MOBIL PHILIPPINES, INC., G.R. No.

154092
Petitioner,
Present:

Davide, Jr., C.J.,

(Chairman),
- versus - Quisumbing,
Ynares-Santiago,
Carpio, and
Azcuna, JJ.

THE CITY TREASURER OF MAKATI Promulgated:

and the CHIEF OF THE LICENSE
DIVISION OF THE CITY OF MAKATI,
Respondents. July 14, 2005

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision[1] dated November 22, 2001 of

the Regional Trial Court of Pasig City, Branch 268, in Civil Case No. 67599, subsequently affirmed in an

Order[2] dated May 15, 2002.

Petitioner is a domestic corporation engaged in the manufacturing, importing, exporting and wholesaling

of petroleum products, while respondents are the local government officials of the City of Makati charged with

the implementation of the Revenue Code of the City of Makati, as well as the collection and assessment of

business taxes, license fees and permit fees within said city.[3]

Prior to September 1998, petitioners principal office was at the National Development Company

Building, in 116 Tordesillas St., Salcedo Village, Makati City. On August 20, 1998, petitioner filed an

application with the City Treasurer of Makati for the retirement of its business within the City of Makati as it

moved its principal place of business to Pasig City.[4]

In its application, petitioner declared its gross sales/receipts as follows:

Gross Sales Receipts for Calendar Year 1997 P 453,799,493.29

Gross Sales Receipts for Calendar Year 1998 267,952,766.67[5]

January to August
 Upon evaluation of petitioners application, then OIC of the License Division, Ms. Jesusa E. Cuneta,

issued to petitioner, a billing slip[6] assessing the following taxes against petitioner:

For the 4th Quarter of 1998 (based on 1997 gross sales)

As Manufacturer P 14,439.54
As Wholesaler 550,778.58
Garbage Fee 1,250.00
Sub-Total P 566,468.12

For the Gross Sales made in 1998

As Manufacturer P 40,008.33
As Wholesaler 1,291,630.51
Sub-Total __1,331,638.84
TOTAL ASSESSED BUSINESS TAXES P 1,898,106.96[7]

On September 11, 1998, petitioner paid the assessed amount of P1,898,106.96 under protest. The City

Treasurer issued therefor Official Receipt No. 9065025C[8] and approved the petitioners application for

retirement of business from Makati to Pasig City.

On July 21, 1999, petitioner filed a claim for P1,331,638.84 refund.[9] On August 11, 1999, petitioner

received a letter[10] denying the claim for refund on the ground that petitioner was merely transferring and not

retiring its business, and that the gross sales realized while petitioner still maintained office in Makati from

January 1 to August 31, 1998 should be taxed in the City of Makati.[11]

Petitioner subsequently filed a petition with the Regional Trial Court of Pasig City, Branch 268, seeking

the refund of business taxes erroneously collected by the City of Makati.

In its Decision, the trial court ruled as follows:

In summary, the pertinent law provides that a person or entity doing business in the
Municipality shall be subject to business tax. The tax shall be fixed by the quarter. The initial tax
for the quarter in which a business starts to operate shall be two and one-half percent (2%) of one
percent (1%) of its capital investment. Thereafter, the tax shall be computed based on the gross
sales or receipts of the preceding quarter. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross sales or receipts for the preceding
calendar year. That tax shall accrue on the first day of January of each year and payment shall be
made within the first 20 days of January or of each subsequent quarter as the case may be.
 Considering therefore that the business tax accrues only on the first day of January as
provided in Sec. 3A.07 and becomes payable within the first 20 days thereof or of each
subsequent quarter, the payments made by Mobil in the year 1998 are therefore payments for the
business tax for 1997 which accrued in January of 1998 and became payable within the first 20
days of January or of each subsequent quarter. Thus, upon retirement in August 1998, the taxes
for said year which should accrue in January 1999 [become] immediately payable before the
application for retirement can be approved (Ibid, (g), Sec. 3A.08). The assessment of the Chief of
the License Division of Makati is therefore with legal basis and does not constitute double
taxation.

WHEREFORE, premises considered, the instant petition for refund is hereby DENIED
and the case is dismissed for lack of merit.

SO ORDERED.[12]

Petitioner filed a Motion for Reconsideration[13] which was denied in an Order dated May 15, 2002,

hence this appeal.

Before us, petitioner alleges now that,

THE TRIAL COURT ERRED IN HOLDING THAT PETITIONERS BUSINESS TAX
PAYMENTS MADE IN 1998 ARE ACTUALLY PAYMENTS FOR BUSINESS TAXES IN
1997. THIS CONCLUSION IS CONTROVERTED BY MAKATI CITYS REVENUE CODE,
AND, IN FACT, CONSTITUTES DOUBLE TAXATION.[14]

Simply stated, the issue is: Are the business taxes paid by petitioner in 1998, business taxes for 1997 or

1998?

According to petitioner, the 1997 gross sales/revenue is merely the basis for the amount of business

taxes due for the privilege of carrying on a business in the year when the tax was paid.

For their part, respondents argue that since local taxes, which include business taxes, are paid either

within the first twenty days of January of each year or of each subsequent quarter, as the case may be, what the

taxpayer actually pays during the recorded calendar year is actually its business tax for the preceding year.

Prefatorily, it is necessary to distinguish between a business tax vis--vis an income tax.

 Business taxes imposed in the exercise of police power for regulatory purposes are paid for the privilege

of carrying on a business in the year the tax was paid. It is paid at the beginning of the year as a fee to allow the

business to operate for the rest of the year. It is deemed a prerequisite to the conduct of business.

Income tax, on the other hand, is a tax on all yearly profits arising from property, professions, trades or

offices, or as a tax on a persons income, emoluments, profits and the like. It is tax on income, whether net or

gross realized in one taxable year.[15] It is due on or before the 15th day of the 4th month following the close of

the taxpayers taxable year and is generally regarded as an excise tax, levied upon the right of a person or entity

to receive income or profits.

The trial court erred when it said that the payments made by petitioner in 1998 are payments for

business tax incurred in 1997 which only accrued in January 1998. Likewise, it erred when it ruled that

petitioner was still liable for business taxes based on its gross income/revenue for January to August 1998.

Section 3A.04 of the Makati City Revenue Code states:

Sec.3A.04. Computation of tax for newly-started business. In the case of newly-started
business under Sec. 3A.02, (a), (b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l), and (m) above, the
tax shall be fixed by the quarter. The initial tax of the quarter in which the business starts to
operate shall be two and one half percent (2 %) of one percent (1%) of the capital investment.

In the succeeding quarter or quarters, in cases where the business opens before the last
quarter of the year, the tax shall be based on the gross sales or receipt for the preceding quarter at
one-half ( ) of the rates fixed therefor by the pertinent schedule in Section 3A.02, (a), (b), (c), (d),
(e), (f), (g), (h), (i), (j), (k), (l), and (m).

In the succeeding calendar year, regardless of when the business started to operate, the
tax shall be based on the gross sales or receipts for the preceding calendar year, or any fraction
thereof as provided in the same pertinent schedules.[16]

Under the Makati Revenue Code, it appears that the business tax, like income tax, is computed based on

the previous years figures. This is the reason for the confusion. A newly-started business is already liable for

business taxes (i.e. license fees) at the start of the quarter when it commences operations. In computing the

amount of tax due for the first quarter of operations, the business capital investment is used as the basis. For the

subsequent quarters of the first year, the tax is based on the gross sales/receipts for the previous quarter. In the

following year(s), the business is then taxed based on the gross sales or receipts of the previous year. The
business taxes paid in the year 1998 is for the privilege of engaging in business for the same year, and not for

having engaged in business for 1997.

Upon its transfer, petitioner was apparently subjected to Sec. 3A.11 par. (g) which states:

...

(g) Retirement of business.

...

For purposes thereof, termination shall mean that business operation are stopped
completely.

...

(2) If it is found that the retirement or termination of the business is legitimate, [a]nd the
tax due therefrom be less than the tax due for the current year based on the gross sales or
receipts, the difference in the amount of the tax shall be paid before the business is considered
officially retired or terminated.[17]

Based on this foregoing provision, on the year an establishment retires or terminates its business within

the municipality, it would be required to pay the difference in the amount if the tax collected, based on the

previous years gross sales or receipts, is less than the actual tax due based on the current years gross sales or

receipts.

For the year 1998, petitioner paid a total of P2,262,122.48 to the City Treasurer of Makati[18] as business

taxes for the year 1998. The amount of tax as computed based on petitioners gross sales for 1998 is

only P1,331,638.84. Since the amount paid is more than the amount computed based on petitioners actual gross

sales for 1998, petitioner upon its retirement is not liable for additional taxes to the City of Makati. Thus, we

find that the respondent erroneously treated the assessment and collection of business tax as if it were income

tax, by rendering an additional assessment of P1,331,638.84 for the revenue generated for the year 1998.

WHEREFORE, the assailed Decision is hereby REVERSED and respondents City Treasurer and

Chief of the License Division of Makati City are ordered to REFUNDto petitioner business taxes paid in the

amount of P1,331,638.84. Costs against respondents.

SO ORDERED.

G.R. No. 160756 March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR., Respondents.

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 84242 and
the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said
provision and those involving creditable withholding taxes.3

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded
former Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong
and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-
98. Petitioner argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98,
and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the
collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends
that these revenue regulations are contrary to law for two reasons: first, they ignore the different
treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of
Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or
fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because
the CWT is being levied upon real estate enterprises but not on other business enterprises, more
particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
 (2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an
MCIT of 2% of its gross income when such MCIT is greater than the normal corporate income tax
imposed under Section 27(A).4 If the regular income tax is higher than the MCIT, the corporation does
not pay the MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited
against the normal income tax for the three immediately succeeding taxable years. Section 27(E) of
RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions
under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection
(E) hereof, the term ‘gross income’ shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods sold" shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually
sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less
sales returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct
costs and expenses necessarily incurred to provide the services required by the customers and
clients including (A) salaries and employee benefits of personnel, consultants and specialists directly
rendering the service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately
following the taxable year in which such corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or negative taxable income or whenever the
amount of minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited
against the normal income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of
taxes.6 Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or
transfer of real property, other than capital assets, by persons residing in the Philippines and
habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. – Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
the real estate business in accordance with the following schedule –

Those which are exempt from a Exempt

withholding tax at source as
prescribed in Sec. 2.57.5 of
these regulations.
 With a selling price of five 1.5%
hundred thousand pesos
(₱500,000.00) or less.

With a selling price of more than 3.0%

five hundred thousand pesos
(₱500,000.00) but not more
than two million pesos
(₱2,000,000.00).

With selling price of more than 5.0%

two million pesos
(₱2,000,000.00)

xxx xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange, as determined in the Income
Tax Regulations shall be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be
withheld on the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax
shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or
exchange of real property, other than capital asset, shall be imposed upon the withholding
agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in Exempt

accordance with Sec. 2.57.5 of these regulations.
Upon the following values of real property, where
the seller/transferor is habitually engaged in the real
estate business.
With a selling price of Five Hundred Thousand 1.5%
Pesos (₱500,000.00) or less.
With a selling price of more than Five Hundred 3.0%
 Thousand Pesos (₱500,000.00) but not more than
Two Million Pesos (₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In
an exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these
rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer
shall withhold the tax based on the gross selling price or fair market value of the property, whichever
is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the
[CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the taxes thereof have been duly paid:7

Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and
the expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully
paid xxxx.

On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling
price or current fair market value as determined in accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations. –

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than
land and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu
of the ordinary income tax, however, domestic corporations may become subject to the [MCIT] under
Sec. 27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.9

Respondents aver that the first three requisites are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal
claims which is susceptible of judicial resolution as distinguished from a hypothetical or abstract
difference or dispute.11 On the other hand, a question is considered ripe for adjudication when the act
being challenged has a direct adverse effect on the individual challenging it.12

Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers’ Multi-Purpose Association, Incorporated
(DESAMA) v. Gozun:13

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is
said to have ripened into a judicial controversy even without any other overt act. Indeed, even a
singular violation of the Constitution and/or the law is enough to awaken judicial duty.14

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle
such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions]. 15

Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy
Spirit Homeowners Association, Inc. v. Defensor,17 we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are
covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to the
rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection
process.18

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.19 The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition. 20

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine
taxation system. It came about as a result of the perceived inadequacy of the self-assessment system
in capturing the true income of corporations.21 It was devised as a relatively simple and effective
revenue-raising instrument compared to the normal income tax which is more difficult to control and
enforce. It is a means to ensure that everyone will make some minimum contribution to the support of
the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost
of government. In this regard, the Tax Reform Act introduces for the first time a new concept called
the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. … This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement. 22

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make
a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters.23

Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in and
year out and paid no tax. So, if the corporation has been losing for the past five years to ten years,
then that corporation has no business to be in business. It is dead. Why continue if you are losing
year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.24

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses
after operations of a corporation or consistent reports of minimal net income render its financial
statements and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by
corporations are allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a
tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major
capital expenditures, the imposition of the MCIT commences only on the fourth taxable year
immediately following the year in which the corporation commenced its operations. 25 This grace
period allows a new business to stabilize first and make its ventures viable before it is subjected to
the MCIT.26

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income
tax which shall be credited against the normal income tax for the three immediately succeeding
years.27

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to
prolonged labor dispute, force majeure and legitimate business reverses.28

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and Asian countries, have the same form
of safeguards as we do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent
(0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions and
exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing you’ll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries. 29

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.30

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is
highly oppressive, arbitrary and confiscatory which amounts to deprivation of property without due
process of law. It explains that gross income as defined under said provision only considers the cost
of goods sold and other direct expenses; other major expenditures, such as administrative and
interest expenses which are equally necessary to produce gross income, were not taken into
account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain." 32

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor
endure. The exercise of taxing power derives its source from the very existence of the State whose
social contract with its citizens obliges it to promote public interest and the common good.33

Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially,

this means that in the legislature primarily lies the discretion to determine the nature (kind), object
(purpose), extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why
it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed
and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very
nature no limits, so that the principal check against its abuse is to be found only in the responsibility of
the legislature (which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of
life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the
due process clause may properly be invoked to invalidate, in appropriate cases, a revenue
measure39 when it amounts to a confiscation of property.40 But in the same case, we also explained
that we will not strike down a revenue measure as unconstitutional (for being violative of the due
process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual
foundation to such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that,
where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital.44 Income means all the wealth which
flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing at
one distinct point in time while income denotes a flow of wealth during a definite period of
time.45 Income is gain derived and severed from capital.46 For income to be taxable, the following
requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. 47

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.
In other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a
tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods48 and other direct expenses from gross
sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net
income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the
amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and
uses as the base the corporation’s gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. 49

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to
uniformity of taxation.50

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base.51 Since our income tax laws are of American
origin, interpretations by American courts of our parallel tax laws have persuasive effect on the
interpretation of these laws.52 Although our MCIT is not exactly the same as the AMT, the policy
behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v.
Commissioner:53

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.55

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. 56 This is because
deductions are a matter of legislative grace.57

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax
base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is
arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional simply because of
its yokes.58 Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.59 The party alleging the law’s unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.60

RR 9-98 Merely Clarifies Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the
MCIT is being imposed and collected even when there is actually a loss, or a zero or negative taxable
income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. —

(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax
due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is
still subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the
MCIT on gross income notwithstanding the amount of the net income. But the law also states that the
MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case
that the MCIT would be less than the net income of the corporation which posts a zero or negative
taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.61 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax
at source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT)
and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"62 because they ignore such distinctions. Petitioner’s conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e.,
upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the
net income at the end of the taxable period.63

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base, modes of
collection and payment of taxes on income from the sale of capital and ordinary assets.

Petitioner’s arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement. 64 It is well-settled that an
administrative agency cannot amend an act of Congress. 65

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.66 The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the government’s cash
flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.68

Respondent Secretary has the authority to require the withholding of a tax on items of income
payable to any person, national or juridical, residing in the Philippines. Such authority is derived from
Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. –

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section
57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the
withholding tax is imposed on the income payable and the tax is creditable against the income tax
liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in
the Real Estate Business

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate
business’ income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. 69 They are installments on the annual tax which may be due at the end of the
taxable year.70

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary
assets remains to be the entity’s net income imposed under Section 24 (resident individuals) or
Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less
allowable deductions. The CWT is to be deducted from the net income tax payable by the taxpayer at
the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax
base for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or
current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-
98], as amended, and consequently, to theordinary income tax under Sec. 27(A) of the Code. In
lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the
tax withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than
the tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is
taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agent’s knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as
these are the only factors reasonably known or knowable by him in connection with the performance
of his duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property
categorized as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax
and flat rate of 6% on the gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.72

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT
are distinguished as follows:

FWT CWT

a) The amount of income tax a) Taxes withheld on certain income

withheld by the withholding agent is payments are intended to equal or
constituted as a full and final at least approximate the tax due of
payment of the income tax due from the payee on said income.
the payee on the said income.

b)The liability for payment of the tax b) Payee of income is required to

rests primarily on the payor as a
withholding agent.
report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more
than the tax due.

c) The payee is not required to file c) The income recipient is still

an income tax return for the required to file an income tax return,
particular income.73 as prescribed in Sec. 51 and Sec.
52 of the NIRC, as amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is
imposed on the sale of ordinary assets. The inherent and substantial differences between FWT and
CWT disprove petitioner’s contention that ordinary assets are being lumped together with, and treated
similarly as, capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary
to the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment
of income tax involving ordinary assets.75

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyer’s act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive

Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT.
It follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1),
27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of
this Code on specified items of income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to the same conditions as provided in
Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income tax
liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is not:

…if the income is generated in the active pursuit and performance of the corporation’s primary
purposes, the same is not passive income…76

It is income generated by the taxpayer’s assets. These assets can be in the form of real properties
that return rental income, shares of stock in a corporation that earn dividends or interest income
received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable
to natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains
to CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is
wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It
has been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its
functions.77 Similarly, considering that the law uses the general term "income," the Secretary and CIR
may specify the kinds of income the rules will apply to based on what is feasible. In addition,
administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts78 in view of the rule-making authority given to those who formulate them and their specific
expertise in their respective fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at
the end of the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant
to the constitutional guarantee of due process. More importantly, the due process requirement applies
to the power to tax.79 The CWT does not impose new taxes nor does it increase taxes.80 It relates
entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a refund. 81 This
argument is misleading. The practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.1avvphi1

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82

Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s
complaints are essentially matters of policy best addressed to the executive and legislative branches
of the government. Besides, the CWT is applied only on the amounts actually received or receivable
by the real estate entity. Sales on installment are taxed on a per-installment basis.83 Petitioner’s
desire to utilize for its operational and capital expenses money earmarked for the payment of taxes
may be a practical business option but it is not a fundamental right which can be demanded from the
court or from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their sales, even if their manner of
doing business is not much different from that of a real estate enterprise. Like a manufacturing
concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate
business are house and lot units.84

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall
be deprived of the same protection of laws which is enjoyed by other persons or other classes in the
same place and in like circumstances."85 Stated differently, all persons belonging to the same class
shall be taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by
legislation based on a reasonable classification. Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all members of the same class.86

The taxing power has the authority to make reasonable classifications for purposes of
taxation.87 Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation.88 The real estate industry is, by itself, a class and can
be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger
and its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are
not similarly subjected to the CWT.89As already discussed, the Secretary may adopt any reasonable
method to carry out its functions.90 Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate.
The sales of manufacturers who have clients within the top 5,000 corporations, as specified by the
BIR, are also subject to CWT for their transactions with said 5,000 corporations.91

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should
not effect the regisration of any document transferring real property unless a certification is issued by
the CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down
this rule except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. –

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."92 When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einstein’s observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner
has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and
CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

COMMISSIONER OF INTERNAL G. R. No. 163653

REVENUE,
Petitioner,

-versus-

FILINVEST DEVELOPMENT
CORPORATION,
Respondent.

x-------------------------------------x G. R. No. 167689

COMMISSIONER OF INTERNAL Present:

REVENUE,
Petitioner, CORONA, C.J.,
 CARPIO,
VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
-versus- PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
FILINVEST DEVELOPMENT VILLARAMA, JR.,
CORPORATION, PEREZ,
Respondent. MENDOZA, and
SERENO,* JJ.

Promulgated:

July 19, 2011

x----------------------------------------------------------------------------------------------- x

DECISION

PEREZ, J.:

Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of the 1997 Rules of
Civil Procedure are the decisions rendered by the Court of Appeals (CA) in the following cases: (a) Decision
dated 16 December 2003 of the then Special Fifth Division in CA-G.R. SP No. 72992;[1] and, (b) Decision dated
26 January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.[2]

The Facts

The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest
Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of
Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI
whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In
exchange for said parcels which were intended to facilitate development of medium-rise residential and
commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI. [3] As a result of the
exchange, FLIs ownership structure was changed to the extent reflected in the following tabular prcis, viz.:

Number and Percentage Number of Number and Percentage

Stockholder
of Shares Held Prior to Additional of Shares Held After the
 the Exchange Shares Exchange
Issued
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%

FAI 00 420,877,000 420,877,000 9.96%

OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%

----------------- ----------- -------------- ---------------

3,763,535,000 100% 463,094,301 4,226,629,000 (100%)

On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no
gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR
issued Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated
under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC)[4] which provides that (n)o gain or
loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such
corporation of which as a result of such exchange said person, alone or together with others, not exceeding four
(4) persons, gains control of said corporation."[5] With the BIRs reiteration of the foregoing ruling upon the 10
February 1997 request for clarification filed by FLI,[6] the latter, together with FDC and FAI, complied with all
the requirements imposed in the ruling.[7]

On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its
affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI). [8] Duly
evidenced by instructional letters as well as cash and journal vouchers, said cash advances amounted
to P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 in 1997.[10] On 15 November 1996, FDC also entered
into a Shareholders Agreement with Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based
joint venture company called Filinvest Asia Corporation (FAC), tasked to develop and manage FDCs 50%
ownership of its PBCom Office Tower Project (the Project). With their equity participation in FAC respectively
pegged at 60% and 40% in the Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in
said joint venture company to RHPLs subscription worth P433.8 million. Having paid its subscription by
executing a Deed of Assignment transferring to FAC a portion of its rights and interest in the Project
worth P500.7 million, FDC eventually reported a net loss of P190,695,061.00 in its Annual Income Tax Return
for the taxable year 1996.[11]

On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and
documentary stamp taxes, plus interests and compromise penalties,[12] covered by the following Assessment
Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum
of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary
stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for
deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-
00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997.[13] The foregoing
deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it
executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with
RHPL as well as the arms-length interest rate and documentary stamp taxes imposable on the advances FDC
extended to its affiliates.[14]

On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income
taxes in the sum of P1,477,494,638.23 for the year 1997.[15] Covered by Assessment Notice No. SP-INC-97-
0027-2000,[16] said deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the
Deed of Exchange it executed with FDC and FLI.[17] On 26 January 2000 or within the reglementary period of
thirty (30) days from notice of the assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the
BIR were bereft of factual and legal basis.[18]Having submitted the relevant supporting documents pursuant to
the 31 January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11 September 2000 a
letter requesting an early resolution of their request for reconsideration/protest on the ground that the 180 days
prescribed for the resolution thereof under Section 228 of the NIRC was going to expire on 20 September
2000.[19]

In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to resolve their request for
reconsideration/protest within the aforesaid period, FDC and FAI filed on 17 October 2000 a petition for review
with the Court of Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said court as
CTA Case No. 6182, the petition alleged, among other matters, that as previously opined in BIR Ruling No. S-
34-046-97, no taxable gain should have been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange; that correlative to the CIR's lack of
authority to impute theoretical interests on the cash advances FDC extended in favor of its affiliates, the rule is
settled that interests cannot be demanded in the absence of a stipulation to the effect; that not being promissory
notes or certificates of obligations, the instructional letters as well as the cash and journal vouchers evidencing
said cash advances were not subject to documentary stamp taxes; and, that no income tax may be imposed on
the prospective gain from the supposed appreciation of FDC's shareholdings in FAC. As a consequence, FDC
and FAC both prayed that the subject assessments for deficiency income and documentary stamp taxes for the
years 1996 and 1997 be cancelled and annulled.[20]
On 4 December 2000, the CIR filed its answer, claiming that the transfer of property in question should not be
considered tax free since, with the resultant diminution of its shares in FLI, FDC did not gain further control of
said corporation. Likewise calling attention to the fact that the cash advances FDC extended to its affiliates were
interest free despite the interest bearing loans it obtained from banking institutions, the CIR invoked Section 43
of the old NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c), gave him "the
power to allocate, distribute or apportion income or deductions between or among such organizations, trades or
business in order to prevent evasion of taxes." The CIR justified the imposition of documentary stamp taxes on
the instructional letters as well as cash and journal vouchers for said cash advances on the strength of Section
180 of the NIRC and Revenue Regulations No. 9-94 which provide that loan transactions are subject to said tax
irrespective of whether or not they are evidenced by a formal agreement or by mere office memo. The CIR also
argued that FDC realized taxable gain arising from the dilution of its shares in FAC as a result of its
Shareholders' Agreement with RHPL.[21]

