilian personnel and their families. The merchandise or
services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the
Philippine authorities. Administrative measures shall be taken by the appropriate authorities of the
United States to prevent the sale of goods which are sold under the provisions of this Article to persons
not entitled to buy goods at such agencies, and, generally, to prevent abuse of the privileges granted
under this Article. There shall be cooperation between such authorities and the Philippines to this end.
2. Except as may be provided in any other agreements, no persons shall habitually render any
professional services in a base except to or for the United States or to or for the persons mentioned in
the preceding paragraph. No business shall be established in a base, it being understood that the
Government agencies mentioned in the preceding paragraph shall not be regarded as businesses for
the purpose of this Article.
The contention is clearly unmeritorious.
The above provision of the Military Bases Agreement has already been interpreted by this Court in at least two
cases, namely: Canlas v. Republic, G.R. No. 1,11035, May 31, 1958 and Naguiat v. J. A. Araneta, G.R. No. L-
11594, December 22, 1958. In the latter case this Court said:
The provision relied upon by the appellant plainly contemplates limiting the exemption from the
licenses, fees and taxes enumerated therein to the right to establish Government agencies, including
concessions, and to the merchandise or services sold or dispensed by such agencies. The income tax,
which is certainly not on the right to establish agencies or on the merchandise or services sold or
dispensed thereby, but on the owner or operator of such agencies, is logically excluded. The payment
by the latter of the income tax is perfectly content with and would not frustrate the obvious objective of
the agreement, namely, to enable the members of the United States Military Forces and authorized
civilian personnel and their families to procure merchandise or services within the bases at reduced
prices. This construction is unmistakably borne out by the fact that, in dealing particularly with the
matter of income tax, the Military Bases Agreement provides as follows:
INTERNAL REVENUE TAX EXEMPTION
1. No member of the United States armed forces, except Filipino citizens, serving in the
Philippines in connection with the bases and residing in the Philippines by reason only of such
services, or his dependents, shall be liable to pay income tax in the Philippines except in
respect of income derived from Philippine sources.
It is urged for the applicant that no opposition has been registered against his petition on the
issues above-discussed. Absence of opposition, however, does not preclude the scanning of
the whole record by the appellate court, with a view to preventing the conferment of citizenship
to persons not fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31,
1965). The applicant's complaint of unfairness could have some weight if the objections on
appeal had been on points not previously passed upon. But the deficiencies here in question
are not new but well-known, having been ruled upon repeatedly by this Court, and we see no
excuse for failing to take them into account.1wph1.t
2. No national of the United State serving or employed in the Philippines in connection with the
maintenance, operation or defense of the bases and residing in the Philippines by reason only
of such employment, or his spouse, and minor children and dependent parents of either
spouses, shall be liable to pay income tax in the Philippines except in respect of income derived
from Philippine source or sources than the United States source.
3. No persons referred to in paragraphs 1 and 2 of this article shall be liable to pay the
Government or local authorities of the Philippines any poll or residence tax, or any import or
export duty, or any other tax on personal property imported for his own use; provided that
privately ovned vehicles shall be subject to the payment of the following only, when certified as
being used for military purposes by appropriate United States authorities, the normal license
plate and registration fees.
4. No national of the United States, or corporation organized under the laws of the United
States, resident in the United States, shall be liable to pay income tax in the Philippines in
respect to any profits derived under a contract made in the United States in connection with the
construction, maintenance, operation and defense of the bases, or any tax in the nature of a
license in respect of any service or work for the United States in connection with the
construction, maintenance, operation and defense of the bases.
None of the above-quoted covenants shields a concessionaire, like the appellant, from the payment of the
income tax. For one thing, even the exemption in favor of members of the United States Armed Forces and
nationals of the United States does not include income derived from Philippine sources.
The appellant cannot seek refuge in the use of "excise" or "other taxes or imposts" in paragraph 1 of Article
XVIII of the Military Bases Agreement, because, as already stated, said terms are employed with specific
application to the right to establish agencies and concessions within the bases and to the merchandise or
services sold or dispensed by such agencies or concessions.
The same conclusion was reached in the case of Canlas v. Republic, supra.
The appellant maintains, however, that the rulings in the above two cases are inapplicable to the suit at bar
because the said cases involved the income of public utility operators in the Air Base who were not
"concessionaires" like him.
The above contention is as unmeritorious as it is untrue. In the case of Araneta v. Manila Pencil Company
Ins., G.R. No. L-8182, June 29, 1957, this Court already ruled that operators of freight and bus services are
within the meaning of the word "concession" appearing in the Military Bases agreement. Thus, in the Canlas
case above, We said:
There is no dispute as to the fact that defendant Manila Pencil Company, as successor-in-interest of
the Philippine Consolidated Freight Lines, Inc., was engaged in and duly licensed by the U.S. Military
authorities to operate a freight and bus service within the Clark Field Air Base, a military reservation
established in conformity with the agreement concluded between the Government of the Philippines
and the United States on March 14, 1947 (43 O.G. No. 3, p. 1020). And as such grantee of a franchise,
which this Court was held to be embraced within the meaning of the word "concession" appearing in
the treaty and was declared exempted from the payment of the contractor's tax (Araneta v. Manila
Pencil Company, G.R. No. L-10507, May 30, 1958) ... .
It is very clear, therefore, that the rulings of this Court in the two cases above cited are applicable to this appeal
under consideration.
The other point raised by the appellant on this appeal pertains to the refusal of the trial court to reconsider its
order declaring him in default for the failure of his counsel to appear at the scheduled trial despite due notice.
He complains that when the trial proceeded in his absence, he was denied his day in court. In the premises,
his counsel insists that this absence then was for a good and reasonable cause.
Suffice it to say in regard to the above that the matter complained of is beyond this Court to disturb. The matter
of adjournments, postponements, continuances and reconsideration of orders of default lies within the
discretion of courts and will not be interfered with either by mandamus or appeal (Samson v. Naval, 41 Phil.
838) unless a showing of grave abuse can be made against said courts. Moreover, where the absence of a
party from the trial was due to his own fault, he should not be heard to complain that he was deprived of his
day in court. (Sandejas v. Robles, 81 Phil. 421; Siojo v. Tecson, 88 Phil. 531)
The-counsel's excuse for his absence at the trial was alleged "lack of transportation facilities in his place of
residence at Gagalangin, Tondo, Manila, on that morning of August 8, when torrential rain poured down in his
locality." The lower court did not deem this as a sufficiently valid explanation because it observed that despite
such torrential rain, the counsel for the plaintiff-appellee, a lady attorney who was then a resident of a usually
inundated area of Sampaloc, Manila, somehow made it to the court. Under these circumstances, the trial
court's ruling can hardly be considered as an abuse of his discretion.
Finally, the appellant disputes the lower court's finding of fraud against him in this incident. He argues that the
facts invoked by the lower court do not sufficiently establish the same.
As rightly argued by the Solicitor General's office, since fraud is a state of mind, it need not be proved by direct
evidence but may be inferred from the circumstances of the case. The failure of the appellant to declare for
taxation purposes his true and actual income derived from his furniture business at the Clark Field Air Base for
two consecutive years is an indication of his fraudulent intent to cheat the Government of its due taxes.
The substantial undeclaration of income in the income tax returns of the appellant for four consecutive
years, coupled with his intentional overstatement of deductions made the imposition of the fraud
penalty proper. (Eugenio Perez v. Court of Tax Appeals and Collector of Internal Revenue, G. R. No. L-
10507, May 30, 1958.)
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming in full the decision here appealed
from, with costs against the defendant-appellant. So ordered.
18. GREENFIELD VS MEER
MILTON GREENFIELD, Plaintiff-Appellant, v. BIBIANO L. MEER, Defendant-Appellee.
Francisco Dalupan, for Appellant.
First Assistant Solicitor General Reyes and Solicitor Arguelles, for Appellee.
SYLLABUS
1. TAXATION; INCOME TAX; DEDUCTION OF LOSSES; DEALER IN SECURITIES; PERSONS ENGAGED

IN TRADE OR BUSINESS OF BUYING AND SELLING SECURITIES WITHIN MEANING OF PHRASE
"INCURRED IN TRADE OR BUSINESS" USED IN SECTION 30 (d) (1) (A) OF COMMONWEALTH ACT NO.
466. Taking into consideration the nature of mining securities, which may be bought or sold either as a
business or for speculation purposes only, the National Assembly of the Philippines has deemed it necessary
to define or determine beforehand in section 84 (t) of Commonwealth Act No. 466 who may be considered as
persons engaged in the trade or business of buying and selling securities within the meaning of the phrase
"incurred in trade or business" used in section 30 (d) (1) (A) of the same Act, in order to avoid any question or
doubt as to deductibility of all losses incurred by a merchant in securities from his net income from whatever
source. The definition of dealer or merchant in securities given in said section 84 (t) includes persons, natural
or judicial, who are engaged in the purchase and sale of securities whether for their own account or for others,
provided they have a place of business and are regularly engaged therein.
2. ID.; ID.; ID.; ID.; ID.; CAPITAL ASSETS. Appellant contends that as from Exhibit A it appears that the
mining securities were inventoried in order to arrive at his profits and losses, they cannot be considered as
capital assets, because, according to section 34, the term capital assists does not include property which
would properly be included in the inventory. But it is to be observed that the law refers not to property merely
included, but to that which would be properly included in the inventory. Section 148 of the Income Tax
Regulations No. 2 of February 10, 1940 (39 Off. Gaz., 325), provides that "the securities (to be) inventoried as
herein provided may include only those held for purposes of resale and not for investment," and that "the
taxpayers who buy and sell or hold securities for investment or speculation. . . . are not dealers in securities
within the meaning of this rule." And the General Counsel of the Federal Bureau of Internal Revenue, after
quoting article 105 of United States Regulations 74 from which said section 148 of our Income Tax Regulations
was taken, said that a person not a dealer in securities is precluded from the use of inventories in computing
his net income." (C. B. X-2, p. 128, G. C. M., 9656.)
3. ID.; ID.; STATUTORY CONSTRUCTION; STATUTE SUSCEPTIBLE OF SEVERAL INTERPRETATIONS;

HISTORY OF STATUTE. Where a statute has been enacted which is susceptible of several interpretations
there is no better means for ascertaining the will and intention of the legislature than that which is afforded by
the history of the statute.
4. ID.; ID.; PERSONAL AND ADDITIONAL EXEMPTIONS DEDUCTED FROM GROSS INCOME. The mere
fact the phrase "in the nature of a deduction" found in section 7 of the old law was omitted in section 23 of the
new or National Internal Revenue Code did not and could not effect any change in the law. It is evident that
said phrase was added or inserted in said section 7 only out of extreme caution, because, even without it, the
exemption would have to be deducted from the gross income in order to determine the net income subject to
tax. Had the provision in the old law been drafted in exactly the same term as that of said section 23, the same
construction should have been adopted. Because "Exemption is an immunity or privilege; it is freedom from a
charge or burden to which others are subjected." (Florar v. Sherifan, 137 Ind., 28; 36 N. E., 365, 369.) If the
amounts of personal and additional exemptions fixed in section 23 are exempt from taxation, they should not
be included as part of the net income, which is taxable. There is nothing in said section 23 to justify the
contention that the tax on personal exemptions (which are exempt from taxation) should first be fixed, and
deducted from the tax on the net income.
5. ID.; ID.; STATUTORY CONSTRUCTION; CHANGE IN PHRASEOLOGY DOES NOT NECESSARILY

ALTER CONSTRUCTION OF OLD LAW. In the revision of statutes, neither an alteration in phraseology nor
the omission or addition of words in the latter statute, shall be held, necessarily, to alter the construction of the
former Act. And the court is only warranted in holding the construction of a statute, when revised, to be
changed, where the intent of the legislature to make such change is clear, or the language used in the new act
plainly requires such change of construction. It should be remembered that condensation is a necessity in the
work of compilation or codification. Very frequently words which do not materially affect the sense will be
omitted from the statutes as incorporated in the code, or that same general idea will be expressed in briefer
phrases. No design of altering the law itself could rightly be predicated upon such modifications of the
language.
DECISION
FERIA, J.:
This an appeal from the decision of the court of First Instance of manila which dismisses the complaint of the
plaintiff and appellant containing two causes of action; one to recover the sum of P9,008.14 paid as income tax
for the year 1939 by plaintiff to defendant under protest, by reason of defendant having disallowed a deduction
of P67,307.80 alleged by plaintiff to be losses in his trade or business; and the other to reclaim, in the event
the first cause of action is dismissed, the sum of P475 collected by defendant from plaintiff illegally according
to the latter, because the former has erroneously the tax on personal and additional exemptions.
The following are the pertinent facts stipulated and submitted by the parties to the lower
court:jgc:chanrobles.com.ph
"2. That since the year 1933 up to the present time, time plaintiff has been continuously engaged in the
embroidery business located at 385 Cristobal, City of Manila and carried on under his name;
"3. That in 1935 the plaintiff began engaging in buying and selling mining stocks and securities for his own
exclusive account and not for the account of orders . . .;
"4. That Exhibit A attached to the complaint and made a part hereof represents plaintiffs purchases and sales
of each of stock and security as well as the profits and losses resulting on each class during the year 1939;
"5. That the plaintiff has not been a dealer in securities as defined in section 84 (t) of Commonwealth Act No.
466; that he has no established place of business for the purchase and sale of mining stocks and securities;
and that he was never a member of any stock exchange;
"6. That the plaintiff filed an income tax return for the calendar year 1939 showing that the made a net profit
amounting to P52,449.29 on embroidery business and P17,850 on dividends from various corporations; and
that from the purchase and sale of mining stocks and securities he made a profit of P10,741.30 and incurred in
the amount of P78,049.10 thereby sustaining a net loss of P67,307.80, which income tax return is hereto
attached and marked Exhibit B;
"7. That in said income tax return for 1939, the plaintiff declared the results of his stock transactions under
Schedule B (Income from Business); but the defendant ruled that they should be declared in the income tax
return, Exhibit B, under Schedule D (Gains and Losses from Sales or Exchanges of Capital Assets, real or
personal);
"8. That in said representing the net loss sustained by him in mining disallowed said item of deduction on the
ground that said losses were sustained by the plaintiff from the sale of mining stocks and securities which are
capital assets, and that the loss arising from the sale of the same should be allowed only to the extent of the
gains from such sales, which gains were already taken into consideration in the computation of the alleged net
loss of P67,307.80;
"9. That the defendant assessed plaintiffs income tax return for the year 1939 at P13,771.06 as shown in the
following computation appearing in the audit sheet of the defendant hereto attached and marked Exhibit C;
"Net income as per return of plaintiff for 1939 P70,299.29
"Add: Net Loss on sale of mining stocks and securities
disallowed in audit 67,307.80
"Total net income as per office audit P137,607.09
"Amount of tax on net income as per office audit P13,821.06
"Less: Tax on exemptions:jgc:chanrobles.com.ph
"Personal exemption P2,500.00
"Additional exemption 1,000.00
"Total P3,500.00
"Tax on exemptions 50.00
"Net amount of tax due P13,771.06
========
"10. That the defendant computed the graduated rate of income tax the entire net income as per office audit,
without first deducting therefrom the amount of personal and additional exemptions to which the plaintiff is
entitled allowing said plaintiff a deduction from the assessed tax the amount of P50 corresponding to the
exemption of P3,500;
"11. That the plaintiff, objecting and excepting to all rulings of the defendant above mentioned and in assessing
plaintiff with P13,771.06, claimed from the defendant the refund of P9,008.14 or in the alternative case P475,
which of plaintiff was overruled by the defendant;"
The questions raised by appellant in his four (4) assignments of error may be reduced into the following: (1)
Whether the losses sustained by the plaintiff from the buying and selling of mining securities during the year
1939 are losses incurred in trade and business, deductible under section 30 (d) (1) (A) of Commonwealth Act
No. 466 from his gains his embroidery business and other income; or whether they are capital losses from
sales of capital assets which shall be allowed only to the extent of the gains from such sales under section 34
of the same Commonwealth Act No. 466. And (2) whether under the present law, the personal and additional
exemptions granted by section 23 of the same Act, should be considered as a credit or be deducted from the
net income, or whether it is tax on such exemptions that should be deducted from the tax on the total net
income.
1. As to the first question, it is agreed in the above-quoted stipulation of facts that the plaintiff was not a dealer
in securities or share of Stock as defined in section 84 (t) of Commonwealth Act No. 466. The question for
determination is whether appellant, though not a dealer in mining securities, may be considered as engaged in
the business of buying and selling them under section 30 (d), (1) (A) of said Act No. 466.
It is evident that, taking into consideration the nature of mining securities, which may be bought or sold either
as a business or for speculation purposes only, the national Assembly of the Philippines has deemed it
necessary to define or determine beforehand in section 84 (t) of Commonwealth Act No. 466 who may be
considered as persons engaged in the trade or business of buying and selling securities within the meaning of
the phrase "incurred in trade or business used in section 30 (d) (1) (A) of the same Act, in order to avoid any
question or doubt as to deductibility of all losses incurred by a merchant in securities from his net income from
whatever. The definition of dealer or merchant in securities given in said section 84 (t) includes persons,
natural or juridical, who are engaged in the purchase and sale of securities whether for their own account or for
others, provided they have a place of business and are regularly engaged therein. There was formerly some
doubt or question as to whether a person engaged in buying and selling securities for his own account might
be considered as engaged that the trade or business, and several cases involving such question had been
submitted to the United States Federal Courts for ruling, and to the Income Tax Units of the United States
Bureau of Internal Revenue for opinion. But with the inclusive definition of the term "dealer" or merchant of
securities given in section 84 (t) of Act No. 466, such doubt can no longer arise.
Said section 84 (t) reads as follows:jgc:chanrobles.com.ph
"(t) The terms dealer securities means a merchant of stocks or securities, whether an individual, partnership,
or corporation, with an established place of business, regularly engaged in the purchase of securities and their
resale of customer; that is, one who as a merchant buys securities and sells them to customers with a view to
the gains and profits that may be derived therefrom."cralaw virtua1aw library
Appellant assumes, however, that the above-quoted definition does not cover or include all persons engaged
in the trade or business of buying and selling securities within the meaning of said section 30 (d) (1) (A). He
contends that, although he is not a dealer in mining securities, he may be considered as having been engaged
in the trade or business of buying and selling securities. And in support of his contention appellant quotes
Opinion No. 1818 of the Income Tax Unit of the United States Bureau o Internal Revenue (I. T. No. 1818, C.
B. II, pp. 39-41), in which opinion the following was said.
"The taxpayer is not a member of any stock exchange, has no place of business, and does not make
purchases and sales of securities for customers. Much of his trading is done on margin. He devotes the greater
part of the time in his brokers office in touch with the market. He has no other trade or business, his income
consisting entirely of interest on bonds, dividends on stocks, and profits from the sale or other disposition of
securities.
"Advice is requested (1) whether this taxpayer is entitled to the benefit of section 204 of the revenue Act of
1921, with reference to a net loss incurred in 1921, from the sale of stocks; (2) whether he is entitled to the
benefit of section 206 of the Revenue Act of 1921, with regard to gains derived in 1922 from the sale of two
blocks of stock held more than two years.
"1. Section 204 (a) provides in part:jgc:chanrobles.com.ph