At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and Issues[22] which was admitted
in the 16 February 2001 resolution issued by the CTA. With the further admission of the Formal Offer of
Documentary Evidence subsequently filed by FDC and FAI[23] and the conclusion of the testimony of Susana
Macabelda anent the cash advances FDC extended in favor of its affiliates,[24] the CTA went on to render the
Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest
income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of
deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and
1997,[25] thus:

WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency
income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and
SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years
1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing
deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET
ASIDE.However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as
deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to
PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof
pursuant to Section 249 (c) (3) of the Tax Code.[26]

Finding that the collective increase of the equity participation of FDC and FAI in FLI rendered the gain
derived from the exchange tax-free, the CTA also ruled that the increase in the value of FDC's shares in FAC
did not result in economic advantage in the absence of actual sale or conversion thereof. While likewise finding
that the documents evidencing the cash advances FDC extended to its affiliates cannot be considered as loan
agreements that are subject to documentary stamp tax, the CTA enunciated, however, that the CIR was justified
in assessing undeclared interests on the same cash advances pursuant to his authority under Section 43 of the
NIRC in order to forestall tax evasion. For persuasive effect, the CTA referred to the equivalent provision in the
Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by Section 1.482-2 of
1965-1969 Regulations of the Law of Federal Income Taxation.[27]

Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review docketed
before the CA as CA-G.R. No. 72992, pursuant to Rule 43 of the 1997 Rules of Civil Procedure. Calling
attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the
express stipulation on interest required under Article 1956 of the Civil Code, FDC questioned the imposition of
an arm's-length interest rate thereon on the ground, among others, that the CIR's authority under Section 43 of
the NIRC: (a) does not include the power to impute imaginary interest on said transactions; (b) is directed only
against controlled taxpayers and not against mother or holding corporations; and, (c) can only be invoked in
cases of understatement of taxable net income or evident tax evasion.[28] Upholding FDC's position, the CA's
then Special Fifth Division rendered the herein assailed decision dated 16 December 2003,[29] the decretal
portion of which states:

WHEREFORE, premises considered, the instant petition is hereby GRANTED. The assailed
Decision dated September 10, 2002 rendered by the Court of Tax Appeals in CTA Case No.
6182 directing petitioner Filinvest Development Corporation to pay the amount of P5,691,972.03
representing deficiency income tax on allegedly undeclared interest income for the taxable year
1997, plus 20% delinquency interest computed from February 16, 2000 until full payment
thereof is REVERSED and SET ASIDE and, a new one entered annulling Assessment Notice
No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner for taxable year
1997. No pronouncement as to costs.[30]

With the denial of its partial motion for reconsideration of the same 11 December 2002 resolution issued
by the CTA,[31] the CIR also filed the petition for review docketed before the CA as CA-G.R. No. 74510. In
essence, the CIR argued that the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency
income taxes on the exchange of property between FDC, FAI and FLI; (b) for deficiency documentary stamp
taxes on the documents evidencing FDC's cash advances to its affiliates; and (c) for deficiency income tax on
the gain FDC purportedly realized from the increase of the value of its shareholdings in FAC. [32] The foregoing
petition was, however, denied due course and dismissed for lack of merit in the herein assailed decision dated
26 January 2005[33] rendered by the CA's then Fourteenth Division, upon the following findings and
conclusions, to wit:

1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29 November 1996
Deed of Exchange resulted in the combined control by FDC and FAI of more than 51%
of the outstanding shares of FLI, hence, no taxable gain can be recognized from the
transaction under Section 34 (c) (2) of the old NIRC;
 2. The instructional letters as well as the cash and journal vouchers evidencing the advances FDC
extended to its affiliates are not subject to documentary stamp taxes pursuant to BIR
Ruling No. 116-98, dated 30 July 1998, since they do not partake the nature of loan
agreements;

3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR Ruling No. 108-99,
dated 15 July 1999, to the effect that documentary stamp taxes are imposable on inter-
office memos evidencing cash advances similar to those extended by FDC, said latter
ruling cannot be given retroactive application if to do so would be prejudicial to the
taxpayer;

4. FDC's alleged gain from the increase of its shareholdings in FAC as a consequence of the
Shareholders' Agreement it executed with RHPL cannot be considered taxable income
since, until actually converted thru sale or disposition of said shares, they merely
represent unrealized increase in capital.[34]

Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the CIR's petitions for review
on certiorari assailing the 16 December 2003 decision in CA-G.R. No. 72992 and the 26 January 2005 decision
in CA-G.R. SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution issued by this Courts
Third Division.

The Issues

In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:

THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE

COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED
BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]

In G.R. No. 167689, on the other hand, petitioner proffers the following issues for resolution:

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF

DISCRETION IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR
PROPERTY AMONG FILINVEST DEVELOPMENT CORPORATION (FDC),
FILINVEST ALABANG, INCORPORATED (FAI) AND FILINVEST LAND
INCORPORATED (FLI) MET ALL THE REQUIREMENTS FOR THE NON-
RECOGNITION OF TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD
NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF
THE NIRC.

II

THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN

HOLDING THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS
 EXTENDED BY FDC TO ITS AFFILIATES ARE NOT DEEMED LOAN
AGREEMENTS SUBJECT TO DOCUMENTARY STAMP TAXES UNDER SECTION
180 OF THE NIRC.

III

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT

GAIN ON DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDCS
SHAREHOLDINGS IN FAC IS NOT TAXABLE.[36]

The Courts Ruling

While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in G.R. No. 167689
impressed with partial merit.

In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding that theoretical interests
can be imputed on the advances FDC extended to its affiliates in 1996 and 1997 considering that, for said
purpose, FDC resorted to interest-bearing fund borrowings from commercial banks. Since considerable interest
expenses were deducted by FDC when said funds were borrowed, the CIR theorizes that interest income should
likewise be declared when the same funds were sourced for the advances FDC extended to its
affiliates. Invoking Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the
CIR maintains that it is vested with the power to allocate, distribute or apportion income or deductions between
or among controlled organizations, trades or businesses even in the absence of fraud, since said power is
intended to prevent evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses. In addition, the CIR asseverates that the CA should have accorded weight and respect to the
findings of the CTA which, as the specialized court dedicated to the study and consideration of tax matters, can
take judicial notice of US income tax laws and regulations.[37]

Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or more organizations,
trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or
controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to
distribute, apportion or allocate gross income or deductions between or among such organization, trade or
business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization, trade or business. In amplification of
the equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2
states as follows:

Determination of the taxable net income of controlled

taxpayer. (A) DEFINITIONS. When used in this section
 (1) The term organization includes any kind, whether it be a sole proprietorship,
a partnership, a trust, an estate, or a corporation or association, irrespective of the place where
organized, where operated, or where its trade or business is conducted, and regardless of whether
domestic or foreign, whether exempt or taxable, or whether affiliated or not.
(2) The terms trade or business include any trade or business activity of any
kind, regardless of whether or where organized, whether owned individually or otherwise, and
regardless of the place where carried on.
(3) The term controlled includes any kind of control, direct or indirect, whether
legally enforceable, and however exercisable or exercised. It is the reality of the control which is
decisive, not its form or mode of exercise. A presumption of control arises if income or
deductions have been arbitrarily shifted.
(4) The term controlled taxpayer means any one of two or more organizations,
trades, or businesses owned or controlled directly or indirectly by the same interests.
(5) The term group and group of controlled taxpayers means the organizations,
trades or businesses owned or controlled by the same interests.
(6) The term true net income means, in the case of a controlled taxpayer, the net
income (or as the case may be, any item or element affecting net income) which would have
resulted to the controlled taxpayer, had it in the conduct of its affairs (or, as the case may be, any
item or element affecting net income) which would have resulted to the controlled taxpayer, had
it in the conduct of its affairs (or, as the case may be, in the particular contract, transaction,
arrangement or other act) dealt with the other members or members of the group at arms length.It
does not mean the income, the deductions, or the item or element of either, resulting to the
controlled taxpayer by reason of the particular contract, transaction, or arrangement, the
controlled taxpayer, or the interest controlling it, chose to make (even though such contract,
transaction, or arrangement be legally binding upon the parties thereto).

(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining, according to
the standard of an uncontrolled taxpayer, the true net income from the property and business of a
controlled taxpayer. The interests controlling a group of controlled taxpayer are assumed to have
complete power to cause each controlled taxpayer so to conduct its affairs that its transactions
and accounting records truly reflect the net income from the property and business of each of the
controlled taxpayers. If, however, this has not been done and the taxable net income are thereby
understated, the statute contemplates that the Commissioner of Internal Revenue shall intervene,
and, by making such distributions, apportionments, or allocations as he may deem necessary of
gross income or deductions, or of any item or element affecting net income, between or among
the controlled taxpayers constituting the group, shall determine the true net income of each
controlled taxpayer. The standard to be applied in every case is that of an uncontrolled
taxpayer. Section 44 grants no right to a controlled taxpayer to apply its provisions at will, nor
does it grant any right to compel the Commissioner of Internal Revenue to apply its provisions.

(C) APPLICATION Transactions between controlled taxpayer and another will be

subjected to special scrutiny to ascertain whether the common control is being used to reduce,
avoid or escape taxes. In determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the
case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce
or avoid tax by shifting or distorting income or deductions. The authority to determine true net
income extends to any case in which either by inadvertence or design the taxable net income in
whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in
the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another
uncontrolled taxpayer.[41]
 As may be gleaned from the definitions of the terms controlled and "controlled taxpayer" under
paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the
purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI,
FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said
affiliates for the purpose of providing them financial assistance for their operational and capital expenditures
seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of
paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to
distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be
likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled
taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's
length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion
of taxes.

Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section
179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled
taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the term gross income is
understood to mean all income from whatever source derived, including, but not limited to the following items:
compensation for services, including fees, commissions, and similar items; gross income derived from business;
gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and partners distributive share of the gross income of general professional partnership. [43] While it has
been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not
expressly exempted within the class of taxable income under our laws, the term "income" has been variously
interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a
specific time" or "something distinct from principal or capital."[44] Otherwise stated, there must be proof of the
actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income
sought to be distributed, apportioned or allocated by the CIR.

Our circumspect perusal of the record yielded no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its
harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had
adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its
affiliates. While admitting that FDC obtained interest-bearing loans from commercial banks,[45] Susan
Macabelda - FDC's Funds Management Department Manager who was the sole witness presented before the
CTA - clarified that the subject advances were sourced from the corporation's rights offering in 1995 as well as
the sale of its investment in Bonifacio Land in 1997.[46] More significantly, said witness testified that said
advances: (a) were extended to give FLI, FAI, DSCC and FCI financial assistance for their operational and
capital expenditures; and, (b) were all temporarily in nature since they were repaid within the duration of one
week to three months and were evidenced by mere journal entries, cash vouchers and instructional letters.[47]

Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had
deducted substantial interest expense from its gross income, there would still be no factual basis for the
imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More
so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall
be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares,[48] the rule is likewise settled that
tax statutes must be construed strictly against the government and liberally in favor of the
taxpayer.[49] Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.[50] While
it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection
should be in accordance with law as any arbitrariness will negate the very reason for government itself.[51]

In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the imposition of
deficiency income taxes on the transfer FDC and FAI effected in exchange for the shares of stock of FLI. With
respect to the Deed of Exchange executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows:

Sec. 34. Determination of amount of and recognition of gain or loss.-

xxxx

(c) Exception x x x x

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for shares of stock in such 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; Provided, That stocks issued for services shall not be considered as issued in
return of property.

As even admitted in the 14 February 2001 Stipulation of Facts submitted by the parties, [52] the requisites for the
non-recognition of gain or loss under the foregoing provision are as follows: (a) the transferee is a corporation;
(b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a
person, acting alone or together with others, not exceeding four persons; and, (d) as a result of the exchange the
transferor, alone or together with others, not exceeding four, gains control of the transferee.[53] Acting on the 13
January 1997 request filed by FLI, the BIR had, in fact, acknowledged the concurrence of the foregoing
requisites in the Deed of Exchange the former executed with FDC and FAI by issuing BIR Ruling No. S-34-
046-97.[54] With the BIR's reiteration of said ruling upon the request for clarification filed by FLI, [55] there is
also no dispute that said transferee and transferors subsequently complied with the requirements provided for
the non-recognition of gain or loss from the exchange of property for tax, as provided under Section 34 (c) (2)
of the 1993 NIRC.[56]

Then as now, the CIR argues that taxable gain should be recognized for the exchange considering that FDC's
controlling interest in FLI was actually decreased as a result thereof.For said purpose, the CIR calls attention to
the fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000 outstanding
capital stock. Upon the issuance of 443,094,000 additional FLI shares as a consequence of the exchange and
with only 42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares, said corporations
controlling interest was supposedly reduced to 61%.03 when reckoned from the transferee's aggregate
4,226,629,000 outstanding shares. Without owning a share from FLI's initial 3,763,535,000 outstanding shares,
on the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the exchange purportedly resulted
in its control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding shares. On the principle
that the transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the 1993 NIRC, the CIR
asseverates that taxable gain in the sum of P263,386,921.00 should be recognized on the part of FDC and in the
sum of P3,088,711,367.00 on the part of FAI.[57]

The paucity of merit in the CIR's position is, however, evident from the categorical language of Section 34 (c)
(2) of the 1993 NIRC which provides that gain or loss will not be recognized in case the exchange of property
for stocks results in the control of the transferee by the transferor, alone or with other transferors not exceeding
four persons. Rather than isolating the same as proposed by the CIR, FDC's 2,579,575,000 shares or 61.03%
control of FLI's 4,226,629,000 outstanding shares should, therefore, be appreciated in combination with the
420,877,000 new shares issued to FAI which represents 9.96% control of said transferee corporation. Together
FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to 3,000,452,000
shares or 70.99% of FLI's 4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of
stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stocks entitled
to one vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for stocks between FDC
FAI and FLI clearly qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision.

Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then Supreme Court Justice Jose
Vitug and CTA Justice Ernesto D. Acosta who, in their book Tax Law and Jurisprudence, opined that said
provision could be inapplicable if control is already vested in the exchangor prior to exchange.[58] Aside from
the fact that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-exempt status of the
exchange between FDC, FAI and FLI was penned by no less than Justice Acosta himself,[59] FDC and FAI
significantly point out that said authors have acknowledged that the position taken by the BIR is to the effect
that "the law would apply even when the exchangor already has control of the corporation at the time of the
exchange."[60] This was confirmed when, apprised in FLI's request for clarification about the change of
percentage of ownership of its outstanding capital stock, the BIR opined as follows:

Please be informed that regardless of the foregoing, the transferors, Filinvest

Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land, Inc. The
term 'control' shall mean ownership of stocks in a corporation by possessing at least 51% of the
total voting power of all classes of stocks entitled to vote. Control is determined by the amount
of stocks received, i.e., total subscribed, whether for property or for services by the transferor or
transferors. In determining the 51% stock ownership, only those persons who transferred
property for stocks in the same transaction may be counted up to the maximum of five (BIR
Ruling No. 547-93 dated December 29, 1993.[61]

At any rate, it also appears that the supposed reduction of FDC's shares in FLI posited by the CIR is more
apparent than real. As the uncontested owner of 80% of the outstanding shares of FAI, it cannot be gainsaid that
FDC ideally controls the same percentage of the 420,877,000 shares issued to its said co-transferor which, by
itself, represents 7.968% of the outstanding shares of FLI. Considered alongside FDC's 61.03% control of FLI
as a consequence of the 29 November 1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998%
of said transferee corporation's outstanding shares of stock which is evidently still greater than the 67.42% FDC
initially held prior to the exchange. This much was admitted by the parties in the 14 February 2001 Stipulation
of Facts, Documents and Issues they submitted to the CTA.[62] Inasmuch as the combined ownership of FDC
and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that neither of said
transferors can be held liable for deficiency income taxes the CIR assessed on the supposed gain which resulted
from the subject transfer.

On the other hand, insofar as documentary stamp taxes on loan agreements and promissory notes are concerned,
Section 180 of the NIRC provides follows:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not payable on sight or demand. On all
loan agreements signed abroad wherein the object of the contract is located or used in the
Philippines; bill of exchange (between points within the Philippines), drafts, instruments and
securities issued by the Government or any of its instrumentalities or certificates of deposits
drawing interest, or orders for the payment of any sum of money otherwise than at sight or on
demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes
issued for circulation, and on each renewal of any such note, there shall be collected a
 documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit or
note: Provided, That only one documentary stamp tax shall be imposed on either loan
agreement, or promissory notes issued to secure such loan, whichever will yield a higher
tax: Provided however, That loan agreements or promissory notes the aggregate of which does
not exceed Two hundred fifty thousand pesos (P250,000.00) executed by an individual for his
purchase on installment for his personal use or that of his family and not for business, resale,
barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the
payment of documentary stamp tax provided under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,[63] the foregoing provision concededly applies to
"(a)ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises
from Philippine sources or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations No. 9-94 provide as follows:

Section 3. Definition of Terms. For purposes of these Regulations, the following term shall
mean:

(b) 'Loan agreement' refers to a contract in writing where one of the parties delivers to another
money or other consumable thing, upon the condition that the same amount of the same kind and
quality shall be paid. The term shall include credit facilities, which may be evidenced by credit
memo, advice or drawings.

The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section 195, both of the
Tax Code, as amended, generally refer to distinct and separate instruments. A loan agreement
shall be taxed under Section 180, while a deed of mortgage shall be taxed under Section 195."

"Section 6. Stamp on all Loan Agreements. All loan agreements whether made or signed in the
Philippines, or abroad when the obligation or right arises from Philippine sources or the property
or object of the contract is located in the Philippines shall be subject to the documentary stamp
tax of thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face
value of any such agreements, pursuant to Section 180 in relation to Section 173 of the Tax
Code.

In cases where no formal agreements or promissory notes have been executed to cover
credit facilities, the documentary stamp tax shall be based on the amount of drawings or
availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by
any form of check or withdrawal slip, under Section 180 of the Tax Code.

Applying the aforesaid provisions to the case at bench, we find that the instructional letters as well as the
journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and 1997 qualified as
loan agreements upon which documentary stamp taxes may be imposed. In keeping with the caveat attendant to
every BIR Ruling to the effect that it is valid only if the facts claimed by the taxpayer are correct, we find that
the CA reversibly erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking, could
be invoked only by ASB Development Corporation, the taxpayer who sought the same. In said ruling, the CIR
opined that documents like those evidencing the advances FDC extended to its affiliates are not subject to
documentary stamp tax, to wit:

On the matter of whether or not the inter-office memo covering the advances granted by an
affiliate company is subject to documentary stamp tax, it is informed that nothing in Regulations
No. 26 (Documentary Stamp Tax Regulations) and Revenue Regulations No. 9-94 states that the
same is subject to documentary stamp tax. Such being the case, said inter-office memo
evidencing the lendings or borrowings which is neither a form of promissory note nor a
certificate of indebtedness issued by the corporation-affiliate or a certificate of obligation, which
are, more or less, categorized as 'securities', is not subject to documentary stamp tax imposed
under Section 180, 174 and 175 of the Tax Code of 1997, respectively. Rather, the inter-office
memo is being prepared for accounting purposes only in order to avoid the co-mingling of funds
of the corporate affiliates.

In its appeal before the CA, the CIR argued that the foregoing ruling was later modified in BIR Ruling No. 108-
99 dated 15 July 1999, which opined that inter-office memos evidencing lendings or borrowings extended by a
corporation to its affiliates are akin to promissory notes, hence, subject to documentary stamp taxes.[64] In
brushing aside the foregoing argument, however, the CA applied Section 246 of the 1993 NIRC[65] from which
proceeds the settled principle that rulings, circulars, rules and regulations promulgated by the BIR have no
retroactive application if to so apply them would be prejudicial to the taxpayers.[66] Admittedly, this rule does
not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the
taxpayer acted in bad faith.[67] Not being the taxpayer who, in the first instance, sought a ruling from the CIR,
however, FDC cannot invoke the foregoing principle on non-retroactivity of BIR rulings.

Viewed in the light of the foregoing considerations, we find that both the CTA and the CA erred in invalidating
the assessments issued by the CIR for the deficiency documentary stamp taxes due on the instructional letters as
well as the journal and cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and
1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed the sum of P6,400,693.62
for documentary stamp tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a total
of P10,425,487.06. Alongside the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly
assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in Assessment Notice No. SP-DST-
97-00021-2000 or a total of P5,796,699.40. The imposition of deficiency interest is justified under Sec. 249 (a)
and (b) of the NIRC which authorizes the assessment of the same at the rate of twenty percent (20%), or such
higher rate as may be prescribed by regulations, from the date prescribed for the payment of the unpaid amount
of tax until full payment.[68] The imposition of the compromise penalty is, in turn, warranted under Sec.
250[69] of the NIRC which prescribes the imposition thereof in case of each failure to file an information or
return, statement or list, or keep any record or supply any information required on the date prescribed therefor.

To our mind, no reversible error can, finally, be imputed against both the CTA and the CA for invalidating the
Assessment Notice issued by the CIR for the deficiency income taxes FDC is supposed to have incurred as a
consequence of the dilution of its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record
shows that the parties were in agreement about the following factual antecedents narrated in the 14 February
2001 Stipulation of Facts, Documents and Issues they submitted before the CTA,[70] viz.:

1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA) with Reco
Herrera Pte. Ltd. (RHPL) for the formation of a joint venture company named Filinvest Asia
Corporation (FAC) which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and 7,
Answer).

1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop and
manage the 50% ownership interest of FDC in its PBCom Office Tower Project (Project) with
the Philippine Bank of Communications (par. 6.12, Petition; par. 7, Answer).

1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC and RHPL in
FAC was 60% and 40% respectively.

1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million worth of shares
of stock representing a 60% equity participation in FAC. In turn, RHPL subscribed to P433.8
million worth of shares of stock of FAC representing a 40% equity participation in FAC.

1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment

transferring to FAC a portion of FDCs right and interests in the Project to the extent of P500.7
million.

1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return for
the taxable year 1996.[71]

Alongside the principle that tax revenues are not intended to be liberally construed,[72] the rule is settled
that the findings and conclusions of the CTA are accorded great respect and are generally upheld by this Court,
unless there is a clear showing of a reversible error or an improvident exercise of authority. [73] Absent showing
of such error here, we find no strong and cogent reasons to depart from said rule with respect to the CTA's
finding that no deficiency income tax can be assessed on the gain on the supposed dilution and/or increase in
the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to establish. Bearing in mind the
meaning of "gross income" as above discussed, it cannot be gainsaid, even then, that a mere increase or
appreciation in the value of said shares cannot be considered income for taxation purposes. Since a mere
advance in the value of the property of a person or corporation in no sense constitute the income specified in the
revenue law, it has been held in the early case of Fisher vs. Trinidad,[74] that it constitutes and can be treated
merely as an increase of capital. Hence, the CIR has no factual and legal basis in assessing income tax on the
increase in the value of FDC's shareholdings in FAC until the same is actually sold at a profit.

WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R. No. 163653
is DENIED for lack of merit and the CAs 16 December 2003 Decision in G.R. No. 72992 is AFFIRMED in
toto. The CIRs petition in G.R. No. 167689 is PARTIALLY GRANTED and the CAs 26 January 2005
Decision in CA-G.R. SP No. 74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 issued for

deficiency documentary stamp taxes due on the instructional letters as well as journal and cash vouchers
evidencing the advances FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-00019-2000 and SP-

INC-97-0027-2000 issued for deficiency income assessed on (a) the arms-length interest from said advances;
(b) the gain from FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution resulting from
FDCs Shareholders Agreement with RHPL is, however, upheld.
SO ORDERED.

G.R. No. L-20569 August 23, 1974

JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H.
Aznar, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sato, Enad Garcia for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Librada R. Natividad for respondents.

ESGUERRA, J.:p

Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and
nullification of the decision of the Court of Tax Appeals in C.T.A. Case No. 109, modifying the
decision of respondent Commissioner of Internal Revenue and ordering the petitioner to pay the
government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to
1951, inclusive, with the condition that if the said amount is not paid within thirty days from the date
the decision becomes final, there shall be added to the unpaid amount the surcharge of 5%, plus
interest at the rate of 12% per annum from the date of delinquency to the date of payment, in
accordance with Section 51 of the National Internal Revenue Code, plus costs against the petitioner.
It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in interest of
herein petitioner, during his lifetime as a resident of Cebu City, filed his income tax returns on the
cash and disbursement basis, reporting therein the following:

Year Net Income Amount Exhibit

of Tax
Paid

1945 P12,822.00 P114.66 pp.

85-88
B.I.R.
rec.

1946 9,910.94 114.66 38-A

(pp.
329-
332
B.I.R
rec.)

1947 10,200.00 132.00 39

(pp.
75-78
B.I.R
rec.)

1948 9,148.34 68.90 40

(pp.
70-73
B.I.R.
rec.)

1949 8,990.66 59.72 41

(pp.
64-67
B.I.R.
rec.)

1950 8,364.50 28.22 42

(pp.
59-62,
BIR
rec.)

1951 6,800.00 none 43

(pp.
54-57
BIR
rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of
one obviously wealthy, pursuant to the authority granted him by Section 38 of the National Internal
Revenue Code, caused B.I.R. Examiner Honorio Guerrero to ascertain the taxpayer's true income for
said years by using the net worth and expenditures method of tax investigation. The assets and
liabilities of the taxpayer during the above-mentioned years were ascertained and it was discovered
that from 1946 to 1951, his net worth had increased every year, which increases in net worth was
very much more than the income reported during said years. The findings clearly indicated that the
taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid
years.

Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated
November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the
amount of P723,032.66, plus compromise penalty. The taxpayer requested a reinvestigation which
was granted for the purpose of verifying the merits of the various objections of the taxpayer to the
deficiency income tax assessment of November 28, 1952.

After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07 dated
February 16, 1955, superseded the previous assessment and notice thereof was received by Matias
H. Aznar on March 2, 1955.

The new deficiency assessment was based on the following computations:

1946

Net income per return ........................ P9,910.94

Add: Under declared income .............. 22,559.94
Net income per investigation............... 32,470.45

Deduct: Income tax liability

per return as assessed ...................................................... 114.66
Balance of tax due ........................................................... P3,687.10
Add: 50% surcharge ........................................................ 1,843.55
DEFICIENCY INCOME TAX ...................................... P5,530.65

1947

Net income per return ..................................................... P10,200.00

Add: Under declared income ............................................ 90,413.56
Net income per reinvestigation ....................................... P100,613.56
Deduct: Personal and additional exemption ...................... 7,000.00
Amount of income subject to tax ...................................... P93,613.56
Total tax liability ............................................................... P24,753.15
Deduct: Income tax liability per return as assessed ............ 132.00
Balance of tax due ........................................................... P24,621.15
Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME TAX
...................................... P36,931.73

1948

Net income per return ...................................................... P9,148.34

Add: Under declared income ............................................. 15,624.63
Net income per reinvestigation .......................................... P24,772.97
Deduct: Personal and additional exemptions ...................... 7,000.00
Amount of income subject to tax ....................................... P17,772.97
Total tax liability ............................................................... 2,201.40
Deduct: Income tax liability per return as assessed ............ 68.90
Balance of tax due ........................................................... P2,132.500
Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME TAX
...................................... P3,198.75

1949

Net income per return ....................................................... P9,990.66

Add: Under declared income ............................................. 105,418.53
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME TAX
....................................... P45,125.94

1950

Net income per return ....................................................... P8,364.50

Add: Under declared income ............................................. 365,578.76
Net income per reinvestigation .......................................... P373,943.26
Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME TAX
....................................... P278,783.00

1951

Net income per return ........................................................ P6,800.00

Add: Under declared income ............................................... 33,355.80
Net income per reinvestigation ............................................ P40,155.80
Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME TAX
.......................................... P11,526.00

SUMMARY

1946 .... P5,530.65

1947 .... 36,931.73

1948 .... 3,198.75

1949 .... 45,125.94

1950 .... 278,783.00

1951 .... 11,526.00

Total .... P381,096.07

In determining the unreported income, the respondent Commissioner of Internal Revenue resorted to
the networth method which is based on the following computations:

1945

Real estate inventory ................................ P64,738.00

Other assets ............................................. 37,606.87
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97

1946

Real estate inventory ................................. P86,944.18

Other assets ............................................. 60,801.65
Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41
Net assets ................................................ P142,870.42
Less: Liabilities .................. P17,000.00
Net Worth as of
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45

1947

Real estate inventory .................................. P237,824.18

Other assets ............................................... 54,495.52
Total assets ............................................... P292,319.70
Less: Depreciation allowed ......................... 12,835.72
Net assets .................................................. 279,483.98
Less: Liabilities ................... P60,000.00
Networth as of
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
Net income ................................................P100,613.56

1948

Real estate inventory .................................. P244,824.18

Other assets .............................................. 118,720.60
Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
Net assets ................................................. P342,608.75
Less: Liabilities ................... P105,351.80
Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97

1949

Real estate inventory ................................. P400,515.52

Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Net assets ................................................. P461.274.73
Less; Liabilities .................. P116,608.59
Networth as of
Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Increase in networth .................................. P107,409.19
Add: Estimated living expenses .................. 7,000.00
Net income ............................................... P114,409.19

1950

Real estate inventory .................................. P412,465.52

Investment in Schools and
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Total assets ............................................... P916,715.38
Less; Depreciation allowed ........................ 47,561.99
Net assets ................................................. P869,153.39
Less: Liabilities .................. P158,343.99
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Increase in networth ................................... P366,143.26
Add: Estimated living expenses ................... 7,800.00
Net income ................................................. P373,943.26

1951

Real estate inventory ................................... P412,465.52

Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40
Total assets ................................................ P946,691.13
Less: Depreciation allowed ......................... 62,466.90
Net assets .................................................. P884,224.23
Less: Liabilities ........................................... P140,459.03
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43
Increase in networth .................................... P32,955.80
Add: Estimated living expenses .................... 7,200.00
Net income ................................................. P40,155.80

(Exh. 45-B, BIR rec. p. 188)

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of
Cebu, placed the properties of Matias H. Aznar under distraint and levy to secure payment of the
deficiency income tax in question. Matias H. Aznar filed his petition for review of the case with the
Court of Tax Appeals on April 1, 1955, with a subsequent petition immediately thereafter to restrain
respondent from collecting the deficiency tax by summary method, the latter petition being granted on
February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review, this
Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of Tax
Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to 1951
or furnish a surety bond for not more than double the amount.

On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the
Court of Tax Appeals, the lower court concluded that the tax liability of the late Matias H. Aznar for
the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87 representing the tax credit for
1945, or P227,691.77, computed as follows:

1946

Net income per return .............................................. P9,910.94

Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65

1947

Net income per return ............................................ P10,200.00

Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57

1948

Net income per return .............................................. P9,148.34

Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15

1949

Net income per return ................................................. P8,990.66

Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27

1950

Net income per return .................................................. P6,800.00

Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00

1951

Net income per return ................................................... P8,364.50

Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00

SUMMARY

1946 P5,530.65

1947 19,932.57
 1948 1,441.15

1949 13,378.27

1950 175,980.00

1951 11,526.00

P227,788.64.

The first vital issue to be decided here is whether or not the right of the Commissioner of Internal
Revenue to assess deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947, and
1948 had already prescribed at the time the assessment was made on November 28, 1952.

Petitioner's contention is that the provision of law applicable to this case is the period of five years
limitation upon assessment and collection from the filing of the returns provided for in See. 331 of the
National Internal Revenue Code. He argues that since the 1946 income tax return could be presumed
filed before March 1, 1947 and the notice of final and last assessment was received by the taxpayer
on March 2, 1955, a period of about 8 years had elapsed and the five year period provided by law
(Sec. 331 of the National Internal Revenue Code) had already expired. The same argument is
advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the return for
1948, which was filed on February 28, 1949. Respondents, on the other hand, are of the firm belief
that regarding the prescriptive period for assessment of tax returns, Section 332 of the National
Internal Revenue Code should apply because, as in this case, "(a) In the case of a false or fraudulent
return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding
in court for the collection of such tax may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC).

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false
and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue
insists contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under
declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of
the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny
that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial
evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We
believe that the proper and reasonable interpretation of said provision should be that in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted to mean a separation of the three different
situations of false return, fraudulent return with intent to evade tax, and failure to file a return is
strengthened immeasurably by the last portion of the provision which segregates the situations into
three different classes, namely "falsity", "fraud" and "omission". That there is a difference between
"false return" and "fraudulent return" cannot be denied. While the first merely implies deviation from
the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to
evade the taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of
the NIRC should be applicable to normal circumstances, but whenever the government is placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten
years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or
omission even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent
Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years
within which to assess petitioner's tax liability had not expired at the time said assessment was made.

II

As to the alleged errors committed by the Court of Tax Appeals in not deducting from the alleged
undeclared income of the taxpayer for 1946 the proceeds from the sale of jewelries valued at
P30,000; in not excluding from other schedules of assets of the taxpayer (a) accounts receivable from
customers in the amount of P38,000 for 1948, P126,816.50 for 1950, and provisions for doubtful
accounts in the amount of P41,810.56 for 1950; (b) over valuation of hospital and dental buildings for
1949 in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow block business in
the amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the amount of P23,000 for
the year 1949; (e) various lands and buildings included in the schedule of assets for the years 1950
and 1951 in the total amount of P243,717.42 for 1950 and P62,564.00 for 1951, these issues would
depend for their resolution on determination of questions of facts based on an evaluation of evidence,
and the general rule is that the findings of fact of the Court of Tax Appeals supported by substantial
evidence should not be disturbed upon review of its decision (Section 2, Rule 44, Rules of Court).

On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount petitioner
contends should be deducted from the taxpayer's net worth as of December 31, 1946, the record
shows that Matias H. Aznar, when interviewed by B.I.R. Examiner Guerrero, stated that at the
beginning of 1945 he had P60,000 worth of jewelries inherited from his ancestors and were disposed
off as follows: 1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000; (Report
of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).

During the hearing of this case in the Court of Tax Appeals, petitioner's accountant testified that on
January 1, 1945, Matias H. Aznar had jewelries worth P60,000 which were acquired by purchase
during the Japanese occupation (World War II) and sold on various occasions, as follows: 1945,
P5,000 and 1946, P30,000. To corroborate the testimony of the accountant, Mrs. Ramona Agustines
testified that she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a pair of
earrings for P30,000; and in 1947 a wrist watch with diamonds, together with antique jewelries, for
P15,000. Matias H. Aznar, on the other hand testified that in 1945, his wife sold to Sards Parino
jewelries for P5,000 and question, Mr. Aznar stated that his transaction with Sards Parino, with
respect to the sale of jewelries, amounted to P15,000.

The lower court did not err in finding material inconsistencies in the testimonies of Matias H. Aznar
and his witnesses with respect to the values of the jewelries allegedly disposed off as stated by the
witnesses. Thus, Mr. Aznar stated to the B.I.R. examiner that jewelries worth P10,000 were sold in
1945, while his own accountant testified that the same jewelries were sold for only P5,000. Mr. Aznar
also testified that Mrs. Agustines purchased from his wife jewelries for P35,000, and yet Mrs.
Agustines herself testified that she bought jewelries for P30,000 and P15,000 on two occasions, or a
total of P45,000.
We do not see any plausible reason to challenge the fundamentally sound basis advanced by the
Court of Tax Appeals in considering the inconsistencies of the witnesses' testimony as material, in the
following words:

We do not say that witnesses testifying on the same transaction should give identical
testimonies. Because of the frailties and the limitations of the human mind, witnesses'
statements are apt to be inconsistent in certain points, but usually the inconsistencies
refer to the minor phases of the transaction. It is the insignificance of the detail of an
occurrence that fails to impress the human mind. When that same mind, made to recall
what actually happened, the significant point which it failed to take note is naturally left
out. But it is otherwise as regards significant matters, for they leave indelible imprints
upon the human mind. Hence, testimonial inconsistencies on the minor details of an
occurrence are dismissed lightly by the courts, while discrepancies on significant points
are taken seriously and weigh adversely to the party affected thereby.

There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in view of the
aforesaid inconsistencies, which we deem material and significant, we dismiss as without factual
basis petitioner's allegation that jewelries form part of his inventory of assets for the purpose of
establishing his net worth at the beginning of 1946."

As to the accounts receivable from the United States government for the amount of P38,254.90,
representing a claim for goods commandered by the U.S. Army during World War II, and which
amount petitioner claimed should be included in his net worth as of January 1, 1946, the Court of Tax
Appeals correctly concluded that the uncontradicted evidence showed that "the collectible accounts of
Mr. Aznar from the U.S. Government in the sum of P38,254.90 should be added to his assets (under
accounts receivable) as of January 1, 1946. As of December 31, 1947, and December 31, 1948, the
years within which the accounts were paid to him, the 'accounts receivable shall decrease by
P31,362.37 and P6,892.53, respectively."

Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was listed as an
asset during the years 1945 and 1947 to 1951, but which was not listed as an asset in 1946 because
of a notation in the tax declaration that it was reconstructed in 1947, the lower court correctly
concluded that the reconstruction of the property did not render it valueless during the time it was
being reconstructed and consequently it should be listed as an asset as of January 1, 1946, with the
same valuation as in 1945, that is P1,500.

On the question of accounts receivable from customers in the amount of P38,000 for 1948, and
P123,816.58 for the years 1950 and 1951, which were included in the assets of Mr. Aznar for those
years by the respondent Commissioner of Internal Revenue, it is very clear that those figures were
taken from the statements (Exhs. 31 and 32) filed by Mr. Matias H. Aznar with the Philippine National
Bank when he was intending to obtain a loan. These statements were under oath and the natural
implication is that the information therein reflected must be the true and accurate financial condition of
the one who executed those statements. To believe the petitioner's argument that the late Mr. Aznar
included those figures in his sworn statement only for the purpose of obtaining a bigger credit from
the bank is to cast suspicion on the character of a man who can no longer defend himself. It would be
as if pointing the finger of accusation on the late Mr. Aznar that he intentionally falsified his sworn
statements (Exhs. 31 and 32) to make it appear that there were non-existent accounts receivable just
to increase his assets by fictitious entries so that his credit with the Philippine National Bank could be
enhanced. Besides, We do not lose sight of the fact that those statements (Exhs. 31 and 32) were
executed before this tax controversy arose and the disputable presumptions that a person is innocent
of crime or wrong; that a person intends the ordinary consequences of his voluntary act; that a person
takes ordinary care of his concerns; that private transaction have been fair and regular; that the
ordinary course of business has been followed; that things have happened according to the ordinary
course of nature and the ordinary habits of life; that the law has been obeyed (Sec. 5, (a), (c), (d), (p),
(q), (z), (ff), Rule 131 of the Rules of Court), together with the conclusive presumption that "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" (Sec. 3 (a), Rule 131, Rules of Court),
convincingly indicate that the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were
true, in existence, and accurate to the very amounts mentioned.

There is no merit to petitioners argument that those statements were only for the purpose of obtaining
a bigger credit from the bank (impliedly stating that those statements were false) and those accounts
were allegedly back accounts of students of the Southwestern Colleges and were worthless, and if
collected, would go to the funds of the school. The statement of the late Mr. Aznar that they were
accounts receivable from customers should prevail over the mere allegation of petitioner,
unsupported as they are by convincing evidence. There is no reason to disturb the lower court's
conclusion that the amounts of P38,000 and P123,816.58 were accounts receivable from customers
and as such must be included as petitioner's assets for the years indicated.

As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is clear that
said amount is taken from Exhibit 31, the sworn statement of financial condition filed by Mr. Matias H.
Aznar with the Philippine National Bank. The lower court did not commit any error in again giving
much weight to the statement of Mr. Aznar and in concluding that inasmuch as this is an item
separate and apart from the taxpayer's accounts receivable and non-deductible expense, it should be
reverted to the accounts receivable and, consequently, considered as an asset in 1950.

On the alleged over valuation of two buildings (hospital building which respondent Commissioner of
Internal Revenue listed as an asset from 1949-1951 at the basic valuation of P130,000, and which
petitioner claims to be over valued by P32,000; dentistry building valued by respondent
Commissioner of Internal Revenue at P36,191.34, which petitioner claims to be over valued by
P6,191.34), We find no sufficient reason to alter the conclusion of respondent Court of Tax Appeals
sustaining the respondent Commissioner of Internal Revenue's valuation of both properties.

Respondent Commissioner of Internal Revenue based his valuation of the hospital building on the
representation of Mr. Matias H. Aznar himself who, in his letter (Exh. 35) to the Philippine National
Bank dated September 5, 1949, stated that the hospital building cost him P132,000. However in view
of the effect of a typhoon in 1949 upon the building, the value allowed was P130,000. Exhibit 35,
contrary to petitioner's contention, should be given probative value because, although it is an
unsigned plain copy, that exhibit was taken by the investigating examiner of the B.I.R. from the files of
the Southwestern Colleges and formed part of his report of investigation as a public official. The
estimates of an architect and a civil engineer who agreed that a value of P84,240 is fair for the
hospital building, made years after the building was constructed, cannot prevail over the petitioner's
own estimate of his property's value.

Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry Building is

based on the letter of Mr. and Mrs. Matias H. Aznar to the Southwestern Colleges, dated December
15, 1950, which is embodied in the minutes of the meeting of the Board of Trustees of the
Southwestern Colleges held on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash book of
the Southwestern Colleges, this building was listed as of the same amount. Petitioner's estimate of
P30,000 for this building, based on Architect Paca's opinion, cannot stand against the owner's
estimate and that which appears in the cash book of the Southwestern Colleges, if we take into
consideration that the owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding
was initiated, while architect Paca's estimate was made upon petitioner's request solely for the
purpose of evidence in this tax case.

In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue included the
administrative building valued at P19,200 for the years 1947 and 1948, and P16,700 for the years
1949 to 1951; and a high school building valued at P48,000 for 1947 and 1948, and P45,000 for
1949, 1950 and 1951. The reduced valuation for the latter years are due to allowance for partial loss
resulting from the 1949 typhoon. Petitioner did not question the inclusion of these buildings in the
inventory for the years prior to 1950, but objected to their inclusion as assets as of January 1, 1950,
because both buildings were destroyed by a typhoon in November of 1949. There is sufficient
evidence (Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of Cebu City,
Exh. 18, Mr. Intan's testimony, a copy of a letter of the City Assessor of Cebu City) to prove that the
two buildings were really destroyed by typhoon in 1949 and, therefore, should be eliminated from the
petitioner's inventory of assets beginning December 31, 1949.

On the issue of investment in the hollow blocks business, We see no compelling reason to alter the
lower court's conclusion that "whatever was spent in the hollow blocks business is an investment, and
being an investment, the same should be treated as an asset. With respect to the amount
representing the value of the building, there is no duplication in the listing as the inventory of real
property does not include the building in question."

Respondent Commissioner of Internal Revenue included in the inventory, under the heading of other
asset, the amount of P8,663.22, treated as investment in the hollow block business. Petitioner objects
to the inclusion of P1,683.42 which was spent on the building and in the business and of P674.35
which was spent for labor, fuel, raw materials, office supplies etc., contending that the former amount
is a duplication of inventory (included among the list of properties) and the latter is a business
expense which should be eliminated from the list of assets.

The inclusion of expenses (labor and raw materials) as part of the hollow block business is
sanctioned in the inventory method of tax verification. It is a sound accounting practice to include raw
materials that will be used for future manufacture. Inclusion of direct labor is also proper, as all these
items are to be embodied in a summary of assets (investment by the taxpayer credited to his capital
account as reflected in Exhibit 72-A, which is a working sheet with entries taken from the journal of
the petitioner concerning his hollow blocks business). There is no evidence to show that there was
duplication in the inclusion of the building used for hollow blocks business as part of petitioner's
investment as this building was not included in the listing of real properties of petitioner (Exh. 45-C p.
187 B.I.R. rec.).

As to the question of the real value of the surplus goods purchased by Mr. Matias H. Aznar from the
U.S. Army, the best evidence, as observed correctly by the lower court, is the statement of Mr. Matias
H. Aznar, himself, as appearing Exh. 35 (copy of a letter dated September 5, 1949 to the Philippine
National Bank), to the effect "as part of my assets I have different merchandise from Warehouse 35,
Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than P20,000 at present market
value." Petitioner's claim that the goods should be valued at only P20,000 in accordance with an
alleged invoice is not supported by evidence since the invoice was not presented as exhibit. The
lower court's act in giving more credence to the statement of Mr. Aznar cannot be questioned in the
light of clear indications that it was never controverted and it was given at a time long before the tax
controversy arose.

The last issue on propriety of inclusion in petitioner's assets made by respondent Commissioner of
Internal Revenue concerns several buildings which were included in the list of petitioner's assets as of
December 31, 1950. Petitioner contends that those buildings were conveyed and ceded to
Southwestern Colleges on December 15, 1950, in consideration of P100,723.99 to be paid in cash.
The value of the different buildings are listed as: hospital building, P130,000; gymnasium, P43,000;
dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law, P10,950;
laboratory building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600;
faculty house, P5,760. It is suggested that the value of the buildings be eliminated from the real
estate inventory and the sum of P100,723.99 be included as asset as of December 31, 1950.

The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer to
the Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be
proven. What is evident is that those buildings were used by the Southwestern Colleges. It is true that
Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for shares
of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the meeting of the
Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that Mr. Aznar was
amenable to the value fixed by the board of trustees and that he requested to be paid in cash instead
of shares of stock. But those are not sufficient evidence to prove that transfer of ownership actually
happened on December 15, 1950. Hence, the lower court did not commit any error in sustaining the
respondent Commissioner of Internal Revenue's act of including those buildings as part of the assets
of petitioner as of December 31, 1950.

Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for
P150,000 worth of shares of stocks, consisting of: land, P22,684; house, P13,700; group of houses,
P8,000; building, P12,000; nurses home, P4,100; nurses home, P2,080, should be excluded from the
inventory of assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows that
said properties were formally conveyed to the Southwestern Colleges only on September 25, 1952.
Undoubtedly, petitioner was the owner of those properties prior to September 25, 1952 and said
properties should form part of his assets as of December 31, 1951.

The uncontested portions of the lower court's decision consisting of its conclusions that library books
valued at P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit 25-A,
being an investment, should be treated as an asset beginning December 31, 1950; that the expenses
for construction to the amount of P113,353.70, which were spent for the improvement of the buildings
appearing in Exhibit 24 are deemed absorbed in the increased value of the buildings as appraised by
respondent Commissioner of Internal Revenue at cost after improvements were made, and should be
taken out as additional assets; that the amount receivable of P5,776 from a certain Benito Chan
should be treated as petitioner's asset but the amount of P5,776 representing the value of a house
and lot given as collateral to secure said loan should not be considered as an asset of petitioner since
to do so would result in a glaring duplication of items, are all affirmed. There seems to be no
controversy as to the rest of the items listed in the inventory of assets.

III

The second issue which appears to be of vital importance in this case centers on the lower court's
imposition of the fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The
petitioner insists that there might have been false returns by mistake filed by Mr. Matias H. Aznar as
those returns were prepared by his accountant employees, but there were no proven fraudulent
returns with intent to evade taxes that would justify the imposition of the 50% surcharge authorized by
law as fraud penalty.