"That as used in this section the term "net loss" means only net losses resulting from the operation of any trade
or business regularly engaged in the trade or business of buying and selling securities.
"The interpretation placed upon the term business or trade by the courts and by the department may be
indicated by a few illustrative decisions. In two early cases (In re Marson [1871], Fed. Cas. No. 9142, and In re
Woodward [1876], Cas. No. 18001) it was held that a speculator in stocks was not a merchant or tradesman
within the meaning of the Bankruptcy Act of 1867. It was said in the former case:jgc:chanrobles.com.ph
" The only business he was engaged he was engaged in was what is called speculating in stocks, that is,
buying and selling them, with a view to his own profit, to be made by the excess of the selling a view to his own
profit, to be made by the excess of the selling price over the buying price . . . . The fact that the bankrupt was
engaged in no other business can not have the effect to make him a merchant or tradesman, because he
carried on the business he did carry on in the way in which he carried it on.
"That is, although his business was buying and selling, since this business was simply with a view to his own
profit and not for others, he was not a merchant of tradesman. Compare In re Surety Guarantee & Trust Co.
([1902], 121 Fed., 73) and In re H.R. Leighton & Co. ([1906], 147 Fed., 311).
With this background, the Department, in Treasury Decisions 1989, 2005, 2090, and 2135 (not published in
Bulletin service), held that the provision of paragraph B of the 1913 Act, allowing as a deduction for the
purpose of the normal tax losses actually sustained during the year, incurred in trade . . ., did not include
losses from v. isolated transactions; for instance, in stocks and bonds. In Mente v. Eisner ([1920], 266 Fed.,
161) (certiorari denied, 254 U.S., 635), these ruling were upheld in a case in which a manufacturer of bagging
was denied deduction for losses in buying and selling cotton on the cotton exchange for his individual account,
not connected with his manufacturing business. (Cf. Black v. Bolen [1920], 268 Fed., 247.) Likewise, in L.O.
601 (not published in Bulletin service), it was held that losses sustained by a person in buying and selling
securities on his own account, he not being a licensed stock and bond broker buying and selling for others as
well as for himself, are not deductible as losses in trade within the meaning of paragraph B of the Act of
October 3, 1913. The basis of these opinions is thus seen to be (1) that dealing in securities on ones own
account is not technically a trade; (2) that isolated transactions in securities, not connected with the tax
payers regular business, do not constitute a trade.
"In the Act of September 8, 1916, the wording of the 1913 Act was slightly changed (section 5 [a], fourth) to
permit a deduction of losses actually sustained during the year, incurred in his business or trade . . . Under
this more liberal provision, it has been uniformly held that where a taxpayer devoted all his time, or the major
portion of it, to buying and selling securities on his own account, this occupation was his business; and
therefore he was permitted to deduct losses sustained in such dealings as being incurred in his business A.
R. R. 404 (C. B. 4, p. 157); Semble L. O. 601. These rulings are inferentially supported by the definitions of
trade or business to comprehend all his activities for gain, profit, or livelihood, entered into with sufficient
frequency, or occupying such portion of his time or attention as to constitute a vocation, contained In article 8
of Regulations 41, relative to the far excess-profits tax (approved in Woods v. Lewellyn [1921], 289 Fed., 498).
...
"It is submitted that these decisions are a sound interpretation of the accepted definition of business: Business
is a very comprehensive term and embrace everything about which a person can be employed. Blacks Law
Dictionary, 158, citing People v. Commissioners of Taxes (23 New York, 242, 244).That which occupies the
time, attention and labor of men for the purpose of a livelihood or profit. Bouviers Law Dictionary, Vol. 1, p.
273. Filing v. Stone Tracy Co. (1910), 220 U.S., 107 at 171; 31 Sup. Ct., 342; 55 Law. ed., 389; Ann. Cas.
1912-B, 1312; cited with approved in Von Baumbach v. Sargent Land Company (1916), U.S., 503, at 515. If
they are sound, the facts of the instant case require a ruling that the taxpayer was regularly engaged in the
business of buying and selling securities on his own account and was, therefore, entitled to the benefit of the
provisions of section 204 (a)." (I.T. No. 1818; C.B. II-2, pp. 39-41.)
But assuming arguendo that the above-quoted opinion may be applied to the present case, it is evident that the
appellant can not be considered as having been engaged in the business of buying and selling securities within
the meaning of section 30 (d) (1) (A) of Act No. 466 According to said opinion, in order that he may be so
considered, it is necessary that he must devote all his time or at least a major portion thereof to said business
and a the latter must be regularly carried on by him
In the stipulation of facts presented in this case it is agree that since the year 1933 up to the present time,
broidery business, and that in 1935 plaintiff began engaging in binding and selling mining stocks and
securities for his own exclusive account." There is nothing therein to show that plaintiff and appellant has
regularly devoted all his time or the major portion thereof to the business buying and selling mining securities
for his own account. On the contrary, it having been stipulated that he has been continuously engaged in the
embroidery business during the same time, it necessarily follows that he has not and could not have devoted
regularly all his time or a major portion thereof to the buying and selling of mining securities.
Furthermore, from Exhibit A attached to the complaint and made a part of said stipulation of facts, which
represents plaintiffs purchases and sales of each class of stocks and securities as well as the profits and
losses resulting therefrom during the year 1939, it appears that he made purchases and sales of securities
only on several days of some months and nothing on others. As shown in said exhibit, during the month of
January, 1939, appellant purchased shares of stock of different mining corporations on January 2, 3, 4, 5, 13,
19, 20, 25, 30, and sold of them on January 4, 10, 13, and 31. during February he made purchases on the
dates 1, 8, 13, 14, 25, and 27, and sales on 6, 9, 10, 16, and 17. During March, he purchased mining securities
on 7, 8, 9, 10, 16, 22, and 30, and sold some on March 9 only. During April he made two purchases on April 4.
During May he purchased mining shares of stock on May 9, 10, 13, 19, 24, and 25; and sold some of then on
May 9, 10, 12, 13, and 31. During June appellant made purchases on 1, 3, 5, 8, 13, 15, and 17, and sales on
22, 23, 24, and 28. During July, purchases on 1, 3, 6, 19; and sales on July 24, 25, 26, and 27. During August
he purchased shares of stock on some mining corporations on 5, 7, 16, and 18 and sold shares of one mining
corporation on August 10 only. During September appellant did not purchase or sell any securities. During
October he sold securities only on the 12th of said month, and made no purchase at all. And during November
and December he did not purchase or sell any.
Appellant contends that as from Exhibit A it appears that the mining securities were inventoried in order to
arrive at his profits and losses, they cannot be considered as capital assets, because, according to section 34,
the term capital assets does not include property which would properly be included in the inventory. But it is to
be observed that the law refers not to property merely included, but to that which would be properly included in
the inventory. Section 148, of the Income Tax Regulations No. 2 of February 10, 1940 (39 Off. Gaz., 325),
provides that "the securities (to be) inventoried as here provided may include only those held for purposes of
resale and not for investment," and that "the taxpayers who buy and sell or hold securities for investment or
speculation, . . . are not dealers in securities within the meaning of this rule." And the General Counsel of the
Federal Bureau of Internal Revenue, after quoting Article 105 of United States Regulations 74 from which said
section 148 of our Income Tax Regulations was taken, said that a person not a dealer in securities is precluded
from the use of inventories in computing his net income." (C. B. X-2, p. 128, G. C. M., 9656.)
The lower court has not therefore erred in dismissing appellants first cause of action, on the ground that the
losses sustained by appellant from the buying and selling of mining securities are not losses incurred in
business or trade but are capital losses from sales of capital assets, as contended by appellee.
2. With regard to the second point, the lower court held that, as the new law does not provide that the personal
exemptions shall be allowed in the nature of a deduction from the net income, as prescribed in the old law, and
there is a distinction between exemption and deduction, the tax due on said exemptions must be deducted
from the tax due on the whole net income, instead of deducting the total amount of the exemptions from the net
income.
The argument of the appellee in support of the lower courts decision is that the omission in section 23 of Act
No. 466 of the phrase "in the nature of a deduction" found in section 7 of the old law, shows that it was the
intention of the national Assembly to adopt the innovation proposed by the Tax Commission which prepared
the draft of the new law, an innovation based on what is known as the "Wisconsin Plan" now in operation in
several American states. Under said plan, the cumulative amount of the tax is fixed on any given amount of net
income without regard to the status of the taxpayer, and then this amount is reduced by the tax credit fixed in
the law according to the status of the taxpayer number of his dependents as follows: for single individuals,
there is allowed a tax credit of p10; for married persons of heads of family, P30; and for defendant below 21
years of age, P10.
Section 7 of the old law provide: "For the purpose of the normal tax only, there shall be allowed as an
exemption in the nature of a deduction from the amount of the net income . . ." ; while section 23 of the new
law provides: "For the purpose of the tax provided for in this Title there shall be allowed the following
exemptions." Now, the question to be determined or answered is: Does this change in the phraseology of the
new show the intention of the National Assembly to change the theory or policy of the old law so as to deduct
now the tax on the personal and additional exemptions from the tax fixed on the amount of the net income,
instead of deducting the amount of personal and additional exemptions from that of the net income, before
determining the tax due on the latter?
It is well-settled rule of statutory construction that where a statute has been enacted which is susceptible of
several interpretations there is no means for ascertaining the will and intention of the legislature than that
which is afforded by the history of the statute. Taking into consideration the history of section 23 of ther
Commonwealth Act No. 466, the answer to the above-propounded question must obviously be in the negative.
Section 22 of the bill entitled "An Act to revise, amend and codify the Internal Revenue Laws of the
Philippines," prepared by the Tax Commission and submitted to the National Assembly of the Philippines, in
substitution off section 7 of the old Income Tax Law, card as follows:jgc:chanrobles.com.ph
"Sec. 22. Amount of tax credit allowable to individuals. There shall be allowed as a credit in the nature of a
deduction from the amount of the tax payable by each citizen or resident of the Philippines under section
20:jgc:chanrobles.com.ph
"(a) Tax credit of single individuals. The sum of P10 if the person making the return is a single person a
married person legally separated from his her spouse.
"(b) Tax credit of a married person or head of family. The sum of P30 of the person making the return is a
married man with a wife not legally separated from him, or a married woman with a husband not legally
separated from him, or a married woman with a husband not legally separated from her, or the head of the
family: Provided, That from the tax due on the aggregate income of both husband and wife when not legally
separated only one tax credit of P30 shall be deducted. For the purpose of this section, the term head of a
family includes an unmarried man or woman with one or both parents, or one or more brothers or sisters, or
one more legitimate, recognized natural or adopted children dependent upon him her for their chief support
where brothers, sisters, or children are less than twenty-one years of age.
(c) Additional tax credit for defendants. The sum of P10 for each legitimate, recognized natural, or adopted
child wholly defendant upon the taxpayer, if such defendants are under twenty-one years of age, or incapable
of self-support mentally or physically defective. The additional tax credit under this paragraph shall be allowed
only if the person making the return is the head of a family."cralaw virtua1aw library
But the National Assembly, instead of adopting or incorporating said proposed section 22 in the National
Internal Revenue Code, C.A. No. 466, copied substantially in section 23 of the latter the provision of section 7
of the old law relating to personal and additional exemptions, with the only modification that the amount of
personal exemption of single individuals has been reduced from two thousands to one thousand pesos, and
that of married persons or heads of family from four thousand to two thousand five hundred pesos.
If it were intention of the national Assembly to adopt the "Wisconsin plan" proposed by the Tax Commission, it
would adopted literally, or at least substantially, the provisions of said section 22 as section 23 of
Commonwealth Act No. 466, instead of substantially incorporating section 7 of the old Income Tax Law as
section 23 of the new, except the first paragraph thereof which reads: "For the purpose of the normal tax, there
shall be allowed as an exemption in the nature of a deduction from the amount of the net income." This was
changed in said section 23, which provides: "For the purpose of the tax provided for ion this Title, there shall
be allowed the following exemptions:" From the fact that National Assembly discarded completely section 22 of
the bill drafted in accordance with the "Wisconsin Plan" and submitted by the Tax Commission, it is to be
presumed that the National Assembly of the Philippines did not intend to introduce any substantial change in
the old law in so far as the effect of personal and additional exemptions on the income tax is concerned.
The mere fact that the phrase "in the nature of a deduction" found in section 7 of the old law was omitted in
section 23 of the new or National Internal Revenue Code did not could not effect any change in the law. it is
evident that said phrase was added or inserted in said section 7 only out of extreme caution, because, even
without it, the exemption would have to be deducted from the gross income in order to determine the net
income subject to tax. Had the provision in the old been drafted in exactly the same term as that of said section
23, the same construction should been adopted. Because "Exemption is an immunity or privilege; it is freedom
from a charge or burden to which others are subjected." (Florar v. Sherifan, 137 Ind., 28; 36 N. E., 365, 369.) If
the amounts of personal and additional exemptions fixed in section 23 are exempt from taxation, they should
not be included as part of the net income, which is taxable. There is nothing in said section 23 to justify the
contention that the tax on personal exemptions (which are exempt from taxation) should be fixed, and then
deducted from the tax on the net income.
The change of phraseology alone does not lead to the conclusion that it was the intention of the lawmaker to
amend or change the construction of the old law as contended by the appellee. For it 15 a. well-established
rule, recognized by the Supreme Court of Ohio in the case of Conger v. Bakers Admr (11 Ohio St., 1); "that in
the revision of statutes, neither an alteration in pthrasteaotutgey nor the omission or addition of words in the
latter statute, shall be held necessarily, to alter the construction of the former act. And the court is only
warranted in holding the construction of a statute, when revised, to be changed, where the intent of the
legislature to make such change is clear, or the language used in the new act plainly requires such change of
construction. It should be remembered that condensation is a necessity in the work of compilation or
codification. Very frequently words which do not materially affect the sense will the be omitted from the statutes
as incorporated in the code, or that same general idea will be expressed in brief phrases. No design of altering
the law itself could rightly be predicated upon of altering modifications of the language." (Emphasis ours.) (See
Black on the Construction and Interpretation of the Laws, Second Edition, pp. 594. 595.)
Our Income Tax Law is patterned after the United States Revenue or Income Tax Laws. The United States
Revenue Laws of 1916, 1918, 1921, 1924, 1926, 1928 and 1932 considered the personal and additional
exemptions as credits against the net income for the purpose of the normal tax; and subsequently, the United
States Revenue Acts of 1934, 1936 and 1938 amended the former acts by making said exemptions as credits
against the net income for the purpose of both the normal tax surtax. Section 7 of our old Tax Law, instead of
providing that the personal and additional exemptions shall be allowed as a credit against the net income as in
the United States Revenue Acts, prescribed that the amounts specified therein shall be allowed as an
exemption in they nature of a deduction from the amount of the net income. Which has exactly the same effect
as the provision regarding and additional exemptions in the said United States Revenue Acts. For, as it was
explained in the Ways and Means Committee Report No. 764, 73d Congress, 2d Session, pages 6,
23:jgc:chanrobles.com.ph
"To carry out the policy of retaining practically the same tax burden on ordinary income, it is necessary in
connection with the proposed plan to allow the personal exemption and credits for defendants as an offset
against surtax as well as normal tax. The personal exemption and credits for dependents would appear to be in
lieu of deductions for necessary living expenses. They may well apply to both taxes as do all other ordinary
deductions."cralaw virtua1aw library
And Paul and Mertens, Law of Federal Taxation, Vol. 3, p. 509, state regarding the change in the United States
Revenue Act of 1934: "The practical effect of this statutory change is to convert the personal exemption and
credit for dependents into deductions . . . . (Emphasis ours.)
The lower court, therefore, erred in not declaring that personal and additional exemptions claimed by appellant
should be credited against or deducted from the net income, and consequently in not sentencing appellee to
refund to appellant the sum of P475.
In view of all the foregoing, the decision of the lower court is affirmed in so far as it dismisses appellants first
cause of action, and is reversed in so far as it dismissed his second cause of action. Appellee is sentenced to
refund to appellant the sum of P475 claimed in the second cause of action of the complaint. without
pronouncement as to costs. So ordered.
Moran, C.J., Pablo, Hilado, Bengzon, Briones and Tuason, JJ., concur.
Separate Opinions
PARAS, J., concurring and dissenting:chanrob1es virtual 1aw library
I concur in the majority opinion in so far as it affirms the dismissal of appellants first cause of action, but I
dissent from so much thereof as reverses the dismissal of appellants second cause of action.
The elimination from section 23 of the National Internal Revenue Code of the words "in the nature of a
deduction from the amount of the income" which appeared in section 7 of the old Income Tax Law), could not
have been effected without a purpose; and said purpose certainly is not to retain the meaning and effect of the
suppressed words. If the legislative department did not intend to make an essential change, the logical and
clear way of doing so was to recopy the old provisions. Said elimination was undoubtedly in answer to, and an
acceptance of, the innovation proposed by the Tax Commissions, namely, that the amount payable under the
prevent law should be the difference between the tax due on the entire net income and that due on the
exemptions, thereby doing away with the former practice of allowing the exemptions to be deducted from the
net income and basing the tax on the difference. We cannot say that the failure of the lawmakers to incorporate
in the new Code the provision regarding tax credits allowable to individuals, as prepared and submitted by the
Tax Commission to the National Assembly in substitution of section 7 of the old Income Tax Law, Suggests a
rejection of the new plan and the retention of the old policy, since the desired aim had equally been
accomplished by mere elimination of the words above referred to. Indeed, at the rates fixed in section 21 of the
new Code, the amounts of personal and additional exemptions granted to individual]s under section 23 are
exactly the amounts specified in the provision recommended by the Tax Commission, namely, P10 for single
individuals, P30 for married persons or heads of family, and P10 for each dependent.
Section 23 should thus be construed not as an original provision, but as one which is the result of a revision.
The interpretation now pursued by the Government is further consistent with the circumstance that the tax is
levied upon the "entire net income" (section 21), which means "the gross income computed under section 29,
less the deductions allowed by section 30" (section 28). It is significant that section 30 fails to make any
reference to personal exemptions." The explanation contained in the Ways and Means Committee Report No.
764, 73rd Congress, 2nd Session, to the effect that the "personal exemption and credits for dependents would
appear to be in lieu of deductions for necessary living expenses," cannot have controlling force because, in
computing the net income both under the law Code (section 31) and under the old Income Tax Law (section 5),
no deduction is allowed in aspect of living expenses.
Of course, neither an alteration in phraseology nor the omission or addition of words in a later statute will
necessarily alter the construction of the former act, but, in the present case, the eliminated words were the very
basis for the prior construction. The alteration here is one of substante, and not merely of form.
Besides, the majority, by their position, are (unwittingly I hope) playing favorite to the taxpayers in the upper
brackets, a situation which undoubtedly could not have been intended by the legislators. The following
remarks of counsel for the Government are in point:jgc:chanrobles.com.ph
"Lastly, the action of the appellee Collector, in allowing merely a tax credit upon the amount of the personal
exemptions, gives all taxpayers entitled to the same exemptions, an equal privilege. The tax saving is the
same for taxpayers having equal number of dependents, whether rich or poor, just as the amount of
exemptions remains the same for all taxpayers under analogous circumstances.
"On the contrary, the method advocated by appellant (of deducting the exemption from the total taxable
income) benefits the rich tax payers, rather than the poor ones. To convince us of the fact, it is enough to
compute the tax on an income lesser than appellants say of P15,000.
Appellants Method Appellees
"Net income 15,000.00 Net income P15,000.00
"Less exemption 3,500.00 Taxable income P15,000.00
_________ _________
"Taxable income P11,500.00
Taxed as follows:
Income Rate Tax Income Tax
P2,000 00 1% P20.00 P2,000.00 Exempt.
2,000.00 2% 40.00 2,000.00 P10.00 (1,500 exempt)
2,000.00 3% 60.00 2,000.00 60.00
4,000.00 4% 160.00 4,000.00 160.00
1,500.00 5% 75.00 5,000.00 250.00
______ _____ ______ ________ ______
P11,500 00 P355.00 P15,000.00 P480.00
________ _____ _______ _______
"A comparison of this computation with that of the tax on appellants income, page 19 of this brief, reveals that,
in appellants case, the deduction of the exemption results in saving of 15 per cent tax on P3,500 (P525) while
in the case just discussed, where the taxpayers income is much less, the deduction method saves the
taxpayer only 5 per cent tax on P3,500 (P175), because in this case the highest bracket of the taxpayers
income is only subject to 5 per cent. So that they appellant, with an income of P137,607.09, recognizes by the
deduction three times more than the second taxpayer whose income is merely P15,000. It requires title
argument to show that a method of computing taxes whereby the same exemption results in higher benefit for
the taxpayer with the bigger income can neither be just nor equitable."cralaw virtua1aw library
My vote is to affirm the judgment appealed from in toto.
PERFECTO, J., concurring and dissenting:chanrob1es virtual 1aw library
We dissent from the majority opinion affirming the decision of the lower court in so far as it dismisses
appellants first cause of action.
Plaintiff "filed an income tax return for the calendar year 1939 showing that he made a net profit amounting to
P52,449.29 on embroidery business and P17,850 on dividends from various corporations; and that from the
purchase and sales of mining stocks and securities he made a profit of P10,741.30 and incurred losses in the
amount of P78,049.10, thereby sustaining a net loss of P67,307.80 . . . ."cralaw virtua1aw library
Defendant disallowed the deduction of the loss of P67,307.80, on the theory that the loss was sustained by
plaintiff from the sale of mining stocks and securities which are capital assets and that the loss arising from the
same should be allowed only to the extent of the gain from such sale.
The question is whether the loss was incurred in trade and business.
"Business is a very comprehensive term and embraces everything about which a person can be employed.
Blacks Law Dictionary, 158, citing People v. Commissioners of Taxes (23 New York, 242 244). That which
occupies the time, attention, and labor of men for the purpose of a livelihood or profit. Bouviers Law
Dictionary, Vol., p. 73. Flint v. Stone Tracy Co. (1910), 220 U. S., 107 at 171; 31 Sup. Ct., 342; 55 Law. Ed.,
389; Ann. Cas. 1912-B, Law 1312, cited with approval in Von Baumbach v. Sargent Land Company. (1916)
242 U.S., 503 at 515."cralaw virtua1aw library
We do not have any doubt that plaintiff engaged in the business and trade of buying and selling mining stocks
and securities. We do not see any reason why the losses sustained by him in said business should be
disallowed in the computation for purposes of determining the income tax he has to pay.
We are of opinion that the lower courts decision should reversed and that, as to plaintiffs first cause of action,
defendant should be ordered to reimburse the plaintiff the amount of P9,008.14 paid by plaintiff to defendant
under protest.
In regards to the second cause of action of plaintiff, we agree with the theory of the majority as explained in the
opinion, but we can not concur in the dispositive part thereof ordering the refund of the sum of P475, in view of
the conclusion we have arrived at regarding plaintiffs first cause of action, it appearing that plaintiff only prays
for the refund of P475 as an alternative in the event his first cause of action is dismissed.
PADILLA, J., concurring and dissenting:chanrob1es virtual 1aw library
I dissent from the opinion of the majority on the second cause of action only.
It must be borne in mind that an exemption is neither an exclusion provided for in section 29 (b) nor a
deduction provided for in section 30, C. A. No. 466. Not being a deduction, the amount constituting an
exemption must not be excluded or deducted from the gross or net income. Exemption means condemnation,
remission, or, as the trial court aptly calls, waiver of the tax by the government. The amount of exemption being
fixed (section 23, C. A. No. 466), the tax condoned, remitted or waived must also be fixed. The exemption
provided for in the Income Tax Law is for personal, living, or family expenses of the taxpayer. It is the same
amount regardless of the amount of net income subject to tax. The law makes no distinction between small
and large incomes. The collectors computation accomplishes the aim of the law, for the tax on the amount
exempted would be the same for every net income, large or small, subject to tax. To illustrate, let us take the
case of two married persons with spouses not legally separated from them and each with three dependent
children, whose net incomes are P10,000 and P30,000, respectively. Under the Collectors interpretation of the
law, the computation would be as follows:
P10,000.00 net income P30,000.00 net income
2, 00 000 1% P20.00 P2,000.00 1% P20.00
2,000.00 2% 40.00 2,000.00 2% 40.00
4,000.00 4% 160.00 4,000.00 4% 160.00
_____________________________ 10,000.00 6% 600.00

P10,000.00 Tax P220.00 10,000.00 6% 600.00
Exemption P60.00 ______________________________
P30,000.00 Tax P1,320.00
Exemption P60.00
Under appellants interpretation of the law, the computation would been as follows:
P10,000.00 net income P30,000.00 net income
4,000.00 less exemption 4,000.00 less exemption
__________ _________
P6,000.00 taxable net P26,000.00 taxable net
P2,000.00 1% P20.00 P2,000.00 1% P20.00
2,000.00 2% 40.00 2,000.00 2% 40.00
2,000.00 3% 60.00 2,000.00 3% 60.00
___________________________ 4,000.00 4% 160.00
P6,000.00 Tax P120.00 10,000.00 5% 500.00
6,000.00 6% 360.00
________ _____________________
P26,000.00 Tax P1,140.00
or under appellants other interpretation of the law, the computation would be, as follows:
P2,000.00 1% P20.00 P2,000.00 1% P20.00
2 000 00 2% 40 00 2,000.00 2% 40.00
2,000.00 3% 60 00 2,000.00 3% 60.00
4,000.00 4% 160.00 4,000.00 4% 160.00
_________________ __________ 10,000.00 5% 500.00
P10,000.00 Tax P120.00 6,000.00 6% 360.00
Exemption P60.00 4,000.00 6% 240.00
________ __________________
P30,000.00 Tax P1,140.00
Exemption P240.00
The result under appellants computation is that a large net income would enjoy a bigger amount of tax
exemption than a small net income, when the law is clear that such exemption is of fixed amount regardless of
the amount of net income subject to tax.
It is correct to say that the "Wisconsin Plan" referred to in the majority opinion was not adopted. It was adopted
not in form but in substance.
I am of the opinion that the judgment under review should be affirmed.
19. TOLENTINO VS SEC OF FINANCE (super haba nung case, baka may mahahanap kayo na medyo
makatarungan)
20. MACEDA VS MACARAIG
G.R. No. 88291 June 8, 1993
ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President, HON.
VICENTE JAYME, ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.
Siguion Reyna, Montecillo & Ongsiako for Caltex.
NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this matter of indirect tax
exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second time.
Unfazed by the Decision We promulgated on May 31, 19911 petitioner Ernesto Maceda asks this Court to
reconsider said Decision. Lest We be criticized for denying due process to the petitioner. We have decided to
take a second look at the issues. In the process, a hearing was held on July 9, 1992 where all parties
presented their respective arguments. Etched in this Court's mind are the paradoxical claims by both petitioner
and private respondents that their respective positions are for the benefit of the Filipino people.
A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at the
risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a
public corporation, mainly to develop hydraulic power from all water sources in the Philippines.2 The sum of
P250,000.00 was appropriated out of the funds in the Philippine Treasury for the purpose of organizing the
NPC and conducting its preliminary work.3 The main source of funds for the NPC was the flotation of bonds in
the capital markets4 and these bonds
. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines, or by any authority, branch, division or political subdivision
thereof and subject to the provisions of the Act of Congress, approved March 24, 1934,
otherwise known as the Tydings McDuffle Law, which facts shall be stated upon the face of said
bonds. . . . .5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial
operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first construction of
any hydraulic power project was to be decided by the NPC Board.6 The provision on tax exemption in relation
to the issuance of the NPC bonds was neither amended nor deleted.
On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's
principal and interest in "gold coins" but adding that payment could be made in United States dollars.7 The
provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.
On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to guarantee,
absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans.8 He was also
authorized to contract on behalf of the NPC with the International Bank for Reconstruction and Development
(IBRD) for NPC loans for the accomplishment of NPC's corporate objectives9 and for the reconstruction and
development of the economy of the country. 10 It was expressly stated that:
Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions
and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur other
types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent tax
exemption provision, the law stated as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from
all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the
President of the Philippines was authorized to negotiate, contract and guarantee loans with the Export-Import
Bank of of Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax provision for
repayment of these loans, as stated in R.A. No. 357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes.
As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from
all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of
the Republic of the Philippines, its provinces, cities, and municipalities.15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the
increased indebtedness 16 should bear the National Economic Council's stamp of approval. The tax exemption
provision related to the payment of this total indebtedness was not amended nor deleted.
On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was
authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax
provision related to the repayment of these loans was not amended nor deleted.
On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31, 2000. 18 All
laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly repealed. 19
On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock
corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a par
20
value of P100.00 each, with said capital stock wholly subscribed to by the Government. No tax exemption
was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to
P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was
incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to P300,000,000.00,
the increase to be wholly subscribed by the Government. No tax provision was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as
amended. Declared as primary objectives of the nation were:
Declaration of Policy. Congress hereby declares that (1) the comprehensive development,
utilization and conservation of Philippine water resources for all beneficial uses, including power
generation, and (2) the total electrification of the Philippines through the development of power
from all sources to meet the needs of industrial development and dispersal and the needs of
rural electrification are primary objectives of the nation which shall be pursued coordinately and
supported by all instrumentalities and agencies of the government, including the financial
institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur
Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:
The bonds issued under the authority of this subsection shall be exempt from the payment of all
taxes by the Republic of the Philippines, or by any authority, branch, division or political
subdivision thereof which facts shall be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as follows:
The loans, credits and indebtedness contracted under this subsection and the payment of the
principal, interest and other charges thereon, as well as the importation of machinery,
equipment, materials and supplies by the Corporation, paid from the proceeds of any loan,
credit or indebtedeness incurred under this Act, shall also be exempt from all taxes, fees,
imposts, other charges and restrictions, including import restrictions, by the Republic of the
Philippines, or any of its agencies and political subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the non-
profit character and tax exemptions of NPC as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment, as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation is hereby declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any
court or administrative proceedings in which it may be a party, restrictions and duties to the
Republic of the Philippines, its provinces, cities, and municipalities and other government
agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on
import of foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities
and other government agencies and instrumentalities, on all petroleum products used by the
Corporation in the generation, transmission, utilization, and sale of electric power. 26
On November 7, 1972, Presidential Decree No. 40 was issued declaring that the electrification
of the entire country was one of the primary concerns of the country. And in connection with
this, it was specifically stated that:
The setting up of transmission line grids and the construction of associated generation facilities
in Luzon, Mindanao and major islands of the country, including the Visayas, shall be the
responsibility of the National Power Corporation (NPC) as the authorized implementing agency
of the State. 27
xxx xxx xxx
It is the ultimate objective of the State for the NPC to own and operate as a single integrated
system all generating facilities supplying electric power to the entire area embraced by any grid
set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role
under aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total domestic
indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC was
authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans.
The relevant tax exemption provision for these foreign loans states as follows:
equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any
loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and
indirect taxes, fees, imposts, other charges and restrictions, including import restrictions
previously and presently imposed, and to be imposed by the Republic of the Philippines, or any
of its agencies and political subdivisions. 32(Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:
(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities including the taxes, duties, fees, imposts and other charges provided for under
the Tariff and Customs Code of the Philippines, Republic Act Numbered Nineteen Hundred
Thirty-Seven, as amended, and as further amended by Presidential Decree No. 34 dated
October 27, 1972, and Presidential Decree No. 69, dated November 24, 1972, and costs and
service fees in any court or administrative proceedings in which it may be a party;
xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by
the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of electricity to
its different customers. 34 No tax exemption provision was amended, deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to
cover the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be
taken from taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds,
treasury bills or notes to be issued by the Secretary of Finance for this particular purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and transmission facilities which
includes nuclear power generation, the present capitalization of National Power Corporation
(NPC) and the ceilings for domestic and foreign borrowings are deemed insufficient; 36
xxx xxx xxx
(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit
character of NPC has not been fully utilized because of restrictive interpretation of the taxing
agencies of the government on said provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion program and attain the declared objective of total
electrification of the country, further amendments of certain sections of Republic Act No. 6395,
as amended by Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38
Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was
increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to US$4,000,000,000.00 41 and
Section 13 of R.A. No. 6395, was amended to read as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay to
its indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby
declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs
and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. 42
II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and
Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports
as follows:
WHEREAS, importations by certain government agencies, including government-owned or

controlled corporation, are exempt from the payment of customs duties and compensating tax;
and
WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it
is necessary to restrict and regulate such tax-free importations.
NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the

powers vested in me by the Constitution, and do hereby decree and order the following:
Sec. 1. All importations of any government agency, including government-owned or controlled

corporations which are exempt from the payment of customs duties and internal revenue taxes,
shall be subject to the prior approval of an Inter-Agency Committee which shall insure
compliance with the following conditions:
(a) That no such article of local manufacture are available in sufficient quantity and comparable
quality at reasonable prices;
(b) That the articles to be imported are directly and actually needed and will be used exclusively
by the grantee of the exemption for its operations and projects or in the conduct of its functions;
and
(c) The shipping documents covering the importation are in the name of the grantee to whom
the goods shall be delivered directly by customs authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of
government agencies in accordance with the conditions set forth in Section 1 hereof and the
regulations to be promulgated to implement the provisions of this Decree. Provided, however,
That any government agency or government-owned or controlled corporation, or any local
manufacturer or business firm adversely affected by any decision or ruling of the Inter-Agency
Committee may file an appeal with the Office of the President within ten days from the date of
notice thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general
and special laws and decrees are hereby amended accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National Budget that is an
instrument of national development, reflective of national objectives, strategies and plans. The
budget shall be supportive of and consistent with the socio-economic development plan and
shall be oriented towards the achievement of explicit objectives and expected results, to ensure
that funds are utilized and operations are conducted effectively, economically and efficiently.
The national budget shall be formulated within a context of a regionalized government structure
and of the totality of revenues and other receipts, expenditures and borrowings of all levels of
government-owned or controlled corporations. The budget shall likewise be prepared within the
context of the national long-term plan and of a long-term budget program. 43
In line with such policy, the law decreed that
All units of government, including government-owned or controlled corporations, shall pay income taxes,
customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations
otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General
Fund in the exact amount of taxes/duties due: provided, further, that a procedure shall be established by the
Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall automatically be
considered as both revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are
inconsistent with the provisions of the Decree are hereby repealed and/or modified
accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino
assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax
privileges to any government-owned or controlled corporation and all other units of
government; 46
and since there was a
. . . need for government-owned or controlled corporations and all other units of government
enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by
paying the duties, taxes and other charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions
from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor
of government-owned or controlled corporations including their subsidiaries, are hereby
withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under Presidential Decree No.
776, is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1
above, any applicable tax and duty, taking into account, among others, any or all of the
following:
1) The effect on the relative price levels;
2) The relative contribution of the corporation to the revenue generation effort;
3) The nature of the activity in which the corporation is engaged in; or
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees,
executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent
with this Decree are hereby repealed, amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or grant
of tax exemption to other government and private entities without benefit of review by the Fiscal Incentives
Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14,
1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax
treatment, of government and private entities with certain exceptions, in order that the
requirements of national economic development, in terms of fiscals and other resources, may
be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal
Incentives Review Board (FIRB), a number of affected entities, government and private, had
their tax and duty exemption privileges restored or granted by Presidential action without benefit
or review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided where necessary by
explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to
improve the fiscal monitoring aspects of government operations.
It was thus ordered that:
Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and
duty incentives granted to government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective internation agreement to which the Government of the Republic
of the Philippines is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment pursuant to Presidential Decree No. 1789, as

amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66
as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial

Authority pursuant to Presidential Decree No. 538, was amended.
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of
Instructions No. 1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal

Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as
amended, is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/or duty exemption that may be restored;
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of
subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and
duty exemptions or preferential treatment in taxation, indicating the source of funding therefor,
eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration
the international commitment of the Philippines and the necessary precautions such that the
grant of subsidies does not become the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take
into account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged; and
d) in general, the greater national interest to be served.
xxx xxx xxx
Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this
Executive Order are hereby repealed or modified accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be
issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the Official
Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official
Gasetter, 51 which 15th day was March 10, 1987.
III
Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their
TAXATION I course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:
According to Persons who pay or who bear the burden:

a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.
Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax),
residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the consumer
who ultimately pays for it, not as a tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the
tariff and customs indirect taxes (import duties, special import tax and other dues) 52
IV
To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the
following:
(1) What kind of tax exemption privileges did NPC have?
(2) For what periods in time were these privileges being enjoyed?
(3) If there are taxes to be paid, who shall pay for these taxes?
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of
taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not
expressly include "indirect taxes."
His point is not well-taken.
A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to
be completely tax exempt from all forms of taxes direct and indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its
creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be
completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside issuance of bonds it was
again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the
ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges of the
NPC were maintained.
NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as
above stated. The exemption was, however, restored by R.A. No. 6395.
Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed NPC. Its
section 13(d) is the starting point of this bone of contention among the parties. For easy reference, it is
reproduced as follows:
[T]he Corporation is hereby declared exempt:

xxx xxx xxx
(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:
xxx xxx xxx
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by
the Republic of the Philippines, its provinces, cities, municipalities and other government
agencies and instrumentalities, on all petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric power. (Emphasis supplied)
Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as follows:
The Corporation shall be non-profit and shall devote all its returns from its capital investment as
well as excess revenues from its operation, for expansion. To enable the Corporation to pay its
indebtedness and obligations and in furtherance and effective implementation of the policy
enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby
declared exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as
costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or
administrative proceedings. (Emphasis supplied)
Petitioner reminds Us that:
[I]t must be borne in mind that Presidential Decree Nos. 380

53
and 938 were issued by one man, acting as such the Executive and Legislative.
xxx xxx xxx
[S]ince both presidential decrees were made by the same person, it would have been very easy
for him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention
were to preserve the indirect tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault were. It
should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;
13(d) : petroleum products used in generation of electric power.
P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,", included
13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions.
This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or
issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes from
55
C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up with
a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of
P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign
loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be
achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay the
government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be
appropriated annually to cover the said unpaid subscription of the Government in NPC's authorized capital
stock. And significantly one of the sources of this annual appropriation of P200 million is TAX MONEY accruing
to the General Fund of the Government. It does not stand to reason then that former President Marcos would
order P200 Million to be taken partially or totally from tax money to be used to pay the Government
subscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the phrase
"All FORMS OF" is supported by the fact that he did not do the same for the tax exemption provision for the
foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:
equipment, materials and supplies by the Corporation, paid from the proceeds of any loan,
credit or indebtedness incurred under this Act, shall also be exempt from all taxes, fees,
imposts, other charges and restrictions, including import restrictions, by the Republic of the
Philippines, or any of its agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:
The loans, credits and indebtedness contracted this subsection and the payment of the
equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any
loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and
indirect taxes, fees, imposts, other charges and restrictions, including import
restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No. 6395, as
amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b) had to do only
with loans and machinery imported, paid for from the proceeds of these foreign loans, THERE WAS NO
OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption stood as is with the express
mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes, fees,
imposts, other charges . . . to be imposed" in the future surely, an indication that the lawmakers wanted the
NPC to be exempt from ALL FORMS of taxes direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect
taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to rationalize government
receipts and expenditures by formulating and implementing a National Budget. 60 The NPC, being a
government owned and controlled corporation had to be shed off its tax exemption status privileges under P.D.
No. 1177. It was, however, allowed to ask for a subsidy from the General Fund in the exact amount of
taxes/duties due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed,
however, NPC to appeal said repeal with the Office of the President and to avail of tax-free importation
privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed created by virtue of
said P.D. No. 882. It is presumed that the NPC, being the special creation of the State, was allowed to
continue its tax-free importations.
This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's tax
exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents'
"Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER the motion for
Reconsideration had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss this tax
exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion No. 133 (S
'77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the basis of the petition
at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63 Applying
by analogy Pulido vs. Pablo, 64 the court declares that the matter of P.D. No. 1177 abolishing NPC's tax
exemption privileges was not seasonably invoked 65 by the petitioner.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption privileges
as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax privileges of any
government-owned or controlled corporation (GOCC). NPC included, was reiterated in the fourth whereas
clause of P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177, being inconsistent
with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue Board was tasked with
recommending the partial or total restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section 23,
P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to the Office
of the President its request for the P200 million mandated by P.D. No. 758 to be appropriated annually by the
Government to cover its unpaid subscription to the NPC authorized capital stock and that under Section 22, of
the same P.D. No. NPC had to likewise submit to the Office of the President its internal operating budget for
review due to capital inputs of the government (P.D. No. 758) and to the national government's guarantee of
the domestic and foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found
themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the Secretary of
Finance and the Commissioner of the Budget had to establish the necessary procedure to accomplish the tax
payment/tax subsidy scheme of the Government. In effect, NPC, did not put any cash to pay any tax as it got
from the General Fund the amounts necessary to pay different revenue collectors for the taxes it had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax
exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to be
restored under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1 and 2 of
said P.D. No. 1931, which reads:
"Section 1. The provisions of special or general law to the contrary

notwithstanding, all exemptions from the payment of duties, taxes, fees, imports
and other charges heretofore granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby withdrawn."
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under P.D. No.
776, is hereby empowered to restore partially or totally, the exemptions
withdrawn by section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had
already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years
earlier or on July 30, 1977, there were no tax exemptions to be withdrawn by section 1 which
could later be restored by the Minister of Finance upon the recommendation of the FIRB under
Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-86, were all
illegally and validly issued since FIRB acted beyond their statutory authority by creating and not
merely restoring the tax exempt status of NPC. The same is true for FIRB Res. No. 17-87 which
restored NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and tax
exemptions but allowed the President upon recommendation of the FIRB to restore those
abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or substantially the same terms the
provisions of the act or acts so revised and consolidated, the revision and consolidation shall be
taken to be a continuation of the former act or acts, although the former act or acts may be
expressly repealed by the revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D.
No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was deemed
to be a continuation of the first half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D.
No. 177, on the subsidy scheme for former tax exempt GOCCs had been expressly repealed by Section 2 with
its institution of the FIRB recommendation of partial/total restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax exemption
privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for the taxes it had to
pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it
did, and the same were granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister
of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both legally
and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax exemption status
but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather infamous
Amendment No. 6 70 as there was no showing that President Marcos' encroachment on legislative prerogatives
was justified under the then prevailing condition that he could legislate "only if the Batasang Pambansa 'failed
or was unable to act inadequately on any matter that in his judgment required immediate action' to meet the
'exigency'. 71
Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the Interim
Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in his (Marcos')
judgment required immediate action, but also when there existed a grave emergency or a threat or thereof. It
must be remembered that said Presidential Decree was issued only around nine (9) months after the
Philippines unilaterally declared a moratorium on its foreign debt payments 72 as a result of the economic crisis
triggered by loss of confidence in the government brought about by the Aquino assassination. The Philippines
was then trying to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$
2.1 billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have
been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his
Amendment 6 power. 76
The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed without
the concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as said P.D.
No. 1931 was not passed by the Interim Batasang Pambansa but by then President Marcos under His
Amendment No. 6 power.
P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6 authority.
Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its
section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same was granted
under FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax exemption privileges
effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication,
however, from the records of the case whether or not similar approvals were given by then President Marcos
for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty of justice"
might have occurred when the Minister of Finance approved his own recommendation as Chairman of the
Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court of Appeals 80 when the
Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he was the
Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave affirmed, on
appeal to Malacaang, his own decision as Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated when
FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same were
recommended by him in his capacity as Chairman of the Fiscal Incentives Review Board. 84
In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-
doctors, respectively. Thus, there was a need for procedural due process to be followed.
In the case of the tax exemption restoration of NPC, there is no other comparable entity not even a single
public or private corporation whose rights would be violated if NPC's tax exemption privileges were to be
restored. While there might have been a MERALCO before Martial Law, it is of public knowledge that the
MERALCO generating plants were sold to the NPC in line with the State policy that NPC was to be the State
implementing arm for the electrification of the entire country. Besides, MERALCO was limited to Manila and its
environs. And as of 1984, there was no more MERALCO as a producer of electricity which could have
objected to the restoration of NPC's tax exemption privileges.
It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just
asking that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's case, the
recommendation and approval of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86,
done by the same person acting in his dual capacities as Chairman of the Fiscal Incentives Review Board and
Minister of Finance, respectively, do not violate procedural due process.
While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5,
1987, the view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no
authority to sub-delegate to the FIRB, which was allegedly not a delegate of the legislature, the power
delegated to her thereunder.
A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative powers.
Thus, there was no power delegated to her, rather it was she who was delegating her power. She delegated it
to the FIRB, which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not
sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy to be carried
out 85 and it fixed the standard to which the delegate had to conform in the performance of his functions, 86
both
qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11,
1984 up to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the Commissaries of the Armed
Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but
groceries and other goods free of all taxes and duties if bought from any AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other
taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over the
total units of goods sold as it would any other cost. Thus, even the ordinary supermarket buyer probably pays
for the specific, ad valorem and other taxes which theses suppliers do not charge the AFP Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the taxes
they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:
xxx xxx xxx
Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees,
imposts, charges, and restrictions of the Republic of the Philippines and its provinces, cities,
and municipalities." This exemption is broad enough to include all taxes, whether direct or
indirect, which the National Power Corporation may be required to pay, such as the specific tax
on petroleum products. That it is indirect or is of no amount [should be of no moment], for it is
the corporation that ultimately pays it. The view which refuses to accord the exemption because
the tax is first paid by the seller disregards realities and gives more importance to form than to
substance. Equity and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge
that many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the
exemption granted the National Power Corporation to direct taxes notwithstanding the general
and broad language of the statue will be to thwrat the legislative intention in giving exemption
from all forms of taxes and impositions without distinguishing between those that are direct and
those that are not. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to
NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect
taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce
to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct
and indirect taxation, the NPC must beheld exempted from absorbing the economic burden of indirect taxation.
This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the
economic burden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy
exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of
the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil
companies to BIR. If NPC nonetheless purchases such oil from the oil companies because to do so may be
more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil
from overseas NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which
verifiably represents the tax already paid by the oil company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS BEEN
RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which the ad
valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as
follows:
EXECUTIVE ORDER NO. 195
AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE

CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM
PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is
hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the
same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and
eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to bear
the economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's complaints
that some indirect tax money has been illegally refunded by the Bureau of Internal Revenue to the NPC and
that more claims for refunds by the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last July
7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period
from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the
PNC did not have indirect tax exemptions with the enactment of P.D. No. 938. As We have already ruled
otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax component of the price
of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly
refunded the amount to NPC.
After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR issues its letter
authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to FIRB
Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there was a
need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad
valorem taxes on the bunker oil it sold NPC during the period above indicated and had billed NPC
correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the
Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY
STATE that itself paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils)
Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National Internal
Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any Manner
wrongfully collected. until a claim for refund or credit has been duly filed with the Commissioner;
but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has
been paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment; Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly, to have been erroneously paid.
xxx xxx xxx
95
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, the Commissioner correctly
issued the Tax Credit Memo in view of NPC's indirect tax exemption.
Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for
P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the BIR from
June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the alleged
claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed of
Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue
amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases
from the Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from
refunding said amount because of Our ruling that NPC has both direct and indirect tax exemption privileges.
Neither can We order the BIR to refund said amount to NPC as there is no pending petition for review
on certiorari of a suit for its collection before Us. At any rate, at this point in time, NPC can no longer file any
suit to collect said amount EVEN IF lt has previously filed a claim with the BIR because it is time-barred under
Section 230 of the National Internal Revenue Code of 1977. as amended, which states:
In any case, no such suit or proceeding shall be begun after the expiration of two years from the
date of payment of the tax or penalty REGARDLESS of any supervening cause that may arise
after payment. . . . (Emphasis supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC for the
amount of P410,580,000.00 had been made on said date. it is clear that more than two (2) years had already
elapsed from said date. At the same time, We should note that there is no legal obstacle to the BIR granting,
even without a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been
made seasonably, and assuming the amounts covered had actually been paid previously by the oil companies
to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED for
lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED.
SO ORDERED.
21. PH ACETYLENE VS COMM
G.R. No. L-19707 August 17, 1967
PHILIPPINE ACETYLENE CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.

Office of the Solicitor General for respondents.
CASTRO, J.:
The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During
the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power
Corporation, an agency of the Philippine Government, and to the Voice of America an agency of the United
States Government. The sales to the NPC amounted to P145,866.70, while those to the VOA amounted to
P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and
demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to
the following-provisions of the National Internal Revenue Code:
Sec. 186. Percentage tax on sales of other articles.There shall be levied, assessed and collected
once only on every original sale, barter, exchange, and similar transaction either for nominal or valuable
considerations, intended to transfer ownership of, or title to, the articles not enumerated in sections one
hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven per centum of the
gross selling price or gross value in money of the articles so sold, bartered exchanged, or transferred,
such tax to be paid by the manufacturer or producer: . . . .
Sec. 183. Payment of percentage taxes.(a) In general.It shall be the duty of every person
conducting business on which a percentage tax is imposed under this Title, to make a true and
complete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or gross
value of output actually removed from the factory or mill warehouse and within twenty days after the
end of each month, pay the tax due thereon: Provided, That any person retiring from a business subject
to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or
declaration and pay the tax due thereon within twenty days after closing his business.
If the percentage tax on any business is not paid within the time specified above, the amount of the tax
shall be increased by twenty-five per centum, the increment to be a part of the tax.
The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are
exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to
the Court of Tax Appeals.
The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the
manufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot claim
exemption from the payment of sales tax simply because its buyer the National Power Corporation is
exempt from the payment of all taxes." With respect to the sales made to the VOA, the court held that goods
purchased by the American Government or its agencies from manufacturers or producers are exempt from the
payment of the sales tax under the agreement between the Government of the Philippines and that of the
United States, provided the purchases are supported by certificates of exemption, and since purchases
amounting to only P558, out of a total of P1,683, were not covered by certificates of exemption, only the sales
in the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and the
petitioner's liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16. 1
The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it
made to the NPC and the VOA because both entities are exempt from taxation.
The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:
Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt
from all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of
the Republic of the Philippines, its provinces, cities and municipalities.
It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on sales
made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by the
latter to the former. The petitioner invokes in support of its position a 1954 opinion of the Secretary of Justice
which ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect."
We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is it
a tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax on
sales, have been described as "act[s] with schizophrenic symptoms,"3 as they apparently have two faces
one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw some light
on the problem. The Code states that the sales tax "shall be paid by the manufacturer or producer,"4 who must
"make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or
gross value of output actually removed from the factory or mill warehouse and within twenty days after the end
of each month, pay the tax due thereon."5
But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is an
entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax cannot be
collected from sales.
Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase "pass
the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he said: "The
phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and on
him alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goods
because of the seller's obligation, but that is all. . . . The price is the sum total paid for the goods. The amount
added because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price . . .".
It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reason
alone that one may validly argue that it is a tax on the purchaser. The exemption granted to the NPC may be
likened to the immunity of the Federal Government from state taxation and vice versa in the federal system of
government of the United States. In the early case of Panhandle Oil Co. v. Mississippi7 the doctrine of
intergovernment mental tax immunity was held as prohibiting the imposition of a tax on sales of gasoline made
to the Federal Government. Said the Supreme court of the United States:
A charge at the prescribed. rate is made on account of every gallon acquired by the United States. It is
immaterial that the seller and not the purchaser is required to report and make payment to the state.
Sale and purchase constitute a transaction by which the tax is measured and on which the burden
rests. . . . The necessary operation of these enactments when so construed is directly to retard, impede
and burden the exertion by the United States, of its constitutional powers to operate the fleet and
hospital. . . . To use the number of gallons sold the United States as a measure of the privilege tax is in
substance and legal effect to tax the sale. . . . And that is to tax the United States to exact tribute on
its transactions and apply the same to the support of the state.1wph1.t
Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:
If the plaintiff in error had paid the tax and added it to the price the government would have nothing to
say. It could take the gasoline or leave it but it could not require the seller to abate his charge even if it
had been arbitrarily increased in the hope of getting more from the government than could be got from
the public at large. . . . It does not appear that the government would have refused to pay a price that
included the tax if demanded, but if the government had refused it would not have exonerated the
seller. . . .
. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come nearer to
the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the sales were
made], because they are instrumentalities of government and cannot function naked and unfed, hitherto
have been held entitled to have their bills for food and clothing cut down so far as their butchers and
tailors have been taxed on their sales; and I had not supposed that the butchers and tailors could omit
from their tax returns all receipts from the large class of customers to which I have referred. The
question of interference with Government, I repeat, is one of reasonableness and degree and it seems
to me that the interference in this case is too remote.
But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious that to
test the constitutionality of a statute by determining the party on which the legal incidence of the tax fell was an
unsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice Hughes' statement
in James v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and Indian Motorcycle Co. v.
United States, 283 U.S. 570 (1931)] have been distinguished and must be deemed to be limited to their
particular facts."
In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from state
taxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but which
he was required to collect from the buyer, in respect of materials purchased by a contractor with the United
States on a cost-plus basis for use in carrying out its contract, despite the fact that the economic burden of the
tax was borne by the United States.
The asserted right of the one to be free of taxation by the other does not spell immunity from paying the
added costs, attributable to the taxation of those who furnish supplies to the Government and who have
been granted no tax immunity. So far as a different view has prevailed, see Panhandle Oil Co. v.
Mississippi and Graves v. Texas Co., supra, we think it no longer tenable.
Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held that
immunity from state regulation in the performance of governmental functions by Federal officers and agencies
did not extend to those who merely contracted to furnish supplies or render services to the government even
though as a result of an increase in the price of such supplies or services attributable to the state regulation, its
ultimate effect may be to impose an additional economic burden on the Government.10
But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in 1952
in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a state
privilege tax on the business of storing gasoline simply because the Federal Government with which it has a
contract for the storage of gasoline is immune from state taxation.
This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the government
property. Instead, the amount collected is graduated in accordance with the exercise of Esso's privilege
to engage in such operations; so it is not "on" the federal property. . . . Federal ownership of the fuel will
not immunize such a private contractor from the tax on storage. It may generally, as it did here, burden
the United States financially. But since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L. ed.
155, 167, 58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw. . . . 12
We have determined the current status of the doctrine of intergovernmental tax immunity in the United States,
by showing the drift of the decisions following announcement of the original rule, to point up the that fact that
even in those cases where exemption from tax was sought on the ground of state immunity, the attempt has
not met with success.
As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:
Since the Dravo case settled that it does not matter that the economic burden of the gross receipts tax
may be shifted to the Government, it could hardly matter that the shift comes about by explicit
agreement covering taxes rather than by being absorbed in a higher contract price by bidders for a
contract. The situation differed from that in the Panhandle and similar cases in that they involved but
two parties whereas here the transaction was tripartite. These cases are condemned in so far as they
rested on the economic ground of the ultimate incidence of the burden being on the Government, but
this condemnation still leaves open the question whether either the state or the United States when
acting in governmental matters may be made legally liable to the other for a tax imposed on it as
vendee.
The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . . .
Yet at the time it would have been a rash man who would find in this a dictum that a sales tax clearly on
the Government as purchaser is invalid or a dictum that Congress may immunize its contractors. 13
If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a
claim resting on statutory grant.
It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax
becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is
billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross
receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax
on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He pays
or may pay the seller more for the goods because of the seller's obligation, but that is all and the amount
added because of the tax is paid to get the goods and for nothing else.14
But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is
largely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser.
We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the
manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential
sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible.
II
This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a claim
is here made that the exemption of such sales from taxation rests on stronger grounds. Even the Court of Tax
Appeals appears to share this view as is evident from the following portion of its decision:
With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the
respondent are in agreement that the Voice of America is an agency of the United States Government
and as such, all goods purchased locally by it directly from manufacturers or producers are exempt
from the payment of the sales tax under the provisions of the agreement between the Government of
the Philippines and the Government of the United States, (See Commonwealth Act No. 733) provided
such purchases are supported by serially numbered Certificates of Tax Exemption issued by the
vendee-agency, as required by General Circular No. V-41, dated October 16, 1947. . . .
The circular referred to reads:
Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or importers
shall be exempt from the sales tax.
It was issued purportedly to implement the Agreement between the Republic of the Philippines and the United
States of America Concerning Military Bases,16 but we find nothing in the language of the Agreement to
warrant the general exemption granted by that circular.
The pertinent provisions of the Agreement read:
ARTICLE V. Exemption from Customs and Other Duties
No import, excise, consumption or other tax, duty or impost shall be charged on material, equipment,
supplies or goods, including food stores and clothing, for exclusive use in the construction,
maintenance, operation or defense of the bases, consigned to, or destined for, the United States
authorities and certified by them to be for such purposes.
ARTICLE XVIII.Sales and Services Within the Bases
1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including concessions,
such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the
United States military forces and authorized civilian personnel and their families. The merchandise or
services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the
Philippine authorities. . . .
Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases,"
in a word, only sales to the quartermaster, are exempt under article V from taxation. Sales of goods to any
other party even if it be an agency of the United States, such as the VOA, or even to the quartermaster but for
a different purpose, are not free from the payment of the tax.
On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not
sales to) commissaries and the like in recognition of the principle that a sales tax is a tax on the seller and not
on the purchaser.
It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and that
the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly
show that such was the intention of the parties.17 Hence, in so far as the circular of the Bureau of Internal
Revenue would give the tax exemptions in the Agreement an expansive construction it is void.
We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186 of
the Code. The petitioner is thus liable for P12,910.60, computed as follows:
Sales to NPC P145,866.70

Sales to VOA P 1,683.00
Total sales subject to tax P147,549.70
7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12
Total amount due and collectible P 12,910.60
Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent Commission the
amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.
22. WONDER MECH VS CTA
G.R. Nos. L-22805 & L-27858 June 30, 1975
WONDER MECHANICAL ENGINEERING CORPORATION represented by Mr. LUCIO QUIJANO,

President & General Manager, petitioner,
vs.
THE HON. COURT OF TAX APPEALS and THE BUREAU OF INTERNAL REVENUE BEING
REPRESENTED BY THE COMMISSIONER OF INTERNAL REVENUE, respondents.
L-22805
Sarte and Espinosa for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Augusto A.
Lim for respondents.
L-27858
Jose Sarte for petitioner.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete, Solicitor
Lolita O. Gal-lang and Special Attorney Elpidio C. Cid for respondents.
ESGUERRA, J.:
Two petitions for review of the decisions of the respondent Court of Tax Appeals in G.R. Nos. L-22805 and L-
27858. The first decision (L-22805) dismissed the appeal of petitioner Wonder Mechanical Engineering
Corporation in C.T.A. Case No. 1036, "for lack of jurisdiction, the same having been filed beyond the 30 day
period prescribed in Section 11 of Republic Act No. 1125", and confirmed the decision of respondent
Commissioner of Internal Revenue which "assessed against petitioner the total amount of P69,699.56 as fixed
taxes and sales and percentage taxes, inclusive of the 25% surcharge for the years 1953-54". The second
decision (L-27858) ordered the same petitioner to pay, respondent Commissioner of Internal Revenue the
amount of "P25,080.91 as deficiency sales and percentage taxes from 1957 to June 30, 1960, inclusive of the
25% surcharge, plus costs", based on the common principal issue of "whether or not the manufacture and sale
of steel chairs, jeepney parts and other articles which are not machines for making other products, and job
orders done by petitioner come within the purview of the tax exemption granted it under Republic Act Nos. 35
and 901."
Petitioner is a corporation which was granted tax exemption privilege under Republic Act 35 in respect to the
"manufacture of machines for making cigarette paper, pails, lead washers, rivets, nails, candies. chairs, etc.".
The tax exemption expired on May 30, 1951. On September 14, 1953, petitioner applied with the Secretary of
Finance for reinstatement of the exemption privilege under the provisions of R.A. 901 approved July 7, 1954,
the reinstatement to commence on June 20, 1953, the date Republic Act 901 took effect.
In G.R. No. L-22805, respondent Commissioner of Internal Revenue, sometime in 1955, caused the
investigation of petitioner for the purpose of ascertaining whether or not it had any tax liability. The findings of
Revenue Examiner Alfonso B. Camillo on September 30, 1955, stated "that during the years 1953 and 1954
the petitioner was engaged in the business of manufacturing various articles, namely, auto spare parts,
flourescent lamp shades, rice threshers, post clips, radio screws, washers, electric irons, kerosene stoves and
other articles; that it also engaged in business of electroplating and in repair of machines; that although it was
engaged in said business, it did not provide itself with the proper privilege tax receipts as required by Section
182 of the Tax Code and did not pay the sales tax on its gross sales of articles manufactured by it and the
percentage tax due on the gross receipts of its electroplating and repair business pursuant to Sections 183,
185, 186 and 191 of the same Code".
Based on the foregoing, respondent Commissioner of Internal Revenue assessed against petitioner on
November 29, 1955, the total amount of P69,699.56 as fixed taxes and sales and percentage taxes, inclusive
of the 25% surcharge, as follows:
Sales and percentage taxes for

1953 and 1954 P55,719.65
25% surcharge 13,929.91
C-14 fixed tax (1953-1954) 20.00
C-4 (27) fixed tax (1954) 10.00
C-4 (37) fixed tax (1953-1954) 20.00

TOTAL P69.699.56
Respondent also suggested the payment of the amount of P3,300.00 as penalties in extrajudicial settlement of
petitioner's violations of Sections 182, 183, 185, 186 and 191 of the Tax Code and of the Bookkeeping
Regulations (p. 25, B.I.R. rec.).
In G.R. No. L-27858, respondent Commissioner of Internal Revenue caused the investigation of petitioner for
the purpose of ascertaining its tax liability on August 10, 1960, as a result of which on December 7, 1960,
Revenue Examiner Pedro Cabigao reported that "petitioner had manufactured and sold steel chairs without
paying the 30% sales tax imposed by Section 185(c) of the Tax Code; accepted job orders without paying the
3% tax in gross receipts imposed by Section 191 of the same Code; manufactured and sold other articles
subject to 7% sales tax under Section 186 of the same Code but not covered by the tax exemption privilege;
failed to register with the Bureau of Internal Revenue books of accounts and sales invoices as required by the
Bookkeeping Regulations; failed to indicate in the sales invoices the Residence Certificate number of
customers who purchased articles worth P50.00 or over, in violation of the Bookkeeping Regulation; and failed
to produce its books of accounts and business records for inspection and examination when required to do so
by the revenue examiner in violation of the Bookkeeping Regulations (pp. 17-18 B.I.R. rec.)".
Based on the foregoing, the respondent Commissioner of Internal Revenue on October 6, 1961, assessed
against the petitioner "the payment of P25,080.91 as deficiency percentage taxes and 25% surcharge for 1957
to 1960 and suggested the payment of P5,020.00 as total compromise penalty in extrajudicial settlement of the
various violations of the Tax Code and Bookkeeping Regulation (pp. 28-29 B.I.R. rec.).1wph1.t "
Regarding the compromise penalty suggested by respondent Bureau of Internal Revenue in both G.R. L-22805
and L-27858, it does not appear that petitioner accepted the imposition of the compromise amounts. Hence
We find no compelling reasons to alter the decision of respondent Court of Tax Appeals in L-27858 that
With respect to the compromise penalty in the total amount of P5,020.00 suggested by
respondent to be paid by petitioner, it is now a well settled doctrine that compromise penalty
cannot be imposed or collected without the agreement or conformity of the tax payer (Collector
of Internal Revenue vs. University of Santo Tomas, et al., G.R. Nos. L-11274 & L-11280,
November 28, 1958; the Collector of Internal Revenue v. Bautista, et al., G.R. Nos. L-12250 &
12259, May 27, 1959; the Philippines International Fair, Inc. v. Collector of Internal Revenue,
G.R. Nos. L-12928 & L-12932, March 31, 1962). (Emphasis for emphasis)
Inasmuch as the figures appearing in the Bureau of Internal Revenue's tax delinquency assessments in both
cases (L-22805 and L-27858) are not in dispute, and the respondent Court of Tax Appeals ruled in its decision
in G.R. No. L-27858 on the lone issue presented in both cases that the tax assessment of "P25,080.91 as
deficiency sales and percentage taxes from 1957 to June 30, 1960" must be paid by petitioner as the sale of
other manufactured items did not come within the purview, of the tax exemption granted petitioner. We find it
no longer necessary to make a definite stand on the question raised in L-22805 as to the alleged error
committed by respondent Court of Tax Appeals in dismissing the appeal in C.T.A. 1036 (subject matter of L-
22805) for lack of jurisdiction, the same having been filed beyond the 30-day period prescribed in Section 11 of
Republic Act 1126. Suffice it to say on that issue that appellants must perfect their appeal from the decision of
the Commissioner of Internal Revenue to the Court of Tax Appeals within the statutory period of 30 days,
otherwise said Court acquires no jurisdiction.
We turn Our attention on the vital issue of tax exemption claimed by petitioner as basis for questioning the tax
assessments made by respondent Bureau of Internal Revenue in both cases (G.R. L-22805 and 27858). There
is no doubt that petitioner was given a Certificate of Tax Exemption By the Secretary of Finance on July
7,1954, as follows:
Be it known that upon application filed by Wonder Mechanical Engineering Corporation, 1310 M.
Hizon, Sta. Cruz, Manila, in respect to the manufacture of machines for making cigarette paper,
pails, lead washers, nails, rivets, candies, etc., the said industry/industries have been
determined to be new and necessary under the provisions of Republic Act No. 901 (or of
Republic Act No. 35), in view of which this Certificate of Tax Exemption has been issued
entitling the abovenamed firm/person to tax exemption from the payment of taxes directly
payable by it/him in respect to the said industry/industries until December 31, 1958, and
thereafter to a diminishing exemption until June 20, 1959, as provided in section 1 of Republic
Act No. 901, except the exemption from the income tax which will wholly terminate on June 20,
1955 (B.I.R. rec., page 13). (Emphasis for emphasis)
Republic Act 35, approved on September 30, 1946, grants to persons "who or which shall engage in a new
and necessary industry", for a period of four years from the date of the organization of such industry,
exemption "from the payment of all internal revenue taxes directly payable by such person". Republic Act 901,
approved on June 20, 1953, which amended Republic Act 35 by extending the period of tax exemption,
elaborated on the meaning of "new and necessary industry" as follows:
Sec. 2. For the purposes of this Act, a "new industry is one not existing or operating on a
commercial scale prior to January first, nineteen hundred and forty-five. Where several
applications for exemptionare filed in connection with the same kind of industry, the Secretary of
Finance shall approve them in the order in which they have been filed until the total output or
production of those already granted exemption for that particular kind of industry is sufficient to
meet local demand or consumption: Provided, That the limitation shall not apply to products
intended for export. (Emphasis for emphasis)
Sec. 3. For the purposes of this Act, a "necessary" industry is one complying with the following
requirements:
(1) Where the establishment of the industry will contribute to the attainment of a
stable and balanced national economy.
(2) Where the industry will operate on a commercial scale in conformity with up-
to-date practices and will make its products available to the general public in
quantities and at prices which justify its operation with a reasonable degree of
permanency.
(3) Where the imported raw materials represent a value not exceeding sixty
percentum of the manufacturing cost plus reasonable selling price and
administrative expenses:Provided, That a grantee of tax exemption shall use
materials of domestic origin, growth, or manufacture wherever the same are
available or could be made available in reasonable quantity and quality and at
reasonable prices. ... (Emphasis for emphasis) .
From the above-quoted provisions of the law, it is clear that an industry to be entitled to tax exemption must be
"new and necessary" and that the tax exemption was granted to new and necessary industries as an incentive
to greater and adequate production of products made scarce by the second world war which wrought havoc on
our national economy, a production "sufficient to meet local demand or consumption"; that will contribute "to
the attainment of a stable and balanced national economy"; an industry that "will make its products available to
the general public in quantities and at prices which will justify its operation."
Viewed in the light of the foregoing reasons for the State grant of tax exemption, We are firmly convinced that
petitioner was granted tax exemption in the manufacture and sale "of machines for making cigarette paper,
pails, lead washers, nails, rivets, candies, etc.", as explicitly stated in the Certificate of Exemption (Annex A of
the petition in G.R. No. L-22805), but certainly not for the manufacture and sale of the articles produced by
those machines.
That such was the intention of the State when it granted tax exemption to the petitioner in the manufacture
of machines for making certain products could be deduced from the following:
Before the approval of the original grant of tax exemption to Petitioner for engaging in a new
and necessary industry under Republic Act No. 35, the then Secretary of Finance submitted a
memorandum to the Cabinet, dated March 3, 1949, the pertinent portions of which read as
follows:
"... If (petitioner) turns out machines whenever orders therefore are received.
Among its products are a medicine tablet wrapping machine for Dr. Agustin
Liboro, photographs of which are attached, a loud speaker for the Manila Supply,
and a "Lompia wrapping"machine for a certain Chinese. ...
The manufacture of the above-mentioned machines can be considered a new

and necessary industry for the purpose of Republic Act No. 35. It is
recommended that the benefits of said Act be extended to this corporation in
respect to said industry.
Respectfully submitted:
(SGD.) PIO PEDROSA