The lower court based its conclusion that the 50% fraud penalty must be imposed on the following
reasoning: .
 It appears that Matias H. Aznar declared net income of P9,910.94, P10,200, P9,148.34,
P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948, 1949, 1950 and
1951, respectively. Using the net worth method of determining the net income of a
taxpayer, we find that he had net incomes of P32,470.45, P67,751.19, P17,880.44,
P52,709.11, P254,813.56 and P40,155.80 during the respective years 1946, 1947,
1948, 1949, 1950, and 1951. In consequence, he underdeclared his income by 227%
for 1946, 564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for
1951. These substantial under declarations of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the income tax return with an intent
to evade the payment of tax. Hence, the imposition of the fraud penalty is proper (Perez
vs. Court of Tax Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)

As could be readily seen from the above rationalization of the lower court, no distinction has been
made between false returns (due to mistake, carelessness or ignorance) and fraudulent returns (with
intent to evade taxes). The lower court based its conclusion on the petitioner's alleged fraudulent
intent to evade taxes on the substantial difference between the amounts of net income on the face of
the returns as filed by him in the years 1946 to 1951 and the net income as determined by the
inventory method utilized by both respondents for the same years. The lower court based its
conclusion on a presumption that fraud can be deduced from the very substantial disparity of incomes
as reported and determined by the inventory method and on the similarity of consecutive disparities
for six years. Such a basis for determining the existence of fraud (intent to evade payment of tax)
suffers from an inherent flaw when applied to this case. It is very apparent here that the respondent
Commissioner of Internal Revenue, when the inventory method was resorted to in the first
assessment, concluded that the correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh. 1,
B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in another assessment dated
February 16, 1955, concluded that the tax liability should be reduced to P381,096.07. This is a
crystal-clear, indication that even the respondent Commissioner of Internal Revenue with the use of
the inventory method can commit a glaring mistake in the assessment of petitioner's tax liability.
When the respondent Court of Tax Appeals reviewed this case on appeal, it concluded that
petitioner's tax liability should be only P227,788.64. The lower court in three instances (elimination of
two buildings in the list of petitioner's assets beginning December 31, 1949, because they were
destroyed by fire; elimination of expenses for construction in petitioner's assets as duplication of
increased value in buildings, and elimination of value of house and lot in petitioner's assets because
said property was only given as collateral) supported petitioner's stand on the wrong inclusions in his
lists of assets made by the respondent Commissioner of Internal Revenue, resulting in the very
substantial reduction of petitioner's tax liability by the lower court. The foregoing shows that it was not
only Mr. Matias H. Aznar who committed mistakes in his report of his income but also the respondent
Commissioner of Internal Revenue who committed mistakes in his use of the inventory method to
determine the petitioner's tax liability. The mistakes committed by the Commissioner of Internal
Revenue which also involve very substantial amounts were also repeated yearly, and yet we cannot
presume therefrom the existence of any taint of official fraud.

From the above exposition of facts, we cannot but emphatically reiterate the well established doctrine
that fraud cannot be presumed but must be proven. As a corollary thereto, we can also state that
fraudulent intent could not be deduced from mistakes however frequent they may be, especially if
such mistakes emanate from erroneous entries or erroneous classification of items in accounting
methods utilized for determination of tax liabilities The predecessor of the petitioner undoubtedly filed
his income tax returns for "the years 1946 to 1951 and those tax returns were prepared for him by his
accountant and employees. It also appears that petitioner in his lifetime and during the investigation
of his tax liabilities cooperated readily with the B.I.R. and there is no indication in the record of any act
of bad faith committed by him.
The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes
was based merely on a presumption and not on evidence establishing a willful filing of false and
fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law
is actual and not constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal right. Negligence,
whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the
law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily
follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns
and in the assessment, respectively, under the inventory method of determining tax liability, it would
be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as
made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code
should not be imposed, but eliminated from the income tax deficiency for each year from 1946 to
1951, inclusive. The tax liability of the petitioner for each year should, therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10

The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945,
thereby leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of the
50% fraud penalty is concerned, and affirmed in all other respects. The petitioner is ordered to pay to
the Commissioner of Internal Revenue, or his duly authorized representative, the sum of
P151,762.23, representing deficiency income taxes for the years 1946 to 1951, inclusive, within 30
days from the date this decision becomes final. If the said amount is not paid within said period, there
shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum
from the date of delinquency to the date of payment, in accordance with Section 51 of the National
Internal Revenue Code.

With costs against the petitioner.

G.R. No. L-26284 October 8, 1986

TOMAS CALASANZ, ET AL., petitioners,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX
APPEALS, respondents.

San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.

FERNAN, J.:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of Tax Appeals
in CTA No. 1275 dated June 7, 1966, holding them liable for the payment of P3,561.24 as deficiency
income tax and interest for the calendar year 1957 and P150.00 as real estate dealer's fixed tax.

Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural land located in
Cainta, Rizal, containing a total area of 1,678,000 square meters. In order to liquidate her inheritance,
Ursula Calasanz had the land surveyed and subdivided into lots. Improvements, such as good roads,
concrete gutters, drainage and lighting system, were introduced to make the lots saleable. Soon after,
the lots were sold to the public at a profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal Revenue on March
31, 1958, petitioners disclosed a profit of P31,060.06 realized from the sale of the subdivided lots,
and reported fifty per centum thereof or P15,530.03 as taxable capital gains.

Upon an audit and review of the return thus filed, the Revenue Examiner adjudged petitioners
engaged in business as real estate dealers, as defined in Section 194 [s] 1 of the National Internal
Revenue Code, required them to pay the real estate dealer's tax 2 and assessed a deficiency income
tax on profits derived from the sale of the lots based on the rates for ordinary income.

On September 29, 1962, petitioners received from respondent Commissioner of Internal Revenue:

a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate

dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and

b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on

ordinary gain of P3,018.00 plus interest of P 543.24.

On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review contesting
the aforementioned assessments.

On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that portion of the
assessment regarding the compromise penalty of P10.00 for the reason that in this jurisdiction, the
same cannot be collected in the absence of a valid and binding compromise agreement.

Hence, the present appeal.

The issues for consideration are:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed
tax; and

b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates.

The issues are closely interrelated and will be taken jointly.

Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from the sale of
the lots under Section 34 [b] [2] 3 of the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital asset within the meaning of
Section 34[a] [1] of the Tax Code and that an heir who liquidated his inheritance cannot be said to
have engaged in the real estate business and may not be denied the preferential tax treatment given
to gains from sale of capital assets, merely because he disposed of it in the only possible and
advantageous way.

Petitioners averred that the tract of land subject of the controversy was sold because of their intention
to effect a liquidation. They claimed that it was parcelled out into smaller lots because its size proved
difficult, if not impossible, of disposition in one single transaction. They pointed out that once
subdivided, certainly, the lots cannot be sold in one isolated transaction. Petitioners, however,
admitted that roads and other improvements were introduced to facilitate its sale. 4

On the other hand, respondent Commissioner maintained that the imposition of the taxes in question
is in accordance with law since petitioners are deemed to be in the real estate business for having
been involved in a series of real estate transactions pursued for profit. Respondent argued that
property acquired by inheritance may be converted from an investment property to a business
property if, as in the present case, it was subdivided, improved, and subsequently sold and the
number, continuity and frequency of the sales were such as to constitute "doing business."
Respondent likewise contended that inherited property is by itself neutral and the fact that the
ultimate purpose is to liquidate is of no moment for the important inquiry is what the taxpayer did with
the property. Respondent concluded that since the lots are ordinary assets, the profits realized
therefrom are ordinary gains, hence taxable in full.

We agree with the respondent.

The assets of a taxpayer are classified for income tax purposes into ordinary assets and capital
assets. Section 34[a] [1] of the National Internal Revenue Code broadly defines capital assets as
follows:

[1] Capital assets.-The term 'capital assets' means property held by the taxpayer
[whether or not connected with his trade or business], but does not include, stock in
trade of the taxpayer or other property of a kind which would properly be included, in the
inventory of the taxpayer if on hand at the close of the taxable year, or property held by
the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business of a character which is subject to the
allowance for depreciation provided in subsection [f] of section thirty; or real property
used in the trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. 5 If the asset is not among the
exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets.
And necessarily, any gain resulting from the sale or exchange of an asset is a capital gain or an
ordinary gain depending on the kind of asset involved in the transaction.

However, there is no rigid rule or fixed formula by which it can be determined with finality whether
property sold by a taxpayer was held primarily for sale to customers in the ordinary course of his
trade or business or whether it was sold as a capital asset. 6 Although several factors or
indices 7 have been recognized as helpful guides in making a determination, none of these is
decisive; neither is the presence nor the absence of these factors conclusive. Each case must in the
last analysis rest upon its own peculiar facts and circumstances. 8

Also a property initially classified as a capital asset may thereafter be treated as an ordinary asset if a
combination of the factors indubitably tend to show that the activity was in furtherance of or in the
course of the taxpayer's trade or business. Thus, a sale of inherited real property usually gives capital
gain or loss even though the property has to be subdivided or improved or both to make it salable.
However, if the inherited property is substantially improved or very actively sold or both it may be
treated as held primarily for sale to customers in the ordinary course of the heir's business. 9

Upon an examination of the facts on record, We are convinced that the activities of petitioners are
indistinguishable from those invariably employed by one engaged in the business of selling real
estate.

One strong factor against petitioners' contention is the business element of development which is
very much in evidence. Petitioners did not sell the land in the condition in which they acquired it.
While the land was originally devoted to rice and fruit trees, 10 it was subdivided into small lots and in
the process converted into a residential subdivision and given the name Don Mariano Subdivision.
Extensive improvements like the laying out of streets, construction of concrete gutters and installation
of lighting system and drainage facilities, among others, were undertaken to enhance the value of the
lots and make them more attractive to prospective buyers. The audited financial
statements 11 submitted together with the tax return in question disclosed that a considerable amount
was expended to cover the cost of improvements. As a matter of fact, the estimated improvements of
the lots sold reached P170,028.60 whereas the cost of the land is only P 4,742.66. There is authority
that a property ceases to be a capital asset if the amount expended to improve it is double its original
cost, for the extensive improvement indicates that the seller held the property primarily for sale to
customers in the ordinary course of his business. 12

Another distinctive feature of the real estate business discernible from the records is the existence of
contracts receivables, which stood at P395,693.35 as of the year ended December 31, 1957. The
sizable amount of receivables in comparison with the sales volume of P446,407.00 during the same
period signifies that the lots were sold on installment basis and suggests the number, continuity and
frequency of the sales. Also of significance is the circumstance that the lots were advertised 13 for
sale to the public and that sales and collection commissions were paid out during the period in
question.

Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner,14 the American court in clear and categorical terms rejected the
liquidation test in determining whether or not a taxpayer is carrying on a trade or business The court
observed that the fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The court enunciated
further:

We fail to see that the reasons behind a person's entering into a business-whether it is
to make money or whether it is to liquidate-should be determinative of the question of
whether or not the gains resulting from the sales are ordinary gains or capital gains. The
sole question is-were the taxpayers in the business of subdividing real estate? If they
were, then it seems indisputable that the property sold falls within the exception in the
definition of capital assets . . . that is, that it constituted 'property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter in this wise:

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not lose
the benefits of the capital gain provision of the statute unless he enters the real estate
 business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the
ordinary course of such a business and the preferred tax status is lost.

In view of the foregoing, We hold that in the course of selling the subdivided lots, petitioners engaged
in the real estate business and accordingly, the gains from the sale of the lots are ordinary income
taxable in full.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.

SO ORDERED.

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices
for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding
tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31,
1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985. 5

(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6

(2) The alleged understatement of ICC’s interest income on the three promissory notes due
from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the
said notices. Hence, it brought the case to the CTA which held that the petition is premature because
the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001,
in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTA’s Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered
to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it
could be considered as deductible expenses only in 1986 when ICC received the billing statements
for said services. It further ruled that ICC did not understate its interest income from the promissory
notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said
years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable
year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding
tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR
are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICC’s gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided
for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’,
dependent upon the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable deductions for the current year but
failed to do so cannot deduct the same for the next year.13

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount
of income or liability be known absolutely, only that a taxpayer has at his disposal the information
necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation
may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or
completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer
bears the burden of proof of establishing the accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18

In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICC’s tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960’s.19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they
could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method of accounting.
For another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firm’s performance of its services in connection with the 1984
tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute
the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC
failed to present evidence showing that even with only "reasonable accuracy," as the standard to
ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which
said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit
Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC
in 198620 and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest.21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for
deficiency expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIR’s disallowance of ICC’s expenses for
professional services. The Court of Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-
000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment
Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural
Corporation for professional and security services, is declared valid only insofar as the expenses for
the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.

G.R. No. 159610 June 12, 2008

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
CENTRAL LUZON DRUG CORPORATION, respondent.

DECISION

CARPIO, J.:

The Case

This petition for review on certiorari1 assails the 13 August 2003 Decision2 of the Court of Appeals in
CA-G.R. SP No. 70480. The Court of Appeals dismissed the appeal filed by the Commissioner of
Internal Revenue (petitioner) questioning the 15 April 2002 Decision3 of the Court of Tax Appeals
(CTA) in CTA Case No. 6054 ordering petitioner to issue, in favor of Central Luzon Drug Corporation
(respondent), a tax credit certificate in the amount of P2,376,805.63, arising from the alleged
erroneous interpretation of the term "tax credit" used in Section 4(a) of Republic Act No. (RA) 7432. 4

The Facts

Respondent is a domestic corporation engaged in the retail of medicines and other pharmaceutical
products.5 In 1997, it operated eight drugstores under the business name and style "Mercury Drug." 6

Pursuant to the provisions of RA 7432 and Revenue Regulations No. (RR) 2-947 issued by the
Bureau of Internal Revenue (BIR), respondent granted 20% sales discount to qualified senior citizens
on their purchases of medicines covering the calendar year 1997. The sales discount granted to
senior citizens totaled P2,798,508.00.
On 15 April 1998, respondent filed its 1997 Corporate Annual Income Tax Return reflecting a nil
income tax liability due to net loss incurred from business operations of P2,405,140.00.8 Respondent
filed its 1997 Income Tax Return under protest.9

On 19 March 1999, respondent filed with the petitioner a claim for refund or credit of overpaid income
tax for the taxable year 1997 in the amount of P2,660,829.00.10 Respondent alleged that the overpaid
tax was the result of the wrongful implementation of RA 7432. Respondent treated the 20% sales
discount as a deduction from gross sales in compliance with RR 2-94 instead of treating it as a tax
credit as provided under Section 4(a) of RA 7432.

On 6 April 2000, respondent filed a Petition for Review with the CTA in order to toll the running of the
two-year statutory period within which to file a judicial claim. Respondent reasoned that RR 2-94,
which is a mere implementing administrative regulation, cannot modify, alter or amend the clear
mandate of RA 7432. Consequently, Section 2(i) of RR 2-94 is without force and effect for being
inconsistent with the law it seeks to implement.11

In his Answer, petitioner stated that the construction given to a statute by a specialized administrative
agency like the BIR is entitled to great respect and should be accorded great weight. When RA 7432
allowed senior citizens' discounts to be claimed as tax credit, it was silent as to the mechanics of
availing the same. For clarification, the BIR issued RR 2-94 and defined the term "tax credit" as a
deduction from the establishment's gross income and not from its tax liability in order to avoid an
absurdity that is not intended by the law. 12

The Ruling of the Court of Tax Appeals

On 15 April 2002, the CTA rendered a Decision ordering petitioner to issue a tax credit certificate in
the amount of P2,376,805.63 in favor of respondent.

The CTA stated that in a number of analogous cases, it has consistently ruled that the 20% senior
citizens' discount should be treated as tax credit instead of a mere deduction from gross income. 13 In
quoting its previous decisions, the CTA ruled that RR 2-94 engraved a new meaning to the phrase
"tax credit" as deductible from gross income which is a deviation from the plain intendment of the law.
An administrative regulation must not contravene but should conform to the standards that the law
prescribes.14

The CTA also ruled that respondent has properly substantiated its claim for tax credit by documentary
evidence. However, based on the examination conducted by the commissioned independent certified
public accountant (CPA), there were some material discrepancies due to missing cash slips, lack of
senior citizen's ID number, failure to include the cash slips in the summary report and vice versa.
Therefore, between the Summary Report presented by respondent and the audited amount
presented by the independent CPA, the CTA deemed it proper to consider the lesser of two amounts.

The re-computation of the overpaid income tax15 for the year 1997 is as follows:

Sales, Net P176,742,607.00

Add: 20% Sales Discount to Senior Citizens 2,798,508.00
Sales, Gross P179,541,115.00
Less: Cost of Sales
Merchandise inventory, beg. P 20,905,489.00
Purchases 168,762,950.00
 Merchandise inventory, end -27,281,439.00 162,387,000.00
Gross Profit P 17,154,115.00
Add: Miscellaneous income 402,124.00
Total Income P 17,556,239.00
Less: Operating expenses 16,913,699.00
Net Income P 642,540.00
Less: Income subjected to final tax (Interest Income16) 249,172.00
Net Taxable Income P 393,368.00
Income Tax Due (35%) P 137,679.00
Less: Tax Credit (Cost of 20% discount as adjusted17) 2,514,484.63
Income Tax Payable (P 2,376,805.63)
Income Tax Actually Paid 0.00
Income Tax Refundable (P 2,376,805.63)

Aggrieved by the CTA's decision, petitioner elevated the case before the Court of Appeals.

The Ruling of the Appellate Court

On 13 August 2003, the Court of Appeals affirmed the CTA's decision in toto.

The Court of Appeals disagreed with petitioner's contention that the CTA's decision applied a literal
interpretation of the law. It reasoned that under the verba legis rule, if the statute is clear, plain, and
free from ambiguity, it must be given its literal meaning and applied without interpretation. This
principle rests on the presumption that the words used by the legislature in a statute correctly express
its intent and preclude the court from construing it differently. 18

The Court of Appeals distinguished "tax credit" as an amount subtracted from a taxpayer's total tax
liability to arrive at the tax due while a "tax deduction" reduces the taxpayer's taxable income upon
which the tax liability is computed. "A credit differs from deduction in that the former is subtracted
from tax while the latter is subtracted from income before the tax is computed." 19

The Court of Appeals found no legal basis to support petitioner's opinion that actual payment by the
taxpayer or actual receipt by the government of the tax sought to be credited or refunded is a
condition sine qua non for the availment of tax credit as enunciated in Section 22920 of the Tax Code.
The Court of Appeals stressed that Section 229 of the Tax Code pertains to illegally collected or
erroneously paid taxes while RA 7432 is a special law which uses the method of tax credit in the
context of just compensation. Further, RA 7432 does not require prior tax payment as a condition for
claiming the cost of the sales discount as tax credit.

Hence, this petition.

The Issues

Petitioner raises two issues21 in this Petition:

1. Whether the appellate court erred in holding that respondent may claim the 20% senior
citizens' sales discount as a tax credit deductible from future income tax liabilities instead of a
mere deduction from gross income or gross sales; and
 2. Whether the appellate court erred in holding that respondent is entitled to a refund.

The Ruling of the Court

The petition lacks merit.

The issues presented are not novel. In two similar cases involving the same parties where
respondent lodged its claim for tax credit on the senior citizens' discount granted in 1995 22 and
1996,23 this Court has squarely ruled that the 20% senior citizens' discount required by RA 7432 may
be claimed as a tax credit and not merely a tax deduction from gross sales or gross income. Under
RA 7432, Congress granted the tax credit benefit to all covered establishments without conditions.
The net loss incurred in a taxable year does not preclude the grant of tax credit because by its nature,
the tax credit may still be deducted from a future, not a present, tax liability. However, the senior
citizens' discount granted as a tax credit cannot be refunded.

RA 7432 expressly allows private establishments

to claim the amount of discounts they grant to senior citizens
as tax credit.

Section 4(a) of RA 7432 states:

SECTION 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:

a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of transportation services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim the cost as tax credit;
(Emphasis supplied)

However, RR 2-94 interpreted the tax credit provision of RA 7432 in this wise:

Sec. 2. DEFINITIONS. - For purposes of these regulations:

xxx

i. Tax Credit - refers to the amount representing 20% discount granted to a qualified
senior citizen by all establishments relative to their utilization of transportation services, hotels
and similar lodging establishments, restaurants, drugstores, recreation centers, theaters,
cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure
and amusement, which discount shall be deducted by the said establishments from their
gross income for income tax purposes and from their gross sales for value-added tax or
other percentage tax purposes. (Emphasis supplied).

xxx

Sec. 4. Recording/Bookkeeping Requirement for Private Establishments

xxx
 The amount of 20% discount shall be deducted from the gross income for income tax
purposes and from gross sales of the business enterprise concerned for purposes of the VAT
and other percentage taxes. (Emphasis supplied)

Tax credit is defined as a peso-for-peso reduction from a taxpayer's tax liability. It is a direct
subtraction from the tax payable to the government. On the other hand, RR 2-94 treated the amount
of senior citizens' discount as a tax deduction which is only a subtraction from gross income resulting
to a lower taxable income. RR 2-94 treats the senior citizens' discount in the same manner as the
allowable deductions provided in Section 34, Chapter VII of the National Internal Revenue Code. RR
2-94 affords merely a fractional reduction in the taxes payable to the government depending on the
applicable tax rate.

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,24 the Court ruled that
petitioner's definition in RR 2-94 of a tax credit is clearly erroneous. To deny the tax credit, despite the
plain mandate of the law, is indefensible. In Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, the Court declared, "When the law says that the cost of the discount may be claimed as
a tax credit, it means that the amount- when claimed ― shall be treated as a reduction from any tax liability,
plain and simple." The Court further stated that the law cannot be amended by a mere regulation because
"administrative agencies in issuing these regulations may not enlarge, alter or restrict the provisions of the law it
administers; it cannot engraft additional requirements not contemplated by the legislature." Hence, there being a
dichotomy in the law and the revenue regulation, the definition provided in Section 2(i) of RR 2-94 cannot be
given effect.

The tax credit may still be deducted

from a future, not a present, tax liability.

In the petition filed before this Court, petitioner alleged that respondent incurred a net loss from its
business operations in 1997; hence, it did not pay any income tax. Since no tax payment was made,
it follows that no tax credit can also be claimed because tax credits are usually applied against a tax
liability.25

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,26 the Court stressed that
prior payment of tax liability is not a pre-condition before a taxable entity can avail of the tax credit.
The Court declared, "Where there is no tax liability or where a private establishment reports a net loss
for the period, the tax credit can be availed of and carried over to the next taxable year." 27 It is
irrefutable that under RA 7432, Congress has granted the tax credit benefit to all covered
establishments without conditions. Therefore, neither a tax liability nor a prior tax payment is required
for the existence or grant of a tax credit.28 The applicable law on this point is clear and without any
qualifications.29

Hence, respondent is entitled to claim the amount of P2,376,805.63 as tax credit despite incurring net
loss from business operations for the taxable year 1997.

The senior citizens' discount may be claimed

as a tax credit and not a refund.

Section 4(a) of RA 7432 expressly provides that private establishments may claim the cost as a tax
credit. A tax credit can only be utilized as payment for future internal revenue tax liabilities of the
taxpayer while a tax refund, issued as a check or a warrant, can be encashed. A tax refund can be
availed of immediately while a tax credit can only be utilized if the taxpayer has existing or future tax
liabilities.
If the words of the law are clear, plain, and free of ambiguity, it must be given its literal meaning and
applied without any interpretation. Hence, the senior citizens' discount may be claimed as a tax credit
and not as a refund.30

RA 9257 now specifically provides that all covered establishments

may claim the senior citizens' discount as tax deduction.

On 26 February 2004, RA 9257, otherwise known as the "Expanded Senior Citizens Act of 2003,"
was signed into law and became effective on 21 March 2004. 31

RA 9257 has amended RA 7432. Section 4(a) of RA 9257 reads:

"Sec. 4. Privileges for the Senior Citizens. - The senior citizens shall be entitled to the
following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and recreation
centers, and purchase of medicinesin all establishments for the exclusive use or enjoyment
of senior citizens, including funeral and burial services for the death of senior citizens;

xxx

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from gross income for the same taxable
year that the discount is granted. Provided, further, That the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross sales receipts for
tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended." (Emphasis supplied)

Contrary to the provision in RA 7432 where the senior citizens' discount granted by all covered
establishments can be claimed as tax credit, RA 9257 now specifically provides that this discount
should be treated as tax deduction.

With the effectivity of RA 9257 on 21 March 2004, there is now a new tax treatment for senior citizens'
discount granted by all covered establishments. This discount should be considered as a deductible
expense from gross income and no longer as tax credit.32 The present case, however, covers the
taxable year 1997 and is thus governed by the old law, RA 7432.

WHEREFORE, we DENY the petition. We AFFIRM the assailed Decision of the Court of Appeals
dated 13 August 2003 in CA-G.R. SP No. 70480.

No pronouncement as to costs.

SO ORDERED.

PHILIPPINE LONG DISTANCE G.R. No. 151899

TELEPHONE COMPANY, INC.,
Petitioner, Present:

PANGANIBAN, J., Chairman

 SANDOVAL-GUTIERREZ,
CORONA,
- versus - CARPIO MORALES, and
GARCIA, JJ.

PROVINCE OF LAGUNA and Promulgated:

MANUEL E. LEYCANO, JR., in his
capacity as the Provincial Treasurer
of the Province of Laguna, August 16, 2005
Respondents.
x----------------------------------------------------------------------------------x

DECISION

GARCIA, J.:

Twice, this Court has denied the earlier plea of petitioner Philippine Long Distance Company,
Inc. (PLDT) to be adjudged exempt from the payment of franchise tax assessed against it by local
government units. The first was in the 2001 case of PLDT vs. City of Davao[1] and the second, in the
very recent case of PLDT vs. City of Bacolod, et al.[2]. Indeed, no less than the Court en banc, in its
Resolution of March 25, 2003[3], denied PLDTs motion for reconsideration in Davao. In both cases,
the Court in effect ruled that the desired relief is not legally feasible.

No less than PLDTs third, albeit this time involving the Province of Laguna, the instant similar
petition for review on certiorari under Rule 45 of the Rules of Court seeks the reversal of the decision
dated 28 November 2001[4] of the Regional Trial Court at Laguna, dismissing PLDTs petition in its
Civil Case No. SC-3953, an action for refund of franchise tax.

Except for inconsequential factual details which understandably vary from the first two (2)
PLDT cases, the legal landscape is practically the same:

PLDT is a holder of a legislative franchise under Act No. 3436, as amended, to render local and
international telecommunications services. On August 24, 1991, the terms and conditions of its
franchise were consolidated under Republic Act No. 7082,[5] Section 12 of which embodies the so-
called in-lieu-of-all taxes clause, whereunder PLDT shall pay a franchise tax equivalent to three
percent (3%) of all its gross receipts, which franchise tax shall be in lieu of all taxes. More
specifically, the provision pertinently reads:

SEC. 12. xxx In addition thereto, the grantee, its successors or assigns shall pay a
franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other
telecommunications businesses transacted under this franchise by the grantee, its successors or
assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof:
xxx (Italics ours).

Meanwhile, or on January 1, 1992, Republic Act No. 7160, otherwise known as the Local
Government Code, took effect. Section 137 of the Code, in relation to Section 151 thereof, grants
provinces and other local government units the power to impose local franchise tax on businesses
enjoying a franchise, thus:

SEC. 137. Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding
calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

By Section 193 of the same Code, all tax exemption privileges then enjoyed by all persons,
whether natural or juridicial, save those expressly mentioned therein, were withdrawn, necessarily
including those taxes from which PLDT is exempted under the in-lieu-of-all taxes clause in its charter.
We quote Section 193:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.

Invoking its authority under Section 137, supra, of the Local Government Code,
the Province of Laguna, through its local legislative assembly, enacted Provincial Ordinance No. 01-
92, made effective January 1, 1993, imposing a franchise tax upon all businesses enjoying a
franchise, PLDT included.

On January 28, 1998, PLDT, in compliance with the aforementioned Ordinance, paid
the Province of Laguna its local franchise tax liability for the year 1998 in the amount of One Million
Eighty-One Thousand Two Hundred Twelve and 10/100 Pesos (P1,081,212.10).

Prior thereto, Congress, aiming to level the playing field among telecommunication companies,
enacted Republic Act No. 7925, otherwise known as the Public Telecommunications Policy Act of the
Philippines, which took effect on March 16, 1995. To achieve the legislative intent, Section 23
thereof, also known as the most-favored treatment clause, provides for an equality of treatment in
the telecommunications industry, to wit:

SEC. 23. Equality of Treatment in the Telecommunications Industry Any advantage,

favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be
granted, shall ipso facto become part of previously granted telecommunications franchises and
shall be accorded immediately and unconditionally to the grantees of such franchises: Provided,
however, That the foregoing shall neither apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the life span of the franchise, or the type
of the service authorized by the franchise.

Then, on June 2, 1998, the Department of Finance, thru its Bureau of Local Government
Finance (BLGF), issued a ruling to the effect that as of March 16, 1995, the effectivity date of
the Public Telecommunications Policy Act of the Philippines,[6] PLDT, among other telecommunication
companies, became exempt from local franchise tax. Pertinently, the BLGF ruling reads:

It appears that RA 7082 further amending Act No. 3436 which granted to PLDT a
franchise to install, operate and maintain a telephone system throughout the Philippine Islands
was approved on August 3, 1991. Section 12 of said franchise, likewise contains the in lieu of all
taxes proviso.

In this connection, Section 23 of RA 7929, quoted hereunder, which was approved

on March 1, 1995 provides for the equality of treatment in the telecommunications industry:

xxx xxx xxx

 On the basis of the aforequoted Section 23 of RA 7925, PLDT as a telecommunications
franchise holder becomes automatically covered by the tax exemption provisions of RA 7925,
which took effect on March 16, 1995.

Accordingly, PLDT shall be exempt from the payment of franchise and business taxes
imposable by LGUs under Sections 137 and 143, respectively of the LGC [Local Government
Code], upon the effectivity of RA 7925 on March 16, 1995. However, PLDT shall be liable to
pay the franchise and business taxes on its gross receipts realized from January 1, 1992 up to
March 15, 1995, during which period PLDT was not enjoying the most favored clause provision
of RA 7025 [sic].

On the basis of the aforequoted ruling, PLDT refused to pay the Province of Laguna its local
franchise tax liability for 1999. And, on December 22, 1999, it even filed with the Office of the
Provincial Treasurer a written claim for refund of the amount it paid as local franchise tax for 1998.

With no refund having been made, PLDT instituted with the Regional Trial Court at Laguna a
petition therefor against the Province and its Provincial Treasurer, which petition was thereat
docketed as Civil Case No. SC-3953.

In its decision of November 28, 2001, the trial court denied PLDTs petition, thus:

WHEREFORE, the petition is denied. Petitioner PLDT is not exempt from paying local
franchise and business taxes to the Respondent Province. Refund is denied. For failure to
substantiate the claim for exemplary damages and attorneys fees, the same is likewise denied.

SO ORDERED.

Hence, this recourse by PLDT, faulting the trial court, as follows:

5.01.a. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER

PETITIONERS FRANCHISE (REPUBLIC ACT NO.7082), AS AMENDED AND
EXPANDED BY SECTION 23 OF REPUBLIC ACT NO. 7925, TAKING INTO ACCOUNT
THE FRANCHISES OF GLOBE TELECOM INC., (GLOBE) (REPUBLIC ACT NO. 7229)
AND SMART COMMUNICATIONS, INC. (SMART) (REPUBLIC ACT NO.7294), WHICH
ARE SPECIAL PROVISIONS AND WERE ENACTED SUBSEQUENT TO THE LOCAL
GOVERNMENT CODE, NO FRANCHISE TAXES MAY BE IMPOSED ON PETITIONER
BY RESPONDENT PROVINCE.

5.01.b. THE LOWER COURT ERRED IN NOT HOLDING THAT SECTION 137 OF THE
LOCAL GOVERNMENT CODE, WHICH ALLOWS RESPONDENT PROVINCE TO
IMPOSE THE FRANCHISE TAX, AND SECTION 193 THEREOF, WHICH PROVIDES FOR
 WITHDRAWAL OF TAX EXEMPTION PRIVILEGES, ARE NOT APPLICABLE IN THIS
CASE.

5.01.c. THE LOWER COURT ERRED IN APPLYING PRINCIPLES OF STATUTORY

CONSTRUCTION THAT TAX EXEMPTIONS ARE DISFAVORED AND IN HOLDING
THAT SECTION 23 OF REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS
POLICY ACT) DOES NOT SUPPORT PETITIONERS POSITION IN THIS CASE.

5.01.d. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF
THE DEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT
FINANCE, THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF FRANCHISE
AND BUSINESS TAXES IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE
LOCAL GOVERNMENT CODE.

5.01.e. THE LOWER COURT ERRED IN NOT GRANTING PETITIONERS CLAIM FOR
TAX REFUND.

5.01.f. THE LOWER COURT ERRED IN DENYING THE PETITION BELOW.

We note, quite interestingly, that except for the particular local government units involved in
the earlier case of PLDT vs. City of Davao[7] and the very recent case of PLDT vs. City of Bacolod, et
al.,[8] the arguments presently advanced by petitioner on the issues raised herein are but a mere
reiteration if not repetition of the very same arguments it has already raised in the two (2) earlier
PLDT cases. For sure, the errors presently assigned are substantially the same as those in Davao and
in Bacolod, all of which have been adequately addressed and passed upon by this Court in its
decisions therein as well as in its en bancResolution in Davao.

In PLDT vs. City of Davao, and again in PLDT vs. City of Bacolod, et al., this Court has
interpreted Section 23 of Rep. Act No. 7925. There, we ruled that Section 23 does not operate to
exempt PLDT from the payment of franchise tax. We quote what we have said in Davao and
reiterated in Bacolod.

In sum, it does not appear that, in approving 23 of R.A. No. 7925, Congress intended it to
operate as a blanket tax exemption to all telecommunications entities. Applying the rule of strict
construction of laws granting tax exemptions and the rule that doubts should be resolved in favor
of municipal corporations in interpreting statutory provisions on municipal taxing powers, we
hold that 23 of R.A. No. 7925 cannot be considered as having amended petitioner's franchise so
as to entitle it to exemption from the imposition of local franchise taxes. Consequently, we hold
that petitioner is liable to pay local franchise taxes in the amount of P3,681,985.72 for the period
covering the first to the fourth quarter of 1999 and that it is not entitled to a refund of taxes paid
by it for the period covering the first to the third quarter of 1998.[9]

The Court explains further:

 To begin with, tax exemptions are highly disfavored. The reason for this was explained
by this Court in Asiatic Petroleum Co. v. Llanes, in which it was held:

. . . Exemptions from taxation are highly disfavored, so much so that they may almost be
said to be odious to the law. He who claims an exemption must be able to point to some positive
provision of law creating the right. . . As was said by the Supreme Court of Tennessee
in Memphis vs. U. & P. Bank (91 Tenn., 546, 550), The right of taxation is inherent in the State.
It is a prerogative essential to the perpetuity of the government; and he who claims an exemption
from the common burden must justify his claim by the clearest grant of organic or statute law.
Other utterances equally or more emphatic come readily to hand from the highest authority.
In Ohio Life Ins. and Trust Co. vs. Debolt (16 Howard, 416), it was said by Chief Justice Taney,
that the right of taxation will not be held to have been surrendered, unless the intention to
surrender is manifested by words too plain to be mistaken. In the case of the Delaware Railroad
Tax (18 Wallace, 206, 226), the Supreme Court of the United States said that the surrender, when
claimed, must be shown by clear, unambiguous language, which will admit of no reasonable
construction consistent with the reservation of the power. If a doubt arises as to the intent of the
legislature, that doubt must be solved in favor of the State. In Erie Railway Company vs.
Commonwealth of Pennsylvania (21 Wallace, 492, 499), Mr. Justice Hunt, speaking of
exemptions, observed that a State cannot strip itself of the most essential power of taxation by
doubtful words. It cannot, by ambiguous language, be deprived of this highest attribute of
sovereignty. In Tennessee vs. Whitworth (117 U.S., 129, 136), it was said: In all cases of this
kind the question is as to the intent of the legislature, the presumption always being against any
surrender of the taxing power. In Farrington vs. Tennessee and County of Shelby (95 U.S., 379,
686), Mr. Justice Swayne said: . . . When exemption is claimed, it must be shown indubitably to
exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It
is only when the terms of the concession are too explicit to admit fairly of any other construction
that the proposition can be supported.

The tax exemption must be expressed in the statute in clear language that leaves no doubt
of the intention of the legislature to grant such exemption. And, even if it is granted, the
exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of
the taxing authority.

xxx xxx xxx

The fact is that the term exemption in 23 is too general. A cardinal rule in statutory
construction is that legislative intent must be ascertained from a consideration of the statute as a
whole and not merely of a particular provision. For, taken in the abstract, a word or phrase might
easily convey a meaning which is different from the one actually intended. A general provision
may actually have a limited application if read together with other provisions. Hence, a
consideration of the law itself in its entirety and the proceedings of both Houses of Congress is in
order.

xxx xxx xxx

R.A. No. 7925 is thus a legislative enactment designed to set the national policy on
telecommunications and provide the structures to implement it to keep up with the technological
advances in the industry and the needs of the public. The thrust of the law is to promote
gradually the deregulation of the entry, pricing, and operations of all public telecommunications
entities and thus promote a level playing field in the telecommunications industry. There is
 nothing in the language of 23 nor in the proceedings of both the House of Representatives and
the Senate in enacting R.A. No. 7925 which shows that it contemplates the grant of tax
exemptions to all telecommunications entities, including those whose exemptions had been
withdrawn by the LGC.

What this Court said in Asiatic Petroleum Co. v. Llanes applies mutatis mutandis to this
case: When exemption is claimed, it must be shown indubitably to exist. At the outset, every
presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of
the concession are too explicit to admit fairly of any other construction that the proposition can
be supported. In this case, the word exemption in 23 of R.A. No. 7925 could contemplate
exemption from certain regulatory or reporting requirements, bearing in mind the policy of the
law. It is noteworthy that, in holding Smart and Globe exempt from local taxes, the BLGF did
not base its opinion on 23 but on the fact that the franchises granted to them after the effectivity
of the LGC exempted them from the payment of local franchise and business taxes.

As before, PLDT argues that because Smart Communications, Inc. (SMART) and Globe
Telecom (GLOBE) under whose respective franchises granted after the effectivity of the Local
Government Code, are exempt from franchise tax, it follows that petitioner is likewise exempt from
the franchise tax sought to be collected by the Province of Laguna, on the reasoning that the grant of
tax exemption to SMART and GLOBE ipso facto applies to PLDT, consistent with the most-favored-
treatment clause found in Section 23 of the Public Telecommunications Policy Act of the
Philippines (Rep. Act No. 7925).

Again, there is nothing novel in petitioners contention. For sure, in Davao, this Court even
adverted to PLDTs similar argument therein, thus:

Finally, it [PLDT] argues that because Smart and Globe are exempt from the franchise
tax, it follows that it must likewise be exempt from the tax being collected by the City of Davao
because the grant of tax exemption to Smart and Globe ipso facto extended the same exemption
to it,

which argument this Court rejected in said case in the following wise:

The acceptance of petitioners theory would result in absurd consequences. To illustrate:

In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum
(1/2% [sic] ) of all gross receipts from its transactions while Smart is required to pay a tax of
three percent (3%) on all gross receipts from business transacted. Petitioners theory would
require that, to level the playing field, any advantage, favor, privilege, exemption, or immunity
granted to Globe must be extended to all telecommunications companies, including Smart. If,
later, Congress again grants a franchise to another telecommunications company imposing, say,
one percent (1%) franchise tax, then all other telecommunications franchises will have to be
adjusted to level the playing field so to speak. This could not have been the intent of Congress in
enacting Section 23 of Rep. Act 7925. Petitioners theory will leave the Government with the
burden of having to keep track of all granted telecommunications franchises, lest some
 companies be treated unequally. It is different if Congress enacts a law specifically granting
uniform advantages, favor, privilege, exemption or immunity to all telecommunications entities.

On PLDTs motion for reconsideration in Davao, the Court added in its en banc Resolution of
March 25, 2003,[10] that even as it is a state policy to promote a level playing field in the
communications industry, Section 23 of Rep. Act No. 7925 does not refer to tax exemption but only
to exemption from certain regulations and requirements imposed by the National
Telecommunications Commission:

xxx. The records of Congress are bereft of any discussion or even mention of tax
exemption. To the contrary, what the Chairman of the Committee on Transportation, Rep.
Jerome V. Paras, mentioned in his sponsorship of H.B. No. 14028, which became R.A. No.
7925, were equal access clauses in interconnection agreements, not tax exemptions. He said:

There is also a need to promote a level playing field in the telecommunications industry. New
entities must be granted protection against dominant carriers through the encouragement
of equitable access charges and equal access clauses in interconnection agreements and the
strict policing of predatory pricing by dominant carriers. Equal access should be granted to all
operators connecting into the interexchange network. There should be no discrimination against
any carrier in terms of priorities and/or quality of services.
Nor does the term exemption in 23 of R.A. No. 7925 mean tax exemption. The term refers to
exemption from certain regulations and requirements imposed by the National
Telecommunications Commission (NTC). For instance, R.A. No. 7925, 17 provides: The
Commission shall exempt any specific telecommunications service from its rate or tariff
regulations if the service has sufficient competition to ensure fair and reasonable rates or tariffs.
Another exemption granted by the law in line with its policy of deregulation is the exemption
from the requirement of securing permits from the NTC every time a telecommunications
company imports equipment.[11]

PLDTs third assigned error has likewise been squarely addressed in the same en
banc Resolution, when the Court rejected PLDTs contention that the in-lieu-of-all-taxes clause does
not refer to tax exemption but to tax exclusion and hence, the strictissimi juris rule does not apply.
The en banc explains that these two terms actually mean the same thing, such that the rule that tax
exemption should be applied in strictissimi juris against the taxpayer and liberally in favor of the
government applies equally to tax exclusions:

Indeed, both in their nature and in their effect there is no difference between tax
exemption and tax exclusion. Exemption is an immunity or privilege; it is freedom from a charge
or burden to which others are subjected. Exclusion, on the other hand, is the removal of
otherwise taxable items from the reach of taxation, e.g., exclusions from gross income and
allowable deductions. Exclusion is thus also an immunity or privilege which frees a taxpayer
from a charge to which others are subjected. Consequently, the rule that tax exemption should be
applied in strictissimi juris against the taxpayer and liberally in favor of the government applies
equally to tax exclusions. To construe otherwise the in lieu of all taxes provision invoked is to be
inconsistent with the theory that R.A. No. 7925, 23 grants tax exemption because of a similar
grant to Globe and Smart.[12]
 As in Davao, PLDT presently faults the trial court for not giving weight to the ruling of the
BLGF which, to petitioners mind, is an administrative agency with technical expertise and mastery
over the specialized matters assigned to it. Again, to quote from our ruling in Davao:

To be sure, the BLGF is not an administrative agency whose findings on questions of fact
are given weight and deference in the courts. The authorities cited by petitioner pertain to the
Court of Tax Appeals, a highly specialized court which performs judicial functions as it was
created for the review of tax cases. In contrast, the BLGF was created merely to provide
consultative services and technical assistance to local governments and the general public on
local taxation, real property assessment, and other related matters, among others. The question
raised by petitioner is a legal question, to wit, the interpretation of 23 of R.A. No. 7925. There is,
therefore, no basis for claiming expertise for the BLGF that administrative agencies are said to
possess in their respective fields.[13]

With the reality that the arguments presently advanced by petitioner are but a mere reiteration
if not a virtual repetition of the very same arguments it has already raised in Davao and in Bacolod, all
of which arguments and submissions have been extensively addressed and adequately passed upon
by this Court in its decisions in said two (2) PLDT cases, and noting that the instant recourse has not
raised any new fresh issue to warrant a second look, it, too, must have to fall.
WHEREFORE, and on the basis of our consistent ruling in PLDT vs. City of Davao and PLDT
vs. City of Bacolod, et al., the petition is DENIED and the assailed decision of the trial
court AFFIRMED.

With treble costs against petitioner.

SO ORDERED.

G.R. No. 96016 October 17, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS and EFREN P. CASTANEDA, respondents.

Leovigildo Monasterial for private respondent.

 RESOLUTION

PADILLA, J.:

The issue to be resolved in this petition for review on certiorari is whether or not terminal leave pay
received by a government official or employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.

We resolve the issue in the negative.

Private respondent Efren P. Castaneda retired from the government service as Revenue Attache in
the Philippine Embassy in London, England, on 10 December 1982 under the provisions of Section
12 (c) of Commonwealth Act 186, as amended. Upon retirement, he received, among other benefits,
terminal leave pay from which petitioner Commissioner of Internal Revenue withheld P12,557.13
allegedly representing income tax thereon.

Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, contending that
the cash equivalent of his terminal leave is exempt from income tax. To comply with the two-year
prescriptive period within which claims for refund may be filed, Castaneda filed on 16 July 1984 with
the Court of Tax Appeals a Petition for Review, seeking the refund of income tax withheld from his
terminal leave pay.

The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of
Internal Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. (,Annex "C",
petition).

Petitioner appealed the above-mentioned Court of Tax Appeals decision to this Court, which was
docketed as G.R. No. 80320. In turn, we referred the case to the Court of Appeals for resolution. The
case was docketed in the Court of Appeals as CA-G.R. SP No. 20482.

On 26 September 1990, the Court of Appeals dismissed the petition for review and affirmed the
decision of the Court of Tax Appeals. Hence, the present recourse by the Commissioner of Internal
Revenue.

The Solicitor General, acting on behalf of the Commissioner of Internal Revenue, contends that the
terminal leave pay is income derived from employer-employee relationship, citing in support of his
stand Section 28 of the National Internal Revenue Code; that as part of the compensation for services
rendered, terminal leave pay is actually part of gross income of the recipient. Thus —

. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce it. . . .
there can thus be no "commutation of salary" when a government retiree applies for terminal
leave because he is not receiving it as salary. What he applies for is a "commutation of leave
credits." It is an accumulation of credits intended for old age or separation from service. . . .

The Court has already ruled that the terminal leave pay received by a government official or
employee is not subject to withholding (income) tax. In the recent case of Jesus N. Borromeo vs. The
Hon. Civil Service Commission, et al.,G.R. No. 96032, 31 July 1991, the Court explained
the rationale behind the employee's entitlement to an exemption from withholding (income) tax on his
terminal leave pay as follows:
 . . . commutation of leave credits, more commonly known as terminal leave, is applied for by
an officer or employee who retires, resigns or is separated from the service through no fault of
his own. (Manual on Leave Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17). In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes that for most
public servants, retirement pay is always less than generous if not meager and scrimpy. A
modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the same policy considerations
governing retirement benefits.

In fine, not being part of the gross salary or income of a government official or employee but a
retirement benefit, terminal leave pay is not subject to income tax.

ACCORDINGLY, the petition for review is hereby DENIED.

SO ORDERED.

SOUTH AFRICAN AIRWAYS, G.R. No. 180356

Petitioner,
Present:

CORONA, J., Chairperson,

- versus - VELASCO, JR.,
LEONARDO-DE CASTRO,*
PERALTA, and
MENDOZA, JJ.
COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent. February 16, 2010

x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007
Decision[1] and October 30, 2007 Resolution[2] of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case
No. 210, entitled South African Airways v. Commissioner of Internal Revenue. The assailed decision affirmed
the Decision dated May 10, 2006[3] and Resolution dated August 11, 2006[4] rendered by the CTA First
Division.

The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and by virtue of the
laws of the Republic of South Africa. Its principal office is located at Airways Park, Jones Road, Johannesburg
International Airport, South Africa. In the Philippines, it is an internal air carrier having no landing rights in the
country. Petitioner has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel
sells passage documents for compensation or commission for petitioners off-line flights for the carriage of
passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. Petitioner is
not registered with the Securities and Exchange Commission as a corporation, branch office, or partnership. It is
not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax returns for its off-line
flights, summarized as follows:

2.5% Gross
Period Date Filed Phil. Billings
st
For Passenger 1 Quarter May 30, 2000 PhP 222,531.25
2nd Quarter August 29, 2000 424,046.95
3rd Quarter November 29, 2000 422,466.00
4th Quarter April 16, 2000 453,182.91
Sub-total PhP 1,522,227.11
st
For Cargo 1 Quarter May 30, 2000 PhP 81,531.00
2nd Quarter August 29, 2000 50,169.65
3rd Quarter November 29, 2000 36,383.74
4th Quarter April 16, 2000 37,454.88
Sub-total PhP 205,539.27
TOTAL 1,727,766.38

Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue, Revenue District Office
No. 47, a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine
Billings (GPB) for the taxable year 2000. Such claim was unheeded. Thus, on April 14, 2003, petitioner filed a
Petition for Review with the CTA for the refund of the abovementioned amount. The case was docketed as
CTA Case No. 6656.

On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of merit. The CTA
ruled that petitioner is a resident foreign corporation engaged in trade or business in the Philippines. It further
ruled that petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the National Internal
Revenue Code (NIRC) of 1997. The CTA, however, stated that petitioner is liable to pay a tax of 32% on its
income derived from the sales of passage documents in the Philippines. On this ground, the CTA denied
petitioners claim for a refund.
Petitioners Motion for Reconsideration of the above decision was denied by the CTA First Division in a
Resolution dated August 11, 2006.

Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for a refund of its tax
payment on its GPB. This was denied by the CTA in its assailed decision. A subsequent Motion for
Reconsideration by petitioner was also denied in the assailed resolution of the CTA En Banc.

Hence, petitioner went to us.

The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents

through an independent sales agent in the Philippines, is engaged in trade or business in the
Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997 NIRC.

Whether or not the income derived by petitioner from the sale of passage documents
covering petitioners off-line flights is Philippine-source income subject to Philippine income tax.

Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on
Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38.[5]

The Courts Ruling

This petition must be denied.

Petitioner Is Subject to Income Tax

at the Rate of 32% of Its Taxable Income

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being taxed for its sale
of passage documents in the Philippines. Petitioner, however, failed to sufficiently prove such contention.

In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,[6] we held, Since an

action for a tax refund partakes of the nature of an exemption, which cannot be allowed unless granted in the
most explicit and categorical language, it is strictly construed against the claimant who must discharge such
burden convincingly.

Petitioner has failed to overcome such burden.

 In essence, petitioner calls upon this Court to determine the legal implication of the amendment to Sec.
28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioners contention that, with the new definition of GPB, it
is no longer liable under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 1/2% tax on GPB is
inapplicable to it, it is thereby excluded from the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. A corporation organized, authorized, or existing under the
laws of a foreign country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines: Provided, however, that international
carriers shall pay a tax of two and one-half percent on their gross Philippine billings.

This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB as follows:

Gross Philippine billings include gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo or mail originates from the
Philippines.

In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:

Gross Philippine Billings means gross revenue realized from uplifts of passengers anywhere in
the world and excess baggage, cargo and mail originating from the Philippines, covered by
passage documents sold in the Philippines.

Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the Philippines. Legislature departed from such concept in the
1997 NIRC where GPB is now defined under Sec. 28(A)(3)(a):

Gross Philippine Billings refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document.

Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to or
from the Philippines, income is included in GPB.

As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from
the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was also found by the
CTA. But petitioner further posits the view that due to the non-applicability of Sec. 28(A)(3)(a) to it, it is
precluded from paying any other income tax for its sale of passage documents in the Philippines.

Such position is untenable.

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British Overseas

Airways),[7] which was decided under similar factual circumstances, this Court ruled that off-line air carriers
having general sales agents in the Philippines are engaged in or doing business in the Philippines and that their
income from sales of passage documents here is income from within the Philippines. Thus, in that case, we held
the off-line air carrier liable for the 32% tax on its taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under the 1939 NIRC, it
does not apply to the instant case, which must be decided under the 1997 NIRC. Petitioner alleges that the 1939
NIRC taxes resident foreign corporations, such as itself, on all income from sources within the Philippines.
Petitioners interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that
does not maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt from
paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes
the application of Sec. 28(A)(1) to it.

Its argument has no merit.

First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to the taxation of
off-line air carriers is more apparent than real.

We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all
international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC. Certainly, had legislatures
intentions been to completely exclude all international air carriers from the application of the general rule under
Sec. 28(A)(1), it would have used the appropriate language to do so; but the legislature did not. Thus, the
logical interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general
rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident foreign
corporation, whether an international air carrier or not, would be liable for the tax under Sec. 28(A)(1).

Clearly, no difference exists between British Overseas Airways and the instant case, wherein petitioner
claims that the former case does not apply. Thus, British Overseas Airways applies to the instant case. The
findings therein that an off-line air carrier is doing business in the Philippines and that income from the sale of
passage documents here is Philippine-source income must be upheld.
 Petitioner further reiterates its argument that the intention of Congress in amending the definition of
GPB is to exempt off-line air carriers from income tax by citing the pronouncements made by Senator Juan
Ponce Enrile during the deliberations on the provisions of the 1997 NIRC. Such pronouncements, however, are
not controlling on this Court. We said in Espino v. Cleofe:[8]

A cardinal rule in the interpretation of statutes is that the meaning and intention of the
law-making body must be sought, first of all, in the words of the statute itself, read and
considered in their natural, ordinary, commonly-accepted and most obvious significations,
according to good and approved usage and without resorting to forced or subtle construction.
Courts, therefore, as a rule, cannot presume that the law-making body does not know the
meaning of words and rules of grammar. Consequently, the grammatical reading of a statute
must be presumed to yield its correct sense. x x x It is also a well-settled doctrine in this
jurisdiction that statements made by individual members of Congress in the consideration
of a bill do not necessarily reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. (Emphasis supplied.)

Moreover, an examination of the subject provisions of the law would show that petitioners interpretation
of those provisions is erroneous.

Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or business within
the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be thirty-three percent (33%), and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

xxxx

(3) International Carrier. - An international carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2 1/2%) on its Gross Philippine Billings as defined
hereunder:
(a) International Air Carrier. Gross Philippine Billings refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight, irrespective of
the place of sale or issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a plane in a port
or point in the Philippines: Provided, further, That for a flight which originates from the
 Philippines, but transshipment of passenger takes place at any port outside the Philippines
on another airline, only the aliquot portion of the cost of the ticket corresponding to the
leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings.

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are liable for 32%
tax on all income from sources within the Philippines. Sec. 28(A)(3) is an exception to this general rule.

An exception is defined as that which would otherwise be included in the provision from which it is
excepted. It is a clause which exempts something from the operation of a statue by express words. [9] Further, an
exception need not be introduced by the words except or unless. An exception will be construed as such if it
removes something from the operation of a provision of law.[10]

In the instant case, the general rule is that resident foreign corporations shall be liable for a 32% income
tax on their income from within the Philippines, except for resident foreign corporations that are international
carriers that derive income from carriage of persons, excess baggage, cargo and mail originating from the
Philippines which shall be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international
carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner
must fall under the general rule. This principle is embodied in the Latin maxim, exception firmat regulam in
casibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview
of the general rule.[11]

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine
Billings, while international air carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of such income.

As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that petitioner is
liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner raises the issue of whether the
existence of such liability would preclude their claim for a refund of tax paid on the basis of Sec. 28(A)(3)(a). In
answer to petitioners motion for reconsideration, the CTA First Division ruled in its Resolution dated August
11, 2006, thus:

On the fourth argument, petitioner avers that a deficiency tax assessment does not, in any
way, disqualify a taxpayer from claiming a tax refund since a refund claim can proceed
independently of a tax assessment and that the assessment cannot be offset by its claim for
refund.
 Petitioners argument is erroneous. Petitioner premises its argument on the existence of an
assessment. In the assailed Decision, this Court did not, in any way, assess petitioner of any
deficiency corporate income tax. The power to make assessments against taxpayers is lodged
with the respondent. For an assessment to be made, respondent must observe the formalities
provided in Revenue Regulations No. 12-99. This Court merely pointed out that petitioner is
liable for the regular corporate income tax by virtue of Section 28(A)(3) of the Tax Code. Thus,
there is no assessment to speak of.[12]

Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their
liability under Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under
the latter provision. Petitioner argues that such offsetting is in the nature of legal compensation, which cannot
be applied under the circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That 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) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced
by third persons and communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,[13] thus:

In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a material distinction between a tax
and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. We find no cogent reason to deviate from the
aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we

categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person cannot refuse to pay
a tax on the ground that the government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the results of a lawsuit against
the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc.
v. Commission on Audit, which reiterated that:
 . . . a taxpayer may not offset taxes due from the claims that he may have against
the government. Taxes cannot be the subject of compensation because the government
and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is
not such a debt, demand, contract or judgment as is allowed to be set-off.

Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency
is unavailing under Art. 1279 of the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals,[14] however, granted the offsetting of a tax
refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners
supplemental motion for reconsideration alleging bringing to said courts attention the existence
of the deficiency income and business tax assessment against Citytrust. The fact of such
deficiency assessment is intimately related to and inextricably intertwined with the right of
respondent bank to claim for a tax refund for the same year. To award such refund despite the
existence of that deficiency assessment is an absurdity and a polarity in conceptual effects.
Herein private respondent cannot be entitled to refund and at the same time be liable for a tax
deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is valid, that
is, the facts stated therein are true and correct. The deficiency assessment, although not yet
final, created a doubt as to and constitutes a challenge against the truth and accuracy of the
facts stated in said return which, by itself and without unquestionable evidence, cannot be
the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that (w)hen an assessment is made
in case of any list, statement, or return, which in the opinion of the Commissioner of Internal
Revenue was false or fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits unless it is proved that the said
list, statement, or return was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines.

Moreover, to grant the refund without determination of the proper assessment and the tax
due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive
period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent
return involved. This would necessarily require and entail additional efforts and expenses on the
part of the Government, impose a burden on and a drain of government funds, and impede or
delay the collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the issue of the deficiency tax assessment against
Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable.
 In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to avail of
remedies under the law to defeat each others claim and to determine all matters of dispute
between them in one single case. It is important to note that in determining whether or not
petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how
much the Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a determination of this case
would constitute res judicata on both parties as to all the matters subject thereof or necessarily
involved therein. (Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above
pronouncements are, therefore, still applicable today.

Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given,
however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is
liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we
cannot grant the prayer for a refund.

Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En
Banc on the outright denial of petitioners claim for a refund. Even though petitioner is not entitled to a refund
due to the question on the propriety of petitioners tax return subject of the instant controversy, it would not be
proper to deny such claim without making a determination of petitioners liability under Sec. 28(A)(1).

It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is
based on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that
petitioners liabilities under the two provisions would be the same. There is a need to make a determination of
petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency
exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the
records are bereft of any evidence sufficient to establish petitioners taxable income. There is a necessity to
receive evidence to establish such amount vis--vis the claim for refund. It is only after such amount is
established that a tax refund or deficiency may be correctly pronounced.

WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the CTA En
Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to the CTA En Banc for
further proceedings and appropriate action, more particularly, the reception of evidence for both parties and the
corresponding disposition of CTA E.B. Case No. 210 not otherwise inconsistent with our judgment in this
Decision.
SO ORDERED.

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

x-----------------------x

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

The Case

These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En Banc and its
Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this case on a pure
question of law, which involves the interpretation of Section 27(B) vis-à-vis Section 30(E) and (G) of
the National Internal Revenue Code of the Philippines (NIRC), on the income tax treatment of
proprietary non-profit hospitals.

The Facts

St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and non-profit
corporation. Under its articles of incorporation, among its corporate purposes are:

(a) To establish, equip, operate and maintain a non-stock, non-profit Christian, benevolent,
charitable and scientific hospital which shall give curative, rehabilitative and spiritual care to
the sick, diseased and disabled persons; provided that purely medical and surgical services
shall be performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

(b) To provide a career of health science education and provide medical services to the
community through organized clinics in such specialties as the facilities and resources of the
corporation make possible;

(c) To carry on educational activities related to the maintenance and promotion of health as
well as provide facilities for scientific and medical researches which, in the opinion of the Board
of Trustees, may be justified by the facilities, personnel, funds, or other requirements that are
available;

(d) To cooperate with organized medical societies, agencies of both government and private
sector; establish rules and regulations consistent with the highest professional ethics;
 xxxx3

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes
amounting to ₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax,
withholding tax on compensation and expanded withholding tax. The BIR reduced the amount to
₱63,935,351.57 during trial in the First Division of the CTA. 4

On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the deficiency tax
assessments. The BIR did not act on the protest within the 180-day period under Section 228 of the
NIRC. Thus, St. Luke's appealed to the CTA.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential
tax rate on the income of proprietary non-profit hospitals, should be applicable to St. Luke's.
According to the BIR, Section 27(B), introduced in 1997, "is a new provision intended to amend the
exemption on non-profit hospitals that were previously categorized as non-stock, non-profit
corporations under Section 26 of the 1997 Tax Code x x x." 5 It is a specific provision which prevails
over the general exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6

The BIR claimed that St. Luke's was actually operating for profit in 1998 because only 13% of its
revenues came from charitable purposes. Moreover, the hospital's board of trustees, officers and
employees directly benefit from its profits and assets. St. Luke's had total revenues of
₱1,730,367,965 or approximately ₱1.73 billion from patient services in 1998. 7

St. Luke's contended that the BIR should not consider its total revenues, because its free services to
patients was ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less
operating expenses) of ₱334,642,615. 8 St. Luke's also claimed that its income does not inure to the
benefit of any individual.

St. Luke's maintained that it is a non-stock and non-profit institution for charitable and social welfare
purposes under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.

The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments before the CTA
that Section 27(B) applies to St. Luke's. The petition raises the sole issue of whether the enactment of
Section 27(B) takes proprietary non-profit hospitals out of the income tax exemption under Section 30
of the NIRC and instead, imposes a preferential rate of 10% on their taxable income. The BIR prays
that St. Luke's be ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and withholding
of a part of its income, 9 as well as the payment of surcharge and delinquency interest. There is no
ground for this Court to undertake such a factual review. Under the Constitution 10 and the Rules of
Court, 11 this Court's review power is generally limited to "cases in which only an error or question of
law is involved." 12 This Court cannot depart from this limitation if a party fails to invoke a recognized
exception.

The Ruling of the Court of Tax Appeals

The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division Decision
dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED.
Accordingly, the 1998 deficiency VAT assessment issued by respondent against petitioner in the
amount of ₱110,000.00 is hereby CANCELLED and WITHDRAWN. However, petitioner is hereby
ORDERED to PAY deficiency income tax and deficiency expanded withholding tax for the taxable
year 1998 in the respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the
total amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to
Section 249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the
failure of St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came
from charitable activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency
assessed by the BIR based on the 10% tax rate under Section 27(B) of the NIRC, which the CTA En
Banc held was not applicable to St. Luke's. 15

The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered by Section
30(E) and (G) of the NIRC. This ruling would exempt all income derived by St. Luke's from services to
its patients, whether paying or non-paying. The CTA reiterated its earlier decision in St. Luke's
Medical Center, Inc. v. Commissioner of Internal Revenue, 16 which examined the primary purposes
of St. Luke's under its articles of incorporation and various documents 17 identifying St. Luke's as a
charitable institution.

The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which states that "a
charitable institution does not lose its charitable character and its consequent exemption from
taxation merely because recipients of its benefits who are able to pay are required to do so, where
funds derived in this manner are devoted to the charitable purposes of the institution x x x." 19 The
generation of income from paying patients does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal Revenue, 20 which
ruled that the old NIRC (Commonwealth Act No. 466, as amended) 21 "positively exempts from
taxation those corporations or associations which, otherwise, would be subject thereto, because of
the existence of x x x net income." 22 The NIRC of 1997 substantially reproduces the provision on
charitable institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared: "[E]very
responsible organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive, whenever
possible, to have a surplus." 23

The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The CTA
explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to be "non-profit."
On the other hand, Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30(E) of the NIRC. According to the CTA, this is unique in the
present tax code, indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is clear that non-
stock, non-profit hospitals operated exclusively for charitable purpose are exempt from income tax on
income received by them as such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended." 25

The Issue

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-profit
hospitals.

The Ruling of the Court

St. Luke's Petition in G.R. No. 195960

As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960 because the
petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise
only questions of law which must be distinctly set forth." St. Luke's cites Martinez v. Court of
Appeals 26 which permits factual review "when the Court of Appeals [in this case, the CTA] manifestly
overlooked certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27

This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated that the CTA
"disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly self-serving, to show the
nature of the 'Other Income-Net' x x x." 28 This is not a case of overlooking or failing to consider
relevant evidence. The CTA obviously considered the evidence and concluded that it is self-serving.
The CTA declared that it has "gone through the records of this case and found no other evidence
aside from the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29

The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25% surcharge
under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency tax within the time
prescribed for its payment in the notice of assessment[.]" 30 St. Luke's is also liable to pay 20%
delinquency interest under Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the
amount of ₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes only
deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency interest. 32

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section
27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable
and social welfare institutions. The 10% income tax rate under Section 27(B) specifically pertains to
proprietary educational institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under Section 27(E) of
the NIRC of 1977, which is now substantially reproduced in Section 30(E) of the NIRC of
1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and
hospitals which are non-profit shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived by such
educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall
be imposed on the entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its
primary purpose or function. A 'proprietary educational institution' is any private school maintained
and administered by private individuals or groups with an issued permit to operate from the
Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a
charitable institution and an organization promoting social welfare. The arguments of St. Luke's focus
on the wording of Section 30(E) exempting from income tax non-stock, non-profit charitable
institutions. 34 St. Luke's asserts that the legislative intent of introducing Section 27(B) was only to
remove the exemption for "proprietary non-profit" hospitals. 35 The relevant provisions of Section 30
state:

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed
under this Title in respect to income received by them as such:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income
or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific
person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of
the NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be
construed together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary non-
profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications for
hospitals are that they must be proprietary and non-profit. "Proprietary" means private, following the
definition of a "proprietary educational institution" as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.

"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v. Club Filipino
Inc. de Cebu, 37this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. 38 The
club was non-profit because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. 39

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court
defined "charity" in Lung Center of the Philippines v. Quezon City 40 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 [by] otherwise lessening the burden of government." 41A non-profit club for the
benefit of its members fails this test. An organization may be considered as non-profit if it does not
distribute any part of its income to stockholders or members. However, despite its being a tax exempt
institution, any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of charity in
Lung Center. The issue in Lung Center concerns exemption from real property tax and not income
tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the burden of government. In other words, charitable
institutions provide for free goods and services to the public which would otherwise fall on the
shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes which should
have been spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by
the government is compensated by its relief from doing public works which would have been funded
by appropriations from the Treasury. 42

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the constitutional provision that
"[n]o law granting any tax exemption shall be passed without the concurrence of a majority of all the
Members of Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the existence of the
government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution
for the purpose of exemption from real property taxes. This ruling uses the same premise as Hospital
de San Juan 45 and Jesus Sacred Heart College 46 which says that receiving income from paying
patients does not destroy the charitable nature of a hospital.

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. 47
For real property taxes, the incidental generation of income is permissible because the test of
exemption is the use of the property. The Constitution provides that "[c]haritable institutions, churches
and personages 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." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The test requires that the institution
use the property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung
Center of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to remove from the
tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the NIRC, Congress
decided to extend the exemption to income taxes. However, the way Congress crafted Section 30(E)
of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that
the institution "actually, directly and exclusively" use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted "exclusively"
for charitable purposes. The organization of the institution refers to its corporate form, as shown by its
articles of incorporation, by-laws and other constitutive documents. Section 30(E) of the NIRC
specifically requires that the corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is distributable as dividends to its members,
trustees, or officers" 49 and that any profit "obtain[ed] as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must not only be
plowed back "whenever necessary or proper," but must be "devoted or used altogether to the
charitable object which it is intended to achieve." 51

The operations of the charitable institution generally refer to its regular activities. Section 30(E) of the
NIRC requires that these operations be exclusive to charity. There is also a specific requirement that
"no part of [the] net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person." The use of lands, buildings and improvements of the institution is but a
part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable institution.
However, this does not automatically exempt St. Luke's from paying taxes. This only refers to the
organization of St. Luke's. Even if St. Luke's meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the
Constitution requires that a charitable institution use the property "actually, directly and exclusively"
for charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a
charitable institution must be "organized and operated exclusively" for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution be "operated
exclusively" for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and operated
exclusively" by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied)

In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution conducts
"any" activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax
exempt. This paragraph qualifies the requirements in Section 30(E) that the "[n]on-stock corporation
or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x."
It likewise qualifies the requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare.

Thus, even if the charitable institution must be "organized and operated exclusively" for charitable
purposes, it is nevertheless allowed to engage in "activities conducted for profit" without losing its tax
exempt status for its not-for-profit activities. The only consequence is that the "income of whatever
kind and character" of a charitable institution "from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate rate under
Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying patients. It cannot
be disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an
institution "operated exclusively" for charitable purposes. Clearly, revenues from paying patients are
income received from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived
profits from its paying patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. No.
195909, St. Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00

OPERATING EXPENSES
Professional care of patients ₱1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00
₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%
 INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" 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." x x x The words "dominant use" or "principal use" cannot be substituted for the
words "used exclusively" without doing violence to the Constitution and the law. Solely is synonymous
with exclusively. 54

The Court cannot expand the meaning of the words "operated exclusively" without violating the NIRC.
Services to paying patients are activities conducted for profit. They cannot be considered any other
way. There is a "purpose to make profit over and above the cost" of services. 55 The ₱1.73 billion total
revenues from paying patients is not even incidental to St. Luke's charity expenditure of
₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating income in
1998. However, if a part of the remaining 34.80% of the operating income is reinvested in property,
equipment or facilities used for services to paying and non-paying patients, then it cannot be said that
the income is "devoted or used altogether to the charitable object which it is intended to
achieve." 56 The income is plowed back to the corporation not entirely for charitable purposes, but for
profit as well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such income."

Jesus Sacred Heart College declared that there is no official legislative record explaining the phrase
"any activity conducted for profit." However, it quoted a deposition of Senator Mariano Jesus Cuenco,
who was a member of the Committee of Conference for the Senate, which introduced the phrase "or
from any activity conducted for profit."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es
una actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha
universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero

considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de
buena posición social económica, lo que se paga por estos enfermos debe estar sujeto a 'income
tax', y es una de las razones que hemos tenido para insertar las palabras o frase 'or from any activity
conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution like the College
of Medicine of the University of Santo Tomas. Senator Cuenco answered that if the hospital has paid
rooms generally occupied by people of good economic standing, then it should be subject to income
tax. He said that this was one of the reasons Congress inserted the phrase "or any activity conducted
for profit."

The question in Jesus Sacred Heart College involves an educational institution. 58 However, it is
applicable to charitable institutions because Senator Cuenco's response shows an intent to focus on
the activities of charitable institutions. Activities for profit should not escape the reach of taxation.
Being a non-stock and non-profit corporation does not, by this reason alone, completely exempt an
institution from tax. An institution cannot use its corporate form to prevent its profitable activities from
being taxed.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for charitable or
social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is
based not only on a strict interpretation of a provision granting tax exemption, but also on the clear
and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution
be "operated exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income from for-profit activities, under the last paragraph of
Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is
spared from sharing in the expenses of government and yet benefits from them. Tax exemptions for
charitable institutions should therefore be limited to institutions beneficial to the public and those
which improve social welfare. A profit-making entity should not be allowed to exploit this subsidy to
the detriment of the government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke's, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC.
However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which
opined that St. Luke's is "a corporation for purely charitable and social welfare purposes"59 and thus
exempt from income tax. 60 In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 the
Court said that "good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is PARTLY
GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November 2010 and its
Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical Center,
Inc. is ORDERED TO PAY the deficiency income tax in 1998 based on the 10% preferential income
tax rate under Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of the National
Internal Revenue Code. All other parts of the Decision and Resolution of the Court of Tax Appeals
are AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating Section 1,
Rule 45 of the Rules of Court.
SO ORDERED.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO
O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.

Rufino R. Tan for and in his own behalf.

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

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one
subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process
of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.
The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for
the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections 21
and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code,
as now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. — A tax is hereby imposed upon the taxable net income as
determined in Section 27 received during each taxable year from all sources, other than
income covered by paragraphs (b), (c), (d) and (e) of this section by every individual
whether
a citizen of the Philippines or an alien residing in the Philippines who is self-employed or
practices his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

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

Over P30,000 P2,100 + 15%

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

Over P120,000 P15,600 + 20%

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

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
 Section 21 (f) in the case of individuals engaged in business or practice of profession,
only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to

the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with the
conduct of a taxpayer's profession, trade or business.

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

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

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

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation
"shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on corporations and partnerships. The
contention clearly forgets, however, that such a system of income taxation has long been the
prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present
and future conditions, and (4) the classification applies equally well to all those belonging to the same
class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable
corporations. We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what
he believes to be an imbalance between the tax liabilities of those covered by the amendatory law
and those who are not. With the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot
freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of
course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of
property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot
override constitutional proscriptions. This stage, however, has not been demonstrated to have been
reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership

(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said law
are to be deducted from partnership income. Also, the expenses paid or incurred by
partners in their individual capacities in the practice of their profession which are not
reimbursed or paid by the partnership but are not considered as direct cost, are not
deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression
of this bill. Do we speak here of individuals who are earning, I mean, who
earn through business enterprises and therefore, should file an income tax
return?
 MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version
of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to

partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and
partners in general professional partnerships. The fact of the matter is that a general professional
partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax
purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income
tax is imposed not on the professional partnership, which is tax exempt, but on the partners
themselves in their individual capacity computed on their distributive shares of partnership profits.
Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each
partner —

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent provided
by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he

declares his distributive share of the gross income undiminished by his
share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can
easily become myopic, however, when the law is understood, as it should be, as only forming part of,
and subject to, the whole income tax concept and precepts long obtaining under the National Internal
Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in
the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the
tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer (that
renders citizens, regardless of residence, and resident aliens subject to income tax liability on their
income from all sources) and of the generally accepted and internationally recognized income taxable
base (that can subject non-resident aliens and foreign corporations to income tax on their income
from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely:
(1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts
(irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such as
in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example.4 Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so
as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a
flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers
on their non-compensation income. There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant variance the income tax
treatment of professionals who practice their respective professions individually and of those who do
it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled
as above, holding that petitioners have constituted an unregistered partnership and are, therefore,
subject to the payment of the deficiency corporate income taxes assessed against them by
respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the
provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic
Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners'
motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo
T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of
First Instance of Manila for the settlement of her estate. Later, Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of said deceased (Exhibit 3,
pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted the project of
partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still
minors when the project of partition was approved, Lorenzo T. Oña, their father and
administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On November 14, 1949,
the Court appointed him guardian of the persons and property of the aforenamed
minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed value
of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they
received from said Commission the amount of P50,000.00, more or less. This amount
was not divided among them but was used in the rehabilitation of properties owned by
them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were
acquired after the death of the decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
 The project of partition also shows that the estate shares equally with Lorenzo T. Oña,
the administrator thereof, in the obligation of P94,973.00, consisting of loans contracted
by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As a result, petitioners'
properties and investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-end balances:

Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept by Lorenzo T. Oña where the corresponding
shares of the petitioners in the net income for the year are also known. Every year,
petitioners returned for income tax purposes their shares in the net income derived from
said properties and securities and/or from transactions involving them (Exhibit 3, supra;
t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly
income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of
Lorenzo T. Oña who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)

decided that petitioners formed an unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and
P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that they have
 formed an unregistered partnership. Finding no merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent,
June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.00

25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with
the ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-
9692, Jan. 6, 1958, so that the questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the "Compromise for non-filing," the latter item
obviously referring to the compromise in lieu of the criminal liability for failure of
petitioners to file the corporate income tax returns for said years. (See Exh. 17, page
86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS

FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.
 THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN

UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE
PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;

V.

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP,

THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR
RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES
OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions involving
the same, or, must they be deemed to have formed an unregistered partnership subject to tax under
Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have formed an
unregistered partnership, should this not be only in the sense that they invested as a common fund
the profits earned by the properties owned by them in common and the loans granted to them upon
the security of the said properties, with the result that as far as their respective shares in the
inheritance are concerned, the total income thereof should be considered as that of co-owners and
not of the unregistered partnership? And (3) assuming again that they are taxable as an unregistered
partnership, should not the various amounts already paid by them for the same years 1955 and 1956
as individual income taxes on their respective shares of the profits accruing from the properties they
owned in common be deducted from the deficiency corporate taxes, herein involved, assessed
against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding their
respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that
he considered them as having formed an unregistered partnership. At least, there is nothing in the
record indicating that an earlier assessment had already been made. Such being the case, and We
see no reason how it could be otherwise, it is easily understandable why petitioners' position that they
are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales thereof in real properties and
securities," as a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties were sold at considerable profit, and that with said profit,
petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is
likewise admitted that all the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased,
all the income thereof does belong commonly to all the heirs, obviously, without them becoming
thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners
continues until the inheritance is actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the partition, they might decide to continue
holding said shares under the common management of the administrator or executor or of anyone
chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be
the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and
84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project partition
either duly executed in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively his own without the intervention of the other
heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after
such partition, he allows his share to be held in common with his co-heirs under a single management
to be used with the intent of making profit thereby in proportion to his share, there can be no doubt
that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil
Code from that of unregistered partnerships which are considered as "corporations" under Sections
24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance, section
24 of said Code exempts from the aforementioned tax "duly registered general
partnerships," which constitute precisely one of the most typical forms of partnerships in
this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in confirmity with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on corporation. Again,
pursuant to said section 84(b),the term "corporation" includes, among others, "joint
accounts,(cuentas en participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members. Accordingly, the lawmaker
could not have regarded that personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly registered general co-
partnerships" — which are possessed of the aforementioned personality — have been
expressly excluded by law (sections 24 and 84[b]) from the connotation of the term
"corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term "partnership"
it includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which
is not, within the meaning of the Code, a trust, estate, or a corporation. ... .
(7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or

other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. ... . (8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis ours.)
 For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships — with the exception only of duly registered general copartnerships
— within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue,
G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently,
We consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and sale of real properties
and corporate securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income derived therefrom
were used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the income
derived from the purchase and sale of other properties but also the income of the
inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is not
distributed or, at least, partitioned, but the moment their respective known shares are used as part of
the common assets of the heirs to be used in making profits, it is but proper that the income of such
shares should be considered as the part of the taxable income of an unregistered partnership. This,
We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court
in the aforementioned resolution denying petitioners' motion for reconsideration of the decision of said
court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the
various amounts paid by the individual petitioners as income tax on their
respective shares of the unregistered partnership should be deducted
from the deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in
Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership
must be reduced by the amounts of income tax paid by each petitioner on his share of
 partnership profits. This is not correct; rather, it should be the other way around. The
partnership profits distributable to the partners (petitioners herein) should be reduced by
the amounts of income tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the years in question,
but the income tax due from the partnership has been correctly assessed. Since the
individual income tax liabilities of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is
argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since they paid their individual
income taxes, they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay
the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be
reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is
affirm with costs against petitioners.

MIGUEL J. OSSORIO PENSION G.R. No. 162175

FOUNDATION, INCORPORATED,
Petitioner, Present:

CARPIO, J., Chairperson,

- versus - PERALTA,
ABAD,
PEREZ,*and
MENDOZA, JJ.
COURT OF APPEALS and
COMMISSIONER OF INTERNAL
REVENUE,
Respondents. Promulgated:
June 28, 2010

x--------------------------------------------------x

DECISION

CARPIO, J.:
 The Case

The Miguel J. Ossorio Pension Foundation, Incorporated (petitioner or MJOPFI) filed this Petition for
Certiorari[1]with Prayer for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary
Injunction to reverse the Court of Appeals (CA) Decision[2]dated 30 May 2003 in CA-G.R. SP No. 61829 as
well as the Resolution[3]dated 7 November 2003 denying the Motion for Reconsideration. In the assailed
decision, the CA affirmed the Court of Tax Appeals (CTA) Decision[4]dated 24 October 2000. The CTA denied
petitioners claim for refund of withheld creditable tax of P3,037,500 arising from the sale of real property of
which petitioner claims to be a co-owner as trustee of the employees trust or retirement funds.

The Facts

Petitioner, a non-stock and non-profit corporation, was organized for the purpose of holding title to and
administering the employees trust or retirement funds (Employees Trust Fund) established for the benefit of the
employees of Victorias Milling Company, Inc. (VMC).[5]Petitioner, as trustee, claims that the income earned by
the Employees Trust Fund is tax exempt under Section 53(b) of the National Internal Revenue Code (Tax
Code).
Petitioner alleges that on 25 March 1992, petitioner decided to invest part of the Employees Trust Fund to
purchase a lot[6]in the Madrigal Business Park (MBP lot) in Alabang, Muntinlupa. Petitioner bought the MBP
lot through VMC.[7]Petitioner alleges that its investment in the MBP lot came about upon the invitation of
VMC, which also purchased two lots. Petitioner claims that its share in the MBP lot is 49.59%. Petitioners
investment manager, the Citytrust Banking Corporation (Citytrust),[8]in submitting its Portfolio Mix Analysis,
regularly reported the Employees Trust Funds share in the MBP lot.[9]The MBP lot is covered by Transfer
Certificate of Title No. 183907 (TCT 183907) with VMC as the registered owner.[10]

Petitioner claims that since it needed funds to pay the retirement and pension benefits of VMC employees and
to reimburse advances made by VMC, petitioners Board of Trustees authorized the sale of its share in the MBP
lot.[11]
On 14 March 1997, VMC negotiated the sale of the MBP lot with Metropolitan Bank and Trust Company, Inc.
(Metrobank) for P81,675,000, but the consummation of the sale was withheld.[12]On 26 March 1997, VMC
eventually sold the MBP lot to Metrobank. VMC, through its Vice President Rolando Rodriguez and Assistant
Vice President Teodorico Escober, signed the Deed of Absolute Sale as the sole vendor.

Metrobank, as withholding agent, paid the Bureau of Internal Revenue (BIR) P6,125,625 as withholding tax on
the sale of real property.
Petitioner alleges that the parties who co-owned the MBP lot executed a notarized Memorandum of Agreement
as to the proceeds of the sale, the pertinent provisions of which state:[13]

2. The said parcels of land are actually co-owned by the following:

BLOCK 4, LOT 1 COVERED BY TCT NO. 183907

% SQ.M. AMOUNT
MJOPFI 49.59% 450.00 P 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30

3. Since Lot 1 has been sold for P81,675,000.00 (gross of 7.5% withholding tax and 3% brokers
commission, MJOPFIs share in the proceeds of the sale is P40,500,000.00 (gross of 7.5%
withholding tax and 3% brokers commission. However, MJO Pension Fund is indebted to VMC
representing pension benefit advances paid to retirees amounting to P21,425,141.54, thereby
leaving a balance of P14,822,358.46 in favor of MJOPFI. Check for said amount
of P14,822,358.46 will therefore be issued to MJOPFI as its share in the proceeds of the sale of
Lot 1. The check corresponding to said amount will be deposited with MJOPFIs account with
BPI Asset Management & Trust Group which will then be invested by it in the usual course of its
administration of MJOPFI funds.

Petitioner claims that it is a co-owner of the MBP lot as trustee of the Employees Trust Fund, based on the
notarized Memorandum of Agreement presented before the appellate courts. Petitioner asserts that VMC has
confirmed that petitioner, as trustee of the Employees Trust Fund, is VMCs co-owner of the MBP lot. Petitioner
maintains that its ownership of the MBP lot is supported by the excerpts of the minutes and the resolutions of
petitioners Board Meetings. Petitioner further contends that there is no dispute that the Employees Trust Fund is
exempt from income tax. Since petitioner, as trustee, purchased 49.59% of the MBP lot using funds of the
Employees Trust Fund, petitioner asserts that the Employees Trust Fund's 49.59% share in the income tax paid
(or P3,037,697.40 rounded off to P3,037,500) should be refunded.[14]
Petitioner maintains that the tax exemption of the Employees Trust Fund rendered the payment of P3,037,500 as
illegal or erroneous. On 5 May 1997, petitioner filed a claim for tax refund.[15]
On 14 August 1997, the BIR, through its Revenue District Officer, wrote petitioner stating that under Section 26
of the Tax Code, petitioner is not exempt from tax on its income from the sale of real property. The BIR asked
petitioner to submit documents to prove its co-ownership of the MBP lot and its exemption from tax.[16]

On 2 September 1997, petitioner replied that the applicable provision granting its claim for tax exemption is not
Section 26 but Section 53(b) of the Tax Code. Petitioner claims that its co-ownership of the MBP lot is
evidenced by Board Resolution Nos. 92-34 and 96-46 and the memoranda of agreement among petitioner,
VMC and its subsidiaries.[17]

Since the BIR failed to act on petitioners claim for refund, petitioner elevated its claim to the Commissioner of
Internal Revenue (CIR) on 26 October 1998. The CIR did not act on petitioners claim for refund. Hence,
petitioner filed a petition for tax refund before the CTA. On 24 October 2000, the CTA rendered a decision
denying the petition.[18]

On 22 November 2000, petitioner filed its Petition for Review before the Court of Appeals. On 20 May 2003,
the CA rendered a decision denying the appeal. The CA also denied petitioners Motion for Reconsideration.[19]

Aggrieved by the appellate courts Decision, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

The CTA held that under Section 53(b)[20][now Section 60(b)] of the Tax Code, it is not petitioner that is
entitled to exemption from income tax but the income or earnings of the Employees Trust Fund. The CTA
stated that petitioner is not the pension trust itself but it is a separate and distinct entity whose function is to
administer the pension plan for some VMC employees.[21] The CTA, after evaluating the evidence adduced by
the parties, ruled that petitioner is not a party in interest.

To prove its co-ownership over the MBP lot, petitioner presented the following documents:

a. Secretarys Certificate showing how the purchase and eventual sale of the MBP lot came
about.

b. Memoranda of Agreement showing various details:

i. That the MBP lot was co-owned by VMC and petitioner on a 50/50 basis;

ii. That VMC held the property in trust for North Legaspi Land Development Corporation,
North Negros Marketing Co., Inc., Victorias Insurance Factors Corporation, Victorias Science
and Technical Foundation, Inc. and Canetown Development Corporation.

iii. That the previous agreement (ii) was cancelled and it showed that the MBP lot was co-
owned by petitioner, VMC and Victorias Insurance Factors Corporation (VFC).[22]
 The CTA ruled that these pieces of evidence are self-serving and cannot by themselves prove petitioners
co-ownership of the MBP lot when the TCT, the Deed of Absolute Sale, and the Monthly Remittance Return of
Income Taxes Withheld (Remittance Return) disclose otherwise. The CTA further ruled that petitioner failed to
present any evidence to prove that the money used to purchase the MBP lot came from the Employees' Trust
Fund.[23]

The CTA concluded that petitioner is estopped from claiming a tax exemption. The CTA pointed out that VMC
has led the government to believe that it is the sole owner of the MBP lot through its execution of the Deeds of
Absolute Sale both during the purchase and subsequent sale of the MBP lot and through the registration of the
MBP lot in VMCs name. Consequently, the tax was also paid in VMCs name alone. The CTA stated that
petitioner may not now claim a refund of a portion of the tax paid by the mere expediency of presenting
Secretarys Certificates and memoranda of agreement in order to prove its ownership. These documents are self-
serving; hence, these documents merit very little weight.[24]

The Ruling of the Court of Appeals

The CA declared that the findings of the CTA involved three types of documentary evidence that petitioner
presented to prove its contention that it purchased 49.59% of the MBP lot with funds from the Employees Trust
Fund: (1) the memoranda of agreement executed by petitioner and other VMC subsidiaries; (2) Secretarys
Certificates containing excerpts of the minutes of meetings conducted by the respective boards of directors or
trustees of VMC and petitioner; (3) Certified True Copies of the Portfolio Mix Analysis issued by Citytrust
regarding the investment of P5,504,748.25 in Madrigal Business Park I for the years 1994 to 1997.[25]

The CA agreed with the CTA that these pieces of documentary evidence submitted by petitioner are largely
self-serving and can be contrived easily. The CA ruled that these documents failed to show that the funds used
to purchase the MBP lot came from the Employees Trust Fund. The CA explained, thus:

We are constrained to echo the findings of the Court of Tax Appeals in regard to the failure of
the petitioner to ensure that legal documents pertaining to its investments, e.g. title to the subject
property, were really in its name, considering its awareness of the resulting tax benefit that such
foresight or providence would produce; hence, genuine efforts towards that end should have been
exerted, this notwithstanding the alleged difficulty of procuring a title under the names of all the
co-owners. Indeed, we are unable to understand why petitioner would allow the title of the
property to be placed solely in the name of petitioner's alleged co-owner, i.e. the VMC, although
it allegedly owned a much bigger (nearly half), portion thereof. Withal, petitioner failed to
ensure a fix so to speak, on its investment, and we are not impressed by the documents which the
petitioner presented, as the same apparently allowed mobility of the subject real estate assets
between or among the petitioner, the VMC and the latter's subsidiaries. Given the fact that the
subject parcel of land was registered and sold under the name solely of VMC, even as payment
of taxes was also made only under its name, we cannot but concur with the finding of the Court
 of Tax Appeals that petitioner's claim for refund of withheld creditable tax is bereft of solid
juridical basis.[26]

The Issues

The issues presented are:

1. Whether petitioner or the Employees Trust Fund is estopped from claiming that the Employees
Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC merely held 49.59% of
the MBP lot in trust for the Employees Trust Fund.

2. If petitioner or the Employees Trust Fund is not estopped, whether they have sufficiently
established that the Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot, and
thus entitled to tax exemption for its share in the proceeds from the sale of the MBP lot.

The Ruling of the Court

We grant the petition.

The law expressly allows a co-owner (first co-owner) of a parcel of land to register his proportionate share in
the name of his co-owner (second co-owner) in whose name the entire land is registered. The second co-owner
serves as a legal trustee of the first co-owner insofar as the proportionate share of the first co-owner is
concerned. The first co-owner remains the owner of his proportionate share and not the second co-owner in
whose name the entire land is registered. Article 1452 of the Civil Code provides:

Art. 1452. If two or more persons agree to purchase a property and by common consent the legal
title is taken in the name of one of them for the benefit of all, a trust is created by force of
law in favor of the others in proportion to the interest of each. (Emphasis supplied)

For Article 1452 to apply, all that a co-owner needs to show is that there is common consent among the
purchasing co-owners to put the legal title to the purchased property in the name of one co-owner for the benefit
of all. Once this common consent is shown, a trust is created by force of law. The BIR has no option but to
recognize such legal trust as well as the beneficial ownership of the real owners because the trust is created by
force of law. The fact that the title is registered solely in the name of one person is not conclusive that he alone
owns the property.
Thus, this case turns on whether petitioner can sufficiently establish that petitioner, as trustee of the Employees
Trust Fund, has a common agreement with VMC and VFC that petitioner, VMC and VFC shall jointly purchase
the MBP lot and put the title to the MBP lot in the name of VMC for the benefit petitioner, VMC and VFC.

We rule that petitioner, as trustee of the Employees Trust Fund, has more than sufficiently established that it has
an agreement with VMC and VFC to purchase jointly the MBP lot and to register the MBP lot solely in the
name of VMC for the benefit of petitioner, VMC and VFC.

Factual findings of the CTA will be reviewed

when judgment is based on a misapprehension of facts.

Generally, the factual findings of the CTA, a special court exercising expertise on the subject of tax, are
regarded as final, binding and conclusive upon this Court, especially if these are substantially similar to the
findings of the CA which is normally the final arbiter of questions of fact. [27] However, there are recognized
exceptions to this rule,[28]such as when the judgment is based on a misapprehension of facts.

Petitioner contends that the CA erred in evaluating the documents as self-serving instead of considering them as
truthful and genuine because they are public documents duly notarized by a Notary Public and presumed to be
regular unless the contrary appears. Petitioner explains that the CA erred in doubting the authenticity and
genuineness of the three memoranda of agreement presented as evidence. Petitioner submits that there is
nothing wrong in the execution of the three memoranda of agreement by the parties.Petitioner points out that
VMC authorized petitioner to administer its Employees Trust Fund which is basically funded by donation from
its founder, Miguel J. Ossorio, with his shares of stocks and share in VMC's profits.[29]

Petitioner argues that the Citytrust report reflecting petitioners investment in the MBP lot is concrete proof that
money of the Employees Trust Funds was used to purchase the MBP lot. In fact, the CIR did not dispute the
authenticity and existence of this documentary evidence. Further, it would be unlikely for Citytrust to issue a
certified copy of the Portfolio Mix Analysis stating that petitioner invested in the MBP lot if it were not true.[30]

Petitioner claims that substantial evidence is all that is required to prove petitioners co-ownership and all the
pieces of evidence have overwhelmingly proved that petitioner is a co-owner of the MBP lot to the extent of
49.59% of the MBP lot. Petitioner explains:
Thus, how the parties became co-owners was shown by the excerpts of the minutes and the
resolutions of the Board of Trustees of the petitioner and those of VMC. All these documents
showed that as far as March 1992, petitioner already expressed intention to be co-owner of the
said property. It then decided to invest the retirement funds to buy the said property and
culminated in it owning 49.59% thereof. When it was sold to Metrobank, petitioner received its
share in the proceeds from the sale thereof. The excerpts and resolutions of the parties' respective
 Board of Directors were certified under oath by their respective Corporate Secretaries at the time.
The corporate certifications are accorded verity by law and accepted as prima facie evidence of
what took place in the board meetings because the corporate secretary is, for the time being, the
board itself.[31]

Petitioner, citing Article 1452 of the Civil Code, claims that even if VMC registered the land solely in its name,
it does not make VMC the absolute owner of the whole property or deprive petitioner of its rights as a co-
owner.[32]Petitioner argues that under the Torrens system, the issuance of a TCT does not create or vest a title
and it has never been recognized as a mode of acquiring ownership.[33]
The issues of whether petitioner or the Employees Trust Fund is estopped from claiming 49.59% ownership in
the MBP lot, whether the documents presented by petitioner are self-serving, and whether petitioner has proven
its exemption from tax, are all questions of fact which could only be resolved after reviewing, examining and
evaluating the probative value of the evidence presented. The CTA ruled that the documents presented by
petitioner cannot prove its co-ownership over the MBP lot especially that the TCT, Deed of Absolute Sale and
the Remittance Return disclosed that VMC is the sole owner and taxpayer.

However, the appellate courts failed to consider the genuineness and due execution of the notarized
Memorandum of Agreement acknowledging petitioners ownership of the MBP lot which provides:

2. The said parcels of land are actually co-owned by the following:

BLOCK 4, LOT 1 COVERED BY TCT NO. 183907

% SQ.M. AMOUNT
MJOPFI 49.59% 450.00 P 5,504,748.25
VMC 32.23% 351.02 3,578,294.70
VFC 18.18% 197.98 2,018,207.30

Thus, there is a common consent or agreement among petitioner, VMC and VFC to co-own the MBP lot in the
proportion specified in the notarized Memorandum of Agreement.

In Cuizon v. Remoto,[34]we held:

Documents acknowledged before notaries public are public documents and public documents are
admissible in evidence without necessity of preliminary proof as to their authenticity and due
execution. They have in their favor the presumption of regularity, and to contradict the same,
there must be evidence that is clear, convincing and more than merely preponderant.
The BIR failed to present any clear and convincing evidence to prove that the notarized Memorandum of
Agreement is fictitious or has no legal effect. Likewise, VMC, the registered owner, did not repudiate
petitioners share in the MBP lot. Further, Citytrust, a reputable banking institution, has prepared a Portfolio Mix
Analysis for the years 1994 to 1997 showing that petitioner invested P5,504,748.25 in the MBP lot. Absent any
proof that the Citytrust bank records have been tampered or falsified, and the BIR has presented none, the
Portfolio Mix Analysis should be given probative value.

The BIR argues that under the Torrens system, a third person dealing with registered property need not go
beyond the TCT and since the registered owner is VMC, petitioner is estopped from claiming ownership of the
MBP lot. This argument is grossly erroneous. The trustor-beneficiary is not estopped from proving its
ownership over the property held in trust by the trustee when the purpose is not to contest the disposition or
encumbrance of the property in favor of an innocent third-party purchaser for value. The BIR, not being a buyer
or claimant to any interest in the MBP lot, has not relied on the face of the title of the MBP lot to acquire any
interest in the lot. There is no basis for the BIR to claim that petitioner is estopped from proving that it co-owns,
as trustee of the Employees Trust Fund, the MBP lot. Article 1452 of the Civil Code recognizes the lawful
ownership of the trustor-beneficiary over the property registered in the name of the trustee. Certainly, the
Torrens system was not established to foreclose a trustor or beneficiary from proving its ownership of a
property titled in the name of another person when the rights of an innocent purchaser or lien-holder are not
involved. More so, when such other person, as in the present case, admits its being a mere trustee of the trustor
or beneficiary.

The registration of a land under the Torrens system does not create or vest title, because registration is not one
of the modes of acquiring ownership. A TCT is merely an evidence of ownership over a particular property and
its issuance in favor of a particular person does not foreclose the possibility that the property may be co-owned
by persons not named in the certificate, or that it may be held in trust for another person by the registered
owner.[35]

No particular words are required for the creation of a trust, it being sufficient that a trust is clearly intended.[36]It
is immaterial whether or not the trustor and the trustee know that the relationship which they intend to create is
called a trust, and whether or not the parties know the precise characteristic of the relationship which is called a
trust because what is important is whether the parties manifested an intention to create the kind of relationship
which in law is known as a trust.[37]

The fact that the TCT, Deed of Absolute Sale and the Remittance Return were in VMCs name does not forestall
the possibility that the property is owned by another entity because Article 1452 of the Civil Code expressly
authorizes a person to purchase a property with his own money and to take conveyance in the name of
another.

In Tigno v. Court of Appeals, the Court explained, thus:

An implied trust arises where a person purchases land with his own money and takes conveyance
thereof in the name of another. In such a case, the property is held on resulting trust in favor of
the one furnishing the consideration for the transfer, unless a different intention or understanding
appears. The trust which results under such circumstances does not arise from a contract or an
agreement of the parties, but from the facts and circumstances; that is to say, the trust results
because of equity and it arises by implication or operation of law. [38]
In this case, the notarized Memorandum of Agreement and the certified true copies of the Portfolio Mix
Analysis prepared by Citytrust clearly prove that petitioner invested P5,504,748.25, using funds of the
Employees' Trust Fund, to purchase the MBP lot. Since the MBP lot was registered in VMCs name only, a
resulting trust is created by operation of law. A resulting trust is based on the equitable doctrine that valuable
consideration and not legal title determines the equitable interest and is presumed to have been contemplated by
the parties.[39] Based on this resulting trust, the Employees Trust Fund is considered the beneficial co-owner of
the MBP lot.

Petitioner has sufficiently proven that it had a common consent or agreement with VMC and VFC to jointly
purchase the MBP lot. The absence of petitioners name in the TCT does not prevent petitioner from claiming
before the BIR that the Employees Trust Fund is the beneficial owner of 49.59% of the MBP lot and that VMC
merely holds 49.59% of the MBP lot in trust, through petitioner, for the benefit of the Employees Trust Fund.

The BIR has acknowledged that the owner of a land can validly place the title to the land in the name of another
person. In BIR Ruling [DA-(I-012) 190-09] dated 16 April 2009, a certain Amelia Segarra purchased a parcel of
land and registered it in the names of Armin Segarra and Amelito Segarra as trustees on the condition that upon
demand by Amelia Segarra, the trustees would transfer the land in favor of their sister, Arleen May Segarra-
Guevara. The BIR ruled that an implied trust is deemed created by law and the transfer of the land to the
beneficiary is not subject to capital gains tax or creditable withholding tax.
Income from Employees Trust Fund is Exempt from Income Tax

Petitioner claims that the Employees Trust Fund is exempt from the payment of income tax. Petitioner further
claims that as trustee, it acts for the Employees Trust Fund, and can file the claim for refund. As trustee,
petitioner considers itself as the entity that is entitled to file a claim for refund of taxes erroneously paid in the
sale of the MBP lot.[40]
The Office of the Solicitor General argues that the cardinal rule in taxation is that tax exemptions are highly
disfavored and whoever claims a tax exemption must justify his right by the clearest grant of law. Tax
exemption cannot arise by implication and any doubt whether the exemption exists is strictly construed against
the taxpayer.[41]Further, the findings of the CTA, which were affirmed by the CA, should be given respect and
weight in the absence of abuse or improvident exercise of authority.[42]
Section 53(b) and now Section 60(b) of the Tax Code provides:

SEC. 60. Imposition of Tax. -

(A) Application of Tax. - x x x

(B) Exception. - The tax imposed by this Title shall not apply to employees trust which forms
part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all
of his employees (1) if contributions are made to the trust by such employer, or employees, or
both for the purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan, and (2) if under the trust instrument it is
impossible, at any time prior to the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used
for, or diverted to, purposes other than for the exclusive benefit of his employees: Provided, That
any amount actually distributed to any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount contributed by such employee or
distributee.

Petitioners Articles of Incorporation state the purpose for which the corporation was formed:

Primary Purpose
To hold legal title to, control, invest and administer in the manner provided, pursuant to
applicable rules and conditions as established, and in the interest and for the benefit of its
beneficiaries and/or participants, the private pension plan as established for certain
employees of Victorias Milling Company, Inc., and other pension plans of Victorias Milling
Company affiliates and/or subsidiaries, the pension funds and assets, as well as accruals,
additions and increments thereto, and such amounts as may be set aside or accumulated for the
benefit of the participants of said pension plans; and in furtherance of the foregoing and as may
be incidental thereto.[43](Emphasis supplied)

Petitioner is a corporation that was formed to administer the Employees' Trust Fund. Petitioner
invested P5,504,748.25 of the funds of the Employees' Trust Fund to purchase the MBP lot. When the MBP lot
was sold, the gross income of the Employees Trust Fund from the sale of the MBP lot was P40,500,000. The
7.5% withholding tax of P3,037,500 and brokers commission were deducted from the proceeds.
In Commissioner of Internal Revenue v. Court of Appeals,[44] the Court explained the rationale for the tax-
exemption privilege of income derived from employees trusts:

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution of accumulated income and
 reduce whatever the trust beneficiaries would receive out of the trust fund. This would run afoul
of the very intendment of the law.

In Miguel J. Ossorio Pension Foundation, Inc. v. Commissioner of Internal Revenue,[45]the CTA held that
petitioner is entitled to a refund of withholding taxes paid on interest income from direct loans made by the
Employees' Trust Fund since such interest income is exempt from tax. The CTA, in recognizing petitioners
entitlement for tax exemption, explained:

In or about 1968, Victorias Milling Co., Inc. established a retirement or pension plan for its
employees and those of its subsidiary companies pursuant to a 22-page plan. Pursuant to said
pension plan, Victorias Milling Co., Inc. makes a (sic) regular financial contributions to the
employee trust for the purpose of distributing or paying to said employees, the earnings and
principal of the funds accumulated by the trust in accordance with said plan. Under the plan, it is
imposable, at any time prior to the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be used for, or diverted to, purposes other than
for the exclusive benefit of said employees. Moreover, upon the termination of the plan, any
remaining assets will be applied for the benefit of all employees and their beneficiaries entitled
thereto in proportion to the amount allocated for their respective benefits as provided in said
plan.

The petitioner and Victorias Milling Co., Inc., on January 22, 1970, entered into a Memorandum
of Understanding, whereby they agreed that petitioner would administer the pension plan funds
and assets, as assigned and transferred to it in trust, as well as all amounts that may from time to
time be set aside by Victorias Milling Co., Inc. For the benefit of the Pension Plan, said
administration is to be strictly adhered to pursuant to the rules and regulations of the Pension
Plan and of the Articles of Incorporation and By Laws of petitioner.

The pension plan was thereafter submitted to the Bureau of Internal Revenue for registration and
for a ruling as to whether its income or earnings are exempt from income tax pursuant to Rep.
Act 4917, in relation to Sec. 56(b), now Sec. 54(b), of the Tax Code.

In a letter dated January 18, 1974 addressed to Victorias Milling Co., Inc., the Bureau of Internal
Revenue ruled that the income of the trust fund of your retirement benefit plan is exempt from
income tax, pursuant to Rep. Act 4917 in relation to Section 56(b) of the Tax Code.
In accordance with petitioners Articles of Incorporation (Annex A), petitioner would hold legal
title to, control, invest and administer, in the manner provided, pursuant to applicable rules
and conditions as established, and in the interest and for the benefit of its beneficiaries and/or
participants, the private pension plan as established for certain employees of Victorias Milling
Co., Inc. and other pension plans of Victorias Milling Co. affiliates and/or subsidiaries, the
pension funds and assets, as well as the accruals, additions and increments thereto, and such
amounts as may be set aside or accumulated of said pension plans. Moreover, pursuant to the
same Articles of Incorporations, petitioner is empowered to settle, compromise or submit to
arbitration, any claims, debts or damages due or owing to or from pension funds and assets
and other funds and assets of the corporation, to commence or defend suits or legal
proceedings and to represent said funds and assets in all suits or legal proceedings.

Petitioner, through its investment manager, the City Trust Banking Corporation, has
invested the funds of the employee trust in treasury bills, Central Bank bills, direct lending,
etc. so as to generate income or earnings for the benefit of the employees-beneficiaries of
 the pension plan. Prior to the effectivity of Presidential Decree No. 1959 on October 15, 1984,
respondent did not subject said income or earning of the employee trust to income tax because
they were exempt from income tax pursuant to Sec. 56(b), now Sec. 54(b) of the Tax Code and
the BIR Ruling dated January 18, 1984 (Annex D). (Boldfacing supplied; italicization in the
original)

xxx

It asserted that the pension plan in question was previously submitted to the Bureau of Internal
Revenue for a ruling as to whether the income or earnings of the retirement funds of said plan are
exempt from income tax and in a letter dated January 18,1984, the Bureau ruled that the
earnings of the trust funds of the pension plan are exempt from income tax under Sec.
56(b) of the Tax Code. (Emphasis supplied)

A close review of the provisions of the plan and trust instrument disclose that in
reality the corpus and income of the trust fund are not at no time used for, or
diverted to, any purpose other than for the exclusive benefit of the plan
beneficiaries. This fact was likewise confirmed after verification of the plan
operations by the Revenue District No. 63 of the Revenue Region No. 14,
Bacolod City. Section X also confirms this fact by providing that if any assets
remain after satisfaction of the requirements of all the above clauses, such
remaining assets will be applied for the benefits of all persons included in such
classes in proportion to the amounts allocated for their respective benefits
pursuant to the foregoing priorities.

In view of all the foregoing, this Office is of the opinion, as it hereby holds, that
the income of the trust fund of your retirement benefit plan is exempt from
income tax pursuant to Republic Act 4917 in relation to Section 56(b) of the Tax
Code. (Annex D of Petition)

This CTA decision, which was affirmed by the CA in a decision dated 20 January 1993, became final and
executory on 3 August 1993.

The tax-exempt character of petitioners Employees' Trust Fund is not at issue in this case. The tax-exempt
character of the Employees' Trust Fund has long been settled. It is also settled that petitioner exists for the
purpose of holding title to, and administering, the tax-exempt Employees Trust Fund established for the benefit
of VMCs employees. As such, petitioner has the personality to claim tax refunds due the Employees' Trust
Fund.

In Citytrust Banking Corporation as Trustee and Investment Manager of Various Retirement Funds v.
Commissioner of Internal Revenue,[46] the CTA granted Citytrusts claim for refund on withholding taxes paid on
the investments made by Citytrust in behalf of the trust funds it manages, including petitioner.[47] Thus:

In resolving the second issue, we note that the same is not a case of first impression. Indeed, the
petitioner is correct in its adherence to the clear ruling laid by the Supreme Court way back in
 1992 in the case of Commissioner of Internal Revenue vs. The Honorable Court of Appeals, The
Court of Tax Appeals and GCL Retirement Plan, 207 SCRA 487 at page 496, supra, wherein it
was succinctly held:

xxx

There can be no denying either that the final withholding tax is collected from
income in respect of which employees trusts are declared exempt (Sec. 56(b), now
53(b), Tax Code). The application of the withholdings system to interest on bank
deposits or yield from deposit substitutes is essentially to maximize and expedite
the collection of income taxes by requiring its payment at the source. If an
employees trust like the GCL enjoys a tax-exempt status from income, we see no
logic in withholding a certain percentage of that income which it is not supposed
to pay in the first place.

xxx

Similarly, the income of the trust funds involved herein is exempt from the payment of final
withholding taxes.

This CTA decision became final and executory when the CIR failed to file a Petition for Review within the
extension granted by the CA.

Similarly, in BIR Ruling [UN-450-95], Citytrust wrote the BIR to request for a ruling exempting it from the
payment of withholding tax on the sale of the land by various BIR-approved trustees and tax-exempt private
employees' retirement benefit trust funds[48]represented by Citytrust. The BIR ruled that the private employees
benefit trust funds, which included petitioner, have met the requirements of the law and the regulations and
therefore qualify as reasonable retirement benefit plans within the contemplation of Republic Act No. 4917
(now Sec. 28(b)(7)(A), Tax Code). The income from the trust fund investments is therefore exempt from the
payment of income tax and consequently from the payment of the creditable withholding tax on the sale of their
real property.[49]
Thus, the documents issued and certified by Citytrust showing that money from the Employees Trust Fund was
invested in the MBP lot cannot simply be brushed aside by the BIR as self-serving, in the light of previous cases
holding that Citytrust was indeed handling the money of the Employees Trust Fund. These documents, together
with the notarized Memorandum of Agreement, clearly establish that petitioner, on behalf of the Employees
Trust Fund, indeed invested in the purchase of the MBP lot. Thus, the Employees' Trust Fund owns 49.59% of
the MBP lot.

Since petitioner has proven that the income from the sale of the MBP lot came from an investment by the
Employees' Trust Fund, petitioner, as trustee of the Employees Trust Fund, is entitled to claim the tax refund
of P3,037,500 which was erroneously paid in the sale of the MBP lot.
WHEREFORE, we GRANT the petition and SET ASIDE the Decision of 30 May 2003 of the Court of
Appeals in CA-G.R. SP No. 61829. Respondent Commissioner of Internal Revenue is directed to refund
petitioner Miguel J. Ossorio Pension Foundation, Incorporated, as trustee of the Employees Trust Fund, the
amount of P3,037,500, representing income tax erroneously paid.

SO ORDERED.

G.R. No. 141212 June 22, 2006

BENGUET CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

CORONA, J.:

Before us is a petition for review on certiorari1 assailing the September 27, 1999 decision2 and
December 20, 1999 resolution3 of the Court of Appeals (CA) in CA-G.R. SP No. 42575 which affirmed
the July 26, 1996 decision of the Court of Tax Appeals (CTA) in CTA Case No. 4795. 4

Petitioner Benguet Corporation is a domestic corporation duly organized and existing under Philippine
laws. On January 16, 1992, it received from respondent Commissioner of Internal Revenue 5 a letter
dated January 10, 1992 demanding payment of P6,188,672.50, as unremitted withholding taxes on
compensation of petitioner’s executives for specified months from 1988 to 1991, 6 excluding penalties
for late payment.7

In said letter, respondent stated that all the payment orders (POs) and confirmation receipts (CRs)
reflected in petitioner’s annual return submitted to respondent’s Accounting Division were found to be
fake, that is, not issued by the Bureau of Internal Revenue (BIR).8

In a letter dated January 24, 1992 filed on the same date with the BIR, petitioner protested the
assessment by stating that it had promptly remitted its withholding taxes within their due
dates.9 Without answering petitioner’s protest, the BIR Collection Service issued and served a
warrant of distraint and/or levy to enforce collection of the assessment in the increased amount
of P10,314,579.51, this time including penalties for late payment and a warrant of garnishment of the
proceeds of the sale of petitioner’s gold bars to the Central Bank10 and its deposits at the Metropolitan
Bank and Trust Company (MBTC).11 Petitioner subsequently filed a written request for the lifting of
the warrants and posted a surety bond for P10,500,000 to guarantee payment of the assessment.
Consequently, the warrants were lifted.12

Respondent informed petitioner in a letter dated April 3, 1992 that the demand letter previously sent
was considered final and unappealable.13 Thus, on April 23, 1992, petitioner filed a "petition for
review with urgent petition for issuance of injunction to restrain tax collection pending appeal" before
the CTA.14 The CTA granted petitioner’s request for the issuance of injunction.15

Petitioner alleged that it was not delinquent in the payment of the withholding taxes on the
compensation of its executives, as in fact the same had been duly remitted to the BIR through its
confidential payroll agent, L.C. Diaz and Company.16 The latter remitted the withholding taxes through
25 MBTC manager’s checks totaling P6,188,673.21.17 It stressed that these payments were
evidenced by official POs and CRs issued by the BIR’s authorized employees and agent banks. 18 The
amounts covered by the MBTC checks were admittedly paid to the BIR for the account of petitioner
and credited to the account of the BIR and/or the national treasury. 19

Respondent, on the other hand, aside from asserting that the POs and CRs reflected in petitioner’s
annual return were spurious, argued that the checks issued by petitioner for the payment of the
withholding taxes on compensation were actually used for the purchase of loose documentary stamps
by various taxpayers other than the petitioner as discovered by respondent’s Special Projects
Team.20

In a decision dated July 26, 1996, the CTA dismissed the petition and ordered petitioner to pay
respondent the total amount of P10,314,579.50.21 The CA affirmed the decision of the CTA.22

Both the CTA and CA ruled that there were no valid remittances of the withholding taxes. They found
that, although the POs and CRs presented by petitioner were genuine, 23 the best evidence of
payment were the checks remitted by petitioner through L.C. Diaz and Company. The dorsal side of
these checks contained handwritten notes that they were used by different individuals and entities to
purchase documentary stamps.24 These notes were supported by the reports prepared by the BIR’s
Special Projects Team.

This petition25 centers on one main issue: were there valid remittances to respondent by petitioner of
its withholding taxes during the specified period? Stated otherwise, the question is what should be
considered as the best evidence of payment (or non-payment) of the withholding taxes: the POs and
CRs which indicated that payment was made as insisted by petitioner, or the dorsal notes on the
checks and reports of the BIR team that no such payments were made (as ruled by the CTA and
CA)?

In finding for respondent, the CA stated:

A careful scrutiny of the MBTC checks x x x revealed that they were not used to pay withholding
taxes but were used to purchase documentary stamps from the BIR, for on the dorsal side of the
subject checks [are] the handwritten notes that they were used to pay documentary stamps x x x, the
corroborating findings or written reports submitted by Manuel J. Seijo, Revenue Collection Agent, and
the report dated February 16, 1994 submitted by Mrs. Rosario Beltran.

The foregoing reports [gathered] by Mr. Leogardio Tenorio, Assistant Chief of the Collection
Performance and Audit Division of the BIR [and] one of the members of the Special Projects Team
that conducted the investigation in the instant case, in addition to the annotations appearing on the
dorsal sides of the checks, substantially established the fact that said checks were used in the
purchase of documentary [stamps] and not in payment of petitioner’s unremitted withholding taxes on
compensation of its employees.

…[Petitioner] never offered any explanation on how and why these things happened to its checks.
Indeed, as borne out by the BIR Records, the MBTC checks of petitioner were actually remitted to the
respondent’s office but they were not remitted as payment for the subject withholding taxes, but as
payment by different taxpayers for loose documentary stamps of different denominations. L.C. Diaz
and Co. is the best party to shed light on this, as it was such company which was authorized by
[petitioner] to handle the latter’s remittances of withholding taxes to the BIR.

xxx xxx xxx

It cannot be denied that when petitioner entrusted to L.C. Diaz the remittance of said taxes to the BIR,
the former is expected to exercise due diligence [and] extra vigilance in the handling of such
remittances. The negligence of the agent is imputable to the principal. Evidently, the latter failed to do
so. Petitioner therefore, should be held responsible for such omission or negligence. The alleged
remittances cannot be considered as valid payments for the unremitted withholding taxes.26

The CTA’s findings of fact, affirmed in toto by the CA, were informative:

x x x [The] POs were later on verified by respondent’s Special Projects Team as to have been used
by different taxpayers for the purchase of documentary stamps. x x x [The] CRs were subsequently
issued to different taxpayers other than the [petitioner] for various payments of documentary stamps.
These facts were also verified by respondent’s Special Projects Team.

xxx xxx xxx

When checks are used for payments in settling obligations, the best evidence are the checks
themselves. x x x [Considering] that the POs and CRs of petitioner, although seemingly genuine, do
not appear in respondent’s files/records,27 the best evidence in proving petitioner’s alleged payments
are the MBTC checks x x x. A careful scrutiny of these checks, however, revealed that they were not
used to pay withholding taxes. The checks themselves confirm respondent’s Special Projects Team’s
findings that they were used to purchase documentary stamps from the BIR. For on the dorsal
sides of the subject checks [are] handwritten notes that they were used to pay documentary stamps.
As to how many pieces of documentary stamps were purchased for each denominations of P5.00
or P3.00, and even their respective serial numbers were also indicated at the back of each check.

xxx xxx xxx

That petitioner’s MBTC checks, Exhibits "A" to "A-24" are undeniably clear proofs of payments of
documentary stamps, is corroborated by findings or written reports submitted by the Special Projects
Team. x x x [The] report of Mr. Manuel J. Bello, Revenue Collection Agent, stating, among others that
the following MBTC checks x x x were all personally handed to him by Mrs. Maria Bulaclac O. Aniel,
District Collection Supervisor, RDO No. 33 x x x as payment for documentary stamps tax.

Another corroborating evidence, proving that the MBTC checks of petitioner were used to purchase
loose documentary stamps, was the report, dated February 16, 1994, submitted by Mrs. Rosario
Beltran x x x stating that the following checks were presented to her as payments for loose
documentary stamps by the representative of L.C. Diaz and Co. named "CANTRE" or "CASTRE" on
different dates x x x.

x x x The reports were gathered by Mr. Leodegario Tenorio, Assistant Chief of the Collection
Performance and Audit Division of the BIR, who was also one of the members of the Special Projects
Team that conducted the investigation of the instant case. Mr. Tenorio was presented as witness for
the respondent. And in the hearing of May 19, 1994, he testified that in the course of his investigation,
he discovered that "the checks which were used for payment of withholding taxes and wages of
[petitioner] were not really used and submitted as payment for withholding taxes and wages. The
same [checks were] used in payment of documentary stamps of different denomination."

xxx xxx xxx

Petitioner presented the Payroll Head of L.C. Diaz, who testified that x x x petitioner’s manager’s
checks are handed to their messenger. The latter, in turn, presents the form and the check to the
collecting agent of the B.I.R. and later to the authorized bank. The messenger of L.C. Diaz was not
presented to testify on this matter, or at least to rebut the reports of respondent’s collecting agents
that he or she presented the manager’s checks of petitioner for the purchase by other taxpayers of
loose documentary stamps.

Therefore, even if respondent also admitted that the checks were for the account of petitioner, said
checks entered the coffers of the government not as [petitioner’s] payments for withholding taxes, but
as somebody else’s payments for loose documentary stamps. No evidence was adduced as to how
and why this happened.28

Petitioner contends that no witness ever identified the notes on the checks nor testified as to their
veracity; therefore they were hearsay evidence with no probative value. 29 It avers that whatever
anomaly occurred with the checks happened while they were already in the possession of the BIR or
its agent banks.30 It also denounces the BIR reports as hearsay.31

There is no merit in the petition.

Under our tax system, the CTA acts as a highly specialized body specifically created for the purpose
of reviewing tax cases.32 Accordingly, its findings of fact are generally regarded as final, binding and
conclusive on this Court, especially if these are substantially similar to the findings of the CA which is
normally the final arbiter of questions of fact.33 Thus, such findings will not ordinarily be reviewed nor
disturbed on appeal when supported by substantial evidence and in the absence of gross error or
abuse on its part.34

By arguing that the POs and CRs should be believed over the BIR reports and the annotations at the
back of the checks, petitioner is actually raising before us questions of fact. This is not allowed. A
question of fact involves an examination of the probative value of the evidence presented. It exists
when doubt arises as to the truth or falsehood of alleged facts. 35

It bears emphasis that questions on whether certain items of evidence should be accorded probative
value or weight, or rejected as feeble or spurious, or whether the proofs on one side or the other are
clear and convincing and adequate to establish a proposition in issue, are without doubt questions of
fact. This is true regardless of whether the body of proofs presented by a party, weighed and
analyzed in relation to contrary evidence submitted by the adverse party, may be said to be strong,
clear and convincing. Whether certain documents presented by one side should be accorded full faith
and credit in the face of protests as to their spurious character by the other side; whether
inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said
proofs weight — all these are issues of fact. Questions like these are not reviewable by us. As a rule,
we confine our review of cases decided by the CA only to questions of law raised in the petition and
therein distinctly set forth.36

The CTA and CA gave credence to the annotations and reports and, these being questions of fact,
we hold that their findings are conclusive. This Court is not mandated to examine and appreciate
anew any evidence already presented below. Petitioner has not advanced strong reasons why we
should delve into the facts. The findings of the CTA, as affirmed by the CA, are supported by
substantial evidence.

Petitioner, as a withholding agent, is burdened by law with a public duty to collect the tax for the
government. However, its payroll agent, L.C. Diaz and Company, failed to remit to the BIR the
withholding taxes on compensation. Hence, no valid payment of the withholding taxes was actually
made by petitioner. Codal provisions on withholding tax are mandatory and must be complied with by
the withholding agent.37 It follows that petitioner is liable to pay the disputed assessment.
WHEREFORE, the petition is hereby DENIED.

Costs against petitioner.

SO ORDERED.