Secretary"
The letter of the Executive Secretary to the petitioner dated May 30, 1949, reads as follows:
"Sirs:
I have the honor to advise you that His Excellency, the President, has today, upon
recommendation of the Honorable, the Secretary of Finance, approved your application for
exemption from the payment of internal revenue taxes on your business of manufacturing
machines for making a number of products, such as cigarette paper, pails, lead washers, rivets,
nails, candies, chairs, etc., under the provisions of Section 2 of Republic Act No. 35.
Very respectfully,
(SGD.) TEODORO EVANGELISTA

Executive Secretary"
(Emphasis for emphasis)
Aside from the clarity of the State's intention in granting tax exemption to petitioner in so far as it manufactures
machines for making certain products, as manifested in the acts of its duly authorized representatives in the
Executive branch of the government, it is quite difficult for Us to believe that the manufacture of steel chairs,
jeep parts, and other articles not constituting machines for making certain products would fall under the
classification of "new and necessary" industries envisioned in Republic Acts 35 and 901 as to entitle the
petitioner to tax exemption.
There is no way to dispute the "cardinal rule in taxation that exemptions therefrom are highly disfavored in law
and he who claims tax exemption must be able to justify his claim or right thereto by the dearest grant of
organic or statute law" as succinctly stated in the decision of the respondent Court of Tax Appeals in C.T.A.
No. 1265 (L-27858).1wph1.t
Tax exemption must be clearly expressed and cannot be established by implication. Exemption from a
common burden cannot be permitted to exist upon vague implication. (Asiatic Petroleum Co. vs. Llanes, 49
Phil. 466; House vs. Posadas, 53 Phil. 338; Collector of Internal Revenue vs. Manila Jockey Club, Inc., G.R.
No. L-8755, March 23, 1956, 98 Phil. 676).
WHEREFORE, the decisions of respondent Court of Tax Appeals in these two cases are affirmed. Costs
against the petitioner in both cases.
23. ATLAS FERTILIZER VS COMMISIONER
ATLAS FERTILIZER CORPORATION, petitioner,

vs.
COMMISSION OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents;
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ATLAS FERTILIZER CORPORATION and COURT OF TAX APPEALS, respondents.
DE CASTRO, J.:
These two (2) cases are appeals by way of certiorari from the decision dated August 24, 1966 of the Court of
Tax Appeals granting Atlas Fertilizer Corporation a tax credit in the sum of P81,899.00 which may be applied
by said corporation in pay of its outstanding and/or future liability for internal revenue taxes.
For the material facts, We could very well quote from the decision of the Court of Tax Appeals, the following.
Petitioner Atlas Fertilizer Corporation was formerly a department of Atlas Mining z Development
Corporation. The latter was granted by the Secretary of Finance a certificate of tax exemption
under Republic Act No. 901 as a new and necessary industry for engaging in the manufacture
of fertilizer namely, sulphuric acid, phosphoric acid, superphosphate, triple superphosphate and
sun the tax exemption privileges of Atlas Consolidated Mining and Development Corporation
were later transferred to the petitioner under the written authority of the Department of Finance
dated November 27, 1957. During the period from June 26, 1961 to October 24, 1962, petitioner
imported raw materials, equipment, spare parts, containers and other supplies on which it paid
one-half or 60% of the compensating taxes due thereon (Exhs. 1 and G, pp. 98-100, BIR rec.).
While petitioner was still enjoying partial tax exemption of 50% as a new and necessary industry
under Republic Act No. 901, Republic Act No. 3050, which took effect on June 17, 1961,
granted tax exemption to any person, partnership, company or corporation engaged or which
shall engage in the manufacture of of whatever nature from the payment, among others, of
compensating taxes on their importation of capital goods, equipment, snare raw materials,
supplies containers and fuel To implement z Republic Act No. 3050, the Department of Finance
issued Department Order No. 105, dated September 15, 1961, which provides, among others,
as follows:
Any ... corporation ... which shall engage in the manufacture of fertilizer and desiring to enjoy
the privileges grandted under the provisions of Republic Act No. 3050 may file its application
therefore with the Secretary of Finance.
Fertilizer manufacturer ... which are granted tax exemption under Republic Act No. should
likewise file appellant com/implications for tax exemption under Republic Act No. 3050,
indicating therein, among other things, that the applicant waives the benefits of tax exemption
authorized under Republic Act No. 3127.
In compliance with the above regulation, petitioner filed on January 25, 1962 with the
Department of Finance an application for tax exemption under the provisions of Republic Act
No. 3050, which application was approved by the Secretary of Finance on February 19, 1962.
The tax exemption granted by the said official to petitioner was made retroactive commencing
on June 17, 1961, the date of the effectivity of Republic Act No. 3050 (pp. 93-94, BIR rec.).
On the basis of the tax exemption granted by the Secretary of Finance under Republic Act No.
3050, petitioner filed with responded on June 21, 1963 a claim for tax at of the compensating
taxes amounting to P 83,629.00 which petitioner allegedly paid to the Bureau of Customs on
petitioner's importations of tax exempt goods, equipment, materials and supplies during the
period from June 26, 1961 to October 24, 1962 (pp. 88-90, BIR rec.). On June 22, 1963, the day
after petitioner had filed its for tax credit with respondent, petitioner filed a petition for review
with this Court seek an order to compel respondent to issue the corresponding letter of tax
credit.
During the pendency of this case, petitioner's claim for tax credit of P 83,629.00 filed with
respondent was referred on June 26, 1963 to the Regional Director of Manila, BIR Regional
District No. 3, for investigation, report and recommendation. On July 15, 1963, the case was
assigned to Revenue Examiner Benjamin Fernandez. Shortly thereafter, the Manila Regional
Office (District No. 3) was divided into two (2) districts North Manila and South Manila
(District Nos. 5 and 6). As a consequence thereof and the confusion which ensued as a result of
the sorting and transfer of revenue dockets and records, allocation and assignment of
personnel, and the division and transfer of supplies, equipment and furniture, the papers
bearing on the tax credit of petitioner were misplaced. It was only on January 25, 1965 when the
investigating examiner submitted his report and recommended therein that petitioner be granted
a tax credit of P76,935.00, instead of P83, 629.00 as because the importations and payment of
the compensating taxes under Item Nos. 1, 17, 35, 50, 58, 61, 62, 64, 65, 67 and 68 were not
supported with import entry declarations and receipts of tax payment
After hearing, the Court of Tax Appeals rendered its decision on August 24, 1966 from which both parties have
appealed to this Court.
In his appeal, the Commissioner of Internal Revenue (Commission Commissioner for short) assigns the
following errors:
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER NEED NOT
PROVE THAT THE RAW MATERIALS, EQUIPMENT, SPARE PARTS, CONTAINERS AND
OTHER SUPPLIES IT IMPORTED WERE USED BY IT IN THE MANUFACTURE OF
FERTILIZER TO BE ENTITLED TO TAX EXEMPTION UNDER REPUBLIC ACT NO. 3050.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT IT IS INCUMBENT UPON

RESPONDENT TO PROVE THAT THE IMPORTATIONS IN QUESTION WERE NOT USED
BY THE PETITIONER IN THE MANUFACTURE OF FERTILIZER NOTWITHSTANDING THE
FACT THAT THERE WAS ABSOLUTELY NO EVIDENCE INTRODUCED BY PETITIONER
SHOWING THAT THE SAID IMPORTATIONS WERE USED BY IT IN THE MANUFACTURE
OF FERTILIZER.
III
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONER NEED NOT
PROVE THAT IT HAD PREVIOUSLY SECURED A SPECIFIC AUTHORITY FROM THE
SECRETARY OF FINANCE TO IMPORT THE GOODS IN QUESTION AS A PREREQUISITE
FOR THE ENJOYMENT OF ITS RIGHT TO TAX EXEMPTION UNDER REPUBLIC ACT NO.
3050.
IV
THE COURT OF FAX APPEALS ERRED IN HOLDING THAT THE PETITIONER HAS IN
EFFECT ABANDONED AND GIVEN UP ITS PARTIAL EXEMPTION PRIVILEGE UNDER
REPUBLIC ACT NO. 901 BY SEEKING TO APPLY ITS TAX EXEMPTION UNDER REPUBLIC
ACT NO. 3050.
THE COURT OF TAX APPEALS ERRED IN ORDERING RESPONDENT TO GRANT

PETITIONER A TAX CREDIT OF P81,899.00 IN SPITE OF THE FACT THAT PETITIONER IS
NOT ENTITLED THERETO.
On the other hand, Atlas Fertilizer Corporation (AFC for short), as appellant has also assigned the following
errors:
THE COURT OF TAX APPEALS ERRED IN DENYING THE AWARD OF INTEREST TO THE
PETITIONER ON THE AMOUNT OF P81,899.00 FOUND TO BE DUE AS TAX CREDIT IN
FAVOR OF PETITIONER.
II
THE COURT OF TAX APPEALS ERRED IN CONCLUDING INCLUDING THAT PETITIONER

FILED ITS CLAIM FOR TAX CREDIT QUITE LATE OR ALMOST TWO YEARS FROM THE
FIRST PAYMENT OF THE COMPENSATING TAX AND EIGHT MONTHS FROM THE LAST
PAYMENT THEREOF.
III
THE COURT OF TAX APPEALS ERRED IN CONCLUDING INCLUDING THAT THE DELAY IN
PROCESSING THE CLAIM FOR TAX CREDIT WAS NOT PREMEDITATED AND
INTENTIONAL BUT CAUSED BY CIRCUMSTANCES BEYOND THE CONTROL OF
RESPONDENT.
IV
THE COURT OF TAX APPEALS ERRED IN APPLYING THE EXISTING DOCTRINE THAT
INTEREST ON REFUND (OR TAX CREDIT) IS AWARDED ONLY WHERE COLLECTIVE
TION OF THE TAXES WAS ATTENDED WITH ARBITRARINESS.
THE COURT OF TAX APPEALS ERRED IN NOT APPLYING THE APPLICABLE PROVISIONS
OF THE NEW CIVIL CODE, NAMELY, ARTICLES 2154, 2155 AND 2209, GOVERNMENT ING
THE RETURN OF PAYMENT'S BY REASON OF MISTAKE AND THE AWARD OF INTEREST
WHEN THE OBLIGOR INCURS DELAY.
Appeal by the Commissioner
The pertinent section upon which AFC based its claim for exemption reads:
Sec. 1. Notwithstanding any provisions of law to the contrary, subject to the conditions
hereinafter provided, any person, partnership, company or corporation engaged or which shall
engage in the manufacture of fertilizer of whatever nature be entitled to exemption until
December 31, 1965 from the payment of special port tax, margin fee on foreign exchange, sales
and compensating taxes and customs duties payable by such person, partnership, company or
corporation, in respect to the importation of capital goods, equipment, spare parts, raw
materials, supplies, containers and fuel by any of those engaged in the above industry, ... 1
Anent the first and second assignment of errors, the Commission Commissioner points out that it is well settled
that exemptions are strictly construed and are never presumed. And the burden of proof is on the claimant to
establish clearly his right to exempt Being an essential and indispensable requisite for the enjoyment of its tax
exemption, the fact that the AFC used the goods for the manufacture of fertilizer must be shown by it.
In refutation to the above contention, AFC claims that since the Secretary of Finance, on February 19, 1962,
approved its application for tax exemption under R.A. 3050, it may be assumed that among the matters
considered by the Secretary of Finance in processing the claim for exemption was the fact of actual use for the
manufacture of fertilizer by AFC of the importations made. It is, therefore, the position of AFC that the
certificate of exemption granted by the Secretary of Finance was sufficient proof that it used the imported
articles in the manufacture of fertilizer.
That the burden of proof is on the claimant to establish his right to exemption cannot be gainsaid. In the instant
case, however, We feel that AFC need not adduce further evidence to show that it is entitled to exemption. It is
to be observed that there is no dispute that AFC is engaged in the manufacturing capture of fertilizer, as the
very name of AFC suggests the nature of its business. It is also pertinent to state that when R. A. 3050 took
effect, AFC was already enjoying partial exemption under R.A. 901 as a new and necessary industry engaged
in the manufacture of fertilizer. Furthermore, when the Secretary of Finance, on February 19, 1962, approved
AFC's application for tax exemption under R. A. 3050, We believe that he already considered that the
importations were needed by AFC for the manufacture of fertilizer. This may be inferred from the fact that
before the Secretary of Finance approves an application, he requires applicants to submit an application which
"shall be in the form prescribed by the Secretary of Finance and contain detailed and complete information
caged for in such form. It shall contain a complete of raw materials, supplies, con- re/containers, and fuel
needed and for the exclusive use in the manufacture of fertilizer. There shall be attached to the appellant
com/implication a firm quotation of the complete machinery equipment and spare parts thereof needed by and
for the exclusive use of the applicant in the manufacture of fertilizer. The appellant com/implication shall be
sworn to before a notary public and filed in quadruplicate.2 Likewise, since it is presumed that official duty has
been regularly performed 3 it can be assumed that the Secretary of Finance in approving the application, was
satisfied that those importations were not only needed for exclusive use in the manufacture of fertilizer but that
they were actually used therefor, for otherwise, the Secretary would have not approved the application.
We, therefore, agree with the position of AFC that the certiorari certificate of exemption granted by the
Secretary of Finance on February 19, 1962 was sufficient proof that it used the importations in question in the
manufacture of fertilizer. This is bolstered by the fact that the certificate of exemption was granted after the
imported goods have already arrived.
The Commissioner also argues that AFC failed to secure first an authority from the Secretary of Finance to
import the goods which AFC wanted to be exempt from tax before said goods were actually imported.
According to the Commissioner, such an authority is a prerequisite for the enjoyment of tax exemption, since in
the letter of the Secretary of Finance dated February 19, 1962 granting AFC tax exemption under R.A. 3050,
the Secretary stated:
As a bonafide fertilizer manufacturer under the provisions of the aforesaid Act, you are entitled
to exemption from the payment of the special import tax, margin fee on foreign exchange, sales
and compensating taxes, and customs duties directly payable by you in respect to
the importation of capital goods, equipment spare part. run materials, supplies, containers and
fuel which this office may specifically authorize until December 31, 1965 unless sooner
let/lat/after terminated for failure to comply with the requirements of the law and existing
regulations.
Indeed, it would be illogical for the AFC to produce the acquired specific authority to import because when the
tax exemption was granted on February 19, 1962, sixty-one (61) of the imported goods have already arrived,
and the AFC has paid the corresponding compensating taxes pursuant P. A. 901 granting manufacturer of
fertilizer partial exemption from payment of compensating taxes. With respect to the seven (7) importation
which arrived after the grant of exemption, it should be noted that AFC was able to withdraw them from
customs custody. We must not lose sight of the fact that before goods may be withdrawn from customs
custody, it is necessary that "a true or photostat copy of the letter-grant authorizing the tax-free importation of
the articles applied to be withdrawn from customs custody" be presented, pursuant to paragraph of the
implementing rules and regulations which is Department Order No. 105-A 4 issued by the Secretary of Finance.
Since AFC has successfully withdrawn all the seven (7) imported articles from customs custody, after payment
of the compensating taxes, it may be inferred that AFC has complied with the above provision of Department
Order No. 105-A to produce AFC's authority to import.
On the fourth issue, the Commissioner contends that respondent court erred in ruling that AFC, by seeking to
avail of its exemption under R. A. No. 3050, has in effect abandoned and given up its partial exemption
privilege under R.A. No. 901. According to the Commissioner, AFC could not have abandoned or given up its
exemption under R. A. No. 901 because it has already applied the same to the importations involved herein,
and that one cannot abandon or give up what he has already taken advantage of Furthermore, tax exemptions
under R.A. 901 and R.A. 3050 cannot be enjoyed simultaneous simultaneously.
The Commissioner's contention is without merit. Department, Order No. 105 issued by the Secretary of
Finance expressly directed fertilizer manufacturers enjoying benefits under R.A. No. 901 to likewise apply for
the benefits of R.A. No. 3050. Said Department Order No. 105 provides:
Fertilizer manufacturers who or which are granted tax exempt under R. A. No. 901 should
likewise file applications for tax exemption under R. A. No. 3050. ...
In compliance with said directive, AFC filed its application for total exemption under R. A. No. 3050 which was
granted by the Secretary of Finance. The Commissioner's argument that AFC enjoyed simultaneous
exemption under R. A. No. 901 and R. A. No. 3050, is without factual basis. R. A. No. 901 grants partial
exemption while R. A. 3050 grants total exemption. Once a manufacturer of fertilizer chose to come under R.
A. 3050, his partial exemption under R. A. 901 ceased. In effect, he enjoyed only one exemption benefit, the
full exemption under R. A. No. 3050. As correctly ruled by the respondent court, when AFC availed of the total
exemption under R. A. No. 3050, it has in effect given up the partial exemption which it was enjoying under R.
A. No. 901.
Appeal by AFC
The assignment of errors of AFC may be synthesized to the sole issue as to whether or not the Government is
liable for the payment of interest on refunds (on tax credit) of taxes erroneously or illegally paid to it on the
ground that the commission Commissioner is guilty of unjust and unreasonable delay in performing an
obligation of the Government .
AFC points out that the Commissioner received the claim for tax credit on June 21, 1963 but it was only on
January 11, 1965 or more than eighteen (18) months later that a BIR examiner came to the premises of the
taxpayer to investigate the claim. In other words, the Commissioner did not act on the claim of AFC and this
inaction is the essence of the delay incur red by the Commissioner in the performance of an obligation which
entitled AFC to reparation in the form of interest payment.
On the alleged delay, the Commissioner in his brief explaining the following:
The records of this case show that petitioner's claim for tax credit was received by the Records
Control Section of the Bureau of Internal Revenue on June 21, 1963 (Memorandum for
Petitioner, STA Case No. 1410, p. 2, p. 121 STA par. 5 of Answer, CTA Case No. 1410, P. 14
STA and was received by the Appellate Division of the said Bureau which processes claims of
that nature on June 25, 1963. The following day, or on June 26, 1963, the said claim was
indorsed to then BIR Regional District No. 3, Manila, for investigation and report and, on the
same date, petitioner was duly notified of the said indorsement. (Exh. D, p. 101, CTA rec.).
However, shortly after the claim for tax credit was referred to Regional District No. 3 for
investigation and report, the said district was divided into two districts to become Regional
District Nos. 5 and 6.
As a consequence of the division, revenue dockets and records then handled by Region No. 3
had to be sorted and apportioned between the two new districts. Office supplies, equipment and
furniture were likewise divided and transferred and personnel had to be allocated and assigned
to each of the new districts. Unfortunately, in the process, the papers bearing on petitioner's
claim for tax credit was misplaced.
This was discovered when the report previously requested on the said claim was called up in a
memorandum of the Deputy Com- Commissioner dated Nov. 23, 1964. As the fieldmen of the
Bureau of In- internal Revenue are grounded during the month of December of each year, the
investigation could not be immediately undertaken after the said call-up but had to wait until
January. On January 27, 1965, the desired report contained in an indorsement dated January
25, 1965 was submitted (Exh. 1, supra).
Finding the above explanation meritorious, We agree with respondent court that the delay in processing the
claim of AFC for tax credit was neither premeditated nor intentional. The Commissioner did not sit on the claim
of AFC. If there was any delay, it was due to the splitting into two (2) districts of Regional District No. 3 where
the claim was filed, as a result of which the documents requesting for refund was misplaced. But the more
important consideration is the when settled rule that in the absence of a statutory provision clearly or expressly
directing or authorizing payment of interest on the amount to be refunded to taxpayer, the Government cannot
be acquired to pay interest. 5Likewise, it is the rule that interest may be awarded only when the collection of tax
sought to be refunded was attended with arbitrariness. 6 Such circumstance is not present in the case at bar as
the payment of compensation taxes in question was made freely and voluntarily and conformably with the
partial exemption granted by Republic Act No. 901.
WHEREFORE, judgment is hereby rendered affirmed the decision of the Court of Tax Appeals. Without special
pro-announcement as to cost.
SO ORDERED.
24. COMMISSIONER VS PH ACE LINE

COMMlSSIONER OF INTERNAL REVENUE and COMMISSIONER OF CUSTOMS, petitioners-appellants,
vs.
PHILIPPINE ACE LINES, INC., respondent-appellee.
Office of the Solicitor General Antonio Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special
Attorney Francisco J. Malate, Jr. for petitioners-appellants.
Dakila F. Castro & Associates for respondent-appellee.
ANGELES, J.:
On appeal by the Government from the decision rendered jointly in Tax Cases Nos. 964 & 984 of the
Court of Tax Appeals, reversing the rulings of the Commissioner of Internal Revenue holding the Philippine
Ace Lines, Inc. liable to pay the aggregate amount of P1,407,724.57 as compensating taxes on four (4) ocean-
going cargo vessels acquired by said company from the Reparations Commission of the Philippines, and of the
Commissioner of Customs to place the four vessels under customs custody until the aforementioned amount
claimed by the Government was first paid.
The antecedent facts of the case are not in dispute and may be summarized briefly as follows:
Under date of January 23, 1959, the Reparations Commission agreed to sell to the Philippine Ace Lines the
cargo vessel M/S YAKAL and M/S MOLAVE which were procured by the former from Japan for the end-use of
the latter under the Philippine- Japanese Reparations Agreement of May 9, 1956, at the agreed prices of
P4,283,241.48 and P4,292,457.48, respectively. Similar agreements involving two (2) other ocean-going cargo
vessels were subsequently entered into by and between the same parties: one, dated November 11, 1959,
referring to the purchase and sale of M/S TINDALO for the price of P7,054.177.78 and, the other, concerning
the purchase and sale of M/S NARRA under date of December 14, 1959, for the price of P3,599,995.44. All
these agreements invariably denominated as "Contract of Conditional Purchase and Sale of Reparations
Goods" stipulated, among others, that the Reparations Commission retains title and ownership of the
above-described vessels until they were fully paid for and that the purchase prices of the vessels were to be
paid by Philippine Ace Lines to the Reparations Commission under deferred payment plans in ten (10) equal
annual installments.
The four (4) vessels referred to were thereafter delivered to Philippine Ace Lines in Japan; they were taken to
the Philippines where they were registered in the Bureau of Customs in the name of the Reparations
Commission; and thereafter, the vessels were operated and utilized by Philippine Ace Lines in its shipping
business, plying between ports of foreign countries and the Philippines.
Sometime later, however, the Commissioner of Internal Revenue assessed against the Philippine Ace lines the
amounts of P304,428.00, P256,275.00, P499,948.10 and P305.073.47 as compensating taxes on the M/S
YAKAL, M/S NARRA, M/S TINDALO and M/S MOLAVE, respectively, and demanded payment of the said
amounts. The Commisioner of Customs, joining the Commissioner of Internal Revenue, then placed the
vessels under customs custody at the different ports of the Philippines where they were found at the time, and
refused to give due course to the "clearance" of said vessels as requested by their respective owner and
operator Reparations Commission and Philippine Ace Lines unless the compensating taxes assessed
against the latter were first paid to the Commissioner of Internal Revenue. Philippine Ace Lines protested said
actions of the Commissioners of Internal Revenue and of Customs, alleging that the legal title and ownership
of the vessels operated by it were still vested with the Reparations Commission which, under Section 14 of the
Reparations Act,1 was exempt from payment of all duties, fees and taxes on all reparations goods obtained by
it; but the said officials rejected the protest and ruled that the compensating taxes should first be paid, per
directive to that effect by the Secretary of Finance. Subsequent protests calling the attention of the
Commissioner of Internal Revenue and the Commissioner of Customs to the substantial loss and irreparable
injury it has suffered by the tying up of the four ships in port also proved futile. Offshoots of the controversy,
Philippine Ace Lines interposed two (2) separate appeals (petitions for review) from the above rulings or
decisions of the Commissioner of Internal Revenue and the Commissioner of Customs, to the Court of Tax
Appeals where they were docketed as C.T.A. Case No. 964, involving M/S YAKAL and M/S NARRA, and
C.T.A. Case No. 984, concerning M/S TINDALO and M/S MOLAVE.
While the cases were pending trial, Philippine Ace Lines petitioned the court a quo to enjoin the collection of
the compensating tax assessed against it and after hearing, writs of preliminary injunction were issued upon
the filing of surety bonds to guarantee payment of the amounts claimed.
In the meantime, Congress enacted Republic Act No. 3079 (effective June 17, 1961) which amended Republic
Act No. 1789, otherwise known as the Reparations Act, and provided as follows:
SEC. 14. Exemption from tax. All reparations goods obtained by the Government shall be exempt
from the payment of all duties, fees and taxes. Reparations goods obtained by private parties shall be
exempt from the payment of customs duties, compensating tax, consular fees and the special import
tax.
xxx xxx xxx
SEC. 20. This Act shall take effect upon its approval, except that the amendment contained in section
seven hereof relating to the requirements for procurement orders including the requirement of
downpayment by private applicant end-users shall not apply to procurement orders already duly issued
and verified at the time of the passage of this amendatory Act, and except further that the amendment
contained in section ten relating to the insurance of the reparations goods by the end-users upon
delivery shall apply also to goods covered by contracts already entered into by the Commission and the
end-user prior to the approval of this amendatory Act as well as goods already delivered to the end-
user, and except further that the amendments contained in sections eleven and twelve hereof relating
to the terms of the installment payments on capital goods disposed of to private parties, and the
execution of a performance bond before delivery of reparations goods, shall not apply to contract for
the utilization of reparations goods already entered into by the Commission and the end-users prior to
the approval of thisamendatory Act: Provided, That any end-user may apply the renovation of his
utilization contract with the commission in order to avail of any provision of this amendatory Act which is
more favorable to an applicant end-user than has heretofore been granted in like manner and to the
same extent as an end-user filing his application after the approval of this amendatory Act, and the
Commission may agree to such renovation on condition that the end-user shall voluntarily assume all
the new obligations provided for in this amendatory Act. [Emphasis supplied]
Invoking the favorable provisions of the new law (Republic Act No. 3079, above quote Philippine Ace Lines
then entered into "Renovated Contract(s) of Conditional Purchase and Sale of Reparations Goods" with the
Reparations Commission, covering the four (4) cargo vessels. It had previously acquired from the latter under
the Reparations Act. Thereafter, the said company filed a "Supplement to the Petition for Review" in each of
the above entitled cases before the Court of Tax Appeals, submitting therewith copies of the said renovated
contracts it had entered with the Reparations Commission regarding the purchase and sale of M/S MOLAVE,
M/S TINDALO, M/S YAKAL and M/S NARRA, with the allegation that "expressly implementing section 14 of
Republic Act No. 3079 in the aforesaid renovated contracts," the Reparations Commission and the Philippine
Ace Lines have agreed as follows:
NOW THEREFORE, for and in consideration of the premises above stated and of the payments to be
made by the herein Conditional Vendee as stipulated in Annex "B" hereof which is made an integral
part of this contract, the parties herein agree to execute this renovation of contract of Conditional
Purchase and Sale and the Conditional Vendor hereby transfers and conveys unto the herein
Conditional Vendee the ocean-going vessels above-described ...; subject further to the pertinent
provisions of Republic Act No. 1789 as amended, including particularly the exempting provisions of
Section 14 thereof relative to the exemption from payment of compensating tax which the herein
Conditional Vendee, as an implemented machinery, do hereby, by these presents, implement. ...
In their "Answer to Supplement to Petition for Review" filed with the court below by counsel for the
Commissioner of Internal Revenue and the Commissioner of Customs, the foregoing allegation was admitted.
They claimed, however, that even if Philippine Ace Lines and the Reparations Commission have agreed to
implement the provisions of Section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, in
the "Renovated Contract of Conditional Purchase and Sale of Reparations Goods" entered into between them,
such implementation did not relieve the Philippine Ace Lines from the payment of the compensating taxes in
question. The parties thereafter submitted the cases for decision upon a stipulation of facts containing,
substantially, the facts as above set forth.
On January 25, 1963, the Court of Tax Appeals rendered a joint decision in the two cases, reversing the
rulings of the Commissioner of Internal Revenue and the Commissioner of Customs, in the following rationale:
The sole issue presented for our consideration is whether or not petitioner is liable for the
compensating tax on the four ocean-going vessels in question. Petitioner claims that it is not liable on
the grounds that said vessels are still owned by the Reparations Commission and that, assuming that it
was liable therefor under Section 190 of the National Internal Revenue Code, in relation to Section 14
of Republic Act 1789 before its amendment, it is now exempt from said tax by virtue of Section 20 of
Republic Act No. 3079 in relation to Section 14 of Republic Act No. 1789, as amended. On the other
hand, respondent claims that petitioner is liable and that the latter's liability is not affected by the
exemption provision of the new law.
xxx xxx xxx
The Government does not deny the fact that petitioner has complied with all the requirements of law in
order that it may avail itself of all the favorable provisions granted in Republic Act No. 3079. It is,
however, contended that the favorable provisions mentioned in Section 20 of said Act which may be
availed of by an applicant for renovation of his utilization contract with the Reparations Commission do
not include exemption from compensating tax because such exemption is not expressly stated in the
law. In providing that the favorable provisions of Republic Act No. 3079 shall be available to applicants
for renovation of their utilization contracts, on condition that said applicants shall voluntarily assume all
the new obligations provided in the new law, the law intends to place persons who acquired reparations
goods before the enactment of the amendatory Act on the same footing as those who acquire
reparations goods after its enactment. This is so because of the provision that once an application for
renovation of a utilization contract has been approved, the favorable provisions of said Act shall be
available to the applicant "in like manner and to the same extentas an end-user filing his application
after the approval of this amendatory Act." To deny exemption from compensating tax to one whose
utilization contract has been renovated, while granting the exemption to one who files an application for
acquisition of reparations goods after the approval of the new law, would be contrary to the express
mandate of the law that they both be subject to the same obligations and they both enjoy the same
privileges in like manner and to the same extent. It would be a manifest distortion of the literal meaning
and purpose of the law.
FOR THE FOREGOING CONSIDERATIONS, the decisions appealed from in both cases are hereby
reversed. Accordingly, the surety bonds filed by petitioner to guarantee payment of the tax in question
are thereby cancelled. No pronouncement as to costs.
Not satisfied with the foregoing decision of the Court of Tax Appeals, the Government has interposed the
instant appeal therefrom to this Court.
Appellant now charges that the lower court had erred in holding that the renovation of the contracts of
purchase and sale of the vessels involved in these cases, after the approval of Republic Act No. 3079, entitled
Philippine Ace Lines to the exemption from payment of compensating tax under the provisions of the said law,
notwithstanding the fact that the vessels referred to were acquired from the Reparations Commission long
before the approval of said amendatory Act which, by the way, did not expressly authorize such exemption. It
is argued that the favorable provisions of Republic Act No. 3079 invoked by Philippine Ace Lines and relied
upon by the decision of the court below cannot include exemption from compensating tax, otherwise, had
Congress intended so, it would have provided for such exemption in clear and explicit terms; that the tax
exemption contained in Section 14 of the amendatory Act cannot have retroactive application in the absence of
any provision for retroactivity; and that to grant such exemption to end-users who have acquired reparations
goods before the approval of Republic Act No. 3079 would be prejudicial to the Government.
Appellant's position calls to mind Commissioner of Internal Revenue vs. Bothelo Shipping Corporation,2 the
factual setting of which is on all fours with the case at bar, and where this Court, speaking through Chief
Justice Roberto Concepcion, disposed of the same charge and contentions in clear and unequivocal terms, in
the following wise:
The inherent weakness of the last ground becomes manifest when we consider that, if true, there could
be no tax exemption of any kind whatsoever, even if Congress should wish to create one, because
every such exemption implies a waiver of the right to collect what otherwise would be due to the
Government, and, in this sense, is prejudicial thereto. In fact, however, tax exemptions may and do
exist, such as the one prescribed in section 14 of Republic Act No. 1789, as amended by Republic Act
No. 3079, which, by the way, is "clear and explicit," thus, meeting the first ground of appellant's
contention. It may not be amiss to add that no tax exemption like any other legal exemption or
exception is given without any reason therefor. In much the same way as other statutory commands,
its avowed purpose is some public benefit or interest, which the law-making body considers sufficient to
offset the monetary loss entailed in the grant of the exemption. Indeed, section 20 of Republic Act No.
3079 exacts a valuable consideration for the retroactivity of its favorable provision, namely, the
voluntary assumption, by the end-user, who bought reparations goods prior to June 17, 1961, of "all
the new obligations provided for in" said Act.
The argument adduced in support of the third ground is that the view adopted by the Tax Court would
operate to grant exemption to particular persons, the Buyers therein. It should be noted, however, that
there is no constitutional injunction against granting tax exemptions to particular persons. In fact, it is
not unusual to grant legislative franchises to specific individuals or entities, conferring tax exemptions
thereto. What the fundamental law forbids is the denial of equal protection such as through
unreasonable discrimination or classification.
Furthermore, Section 14 of the Law on Reparations, as amended, exempts from the compensating tax,
not particular persons but persons belonging to a particular class. Indeed, appellants do not assail the
Constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval
of Republic Act No. 3079, on June 17, 1961, purchased reparations goods procured by the
Commission. From the view point of Constitutional Law, especially the equal protection clause, there is
no difference between the grant of exemption to said end-users, and the extension of the grant to those
whose contracts of purchase and sale were made before said date, under Republic Act No. 1789.
It is true that Republic Act No. 3079 does not explicitly declare that those who purchased reparations
goods prior to June 17, 1961, are exempt from the compensating tax. It does not say so, because they
do not really enjoy such exemption, unless they comply with the proviso in Section 20 of said Act, by
applying for the renovation of their respective utilization contracts, "in order to avail of any provision of
the Amendatory Act which is more favorable" to the applicant. In other words, it is manifest, from the
language of said section 20, that the same intended to give such buyers the opportunity to be treated
"in like manner and to the same extent as an end-user filing his application after the approval of this
Amendatory Act." Like the "most favored nation clause" in international agreements, the
aforementioned section 20 thus seeks, not to discriminate or to create an exemption or exceptions, but
to abolish the discrimination, exemption or exception that would otherwise result, in favor of the end-
user who bought after June 17, 1961 and against one who bought prior thereto. Indeed, it is difficult to
find substantial justification for the distinction between the one and the other. ...
We find no cogent reason to modify, much less depart from the conclusion reached in Bothelo, as expressed in
the above-quoted opinion of the Court there, and the same should resolve the identical problem now brought
before Us in this proceeding.
WHEREFORE, the decision of the Court of Tax Appeals appealed from in these cases is affirmed; no
pronouncement as to costs.
25. CALTEX VS COMM
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the decision promulgated by
respondent court on March 8, 1991 in CA-G.R. CV No. 23615 1 affirming with modifications, the earlier
decision of the Regional Trial Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by
herein petitioner against respondent bank.
The undisputed background of this case, as found by the court a quo and adopted by respondent court,
appears of record:
1. On various dates, defendant, a commercial banking institution, through its Sucat Branch
issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who deposited
with herein defendant the aggregate amount of P1,120,000.00, as follows: (Joint Partial
Stipulation of Facts and Statement of Issues, Original Records, p. 207; Defendant's Exhibits 1 to
280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000

26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff in connection
with his purchased of fuel products from the latter (Original Record, p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the Sucat Branch
Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said
depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's
procedure, if he desired replacement of said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant bank the required
Affidavit of Loss (Defendant's Exhibit 281). On the basis of said affidavit of loss, 280
replacement CTDs were issued in favor of said depositor (Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from defendant bank in
the amount of Eight Hundred Seventy Five Thousand Pesos (P875,000.00). On the same date,
said depositor executed a notarized Deed of Assignment of Time Deposit (Exhibit 562) which
stated, among others, that he (de la Cruz) surrenders to defendant bank "full control of the
indicated time deposits from and after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or
amounts may be due" on the loan upon its maturity (TSN, February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc.,
went to the defendant bank's Sucat branch and presented for verification the CTDs declared
lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for
purchases made with Caltex Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-
68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563) from herein
plaintiff formally informing it of its possession of the CTDs in question and of its decision to pre-
terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish the former "a
copy of the document evidencing the guarantee agreement with Mr. Angel dela Cruz" as well as
"the details of Mr. Angel dela Cruz" obligation against which plaintiff proposed to apply the time
deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for payment of the
value of the CTDs in a letter dated February 7, 1983 (Defendant's Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured and fell due and
on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of
the matured loan (TSN, February 9, 1987, pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus
accrued interest and compounded interest therein at 16% per annum, moral and exemplary
damages as well as attorney's fees.
3
After trial, the court a quo rendered its decision dismissing the instant complaint.
On appeal, as earlier stated, respondent court affirmed the lower court's dismissal of the complaint, hence this
petition wherein petitioner faults respondent court in ruling (1) that the subject certificates of deposit are non-
negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due
course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of
Commerce relating to lost instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a better understanding of the
issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00
CTS Pesos, Philippine Currency, repayable to said depositor 731 days. after
date, upon presentation and surrender of this certificate, with interest at the rate
of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs issued, it is
important to note that after the word "BEARER" stamped on the space provided supposedly for
the name of the depositor, the words "has deposited" a certain amount follows. The document
further provides that the amount deposited shall be "repayable to said depositor" on the period
indicated. Therefore, the text of the instrument(s) themselves manifest with clarity that they are
payable, not to whoever purports to be the "bearer" but only to the specified person indicated
therein, the depositor. In effect, the appellee bank acknowledges its depositor Angel dela Cruz
as the person who made the deposit and further engages itself to pay said depositor the amount
indicated thereon at the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable
instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of
contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security
Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is
no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the
one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:
q Mr. Witness, who is the depositor identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from
the writing, that is, from the face of the instrument itself.9 In the construction of a bill or note, the intention of the
parties is to control, if it can be legally ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments. The documents provide that the
amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor?
It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la Cruz only, it could have with
facility so expressed that fact in clear and categorical terms in the documents, instead of having the word
"BEARER" stamped on the space provided for the name of the depositor in each CTD. On the wordings of the
documents, therefore, the amounts deposited are repayable to whoever may be the bearer thereof. Thus,
petitioner's aforesaid witness merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between them would not be in a position to
know that the depositor is not the bearer stated in the CTDs. Hence, the situation would require any party
dealing with the CTDs to go behind the plain import of what is written thereon to unravel the agreement of the
parties thereto through facts aliunde. This need for resort to extrinsic evidence is what is sought to be avoided
by the Negotiable Instruments Law and calls for the application of the elementary rule that the interpretation of
obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This time, the answer is in the
negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for
reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent
bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid
negotiation thereof for the true purpose and agreement between it and De la Cruz, as ultimately ascertained,
requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in
reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the
CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in
favor of the latter by petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank, J.Q. Aranas, Jr., Caltex Credit
Manager, wrote: ". . . These certificates of deposit were negotiated to us by Mr. Angel dela Cruz to guarantee
his purchases of fuel products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or representation is rendered
conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon. 14 A party may not go back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own declaration, act, or omission,
intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security, petitioner's credit manager could
have easily said so, instead of using the words "to guarantee" in the letter aforequoted. Besides, when
respondent bank, as defendant in the court below, moved for a bill of particularity therein 17 praying, among
others, that petitioner, as plaintiff, be required to aver with sufficient definiteness or particularity (a) the due
date or dates of payment of the alleged indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it
issued a receipt showing that the CTDs were delivered to it by De la Cruz as payment of the latter's alleged
indebtedness to it, plaintiff corporation opposed the motion. 18 Had it produced the receipt prayed for, it could
have proved, if such truly was the fact, that the CTDs were delivered as payment and not as security. Having
opposed the motion, petitioner now labors under the presumption that evidence willfully suppressed would be
adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty Corporation, et al. vs. Philippine
National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote therefrom:

The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as
a pledge; but if there was some other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing
declaring it to have been a deposit of the property as collateral security. It has
been said that a transfer of property by the debtor to a creditor, even if sufficient
on its face to make an absolute conveyance, should be treated as a pledge if the
debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute
ownership will not be given that effect in such a transaction if they are also
commonly used in pledges and mortgages and therefore do not unqualifiedly
indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question. Under the Negotiable Instruments
Law, an instrument is negotiated when it is transferred from one person to another in such a manner as to
constitute the transferee the holder thereof, 21 and a holder may be the payee or indorsee of a bill or note, who
is in possession of it, or the bearer thereof. 22 In the present case, however, there was no negotiation in the
sense of a transfer of the legal title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof only as security for the
purchases of Angel de la Cruz (and we even disregard the fact that the amount involved was not disclosed)
could at the most constitute petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the instrument since, necessarily, the
terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal
obligation, must be contractually provided for.
The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is
deemed a holder for value to the extent of his lien. 23 As such holder of collateral security, he would be a
pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable
Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which
inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged.
The instrument proving the right pledged shall be delivered to the creditor, and if negotiable,
must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of the thing
pledged and the date of the pledge do not appear in a public instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court
quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract
of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the
CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The
requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode
whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a
condition without which the execution of a pledge contract cannot affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was
embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically
declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as against third
persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of
Property in case the assignment involves real property.
Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser,
assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the
execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as
between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of whether or not private
respondent observed the requirements of the law in the case of lost negotiable instruments and the issuance of
replacement certificates therefor, on the ground that petitioner failed to raised that issue in the lower court. 28
On this matter, we uphold respondent court's finding that the aspect of alleged negligence of private
respondent was not included in the stipulation of the parties and in the statement of issues submitted by them
to the trial court. 29 The issues agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs against the
depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount covered by the
CTDs and the depositor's outstanding account with defendant, if any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs before the maturity
date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation expenses from
each other.
As respondent court correctly observed, with appropriate citation of some doctrinal authorities, the foregoing
enumeration does not include the issue of negligence on the part of respondent bank. An issue raised for the
first time on appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the parties and, consequently,
issues not raised in the trial court cannot be raised for the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the disposition of a case are properly
raised. Thus, to obviate the element of surprise, parties are expected to disclose at a pre-trial conference all
issues of law and fact which they intend to raise at the trial, except such as may involve privileged or
impeaching matters. The determination of issues at a pre-trial conference bars the consideration of other
questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence may be considered
encompassed by the issues on its right to preterminate and receive the proceeds of the CTDs would be
tantamount to saying that petitioner could raise on appeal any issue. We agree with private respondent that the
broad ultimate issue of petitioner's entitlement to the proceeds of the questioned certificates can be premised
on a multitude of other legal reasons and causes of action, of which respondent bank's supposed negligence is
only one. Hence, petitioner's submission, if accepted, would render a pre-trial delimitation of issues a useless
exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the court below, petitioner still
cannot have the odds in its favor. A close scrutiny of the provisions of the Code of Commerce laying down the
rules to be followed in case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are merely permissive and not
mandatory. The very first article cited by petitioner speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply to the judge or
court of competent jurisdiction, asking that the principal, interest or dividends due or about to
become due, be not paid a third person, as well as in order to prevent the ownership of the
instrument that a duplicate be issued him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but discretionary on the part of the
"dispossessed owner" to apply to the judge or court of competent jurisdiction for the issuance of a duplicate of
the lost instrument. Where the provision reads "may," this word shows that it is not mandatory but
discretional. 34 The word "may" is usually permissive, not mandatory. 35 It is an auxiliary verb indicating liberty,
opportunity, permission and possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of the Code of Commerce, on
which petitioner seeks to anchor respondent bank's supposed negligence, merely established, on the one
hand, a right of recourse in favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party liable thereon who, for some
valid ground, may elect to refuse to issue a replacement of the instrument. Significantly, none of the provisions
cited by petitioner categorically restricts or prohibits the issuance a duplicate or replacement
instrument sans compliance with the procedure outlined therein, and none establishes a mandatory precedent
requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED and the appealed decision is
hereby AFFIRMED.
SO ORDERED.
26. TOLENTINO VS SEC OF FINANCE (too long, hanap kayo ng makatarungan ang haba)
27. MACEDA VS MACARAIG (naulit lang)
28. DAVAO LIGHT VS COMM
DAVAO LIGHT and POWER CO., INC., petitioner-appellant,

vs.
THE COMMISSIONER OF CUSTOMS and COURT OF TAX APPEALS, respondents-appellees.
Abelardo P. Cecilio for petitioner-appellant.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Isidro C. Borromeo and Solicitor
Sumilang V. Bernardo for respondents-appellees.
REYES, J.B.L., J.:p

These are appeals from the decision of the Court of Tax Appeals in CTA Cases Nos. 1337 and 1551, denying
the claim of Davao Light & Power Co., Inc., for refund of the amount paid by said company as customs duties,
special import taxes, compensating taxes and wharfage fees on the importations of electrical supplies and
materials for installation and use at its power plant.
The Davao Light & Power Co., Inc., hereafter referred to as Davao Light, is the grantee of a legislative
franchise to install, operate and maintain an electric light, heat and power plant in the city (then Municipality) of
Davao, for a period of 50 years. On two different occasions in 1962, it imported electrical supplies, materials
and equipment for installation in its power plant. The importations arrived in the port of Cebu City, on which the
Collector of Customs imposed, and Davao light paid under protest, customs duties and taxes in the total
amount of P9,928.00. As the Collector of Customs later ruled unfavorably on the protests (Nos. 267, 268, 269
and 278) and denied its claim for refund of the taxes and duties paid on the imported articles, Davao Light
appealed to the Commissioner of Customs. And when said official sued the action of the Collector, Davao Light
went to the Court of Tax Appeals, maintaining its claim to exemption from the taxes and duties imposable on
the aforementioned motions.
In the Court of Tax Appeals, the parties entered into a stipulation of facts, the pertinent provisions of which
read as follows:
6. That the petitioner (Davao Light) is a grantee of a legislative franchise under Philippine
Legislature Act No. 3760, ...;
7. That the petitioner was granted by the Public Service Commission its Certificate of Public
Convenience and Necessity in 1931 and by virtue of said franchise has established and has
been maintaining and operating a power plant generating electric light, heat and power and
distributing the same for sale within the municipality (now City) of Davao;
8. That the National Power Corporation was created by virtue of Commonwealth Act No. 120,
and under Section 2, par. (g) it was empowered and granted authority:
"To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs, pipes,
mains, transmission lines, power stations and substations and other works, for the purpose of
developing hydraulic power from any river, creek, lake, spring and waterfalls in the Philippines
and supplying such power to the inhabitants thereof; to acquire, construct, install, maintain and
operate and improve gas, oil or steam engines and/or other prime movers, generators and other
machinery in plants and/or auxiliary plants for the production of electric power; to establish,
develop, operate and maintain and administer power and lighting systems for the use of the
Government and the general public; to sell electric power and to fix the rates and provide for the
collection of the charges for any service rendered: Provided, that the rates of charges shall not
be subject to revision by the Public Service Commission."
9. That by virtue of this authority given the National Power Corporation, it established and
constructed a power plant, power stations and transmission lines in Davao City, for the purpose
of generating electric light, heat and power for the inhabitants of Davao City and its surrounding
areas and that it is presently operating and maintaining said power plant, power station and
transmission lines and selling electric power, heat and light in the City of Davao;
10. That Section 17 of (pre-Commonwealth) Act No. 3636 (Standard Electric Power & Light
Franchises Law) provides:
"In the event of any competing individual, association of persons or corporation receiving either
a franchise or permission from the Government of the Philippine Islands, or from any province,
city or municipality thereof, to conduct a similar business in all or any substantial portion of the
territory covered by this franchise to that of the grantee, in which franchise or permission there
shall be any term or terms more favorable than those herein granted or tending to place the
herein grantee at any disadvantage, then such term or terms shall ipso facto become a part of
the terms hereof and shall operate equally in favor of the grantee as in the case of said
competing individual asssociation of persons or corporations."
xxx xxx xxx
12 That under Section 2 of Republic Act No. 358, as amended by Republic Act No. 937, it is
provided that "to facilitate payment of its indebtedness, the National Power Corporation shall
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities."
It was therein petitioner's contention that pursuant to Section 17 of Act 3636, the provision of Republic Act 987
granting tax exemption privileges to the National Power Corporation ipso facto became part of its franchise;
hence, its claim to exemption from taxes and customs duties on the importations in question.
In its decision of 15 December 1967, the Court of Tax Appeals affirmed the ruling of the Customs
Commissioner, the Court holding that the tax exemption privileges granted to the National Power Corporation
were intended to benefit only said government corporation and did not extend to other bodies or entities.
Davao Light thus brought the present petition for review in this Court, raising the same issue of the correctness
of the imposition of taxes and customs duties on its importations of electrical supplies and materials for use in
its electric plant.
Petitioner in this instance reiterates the contention that is legislative franchise to construct, maintain and
operate an electric light, heat and power system (granted by Act 3760) was specifically made subject to Act
3636, which Act, in its Section 17, provides that any favorable terms granted to any "competing individual,
association of persons or corporation" shall ipso facto become part of a franchise earlier issued. As the
National Power Corporation (NPC) is actually operating a power plant, power stations and transmission lines in
Davao City and selling electric power, heat and light in said locality, and said corporation is enjoying exemption
from all taxes, duties, fees, imposts and charges collectible by the government, it is argued that such tax
exemption benefits ipso facto became part of its franchise and are not available to petitioner.
There is no merit in petitioner's contention. Firstly, the aforecited provision of Section 17 of Act 3636 makes
mention of franchise or permit issued to "competing" individuals, associations or corporations. In short, by
express provision of law favorable terms contained in a subsequent franchise issued to an individual,
association, etc. shall automatically be considered incorporated in the franchise or permit earlier issued to
another individual, association, etc. engaged in the same business. The idea is to place both competing groups
or entities on equal footing and not to give one an advantage over the other. This principle of fair play, which is
the basic idea behind the provision, does not find operation in the present case.
It is undeniable that petitioner's purpose in securing a franchise to establish and operate an electric plant and
power stations was to engage in a business or profit-making venture. The NPC, on the other hand, was
specifically created to undertake the development of hydraulic power throughout the country and the
production of power from other sources, for use of the government and the general public.1 As envisioned by
the law creating it, the activity to be pursued by the NPC can hardly be motivated by profit or income.
In operating and maintaining a power plant, power stations and transmission lines in Davao City, as duly
authorized in its charter, the NPC can not be considered as posing competition to petitioner's business. In fact,
there is evidence on record that the NPC does not sell electric lower directly to the general public; instead, it
did sell lower to petitioner for resale to the latter's customers.2 In other words, the NPC is even the source of
petitioner's merchandise; it is aiding petitioner in its business operations, not competing with it.
Nor would the fact that the NPC supplies electric power to the National Development Company (NDC) plant in
Davao justify the claim that the NPC is a competitor to petitioner's business, because Section 10 of
Commonwealth Act 120 (NPC charter) made it NPC's duty to supply power to the NDC.
Sec. 10. At any time that the Board certifies that the Corporation is able to furnish electric power
for lighting an other purposes to any office, shop, or establishment operated and/or owned or
controlled by the National Government or by any city, province, municipality or other political
subdivision of the Commonwealth of the Philippines, the National Government and the
government of said city, province, municipality or other political subdivision shall be compelled
to secure from the Corporation as soon as practicable such electric power as it may need for
lighting and the operation of its offices, shops or establishments or for any work undertaken by
it.
The provisions of this section shall also apply to firms or business owned or controlled by the
National Government or by the government of any city, province, municipality or other political
subdivisions.
Be that as it may, such an isolated case of sale of electric power to one government-owned plant would not be
enough to classify the NPC as a "competing" concern to petitioner's enterprise, which must be assumed to be
catering to the general public to which the NPC has no dealing.
Secondly, petitioner can not rely on the provisions of Republic Act 358, as amended by Republic Act 9873 , to
support its claim for tax exemption.
Section 1 of Republic Act 358, approved on 4 June 1949, amended Section 2 (k) of Commonwealth Act 120,
which authorized the NPC to "contract indebtedness and issue bonds subject to the approval of the President
of the Philippines, upon recommendation of the Secretary of Finance" in an amount not to exceed one hundred
seventy million five hundred pesos. Then in its Section 2, the same law provided:
SEC 2. To facilitate payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities, and municipalities." (emphasis supplied).
On the same day, 4 June 1949, Republic Act 357 was approved, authorizing the President of the Philippines to
negotiate and contract loans from time to time from the International Bank for Reconstruction and
Development, on behalf of the NPC, and to guarantee, absolutely and unconditionally, as primary obligator and
not merely as surety, the payment of loans therefore contracted.4 The provisions of Section 2 of Republic Act
358 granting tax exemption to the NPC, taken in the light of the existing legislation affecting the NPC, notably
Republic Act 357, must be construed as intended to benefit only the NPC, the lawmakers expecting (as so
unequivocally expressed in the law) that by relieving said corporation of tax obligations, the NPC would be
enabled to pay easily its indebtedness or whatever indebtedness it is certain to incur. In granting such tax
exemption, the government actually waived its right to collect taxes from the NPC in order to facilitate the
liquidation by said corporation of its liabilities, and the consequential release by the government itself from its
obligation (as principal obligor) in the transactions entered into by the President on behalf of the NPC. Such
condition, peculiar only to the NPC, cannot be said to exist in petitioner's case; hence, the absolute lack of
basis for awarding of equal privileges (granted to the NPC) to said petitioner.
Similarly, petitioner can not lay claim to the enjoyment of the tax exemption benefits given to NPC because
said corporation happened to be operating a power plant in the same locality where petitioner has a franchise.
The legal principle on the matter is firmly established and well-observed: exemption from taxation is never
presumed;5 for tax exemption to be recognized, the grant must be clear and expressed; it cannot be made to
rest on vague implications.6 The possession by petitioner of a permit to operate an electric plant in Davao City
does not entitle it to the same exemption privileges enjoyed by another operator without an express provision
of the law to that effect.
FOR THE FOREGOING CONSIDERATIONS, the decision of the Court of Tax Appeals is hereby affirmed, with
costs against the petitioner.
29. TAM KIM KEE V. CTA, 7 SCRA 122 (WALA AKO MAHANAP)
30. NPC VS PRESIDING JUDGE (1930 NAKALAGAY SA SYLLABUS NI ATTY, PERO 1990
ITO..PAKICHECK DIN)
G.R. No. 72477 October 16, 1990
NATIONAL POWER CORPORATION, petitioner,

vs.
HON. PRESIDING JUDGE, REGIONAL TRIAL COURT, 10TH JUDICIAL REGION BRANCH XXV,
CAGAYAN DE ORO CITY, PROVINCE OF MISAMIS ORIENTAL, MUNICIPALITY OF JASAAN, MISAMIS
ORIENTAL AND BARANGAY APLAYA, JASAAN, MISAMIS ORIENTAL, respondents.
Pantaleon Z. Salcedo for respondent Barangay Aplaya.
The Provincial Attorney for respondent Misamis Oriental and Municipality of Jasaan.
FERNAN, C.J.:
In this Special Civil Action for Certiorari, petitioner National Power Corporation (NAPOCOR for brevity)
questions the jurisdiction of the Regional Trial Court of Cagayan de Oro City, Branch XXV to hear Civil Case
No. 9901 filed by respondents Province of Misamis Oriental and Municipality of Jasaan for the collection of real
property tax and special education fund tax from petitioner covering the years 1978 to 1984. The antecedent
facts are as follows:
On October 10, 1984, the Province of Misamis Oriental filed a complaint 1 with the Regional Trial Court of
Cagayan de Oro City, Branch XXV against NAPOCOR for the collection of real property tax and special
education fund tax in the amounts of P11,105,008.10 and P11,104,658.10, respectively, covering the period
1978 to 1984. Petitioner NAPOCOR then defendant therein, filed a motion to dismiss 2 dated January 12, 1985
on the grounds that the court has no jurisdiction over the action or suit and that it is not the proper forum for the
adjudication of the case. In support of this motion NAPOCOR cited Presidential Decree No. 242 dated July 9,
1973 which provides that disputes between agencies of the government including govemment-owned or
controlled corporations shall be administratively settled or adjudicated by the Secretary of Justice.
The court through Judge Pablito C. Pielago issued an order 3 dated January 28, 1985 denying the motion to
dismiss. NAPOCOR filed a supplemental motion to dismiss 4 on February 22, 1985 citing a resolution of the
Fiscal Incentive Review Board, No. 10-85 effective January 11, 1984, restoring the tax and duty exemption
privileges of petitioner.
On March 27, 1985, NAPOCOR filed its answer to the complaint with counterclaim. Treating the same as a
second motion to dismiss and finding the affirmative defenses therein stated to be unmeritorious, the court a
quo issued an order on June 27, 1985, denying the second motion to dismiss and requiring both parties to
appear before the court for the purpose of submitting a stipulation of facts.
On July 23, 1985, Barangay Aplaya, Municipality of Jasaan, Misamis Oriental filed a complaint in
intervention 5contending that non-payment by NAPOCOR of real property taxes would adversely affect its
interest since under the law, ten percent (10%) of the real property tax collected on properties within its
jurisdiction shall accrue to the general fund of the barangay. Thereafter, the case was set for trial pursuant to
the court's order dated August 20, 1985. 6
On October 30, 1985, petitioner NAPOCOR filed before this Court the present special civil action for
certiorari 7setting forth the following issues, to wit:
1) Respondent Court acted without or in excess of jurisdiction and with grave abuse of
discretion when it issued the orders dated January 28, 1985, June 27, 1985 and August 20,
1985, denying petitioner's motions to have Civil Case No. 9901 dismissed on the grounds of
lack of jurisdiction and/or improper venue.
2) Petitioner is exempt from payment of real property taxes.
Relied upon by NAPOCOR in assailing the jurisdiction of the lower court and/or the venue of the action are
Sections 2 and 3 of Presidential Decree No. 242, entitled "PRESCRIBING THE PROCEDURE FOR
ADMINISTRATIVE SETTLEMENT OR ADJUDICATION OF DISPUTES, CLAIMS AND CONTROVERSIES
BETWEEN OR AMONG GOVERNMENT OFFICES, AGENCIES AND INSTRUMENTALITIES, INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AND FOR OTHER PURPOSES" dated on
July 9, 1973. Sections 2 and 3 of this Decree provide:
Section 2. In all cases involving only questions of law, the same shall be submitted to and
settled or adjudicated by the Secretary of Justice, as Attorney General and ex officio legal
adviser of all government-owned or controlled corporations and entities, in consonance with
section 83 of the Revised Administrative Code. His ruling or determination of the question in
each case shall be conclusive and binding upon all the parties concerned.
Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be
submitted to and settled or adjudicated by:
(a) The Solicitor General, with respect to disputes or claims or controversies between or among
the departments, bureaus, offices and other agencies of the National Government;
(b) The Govermnent Corporate Counsel, with respect to disputes or claims or controversies
between or among the government-owned or controlled corporations or entities being served by
the office of the Government Corporate Counsel and
(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which
do not fall under the categories mentioned in paragraphs (a) and (b). (Emphasis supplied)
In upholding the lower court's jurisdiction, respondent municipal corporations, on the other hand, rely on
Presidential Decree No. 464, entitled "THE REAL PROPERTY TAX CODE" enacted on July 1, 1974,
specifically Section 82 thereof which provides:
Section 82. Collection of real property tax through the courts. The delinquent real property
tax shall constitute a lawful indebtedness of the taxpayer to the province or city and collection of
the tax may be enforced by civil action in any court of competent jurisdiction. The civil action
shall be filed by the Provincial or City Fiscal within fifteen days after receipt of the statement of
delinquency certified to by the provincial or city treasurer. This remedy shall be in addition to all
other remedies provided by law.
It is indeed desirable and beneficial to the Judiciary's ongoing program of decongesting court dockets that
intra-governmental disputes such as this be settled administratively. Unfortunately, our consideration of the
legal provisions involved leads us to a different conclusion. In reconciling these two conflicting provisions of
P.D. 242 and P.D. 464 on the matter of jurisdiction, we are guided by the basic rules on statutory construction.
An examination of these two decrees shows that P.D. 242 is a general law which deals with administrative
settlement or adjudication of disputes, claims and controversies between or among government offices,
agencies and instrumentalities, including government-owned or controlled corporations. The coverage is broad
and sweeping, encompassing all disputes, claims and controversies.
P.D. 464 on the other hand, governs the appraisal and assessment of real property for purposes of taxation by
provinces, cities and municipalities, as wen as the levy, collection and administration of real property tax. It is a
special law which deals specifically with real property taxes.
It is a basic tenet in statutory construction that between a general law and a special law, the special law
prevails. GENERALIA SPECIALIBUS NON DEROGANT. 8
Where a later special law on a particular subject is repugnant to, or inconsistent with, a prior general law on the
same subject, a partial repeal of the latter win be implied to the extent of the repugnancy or an exception
grafted upon the general law.
A special law must be intended to constitute an exception to the general law in the absence of special
circumstances forcing a contrary conclusion. 9
The conflict in the provisions on jurisdiction between P.D. 242 and P.D. 464 should be resolved in favor of the
latter law, since it is a special law and of later enactment. P.D. 242 must yield to P.D. 464 on the matter of who
or which tribunal or agency has jurisdiction over the enforcement and collection of real property taxes.
Therefore, respondent court has jurisdiction to hear and decide Civil Case No. 9901.
On the question of whether or not NAPOCOR is liable to pay real property taxes and special education fund
taxes for the years 1978 to 1984, we rule in the affirmative.
Presidential Decree No. 1177, entitled "REVISING THE BUDGET PROCESS IN ORDER TO
INSTITUTIONALIZE THE BUDGETARY INNOVATIONS OF THE NEW SOCIETY" was passed on July 30,
1977. Section 23 thereof provides:
Section 23. Tax and Duty Exemptions. All units of govemment, including government-owned
or controlled corporations, shall pay income taxes, customs duties and other taxes and fees as
are imposed under revenue laws; provided, that organizations otherwise exempted by law from
the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact
amount of taxes/duties due; provided, further, that a procedure shag be established by the
Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall
automatically be considered as both revenue and expenditure of the General Fund. (Emphasis
supplied)
Petitioner alleges that what has been withdrawn is its exemption from taxes, duties, and fees which are
payable to the national government while its exemption from taxes, duties and fees payable to government
branches, agencies and instrumentalities remains unaffected. Considering that real property taxes are payable
to the local government, NAPOCOR maintains that it is exempt therefrom.
We find the above argument untenable. It reads into the law a distinction that is not there. It is contrary to the
clear intent of the law to withdraw from all units of government, including government-owned or controlled
corporations their exemptions from all kinds of taxes. Had it been otherwise, then the law would have said so.
Not having distinguished as to the kinds of tax exemptions withdrawn, the plain meaning is that all tax
exemptions are covered. There the law does not distinguish, neither must we.
Moreover, Presidential Decree No. 1931 entitled "DIRECTING THE RATIONALIZATION OF DUTY AND TAX
EXEMPTION PRIVILEGES GRANTED TO GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
AND ALL OTHER UNITS OF GOVERNMENT" which was passed on June 11, 1984, categorically states:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grunt of tax
privileges to any government-owned or controlled corporation and all other units of government.
(Emphasis supplied )
Thus, any dubiety on NAPOCOR'S liability to pay taxes, duties and fees should be considered unequivocably
resolved by the above provision.
In the case of National Power Corporation vs. The Province of Albay, et. al., 10 herein petitioner was held liable
for real property taxes to the provincial government of Albay for the period June 11, 1984 to March 10, 1987,
when it claims to have been enjoying tax exemptions under Resolutions Nos. 10-85, 1-86 and 17-87 of the
Fiscal Incentives Review Board (FIRB). It must be noted that Resolution 10-85 was the same resolution cited
by petitioner in its supplemental motion to dismiss 11 inCivil Case No. 9901. If the attempt (found ineffective for
lack of authority in the above-cited case of NPC vs. The Province of Albay) to restore petitioner's tax
exemptions began only in 1985 with the issuance of FIRB Resolution No. 10-85, it stands to reason that prior
thereto, i.e., from 1977 when P.D. 1177 was promulgated up to 1984, petitioner did not enjoy any tax privilege
as would exempt it from the payment of the taxes under consideration.
In the same case of NPC vs. The Province of Albay, 12 this Court had occasion to state:
Actually, the State has no reason to decry the taxation of NAPOCOR's properties, as and by
way of real property taxes. Real property taxes, after all, form part and parcel of the financing
apparatus of the Government in development and nation-building, particularly in the local
government level.
xxx xxx xxx
To all intents and purposes, real property taxes are funds taken by the State with one hand and
given to the other. In no measure can the Government be said to have lost anything.
The proceeds of the real property tax are divided among the province, city or municipality where the property
subject to the tax is situated and shall be applied by the respective local government unit for its own use and
benefit. Even the barrio where the property is situated shares in the real property tax collections. Likewise, the
entire proceeds of the additional one per cent (1%) real property tax levied for the Special Education Fund
created under R.A. 5447, are divided among the province, city and municipalities where the property is
situated.
WHEREFORE, the petition is DISMISSED. Petitioner having been found liable for the taxes being collected in
Civil Case No. 9901, the respondent court is hereby directed to proceed with deliberate dispatch in hearing the
case for the purpose of determining the exact liability of petitioner. No Costs.
SO ORDERED.
31. ABRA VALLEY COLLEGE VS AQUINO
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO
MILLARE, respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch
I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented
by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as
Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial
Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc.,
represented by Director Pedro Borgonia located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay all back taxes in
the amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be
confiscated to apply for the payment of the back taxes and for the redemption of the property in
question, if the amount is less than P6,000.00, the remainder must be returned to the Director of
Pedro Borgonia, who represents the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial
must be returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
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 non-payment 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.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to
dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial
Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare;
Rollo, pp. 98-100) to the complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-
103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge,
Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-
110) the respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the
auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial
court the sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its
questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter
into the following agreed stipulation of facts:
1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is
admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by
anyone who is actually holding the position of Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon
located in Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be
served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said
school under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes
thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint
as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at
public auction for the satisfaction of the unpaid real property taxes thereon and the same was
sold to defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of
Sale in his favor was issued by the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this stipulation of facts will be
the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this
stipulation of facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd. Agripino
Brillantes
Typ AGRIPINO
BRILLANTES
Attorney for Plaintiff
Sgd. Loreto Roldan

Typ LORETO
ROLDAN
Provincial Fiscal
Counsel for
Defendants
Provincial Treasurer
of
Abra and the
Municipal
Treasurer of
Bangued, Abra
Sgd. Demetrio V. Pre

Typ. DEMETRIO V.
PRE
Attorney for
Defendant
Paterno Millare
(Rollo, pp. 17-18)
Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is
recognized by the government and is offering Primary, High School and College Courses, and has a school
population of more than one thousand students all in all; (b) that it is located right in the heart of the town of
Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; (c) that
the elementary pupils are housed in a two-storey building across the street; (d) that the high school and college
students are housed in the main building; (e) that the Director with his family is in the second floor of the main
building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or
not the lot and building in question are used exclusively for educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a
Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974,
wherein they opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the
school building and school lot used for educational purposes of the Abra Valley College, Inc., are exempted
from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner
school for residential purposes. He thus ruled for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal
(Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant
petition for review on certiorari with prayer for preliminary injunction before this Court, which petition was filed
on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58).
Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT
AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE
COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY
P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN
THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the
Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for educational
purposes."
Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental
use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935
Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well
as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal
basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in question which were
subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the
college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his
family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of
the college building is being used and rented by a commercial establishment, the Northern Marketing
Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22,
paragraph 3, Article VI, of the then 1935 Philippine Constitution, which 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 ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409,
otherwise known as the Assessment Law, provides:
The following are exempted from real property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, scientific or educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling
guide, norm and standard to determine tax exemption, and not the mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that
while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its
members, still these do not constitute business in the ordinary acceptance of the word, but an institution used
exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from
taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court
included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It
was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment
of land tax in favor of the convent includes, not only the land actually occupied by the building but also the
adjacent garden devoted to the incidental use of the parish priest. The 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.
The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases
of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal
Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus
Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2,
p. 1430), but extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said purposes, such as in the case of hospitals, "a school for training nurses,
a nurses' home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student
nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for
the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution
(Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the
phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the
1935 Philippine Constitution, 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. Otherwise
stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by
jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential
purposes of the Director and his family, may find justification under the concept of incidental use, which is
complimentary to the main or primary purposeeducational, the lease of the first floor thereof to the Northern
Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of
education.
It will be noted however that the aforementioned lease appears to have been raised for the first time in this
Court. That the matter was not taken up in the to court is really apparent in the decision of respondent Judge.
No mention thereof was made in the stipulation of facts, not even in the description of the school building by
the trial judge, both embodied in the decision nor as one of the issues to resolve in order to determine whether
or not said properly may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand,
it is noteworthy that such fact was not disputed even after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal.
Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely
raised below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal
factual matter. "The Supreme Court is clothed with ample authority to review palpable errors not assigned as
such if it finds that their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals,
127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well
as the lot where it is built, should be taxed, not because the second floor of the same is being used by the
Director and his family for residential purposes, but because the first floor thereof is being used for commercial
purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the
assessed tax be returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED
subject to the modification that half of the assessed tax be returned to the petitioner.
SO ORDERED.
32. LUNG CENTER OF THE PH VS QUEZON CITY
LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of
the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its hospital building
constructed thereon are subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16,
1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of land, particularly
described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road,
Central District, Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer
Certificate of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of the
aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the ground floor is being
leased to private parties, for canteen and small store spaces, and to medical or professional practitioners who
use the same as their private clinics for their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon Avenue is vacant and idle, while a big
portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both
paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies
from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property taxes
in the amount of 4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-
01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 from real property taxes with the
City Assessor, predicated on its claim that it is a charitable institution. The petitioners request was denied, and
a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for
brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,
paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a
minimum of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its
hospital operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as
such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding
the petitioner liable for real property taxes.6
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of
Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable institution and that its real
properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to
real property tax exemption under the constitution and the law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY TAX
EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT
OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY DEVOTED FOR
CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON PROPER
APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the 1987
Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits paying
patients and renders medical services to them, leases portions of the land to private parties, and rents out
portions of the hospital to private medical practitioners from which it derives income to be used for operational
expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity
patients and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the government attests to its character as a charitable
institution. It contends that the "exclusivity" required in the Constitution does not necessarily mean "solely."
Hence, even if a portion of its real estate is leased out to private individuals from whom it derives income, it
does not lose its character as a charitable institution, and its exemption from the payment of real estate taxes
on its real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner
further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not
precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The
petitioners real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even
under the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property
is actually, directly and exclusively used for charitable purposes. The respondents noted that in a newspaper
report, it appears that graft charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13 square meters of the property in 1990 for only 20,000 a month,
when the monthly rental should be 357,000 a month as determined by the Commission on Audit; and that
instead of complying with the directive of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a monthly rental of only
24,000. They assert that the petitioner uses the subsidies granted by the government for charity patients and
uses the rest of its income from the property for the benefit of paying patients, among other purposes. They
aver that the petitioner failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the
hospital are reserved for indigent patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That
before a patient is admitted for treatment in the Center, first impression is that it is pay-patient and
required to pay a certain amount as deposit. That even if a patient is living below the poverty line, he is
charged with high hospital bills. And, without these bills being first settled, the poor patient cannot be
allowed to leave the hospital or be discharged without first paying the hospital bills or issue a
promissory note guaranteed and indorsed by an influential agency or person known only to the Center;
that even the remains of deceased poor patients suffered the same fate. Moreover, before a patient is
admitted for treatment as free or charity patient, one must undergo a series of interviews and must
submit all the requirements needed by the Center, usually accompanied by endorsement by an
influential agency or person known only to the Center. These facts were heard and admitted by the
Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they prefer to be treated at
the Quezon Institute. Can such practice by the Center be called charitable?10
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the context
of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No.
7160; and (b) whether the real properties of the petitioner are exempt from real property taxes.
The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which
should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-
laws, the methods of administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties. 11
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of
government.12 It may be applied to almost anything that tend to promote the well-doing and well-being of social
man. It embraces the improvement and promotion of the happiness of man.13 The word "charitable" is not
restricted to relief of the poor or sick.14 The test of a charity and a charitable organization are in law the same.
The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in law
as charitable or whether it is maintained for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the provisions of
the decree, is to be administered by the Office of the President of the Philippines with the Ministry of Health
and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The raison
detre for the creation of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been the leading
cause of illness and death in the Philippines, comprising more than 45% of the total annual deaths from
all causes, thus, exacting a tremendous toll on human resources, which ailments are likely to increase
and degenerate into serious lung diseases on account of unabated pollution, industrialization and
unchecked cigarette smoking in the country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early
and adequate medical care, immunization and through prompt and intensive prevention and health
education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts
at preventing, treating and rehabilitating people affected by lung diseases, and to undertake research
and training on the cure and prevention of lung diseases, through a Lung Center which will house and
nurture the above and related activities and provide tertiary-level care for more difficult and
problematical cases;
Whereas, to achieve this purpose, the Government intends to provide material and financial support
towards the establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino
people.15
The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated medical

institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung and
allied diseases in line with the concern of the government to assist and provide material and
financial support in the establishment and maintenance of a lung center primarily to benefit the
people of the Philippines and in pursuance of the policy of the State to secure the well-being of
the people by providing them specialized health and medical services and by minimizing the
incidence of lung diseases in the country and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of lung or
pulmonary ailments and the care of lung patients, including the holding of a series of relevant
congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the biological,

demographic, social, economic, eugenic and physiological aspects of lung or pulmonary
diseases and their control; and to collect and publish the findings of such research for public
consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung

consciousness or awareness, and the development of fact-finding, information and reporting
facilities for and in aid of the general purposes or objects aforesaid, especially in human lung
requirements, general health and physical fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health officers, social workers and medical
and technical personnel in the practical and scientific implementation of services to lung
patients;
6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support educational
programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial and/or city and
local levels; and to coordinate their various efforts and activities for the purpose of achieving a
more effective programmatic approach on the common problems relative to the objectives
enumerated herein;
8. To seek and obtain assistance in any form from both international and local foundations and
organizations; and to administer grants and funds that may be given to the organization;
9. To extend, whenever possible and expedient, medical services to the public and, in general,
to promote and protect the health of the masses of our people, which has long been recognized
as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the
people in any and all walks of life, including those who are poor and needy, all without regard to
or discrimination, because of race, creed, color or political belief of the persons helped; and to
enable them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and carried on to
promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational materials
and supplies by purchase, donation, or otherwise and to dispose of and distribute the same in
such manner, and, on such basis as the Center shall, from time to time, deem proper and best,
under the particular circumstances, to serve its general and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the accomplishment of any
of the powers herein set forth and to do every other act and thing incidental thereto or
connected therewith.16
Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks of
life including those who are poor and the needy without discrimination. After all, any person, the rich as well as
the poor, may fall sick or be injured or wounded and become a subject of charity.17
As a general principle, a charitable institution does not lose its character as such and its exemption from taxes
simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.18 In Congregational Sunday School, etc. v. Board of Review,19 the State
Supreme Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and consequent exemption from taxation, by
reason of the fact that those recipients of its benefits who are able to pay are required to do so, where
no profit is made by the institution and the amounts so received are applied in furthering its charitable
purposes, and those benefits are refused to none on account of inability to pay therefor. The
fundamental ground upon which all exemptions in favor of charitable institutions are based is the
benefit conferred upon the public by them, and a consequent relief, to some extent, of the burden upon
the state to care for and advance the interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South Dakota
v. Baker:21
[T]he fact that paying patients are taken, the profits derived from attendance upon these patients
being exclusively devoted to the maintenance of the charity, seems rather to enhance the usefulness of
the institution to the poor; for it is a matter of common observation amongst those who have gone about
at all amongst the suffering classes, that the deserving poor can with difficulty be persuaded to enter an
asylum of any kind confined to the reception of objects of charity; and that their honest pride is much
less wounded by being placed in an institution in which paying patients are also received. The fact of
receiving money from some of the patients does not, we think, at all impair the character of the charity,
so long as the money thus received is devoted altogether to the charitable object which the institution is
intended to further.22
The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust
purposes and cannot be diverted to private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character
as a charitable institution simply because the gift or donation is in the form of subsidies granted by the
government. As held by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:24
Second, the government subsidy payments are provided to the project. Thus, those payments are
like a gift or donation of any other kind except they come from the government. In both Intermountain
Health Careand the present case, the crux is the presence or absence of material reciprocity. It is
entirely irrelevant to this analysis that the government, rather than a private benefactor, chose to make
up the deficit resulting from the exchange between St. Marks Tower and the tenants by making a
contribution to the landlord, just as it would have been irrelevant in Intermountain Health Care if the
patients income supplements had come from private individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government
rather than private charitable contributions does not dictate the denial of a charitable exemption if the
facts otherwise support such an exemption, as they do here.25
In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from
the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net
loss in 1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from real property taxes as these
are not actually, directly and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken. 26 As held
in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an exemption from the taxing power of the state will
never be implied from language which will admit of any other reasonable construction. Such an
intention must be expressed in clear and unmistakable terms, or must appear by necessary implication
from the language used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed strictly against the property
owner and in favor of the public. This principle applies with peculiar force to a claim of exemption from
taxation . 28
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the petitioner
shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment and supplies to be imported by authorized
entities or persons and by the Board of Trustees of the Lung Center of the Philippines, Inc., for the
actual use and benefit of the Lung Center, shall be exempt from income and gift taxes, the same further
deductible in full for the purpose of determining the maximum deductible amount under Section 30,
paragraph (h), of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with respect to
equipment purchases made by, or for the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges for
its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should
have been among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar maxim, expressio
unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the
rule is the principle that what is expressed puts an end to that which is implied. Expressium facit
cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters, it may not,
by interpretation or construction, be extended to other matters.
...
The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human mind. They
are predicated upon ones own voluntary act and not upon that of others. They proceed from the
premise that the legislature would not have made specified enumeration in a statute had the intention
been not to restrict its meaning and confine its terms to those expressly mentioned. 30
The exemption must not be so enlarged by construction since the reasonable presumption is that the State has
granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms
of the statute the favor would be intended beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from taxation.32
The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice Hilario G.
Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes."34
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the
real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,

non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusivelyused for religious, charitable or educational purposes.35
We note that under the 1935 Constitution, "... all lands, buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered exempt,
the same should not only be "exclusively" used for charitable purposes; it is required that such property be
used "actually" and "directly" for such purposes.37
In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39
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." 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. 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.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively."40 If real property is used
for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to
taxation.41 The words "dominant use" or "principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law.42 Solely is synonymous with exclusively.43
What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.44
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly and
exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are
being leased to private individuals for their clinics and a canteen. Further, a portion of the land is being leased
to a private individual for her business enterprise under the business name "Elliptical Orchids and Garden
Center." Indeed, the petitioners evidence shows that it collected 1,136,483.45 as rentals in 1991 and
1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes.45 On the other hand, the portions of the land
occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent Quezon City
Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and the area
thereof which are leased to private persons, and to compute the real property taxes due thereon as provided
for by law.
SO ORDERED.
Arturo Tolentino vs Secretary of Finance
November 10, 2011 6 comments
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ADVERTISEMENTS
235 SCRA 630 (1994) 249 SCRA 635 (1995) Political Law Origination of Revenue Bills EVAT
Amendment by Substitution
Arturo Tolentino et al are questioning the constitutionality of RA 7716 otherwise known as the
Expanded Value Added Tax (EVAT) Law. Tolentino averred that this revenue bill did not exclusively
originate from the House of Representatives as required by Section 24, Article 6 of the Constitution.
Even though RA 7716 originated as HB 11197 and that it passed the 3 readings in the HoR, the same
did not complete the 3 readings in Senate for after the 1st reading it was referred to the Senate Ways &
Means Committee thereafter Senate passed its own version known as Senate Bill 1630. Tolentino
averred that what Senate could have done is amend HB 11197 by striking out its text and substituting it
with the text of SB 1630 in that way the bill remains a House Bill and the Senate version just becomes
the text (only the text) of the HB. (Its ironic however to note that Tolentino and co-petitioner Raul
Roco even signed the said Senate Bill.)
ISSUE: Whether or not the EVAT law is procedurally infirm.
HELD: No. By a 9-6 vote, the Supreme Court rejected the challenge, holding that such consolidation
was consistent with the power of the Senate to propose or concur with amendments to the version
originated in the HoR. What the Constitution simply means, according to the 9 justices, is that the
initiative must come from the HoR. Note also that there were several instances before where Senate
passed its own version rather than having the HoR version as far as revenue and other such bills are
concerned. This practice of amendment by substitution has always been accepted. The proposition of
Tolentino concerns a mere matter of form. There is no showing that it would make a significant
difference if Senate were to adopt his over what has been done.

Tax 1 Cases Pages 1-2

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TAXATION LAW 1 CASES (PAGE 1-PAGE 2)

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

We deal first with the procedural question.

Now for the substantive question.

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

G.R. No. 99886 March 31, 1993

JOHN H. OSMEA, petitioner,

Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

c) Any additional amount to be imposed on petroleum products to augment the

xxx xxx xxx

xxx xxx xxx

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

The answer is NO.

"(d) The provisions of existing special or general laws to the contrary

xxx xxx xxx

G.R. Nos. L-19824, L-19825 and 19826 July 9, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

We find for the appellee.

5. TIO VS VIDEOGRAM REGULATORY BOARD

G.R. No. L-75697

Nelson Y. Ng for petitioner.

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

We shall consider the foregoing objections in seriatim.

xxx xxx xxx

WHEREFORE, the instant Petition is hereby dismissed.

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

DAVIDE, JR., J.:

c) Any additional amount to be imposed on petroleum products to augment the

The Fund herein created shall be used for the following:

2) To reimburse the oil companies for possible cost under-recovery incurred as a

i. Reduction in oil company take as directed by the Board of

ii. Reduction in internal ad valorem taxes as a result of foregoing

iii. Other factors as may be determined by the Ministry of Finance

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

(4) The review of current claims (1989) will be conducted expeditiously to

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission

Dear Atty. dela Paz:

As presented in the foregoing computation the disallowances totalled P387,683,535, which

Recovery of financing charges P162,728,475 /a

Disallowances of OEA 130,420,235

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

b. Product Sales Sales to International Vessels/Airlines

c. Inventory losses Settlement of Ad Valorem

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY

xxx xxx xxx

As part of your program to promote economic recovery, . . . oil companies (were

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING

RESPONDENT COMMISSION ERRED IN DISALLOWING

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT