TAXATION CASES |1
1. ABS CBN vs. Court of Tax Appeals
G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE,
respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Tax Appeals
in C.T.A. Case No. 2809, dated November 29, 1979, which affirmed the assessment
by the Commissioner of Internal Revenue, dated April 16, 1971, of a deficiency
withholding income tax against petitioner, ABS-CBN Broadcasting Corporation, for the
years 1965, 1966, 1967 and 1968 in the respective amounts of P75,895.24,
P99,239.18, P128,502.00 and P222, 260.64, or a total of P525,897.06.
During the period pertinent to this case, petitioner corporation was engaged in the
business of telecasting local as well as foreign films acquired from foreign
corporations not engaged in trade or business within the Philippines. for which
petitioner paid rentals after withholding income tax of 30%of one-half of the film
rentals.
In so far as the income tax on non-resident corporations is concerned, section 24 (b)
of the National Internal Revenue Code, as amended by Republic Act No. 2343 dated
June 20, 1959, used to provide:
(b) Tax on foreign corporations.—(1) Non-resident corporations.— There shall be
levied, collected, and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from an sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical gains, profits, and income, a tax equal to thirty per centum of such
amount. (Emphasis supplied)
On April 12, 1961, in implementation of the aforequoted provision, the Commissioner
of Internal Revenue issued General Circular No. V-334 reading thus:
In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic
Act No. 2343, under which an income tax equal to 30% is levied upon the amount
received by every foreign corporation not engaged in trade or business within the
Philippines from all sources within this country as interest, dividends, rents, salaries,
wages, premiums, annuities, compensations, remunerations, emoluments, or other
fixed or determinable annual or periodical gains, profits, and income, it has been
determined that the tax is still imposed on income derived from capital, or labor, or
both combined, in accordance with the basic principle of income taxation (Sec. 39,
Income Tax Regulations), and that a mere return of capital or investment is not
income (Par. 5,06, 1 Mertens Law of Federal 'Taxation). Since according to the findings
of the Special Team who inquired into business of the non-resident foreign film
distributors, the distribution or exhibition right on a film is invariably acquired for a
consideration, either for a lump sum or a percentage of the film rentals, whether from
a parent company or an independent outside producer, apart of the receipts of a non-
resident foreign film distributor derived from said film represents, therefore, a return
of investment.
xxx xxx xxx
4. The local distributor should withhold 30% of one-half of the film rentals paid to the
non-resident foreign film distributor and pay the same to this office in accordance
with law unless the non- resident foreign film distributor makes a prior settlement of
its income tax liability. (Emphasis ours).
Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau
of Internal Revenue the amount of 30% of one-half of the film rentals paid by it to
foreign corporations not engaged in trade or business within the Philippines. The last
year that petitioner withheld taxes pursuant to the foregoing Circular was in 1968.
On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code
increasing the tax rate from 30 % to 35 % and revising the tax basis from "such
amount" referring to rents, etc. to "gross income," as follows:
(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign
corporation not engaged in trade or business in the Philippines including a foreign life
insurance company not engaged in the life insurance business in the Philippines shall
pay a tax equal to thirty-five per cent of the gross income received during each taxable
year from all sources within the Philippines, as interests, dividends, rents, royalties,
salaries, wages, premiums, annuities, compensations, remunerations for technical
services or otherwise, emoluments or other fixed or determinable annual, periodical
or casual gains, profits, and income, and capital gains, Provided however, That
premiums shah not include reinsurance premiums. (Emphasis supplied)
On February 8, 1971, the Commissioner of Internal Revenue issued Revenue
Memorandum Circular No. 4-71, revoking General Circular No. V-334, and holding
that the latter was "erroneous for lack of legal basis," because "the tax therein
prescribed should be based on gross income without deduction whatever," thus:
After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code,
as amended by Republic Act No. 5431, and guided by the interpretation given by tax
authorities to a similar provision in the Internal Revenue Code of the United States,

on which the aforementioned provision of our Tax Code was patterned, this Office
has come to the conclusion that the tax therein prescribed should be based on gross
income without t deduction whatever. Consequently, the ruling in General Circular
No. V-334, dated April 12, 1961, allowing the deduction of the proportionate cost of
production or exhibition of motion picture films from the rental income of non-
resident foreign corporations, is erroneous for lack of legal basis.
In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked
and henceforth, local films distributors and exhibitors shall deduct and withhold 35%
of the entire amount payable by them to non-resident foreign corporations, as film
rental or royalty, or whatever such payment may be denominated, without any
deduction whatever, pursuant to Section 24 (b), and pay the withheld taxes in
accordance with Section 54 of the Tax Code, as amended.
All rulings inconsistent with this Circular is likewise revoked. (Emphasis ours)
On the basis of this new Circular, respondent Commissioner of Internal Revenue
issued against petitioner a letter of assessment and demand dated April 15, 1971, but
allegedly released by it and received by petitioner on April 12, 1971, requiring them
to pay deficiency withholding income tax on the remitted film rentals for the years
1965 through 1968 and film royalty as of the end of 1968 in the total amount of
P525,897.06 computed as follows:
On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the
assessment. However, without acting thereon, respondent, on April 6, 1976, issued a
warrant of distraint and levy over petitioner's personal as well as real properties. The
petitioner then filed its Petition for Review with the Court of Tax Appeals whose
Decision, dated November 29, 1979, is, in turn, the subject of this review. The Tax
Court held:
For the reasons given, the Court finds the assessment issued by respondent on April
16, 1971 against petitioner in the amounts of P75,895.24, P 99,239.18, P128,502.00
and P222,260.64 or a total of P525,897.06 as deficiency withholding income tax for
the years 1965, 1966, 1967 and 1968, respectively, in accordance with law. As prayed
for, the petition for review filed in this case is dismissed, and petitioner ABS-CBN
Broadcasting Corporation is hereby ordered to pay the sum of P525,897.06 to
respondent Commissioner of Internal Revenue as deficiency withholding income tax
for the taxable years 1965 thru 1968, plus the surcharge and interest which have
accrued thereon incident to delinquency pursuant to Section 51 (e) of the National
Internal Revenue Code, as amended.
WHEREFORE, the decision appealed from is hereby affirmed at petitioner's cost.
SO ORDERED. 2
TAXATION CASES |2
The issues raised are two-fold:
I. Whether or not respondent can apply General Circular No. 4-71 retroactively and
issue a deficiency assessment against petitioner in the amount of P 525,897.06 as
deficiency withholding income tax for the years 1965, 1966, 1967 and 1968.
II. Whether or not the right of the Commissioner of Internal Revenue to assess the
deficiency withholding income tax for the year 196,5 has prescribed. 3
Upon the facts and circumstances of the case, review is warranted.
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No.
6110 on August 9, 1969, it provides:
Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or reversal
of and of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner of Internal
Revenue shall not be given retroactive application if the relocation, modification, or
reversal will be prejudicial to the taxpayers, except in the following cases: (a) where
the taxpayer deliberately mis-states or omits material facts from his return or 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. (italics for emphasis)
It is clear from the foregoing that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive application where to so apply
them would be prejudicial to taxpayers. The prejudice to petitioner of the retroactive
application of Memorandum Circular No. 4-71 is beyond question. It was issued only
in 1971, or three years after 1968, the last year that petitioner had withheld taxes
under General Circular No. V-334. The assessment and demand on petitioner to pay
deficiency withholding income tax was also made three years after 1968 for a period
of time commencing in 1965. Petitioner was no longer in a position to withhold taxes
due from foreign corporations because it had already remitted all film rentals and no
longer had any control over them when the new Circular was issued. And in so far as
the enumerated exceptions are concerned, admittedly, petitioner does not fall under
any of them.
Respondent claims, however, that the provision on non-retroactivity is inapplicable in
the present case in that General Circular No. V-334 is a nullity because in effect, it
changed the law on the matter. The Court of Tax Appeals sustained this position
holding that: "Deductions are wholly and exclusively within the power of Congress or
the law-making body to grant, condition or deny; and where the statute imposes a
tax equal to a specified rate or percentage of the gross or entire amount received by
the taxpayer, the authority of some administrative officials to modify or change, much
less reduce, the basis or measure of the tax should not be read into law." 4 Therefore,

the Tax Court concluded, petitioner did not acquire any vested right thereunder as
the same was a nullity.
The rationale behind General Circular No. V-334 was clearly stated therein, however:
"It ha(d) been determined that the tax is still imposed on income derived from capital,
or labor, or both combined, in accordance with the basic principle of income taxation
...and that a mere return of capital or investment is not income ... ." "A part of the
receipts of a non-resident foreign film distributor derived from said film represents,
therefore, a return of investment." The Circular thus fixed the return of capital at 50%
to simplify the administrative chore of determining the portion of the rentals covering
the return of capital." 5
Were the "gross income" base clear from Sec. 24 (b), perhaps, the ratiocination of the
Tax Court could be upheld. It should be noted, however, that said Section was not too
plain and simple to understand. The fact that the issuance of the General Circular in
question was rendered necessary leads to no other conclusion than that it was not
easy of comprehension and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of
General Circular No. V-334, was just one in a series of enactments regarding Sec. 24
(b) of the Tax Code. Republic Act No. 3825 came next on June 22, 1963 without
changing the basis but merely adding a proviso (in bold letters).
(b) Tax on foreign corporation.—(1) Non-resident corporations. — There shall be
levied, collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical gains, profits, and income, a tax equal to thirty per centum of such
amount: PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE
PREMIUMS. (double emphasis ours).
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the
proviso and inserting some words (also in bold letters).
(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be
levied, collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph, upon the amount received by every foreign corporation not
engaged in trade or business within the Philippines, from all sources within the
Philippines, as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or determinable annual
or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal
to thirty per centum of such amount. 6 (double emphasis supplied)
TAXATION CASES |3
The principle of legislative approval of administrative interpretation by re-enactment
clearly obtains in this case. It provides that "the re-enactment of a statute
substantially unchanged is persuasive indication of the adoption by Congress of a
prior executive construction. 7 Note should be taken of the fact that this case involves
not a mere opinion of the Commissioner or ruling rendered on a mere query, but a
Circular formally issued to "all internal revenue officials" by the then Commissioner of
Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the
basis of Revenue Memorandum Circular No. 4-71, that Sec. 24 (b) was amended to
refer specifically to 35% of the "gross income."
This Court is not unaware of the well-entrenched principle that the Government is
never estopped from collecting taxes because of mistakes or errors on the part of its
agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like other
principles of law, this also admits of exceptions in the interest of justice and fairplay.
The insertion of Sec. 338-A into the National Internal Revenue Code, as held in the
case of Tuason, Jr. vs. Lingad, 10 is indicative of legislative intention to support the
principle of good faith. In fact, in the United States, from where Sec. 24 (b) was
patterned, it has been held that the Commissioner of Collector is precluded from
adopting a position inconsistent with one previously taken where injustice would
result therefrom, 11 or where there has been a misrepresentation to the taxpayer. 12
We have also noted that in its Decision, the Court of Tax Appeals further required the
petitioner to pay interest and surcharge as provided for in Sec. 51 (e) of the Tax Code
in addition to the deficiency withholding tax of P 525,897.06. This additional
requirement is much less called for because the petitioner relied in good faith and
religiously complied with no less than a Circular issued "to all internal revenue
officials" by the highest official of the Bureau of Internal Revenue and approved by
the then Secretary of Finance. 13
With the foregoing conclusions arrived at, resolution of the issue of prescription
becomes unnecessary.
WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and the
questioned assessment set aside. No costs.
SO ORDERED.

2. CIR vs. Proctor and Gamble
G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT
OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending
30 June 1975, private respondent Procter and Gamble Philippine Manufacturing
Corporation ("P&G-Phil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the
thirty-five percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner
of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26
claiming, among other things, that pursuant to Section 24 (b) (1) of the National
Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the
applicable rate of withholding tax on the dividends remitted was only fifteen percent
(15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13
July 1977, filed a petition for review with public respondent Court of Tax Appeals
("CTA") docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a
decision ordering petitioner Commissioner to refund or grant the tax credit in the
amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the
decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the
refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows
a credit against the US tax due from P&G-USA of taxes deemed to have been paid in
the Philippines equivalent to twenty percent (20%) which represents the difference
TAXATION CASES |4
between the regular tax of thirty-five percent (35%) on corporations and the tax of
fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order
that "the dividends received by its non-resident parent company in the US (P&G-USA)
may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we
will deal with them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil.
to bring the present claim for refund or tax credit, which need to be examined. This
question was raised for the first time on appeal, i.e., in the proceedings before this
Court on the Petition for Review filed by the Commissioner of Internal Revenue. The
question was not raised by the Commissioner on the administrative level, and neither
was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to
defeat an otherwise valid claim for refund by raising this question of alleged incapacity
for the first time on appeal before this Court. This is clearly a matter of procedure.
Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund,
is likely to run away, as it were, with the refund instead of transmitting such refund
or tax credit to its parent and sole stockholder. It is commonplace that in the absence
of explicit statutory provisions to the contrary, the government must follow the same
rules of procedure which bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of Circular No. 1-88 of this Court
in exactly the same way that private litigants are held to such compliance, save only
in respect of the matter of filing fees from which the Republic of the Philippines is
exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any
other litigant, be allowed to raise for the first time on appeal questions which had not
been litigated either in the lower court or on the administrative level. For, if petitioner
had at the earliest possible opportunity, i.e., at the administrative level, demanded
that P&G-Phil. produce an express authorization from its parent corporation to bring
the claim for refund, then P&G-Phil. would have been able forthwith to secure and
produce such authorization before filing the action in the instant case. The action here
was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately relate to
fairness.

Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for recovery
of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner of Internal Revenue; but such suit
or proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress. In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment of the tax or penalty
regardless of any supervening cause that may arise after payment: . . . (Emphasis
supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.—
The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of
taxes or penalties shall be allowed unless the taxpayer files in writing with the
Commissioner a claim for credit or refund within two (2) years after the payment of
the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-
Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term "taxpayer" is defined
in our NIRC as referring to "any person subject to tax imposed by the Title [on Tax on
Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC,
the withholding agent who is "required to deduct and withhold any tax" is made "
personally liable for such tax" and indeed is indemnified against any claims and
demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and independently liable 3 for the
correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments,
surcharges and penalties should the amount of the tax withheld be finally found to be
less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible,
to consider a person who is statutorily made "liable for tax" as not "subject to tax." By
TAXATION CASES |5
any reasonable standard, such a person should be regarded as a party in interest, or
as a person having sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this
Court pointed out that a withholding agent is in fact the agent both of the government
and of the taxpayer, and that the withholding agent is not an ordinary government
agent:
The law sets no condition for the personal liability of the withholding agent to attach.
The reason is to compel the withholding agent to withhold the tax under all
circumstances. In effect, the responsibility for the collection of the tax as well as the
payment thereof is concentrated upon the person over whom the Government has
jurisdiction. Thus, the withholding agent is constituted the agent of both the
Government and the taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing of the necessary income
tax return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government agent
especially because under Section 53 (c) he is held personally liable for the tax he is
duty bound to withhold; whereas the Commissioner and his deputies are not made
liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the
beneficial owner of the dividends with respect to the filing of the necessary income
tax return and with respect to actual payment of the tax to the government, such
authority may reasonably be held to include the authority to file a claim for refund
and to bring an action for recovery of such claim. This implied authority is especially
warranted where, is in the instant case, the withholding agent is the wholly owned
subsidiary of the parent-stockholder and therefore, at all times, under the effective
control of such parent-stockholder. In the circumstances of this case, it seems
particularly unreal to deny the implied authority of P&G-Phil. to claim a refund and to
commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-
Phil. to show some written or telexed confirmation by P&G-USA of the subsidiary's
authority to claim the refund or tax credit and to remit the proceeds of the refund.,
or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be
vitiated by basic unfairness is petitioner's position that, although P&G-Phil. is directly
and personally liable to the Government for the ataxes and any deficiency
assessments to be collected, the Government is not legally liable for a refund simply
because it did not demand a written confirmation of P&G-Phil.'s implied authority
from the very beginning. A sovereign government should act honorably and fairly at
all times, even vis-a-vis taxpayers.

We believe and so hold that, under the circumstances of this case, P&G-Phil. is
properly regarded as a "taxpayer" within the meaning of Section 309, NIRC, and as
impliedly authorized to file the claim for refund and the suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the
dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent (15%) tax rate
provided for in the following portion of Section 24 (b) (1) of the NIRC:
(b) Tax on foreign corporations.—
(1) Non-resident corporation. — A foreign corporation not engaged in trade and
business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income receipt
during its taxable year from all sources within the Philippines, as . . . dividends . . .
Provided, still further, that on dividends received from a domestic corporation liable
to tax under this Chapter, the tax shall be 15% of the dividends, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the condition
that the country in which the non-resident foreign corporation, is domiciled shall
allow a credit against the tax due from the non-resident foreign corporation, taxes
deemed to have been paid in the Philippines equivalent to 20% which represents the
difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to
non-resident corporate stockholders of a Philippine corporation, goes down to fifteen
percent (15%) if the country of domicile of the foreign stockholder corporation "shall
allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. In other words, in the instant case, the reduced fifteen
percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&G-USA a tax
credit for "taxes deemed paid in the Philippines" applicable against the US taxes of
P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in the
Philippines" must, as a minimum, reach an amount equivalent to twenty (20)
percentage points which represents the difference between the regular thirty-five
percent (35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax
rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must
give a "deemed paid" tax credit for the dividend tax (20 percentage points) waived by
the Philippines in making applicable the preferred divided tax rate of fifteen percent
(15%). In other words, our NIRC does not require that the US tax law deem the parent-
corporation to have paid the twenty (20) percentage points of dividend tax waived by
the Philippines. The NIRC only requires that the US "shall allow" P&G-USA a "deemed
paid" tax credit in an amount equivalent to the twenty (20) percentage points waived
by the Philippines.
TAXATION CASES |6
2. The question arises: Did the US law comply with the above requirement? The
relevant provisions of the US Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of this subpart,
the tax imposed by this chapter shall, subject to the applicable limitation of section
904, be credited with the amounts provided in the applicable paragraph of subsection
(b) plus, in the case of a corporation, the taxes deemed to have been paid under
sections 902 and 960. Such choice for any taxable year may be made or changed at
any time before the expiration of the period prescribed for making a claim for credit
or refund of the tax imposed by this chapter for such taxable year. The credit shall not
be allowed against the tax imposed by section 531 (relating to the tax on accumulated
earnings), against the additional tax imposed for the taxable year under section 1333
(relating to war loss recoveries) or under section 1351 (relating to recoveries of
foreign expropriation losses), or against the personal holding company tax imposed
by section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904, the
following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. — In the case of a citizen of the United States
and of a domestic corporation, the amount of any income, war profits, and excess
profits taxes paid or accrued during the taxable year to any foreign country or to any
possession of the United States; and
xxx xxx xxx
Sec. 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of this subject,
a domestic corporation which owns at least 10 percent of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall —
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such
foreign corporation is a less developed country corporation, be deemed to have paid
the same proportion of any income, war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation to any foreign country or to any
possession of the United States on or with respect to such accumulated profits, which
the amount of such dividends bears to the amount of such accumulated profits.
xxx xxx xxx

(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or
income computed without reduction by the amount of the income, war profits, and
excess profits taxes imposed on or with respect to such profits or income by any
foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or
income in excess of the income, war profits, and excess profits taxes imposed on or
with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shows
otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the
following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the
dividend tax actually paid (i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8
for a proportionate part of the corporate income tax actually paid to the Philippines
by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine
corporate income tax although that tax was actually paid by its Philippine subsidiary,
P&G-Phil., not by P&G-USA. This "deemed paid" concept merely reflects economic
reality, since the Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable as dividends
to P&G-USA. In other words, US tax law treats the Philippine corporate income tax as
if it came out of the pocket, as it were, of P&G-USA as a part of the economic cost of
carrying on business operations in the Philippines through the medium of P&G-Phil.
and here earning profits. What is, under US law, deemed paid by P&G- USA are not
"phantom taxes" but instead Philippine corporate income taxes actually paid here by
P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax
actually withheld, and (ii) the tax credit for the Philippine corporate income tax
TAXATION CASES |7
actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax credits available or
applicable against the US corporate income tax of P&G-USA. These tax credits are
allowed because of the US congressional desire to avoid or reduce double taxation of
the same income stream. 9
In order to determine whether US tax law complies with the requirements for
applicability of the reduced or preferential fifteen percent (15%) dividend tax rate
under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the
Philippine government under Section 24 (b) (1), NIRC, and which hence goes to P&G-
USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must
allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is
at least equal to the amount of the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government
is arithmetically determined in the following manner:
P100.00 — Pretax net corporate income earned by P&G-Phil.
x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA
P65.00 — Dividends remittable to P&G-USA
x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax
P65.00 — Dividends remittable to P&G-USA
x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———

P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by
P&G-Phil. Amount (a) is also the minimum amount of the "deemed paid" tax credit
that US tax law shall allow if P&G-USA is to qualify for the reduced or preferential
dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law
allows under Section 902, Tax Code, may be computed arithmetically as follows:
P65.00 — Dividends remittable to P&G-USA
- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA
P35.00 — Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of
15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of P29.75 is allowed by
Section 902 US Tax Code for Philippine corporate income tax "deemed paid" by the
parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the
Philippine government), Section 902, US Tax Code, specifically and clearly complies
with the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of
the US Tax Code is identical with the reading of the BIR of Sections 901 and 902 of the
US Tax Code is identical with the reading of the BIR of Sections 901 and 902 as shown
by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting
Commissioner of Intemal Revenue Efren I. Plana, later Associate Justice of this Court,
the relevant portion of which stated:
TAXATION CASES |8
However, after a restudy of the decision in the American Chicle Company case and
the provisions of Section 901 and 902 of the U.S. Internal Revenue Code, we find merit
in your contention that our computation of the credit which the U.S. tax law allows in
such cases is erroneous as the amount of tax "deemed paid" to the Philippine
government for purposes of credit against the U.S. tax by the recipient of dividends
includes a portion of the amount of income tax paid by the corporation declaring the
dividend in addition to the tax withheld from the dividend remitted. In other words,
the U.S. government will allow a credit to the U.S. corporation or recipient of the
dividend, in addition to the amount of tax actually withheld, a portion of the income
tax paid by the corporation declaring the dividend. Thus, if a Philippine corporation
wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The
net income, after income tax, which is P75,000, will then be declared as dividend to
the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the
aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation
receiving the dividend can utilize as credit against its U.S. tax payable on said
dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750
———
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the
dividends received by the U.S. corporation from a Philippine subsidiary is clearly more
than 20% requirement of Presidential Decree No. 369 as 20% of P75,000.00 the
dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is
hereby amended in the sense that the dividends to be remitted by your client to its
parent company shall be subject to the withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent
provisions of the U.S. Federal Tax Code, which are the bases of the ruling, are not
revoked, amended and modified, the effect of which will reduce the percentage of
tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign
corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to
Basic Foods Corporation and BIR Ruling dated 20 October 1987 addressed to Castillo,

Laman, Tan and Associates. In other words, the 1976 Ruling of Hon. Efren I. Plana was
reiterated by the BIR even as the case at bar was pending before the CTA and this
Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit,
which is embodied in Section 902, US Tax Code, is exactly the same "deemed paid"
tax credit found in our NIRC and which Philippine tax law allows to Philippine
corporations which have operations abroad (say, in the United States) and which,
therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In computing net income, there shall be
allowed as deductions — . . .
(c) Taxes. — . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. — If the taxpayer signifies in his
return his desire to have the benefits of this paragraphs, the tax imposed by this Title
shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the Philippines and
of domestic corporation, the amount of net income, war profits or excess profits,
taxes paid or accrued during the taxable year to any foreign country. (Emphasis
supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine
corporation for taxes actually paid by it to the US government—e.g., for taxes
collected by the US government on dividend remittances to the Philippine
corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax
Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code,
and provides as follows:
(8) Taxes of foreign subsidiary. — For the purposes of this subsection a domestic
corporation which owns a majority of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall be deemed to have paid the same
proportion of any income, war-profits, or excess-profits taxes paid by such foreign
corporation to any foreign country, upon or with respect to the accumulated profits
of such foreign corporation from which such dividends were paid, which the amount
of such dividends bears to the amount of such accumulated profits: Provided, That
the amount of tax deemed to have been paid under this subsection shall in no case
exceed the same proportion of the tax against which credit is taken which the amount
TAXATION CASES |9
of such dividends bears to the amount of the entire net income of the domestic
corporation in which such dividends are included. The term "accumulated profits"
when used in this subsection reference to a foreign corporation, means the amount
of its gains, profits, or income in excess of the income, war-profits, and excess-profits
taxes imposed upon or with respect to such profits or income; and the Commissioner
of Internal Revenue shall have full power to determine from the accumulated profits
of what year or years such dividends were paid; treating dividends paid in the first
sixty days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shown otherwise), and in other
respects treating dividends as having been paid from the most recently accumulated
gains, profits, or earnings. In the case of a foreign corporation, the income, war-
profits, and excess-profits taxes of which are determined on the basis of an
accounting period of less than one year, the word "year" as used in this subsection
shall be construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a
Philippine parent corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid
to the US by the US subsidiary of a Philippine-parent corporation. The Philippine
parent or corporate stockholder is "deemed" under our NIRC to have paid a
proportionate part of the US corporate income tax paid by its US subsidiary, although
such US tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be
allowed by US law to P&G-USA, is the same "deemed paid" tax credit that Philippine
law allows to a Philippine corporation with a wholly- or majority-owned subsidiary in
(for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax
Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit
granted in Section 30 (c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in
the instant case was the regular thirty-five percent (35%) rate rather than the reduced
rate of fifteen percent (15%), held that P&G-Phil. had failed to prove that its parent,
P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit
in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question
before this Court from questions of administrative implementation arising after the
legal question has been answered. The basic legal issue is of course, this: which is the
applicable dividend tax rate in the instant case: the regular thirty-five percent (35%)
rate or the reduced fifteen percent (15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a "deemed paid" tax credit in the required
amount, relates to the administrative implementation of the applicable reduced tax
rate.

In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed
paid" tax credit shall have actually been granted before the applicable dividend tax
rate goes down from thirty-five percent (35%) to fifteen percent (15%). As noted
several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that
the USA "shall allow a credit against the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ."
There is neither statutory provision nor revenue regulation issued by the Secretary of
Finance requiring the actual grant of the "deemed paid" tax credit by the US Internal
Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend
rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption
nor does it provide a tax credit; it is a provision which specifies when a particular
(reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a
severe practical problem of administrative circularity. The Second Division in effect
held that the reduced dividend tax rate is not applicable until the US tax credit for
"deemed paid" taxes is actually given in the required minimum amount by the US
Internal Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot
be given by the US tax authorities unless dividends have actually been remitted to the
US, which means that the Philippine dividend tax, at the rate here applicable, was
actually imposed and collected. 11 It is this practical or operating circularity that is in
fact avoided by our BIR when it issues rulings that the tax laws of particular foreign
jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply
with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the fifteen
percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins
to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as
a condition for the applicability, as a matter of law, of a particular tax rate. Upon the
other hand, upon the determination or recognition of the applicability of the reduced
tax rate, there is nothing to prevent the BIR from issuing implementing regulations
that would require P&G Phil., or any Philippine corporation similarly situated, to
certify to the BIR the amount of the "deemed paid" tax credit actually subsequently
granted by the US tax authorities to P&G-USA or a US parent corporation for the
taxable year involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such certification
within a certain period of time, would result in the imposition of a deficiency
assessment for the twenty (20) percentage points differential. The task of this Court
is to settle which tax rate is applicable, considering the state of US law at a given time.
We should leave details relating to administrative implementation where they
properly belong — with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government
is not, for that reason alone, necessarily the correct reading of the statute. There are
many tax statutes or provisions which are designed, not to trigger off an instant surge
of revenues, but rather to achieve longer-term and broader-gauge fiscal and
TAXATION CASES |10
economic objectives. The task of our Court is to give effect to the legislative design
and objectives as they are written into the statute even if, as in the case at bar, some
revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by
reducing the thirty-five percent (35%) dividend rate to fifteen percent (15%) are set
out in the preambular clauses of P.D. No. 369 which amended Section 24 (b) (1), NIRC,
into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a
developing economy foremost of which is the financing of economic development
programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are
taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an
appropriate tax need be imposed on dividends received by non-resident foreign
corporations in the same manner as the tax imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign
equity investment in the Philippines by reducing the tax cost of earning profits here
and thereby increasing the net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of the Philippine dividend
tax rate unless its home country gives it some relief from double taxation (i.e., second-
tier taxation) (the home country would simply have more "post-R.P. tax" income to
subject to its own taxing power) by allowing the investor additional tax credits which
would be applicable against the tax payable to such home country. Accordingly,
Section 24 (b) (1), NIRC, requires the home or domiciliary country to give the investor
corporation a "deemed paid" tax credit at least equal in amount to the twenty (20)
percentage points of dividend tax foregone by the Philippines, in the assumption that
a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following
manner:
P65.00 — Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA
 TAXATION CASES |11

P55.25 (2) The rate of tax imposed by one of the Contracting States on dividends derived
x 46% — Maximum US corporate income tax rate from sources within that Contracting State by a resident of the other Contracting
——— State shall not exceed —
P25.415—US corporate tax payable by P&G-USA
without tax credits (a) 25 percent of the gross amount of the dividend; or

P25.415 (b) When the recipient is a corporation, 20 percent of the gross amount of the
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil. dividend if during the part of the paying corporation's taxable year which precedes
at 15% (Section 901, US Tax Code) the date of payment of the dividend and during the whole of its prior taxable year (if
——— any), at least 10 percent of the outstanding shares of the voting stock of the paying
P15.66 — US corporate income tax payable after Section 901 corporation was owned by the recipient corporation.
——— tax credit.
xxx xxx xxx
P55.25
- 15.66 (Emphasis supplied)
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S. The Tax Convention, at the same time, established a treaty obligation on the part of
===== taxes without "deemed paid" tax credit. the United States that it "shall allow" to a US parent corporation receiving dividends
from its Philippine subsidiary "a [tax] credit for the appropriate amount of taxes paid
P25.415 or accrued to the Philippines by the Philippine [subsidiary] —.16 This is, of course,
- 29.75 — "Deemed paid" tax credit under Section 902 US precisely the "deemed paid" tax credit provided for in Section 902, US Tax Code,
——— Tax Code (please see page 18 above) discussed above. Clearly, there is here on the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a
- 0 - — US corporate income tax payable on dividends maximum rate, there is still a differential or additional reduction of five (5) percentage
====== remitted by P&G-Phil. to P&G-USA after points which compliance of US law (Section 902) with the requirements of Section 24
Section 902 tax credit. (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

P55.25 — Amount received by P&G-USA net of RP and US We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax
====== taxes after Section 902 tax credit. credit which it seeks.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code,
could offset the US corporate income tax payable on the dividends remitted by P&G-
Phil. The result, in fine, could be that P&G-USA would after US tax credits, still wind
up with P55.25, the full amount of the dividends remitted to P&G-USA net of
Philippine taxes. In the calculation of the Philippine Government, this should
encourage additional investment or re-investment in the Philippines by P&G-USA.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's
Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision of the and
Division of the Court promulgated on 15 April 1988, and in lieu thereof, to REINSTATE
and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.

3. It remains only to note that under the Philippines-United States Convention "With
Respect to Taxes on Income," 15 the Philippines, by a treaty commitment, reduced
the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross
amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

 TAXATION CASES |12

3. Republic vs. Ker & Company On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for
review with preliminary injunction. No preliminary injunction was issued, for said
G.R. No. L-21609 September 29, 1966 court dismissed the appeal for having been instituted beyond the 30-day period
provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, L-12396. 1
vs.
KER & COMPANY, LTD., defendant-appellant. On March 15, 1962, the Bureau of Internal Revenue demanded payment of the
aforesaid assessments together with a surcharge of 5% for late payment and interest
Office of the Solicitor General for plaintiff-appellant. at the rate of 1% monthly. Ker & Co., Ltd. refused to pay, instead in its letters dated
Leido, Andrada, Perez and Associates for defendant-appellant. March 28, 1962 and April 10, 1962 it set up the defense of prescription of the
Commissioner's right to collect the tax. Subsequently, the Republic of the Philippines
filed on March 27, 1962 a complaint with the Court of First Instance of Manila seeking
collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and
BENGZON, J.P., J.: 1950. The complaint did not allege fraud in the filing of any of the income tax returns
for the years involved, nor did it pray for the payment of the corresponding 50%
Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, surcharge, but it prayed for the payment of 5% surcharge for late payment and
1948, 1949 and 1950 on the following dates: interest of 1% per month without however specifying from what date interest started
Year Date Filed to accrue.
1947 April 12, 1948
1948 April 30, 1949 Summons was served not on the defendant taxpayer but upon Messrs. Leido and
1949 May 15, 1950 Associates, its counsel in the proceedings before the Bureau of Internal Revenue and
1950 May 9, 1951 the Court of Tax Appeals.

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez &
1950, respectively. Associates, moved for the dismissal of the complaint on the ground that the court did
not acquire jurisdiction over the person of the defendant and that plaintiff's cause of
In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns action has prescribed. This motion was denied and defendant filed a motion for
and books of accounts and subsequently issued the following assessments for reconsideration. Resolution on said motion, however, was deferred until trial of the
deficiency income tax: case on the merits.
Year Amount Date Assessed
1947 P42,342.30 July 25, 1953 On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein
1948 18,651.87 Feb. 16, 1953 the defense set up in its motion to dismiss of April 14, 1962.
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953 On September 18, 1962 the Republic of the Philippines amended its complaint, in
answer to which Ker & Co., Ltd. adopted the same answer which it had filed on May
due and payable on dates indicated in the accompanying notices of assessment. The 18, 1962.
assessments for 1948 and 1950 carried the surcharge of 50% authorized under
Section 72 of the Tax Code for the filing of fraudulent returns. On January 30, 1963 the Court of First Instance rendered judgment, the dispositive
portion of which states:
Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of
Internal Revenue reduced the assessments for the year 1947 from P42,342.30 to WHEREFORE, this Court dismisses the claim for the collection of deficiency income
P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00, imposed the 50% taxes for 1947, but orders defendant taxpayer to pay the deficiency income taxes for
surcharge for the year 1947 and eliminated the same surcharge from the assessment 1948, 1949 and 1950, in the amounts of P18,651.87, P139.67 and P8,542.00,
for the year 1950. The assessments for years 1948 and 1949 remained the same. respectively, plus 5% surcharge thereon on each amount and interest of 1% a month
computed from March 27, 1962 and until full payment thereof is made, plus the costs
of suit.

On February 20, 1963 the Republic of the Philippines filed a motion for
reconsideration contending that the right of the Commissioner of Internal Revenue
to collect the deficiency assessment for 1947 has not prescribed by a lapse of merely
five years and three months, because the taxpayer's income tax return was fraudulent
in which case prescription sets in ten years from October 31, 1951, the date of
discovery of the fraud, pursuant to Section 332 (a) of the Tax Codes and that the
payment of delinquency interest of 1% per month should commence from the date it
fell due as indicated in the assessment notices instead of on the date the complaint
was filed.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating
its assertion that the Court of First Instance did not acquire jurisdiction over its
person, and maintaining that since the complaint was filed nine years, one month and
eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and
since the filing of its petition for review in the Court of Tax Appeals did not stop the
running of the period of limitations, the right of the Commissioner of Internal Revenue
to collect the tax in question has prescribed.
The two motions for reconsideration having been denied, both parties appealed
directly to this Court.
The issues in this case are:
1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker
& Co., Ltd.? .
2. Did the right of the Commissioner of Internal Revenue to assess deficiency income
tax for the year 1947 prescribe? .
3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals
suspend the running of the statute of limitations to collect the deficiency income for
the years 1948, 1949 and 1950?
4. When did the delinquency interest on the deficiency income tax for the years 1948,
1949 and 1950 accrue?
First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its
person inasmuch as summons was not served upon it but upon Messrs. Leido and
Associates who do not come under any of the class of persons upon whom summons
should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2 which
reads:
TAXATION CASES |13
SEC. 13. Service upon private domestic corporation or partnership.—If the defendant
is a corporation formed under the laws of the Philippines or a partnership duly
registered, service may be made on the president, manager, secretary, cashier, agent,
or any of its directors.
Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was
in its administrative stage. The same counsel represented Ker & Co., Ltd., when it
appealed said case to the Court of Tax Appeals and later to this Court. Subsequently,
when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962,
demanded the payment of the deficiency income tax in question, it was Messrs. Leido,
Andrada, Perez & Associates who replied in behalf of Ker & Co., Ltd. in two letters,
dated March 28, 1962 and April 10, 1962, both after the complaint in this case was
filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates received
the summons, they were still acting for and in behalf of Ker & Co., Ltd. in connection
with its tax liability involved in this case. Perforce, they were the taxpayer's agent
when summons was served. Under Section 13 of Rule 7, aforequoted, service upon
the agent of a corporation is sufficient.
We observe that the motion to dismiss filed on April 14, 1962, aside from disputing
the lower court's jurisdiction over defendant's person, prayed for dismissal of the
complaint on the ground that plaintiff's cause of action has prescribed. By interposing
such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative
defense on the basis of which it prayed the court to resolve controversy in its favor.
For the court to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily
had to acquire jurisdiction upon the latter's person, who, being the proponent of the
affirmative defense, should be deemed to have abandoned its special appearance and
voluntarily submitted itself to the jurisdiction of the court.3
Voluntary appearance cures defects of summons, if any.4 Such defect, if any, was
further cured when defendant filed its answer to the complaint.5 A defendant can
not be permitted to speculate upon the judgment of the court by objecting to the
court's jurisdiction over its person if the judgment is adverse to it, and acceding to
jurisdiction over its person if and when the judgment sustains its defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the
Commissioner of Internal Revenue to assess against it a deficiency income tax for the
year 1947 has prescribed because the assessment was issued on July 25, 1953 after a
lapse of five years, three months and thirteen days from the date (April 12, 1948) it
filed its income tax return. On the other hand, the Republic of the Philippines insists
that the taxpayer's income tax return was fraudulent, therefore the Commissioner of
Internal Revenue may assess the tax within ten years from discovery of the fraud on
October 31, 1951 pursuant to Section 322(a) of the Tax Code.

The stand of the Republic of the Philippines hinges on whether or not taxpayer's
income tax return for 1947 was fraudulent.
The court a quo, confining itself to determining whether or not the assessment of the
tax for 1947 was issued within the five-year period provided for in Section 331 of the
Tax Code, ruled that the right of the Commissioner of Internal Revenue to assess the
tax has prescribed. Said the lower court:
The Court resolves the second issue in the negative, because Section 331 of the
Revenue Code explicitly provides, in mandatory terms, that "Internal Revenue taxes
shall be assessed within 5 years after the return was filed, and no proceedings in court
without assessment, for the collection of such taxes, shall be begun after expiration
of such period. The attempt by the Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an
exercise of authority against the aforequoted explicit and mandatory limitations of
statutory law. Settled in our system is the rule that acts committed against the
provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil Code). . . .
Said court resolved the issue without touching upon fraudulence of the return. The
reason is that the complaint alleged no fraud, nor did the plaintiff present evidence
to prove fraud.
In reply to the lower court's conclusion, the Republic of the Philippines maintains in
its brief that Ker & Co., Ltd. filed a false return and since the fraud penalty of 50%
surcharge was imposed in the deficiency income tax assessment, which has become
final and executory, the finding of the Commissioner of Internal Revenue as to the
existence of the fraud has also become final and need not be proved. This contention
suffers from a flaw in that it fails to consider the well-settled principle that fraud is a
question of fact6 which must be alleged and proved.7 Fraud is a serious charge and,
to be sustained, it must be supported by clear and convincing proof.8 Accordingly,
fraud should have been alleged and proved in the lower court. On these premises We
therefore sustain the ruling of the lower court upon the point of prescription.
It would be worth mentioning that since the assessment for deficiency income tax for
1947 has become final and executory, Ker & Co., Ltd. may not anymore raise defenses
which go into the merits of the assessment, i.e., prescription of the Commissioner's
right to assess the tax. Such was our ruling in previous cases.9 In this case however,
Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the
Republic of the Philippines, instead of questioning the right of the defendant to raise
such defense, litigated on it and submitted the issue for resolution of the court. By its
actuation, the Republic of the Philippines should be considered to have waived its
right to object to the setting up of such defense.
Third Issue
TAXATION CASES |14
Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the
complaint for the collection of the deficiency income tax for the years 1948, 1949 and
1950 only on March 27, 1962, or nine years, one month and eleven days from
February 16, 1953, the date the tax was assessed, the right to collect the same has
prescribed pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines
however contends that the running of the prescriptive period was interrupted by the
filing of the taxpayer's petition for review in the Court of Tax Appeals on March 1,
1956.
If the period during which the case was pending in the Court of Tax Appeals and in
the Supreme Court were not counted in reckoning the prescriptive period, less than
five years would have elapsed, hence, the right to collect the tax has not prescribed.
The taxpayer counters that the filing of the petition for review in the Court of Tax
Appeals could not have stopped the running of the prescriptive period to collect
because said court did not have jurisdiction over the case, the appeal having been
interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125.
Precisely, it adds, the Tax Court dismissed the appeal for lack of jurisdiction and said
dismissal was affirmed by the Supreme Court in L-12396 aforementioned.
Under Section 333 of the Tax Code, quoted hereunder:
SEC. 333. Suspension of running of statute.—The running of the statute of limitations
provided in Section 331 or three hundred thirty-two on the making of assessments
and the beginning, of distraint or levy or a proceeding in court for collection, in respect
of any deficiency, shall be suspended for the period during which the Collector of
Internal Revenue is prohibited from making the assessment or beginning distraint or
levy or a proceeding in court, and for sixty days thereafter.
the running of the prescriptive period to collect the tax shall be suspended for the
period during which the Commissioner of Internal Revenue is prohibited from
beginning a distraint and levy or instituting a proceeding in court, and for sixty days
thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the
Supreme Court have the effect of legally preventing the Commissioner of Internal
Revenue from instituting an action in the Court of First Instance for the collection of
the tax? Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of
Tax Appeals contesting the legality of the assessments in question, until the
termination of its appeal in the Supreme Court, the Commissioner of Internal Revenue
was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax
Appeals, 10 from filing an ordinary action in the Court of First Instance to collect the
tax. Besides, to do so would be to violate the judicial policy of avoiding multiplicity of
suits and the rule on lis pendens. 11
 TAXATION CASES |15

It would be interesting to note that when the Commissioner of Internal Revenue
issued the final deficiency assessments on January 5, 1954, he had already lost, by
prescription, the right to collect the tax (except that for 1950) by the summary
method of warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter
requested suspension of the collection of the tax without penalty incident to late
payment pending the filing of a memorandum in support of its views. As requested,
no tax was collected. On May 22, 1954 the projected memorandum was filed, but as
of that date the Commissioner's right to collect by warrant of distraint and levy the
deficiency tax for 1950 had already prescribed. So much so, that on March 1, 1956
when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals, the
Commissioner of Internal Revenue had but one remedy left to collect the tax, that is,
by judicial action. 12 However, as stated, an independent ordinary action in the Court
of First Instance was not available to the Commissioner pursuant to Our ruling in
Ledesma, et al. v. Court of Tax Appeals, supra, in view of the pendency of the
taxpayer's petition for review in the Court of Tax Appeals. Precisely he urgently filed
a motion to dismiss the taxpayer's petition for review with a view to terminating
therein the proceedings in the shortest possible time in order that he could file a
collection case in the Court of First Instance before his right to do so is cut off by the
passage of time. As moved, the Tax Court dismissed the case and Ker & Co., Ltd.
appealed to the Supreme Court. By the time the Supreme Court affirmed the order of
dismissal of the Court of Tax Appeals in L-12396 on January 31, 1962 more than five
years had elapsed since the final assessments were made on January 5, 1954.
Thereafter, the Commissioner of Internal Revenue demanded extra-judicially the
payment of the deficiency tax in question and in reply the taxpayer, by its letter dated
March 28, 1962, advised the Commissioner of Internal Revenue that the right to
collect the tax has prescribed pursuant to Section 332 (c) of the Tax Code.1awphîl.nèt
SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or sums due
and unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment
of the same, there shall be added the sum of five per centum on the amount of tax
unpaid and interest at the rate of one per centum a month upon said tax from the
time the same became due, except from the estates of insane, deceased, or insolvent
persons. (emphasis supplied)
Exhibit "F" — the letter of assessment — shows that the deficiency income tax for
1948 and 1949 became due on March 15, 1953 and that for 1950 accrued on February
15, 1954 in accordance with Section 51(d) of the Tax Code. Since the tax in question
remained unpaid, delinquency interest accrued and became due starting from said
due dates. The decision appealed from should therefore be modified accordingly.
WHEREFORE, the decision appealed from is affirmed with the modification that the
delinquency interest at the rate of 1% per month shall be computed from March 15,
1953 for the deficiency income tax for 1948 and 1949 and from February 15, 1954 for
the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, Sanchez
and Castro, JJ., concur.

Thus, did the taxpayer produce the effect of temporarily staying the hands of the
Commissioner of Internal Revenue simply through a choice of remedy. And, if We
were to sustain the taxpayer's stand, We would be encouraging taxpayers to delay
the payment of taxes in the hope of ultimately avoiding the same.

Under the circumstances, the Commissioner of Internal Revenue was in effect

prohibited from collecting the tax in question. This being so, the provisions of Section
333 of the Tax Code will apply.

Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on the
deficiency income tax for 1948, 1949 and 1950 accrued and should commence from
the date of the assessments as shown in the assessment notices, pursuant to Section
51(e) of the Tax Code, instead of from the date the complaint was filed as determined
in the decision appealed from.

Section 51 (e) of the Tax Code states:


4. Mamba vs. Lara
G.R. No. 165109 December 14, 2009
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN, ALDEGUNDO Q.
CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P. FERNANDEZ, VILMER V. VILORIA,
BAYLON A. CALAGUI, CECILIA MAEVE T. LAYOS, PREFERRED VENTURES CORP., ASSET
BUILDERS CORP., RIZAL COMMERCIAL BANKING CORPORATION, MALAYAN
INSURANCE CO., and LAND BANK OF THE PHILIPPINES, Respondents.
DECISION
DEL CASTILLO, J.:
The decision to entertain a taxpayer’s suit is discretionary upon the Court. It can
choose to strictly apply the rule or take a liberal stance depending on the controversy
involved. Advocates for a strict application of the rule believe that leniency would
open floodgates to numerous suits, which could hamper the government from
performing its job. Such possibility, however, is not only remote but also negligible
compared to what is at stake - "the lifeblood of the State". For this reason, when the
issue hinges on the illegal disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a Temporary Restraining
Order/Writ of Preliminary Injunction, under Rule 45 of the Rules of Court, seeks to set
aside the April 27, 2004 Order 1 of the Regional Trial Court (RTC), Branch 5,
Tuguegarao City, dismissing the Petition for Annulment of Contracts and Injunction
with prayer for the issuance of a Temporary Restraining Order/Writ of Preliminary
Injunction, 2 docketed as Civil Case No. 6283. Likewise assailed in this Petition is the
August 20, 2004 Resolution 3 of RTC, Branch 1, Tuguegarao City denying the Motion
for Reconsideration of the dismissal.
Factual Antecedents
On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed Resolution
No. 2001-272 4 authorizing Governor Edgar R. Lara (Gov. Lara) to engage the services
of and appoint Preferred Ventures Corporation as financial advisor or consultant for
the issuance and flotation of bonds to fund the priority projects of the governor
without cost and commitment.
On November 19, 2001, the Sangguniang Panlalawigan, through Resolution No. 290-
2001, 5 ratified the Memorandum of Agreement (MOA) 6 entered into by Gov. Lara
and Preferred Ventures Corporation. The MOA provided that the provincial
TAXATION CASES |16
government of Cagayan shall pay Preferred Ventures Corporation a one-time fee of
3% of the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan approved Resolution No. 2002-
061-A 7 authorizing Gov. Lara to negotiate, sign and execute contracts or agreements
pertinent to the flotation of the bonds of the provincial government in an amount not
to exceed P500 million for the construction and improvement of priority projects to
be approved by the Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the Sangguniang Panlalawigan of
Cagayan approved Ordinance No. 19-2002, 8 authorizing the bond flotation of the
provincial government in an amount not to exceed P500 million to fund the
construction and development of the new Cagayan Town Center. The Resolution
likewise granted authority to Gov. Lara to negotiate, sign and execute contracts and
agreements necessary and related to the bond flotation subject to the approval and
ratification by the Sangguniang Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan approved Resolution No. 350-
2003 9 ratifying the Cagayan Provincial Bond Agreements entered into by the
provincial government, represented by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC) – Trust and
Investment Division and Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC and the Land Bank of the
Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC – Trust and Investment
Division.
d. Guarantee Agreement with the RCBC – Trust and Investment Division and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved Resolution No. 351-2003,
10 ratifying the Agreement for the Planning, Design, Construction, and Site
Development of the New Cagayan Town Center 11 entered into by the provincial
government, represented by Gov. Lara and Asset Builders Corporation, represented
by its President, Mr. Rogelio P. Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders Corporation,
giving to the latter the planning, design, construction and site development of the
town center project for a fee of P213,795,732.39. 12
Proceedings before the Regional Trial Court

On December 12, 2003, petitioners Manuel N. Mamba, Raymund P. Guzman and
Leonides N. Fausto filed a Petition for Annulment of Contracts and Injunction with
prayer for a Temporary Restraining Order/Writ of Preliminary Injunction 13 against
Edgar R. Lara, Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr.,
Norman A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia
Maeve T. Layos, Preferred Ventures Corporation, Asset Builders Corporation, RCBC,
MICO and LBP.1avvphi1
At the time of the filing of the petition, Manuel N. Mamba was the Representative of
the 3rd Congressional District of the province of Cagayan 14 while Raymund P.
Guzman and Leonides N. Fausto were members of the Sangguniang Panlalawigan of
Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while Jenerwin C.
Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.
Fernandez, Vilmer V. Viloria, Baylon A. Calagui and Cecilia Maeve T. Layos were sued
as members of the Sangguniang Panlalawigan of Cagayan. 17 Respondents Preferred
Ventures Corporation, Asset Builders Corporation, RCBC, MICO and LBP were all
impleaded as indispensable or necessary parties.
Respondent Preferred Ventures Corporation is the financial advisor of the province of
Cagayan regarding the bond flotation undertaken by the province. 18 Respondent
Asset Builders Corporation was awarded the right to plan, design, construct and
develop the proposed town center. 19 Respondent RCBC, through its Trust and
Investment Division, is the trustee of the seven-year bond flotation undertaken by the
province for the construction of the town center, 20 while respondent MICO is the
guarantor. 21 Lastly, respondent LBP is the official depositary bank of the province.
22
In response to the petition, public respondents filed an Answer with Motion to
Dismiss, 23 raising the following defenses: a) petitioners are not the proper parties or
they lack locus standi in court; b) the action is barred by the rule on state immunity
from suit and c) the issues raised are not justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a Motion to Dismiss 24
on the following grounds: a) petitioners have no cause of action for injunction; b)
failure to join an indispensable party; c) lack of personality to sue and d) lack of locus
standi. Respondent MICO likewise filed a Motion to Dismiss 25 raising the grounds of
lack of cause of action and legal standing. Respondent RCBC similarly argued in its
Motion to Dismiss 26 that: a) petitioners are not the real parties-in-interest or have
no legal standing to institute the petition; b) petitioners have no cause of action as
the flotation of the bonds are within the right and power of both respondent RCBC
and the province of Cagayan and c) the viability of the construction of a town center
is not a justiciable question but a political question.
TAXATION CASES |17
Respondent Asset Builders Corporation, on the other hand, filed an Answer 27
interposing special and affirmative defenses of lack of legal standing and cause of
action. Respondent LBP also filed an Answer 28 alleging in the main that petitioners
have no cause of action against it as it is not an indispensable party or a necessary
party to the case.
Two days after the filing of respondents’ respective memoranda on the issues raised
during the hearing of the special and/or affirmative defenses, petitioners filed a
Motion to Admit Amended Petition 29 attaching thereto the amended petition. 30
Public respondents opposed the motion for the following reasons: 1) the motion was
belatedly filed; 2) the Amended Petition is not sufficient in form and in substance; 3)
the motion is patently dilatory and 4) the Amended Petition was filed to cure the
defect in the original petition. 31
Petitioners also filed a Consolidated Opposition to the Motion to Dismiss 32 followed
by supplemental pleadings 33 in support of their prayer for a writ of preliminary
injunction.
On April 27, 2004, the RTC issued the assailed Order denying the Motion to Admit
Amended Petition and dismissing the petition for lack of cause of action. It ruled that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure dealing on
the filing of an amended pleading is quite clear. As such, the Court rules that the
motion was belatedly filed. The granting of leave to file amended pleadings is a matter
peculiarly within the sound discretion of the trial court. But the rule allowing
amendments to pleadings is subject to the general but inflexible limitation that the
cause of action or defense shall not be substantially changed or the theory of the case
altered to the prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable issues which this Court
may take cognizance of, petitioners in the present case who presumably presented
legitimate interests in the controversy are not parties to the questioned contract.
Contracts produce effect as between the parties who execute them. Only a party to
the contract can maintain an action to enforce the obligations arising under said
contract (Young vs. CA, 169 SCRA 213). Since a contract is binding only upon the
parties thereto, a third person cannot ask for its rescission if it is in fraud of his rights.
One who is not a party to a contract has no rights under such contract and even if the
contrary may be voidable, its nullity can be asserted only by one who is a party
thereto; a third person would have absolutely no personality to ask for the annulment
(Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibañez vs. Hongkong & Shanghai Bank,
22 Phil. 572; Ayson vs. CA, G.R. Nos. L-6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party obliged principally or
subsidiarily in a contract may exercise an action for nullity of the contract if he is
prejudiced in his rights with respect to one of the contracting parties and can show
the detriment which would positively result to him from the contract in which he had

no intervention (Bañez vs. CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-
113; Leodovica vs. CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show
that they were prejudiced in their rights [or that a] detriment x x x would positively
result to them. Hence, they lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present controversy may be
dispensed with, stressing that the instant case is a political question, a question which
the court cannot, in any manner, take judicial cognizance. Courts will not interfere
with purely political questions because of the principle of separation of powers
(Tañada vs. Cuenco, 103 Phil. 1051). Political questions are those questions which,
under the Constitution, are to be decided by the people in their sovereign capacity or
in regard to which full discretionary authority has been delegated to the legislative or
[to the] executive branch of the government (Nuclear Free Phils. Coalition vs. NPC,
141 SCRA 307 (1986); Torres vs. Gonzales, 152 SCRA 272; Citizen’s Alliance for
Consumer Protection vs. Energy Regulatory Board, G.R. No. 78888-90, June 23, 1988).
The citation made by the provincial government[, to] which this Court is inclined to
agree, is that the matter falls under the discretion of another department, hence the
decision reached is in the category of a political question and consequently may not
be the subject of judicial jurisdiction (Cruz in Political Law, 1998 Ed., page 81) is
correct.
It is [a] well-recognized principle that purely administrative and discretionary
functions may not be interfered with by the courts (Adm. Law Test & Cases, 2001 Ed.,
De Leon, De Leon, Jr.).
The case therefore calls for the doctrine of ripeness for judicial review. This
determines the point at which courts may review administrative action. The basic
principle of ripeness is that the judicial machinery should be conserved for problems
which are real and present or imminent and should not be squandered on problems
which are future, imaginary or remote. This case is not ripe for judicial determination
since there is no imminently x x x substantial injury to the petitioners.
In other words, the putting up of the New Cagayan Town Center by the province over
the land fully owned by it and the concomitant contracts entered into by the same is
within the bounds of its corporate power, an undertaking which falls within the ambit
of its discretion and therefore a purely political issue which is beyond the province of
the court x x x. [Consequently, the court cannot,] in any manner, take judicial
cognizance over it. The act of the provincial government was in pursuance of the
mandate of the Local Government Code of 1991.
xxxx
TAXATION CASES |18
Indeed, adjudication of the procedural issues presented for resolution by the present
action would be a futile exercise in exegesis.
What defeats the plea of the petitioners for the issuance of a writ of preliminary
injunction is the fact that their averments are merely speculative and founded on
conjectures. An injunction is not intended to protect contingent or future rights nor
is it a remedy to enforce an abstract right (Cerebo vs. Dictado, 160 SCRA 759; Ulang
vs. CA, 225 SCRA 637). An injunction, whether preliminary or final, will not issue to
protect a right not in in esse and which may never arise, or to restrain an act which
does not give rise to a cause of action. The complainant’s right on title, moreover,
must be clear and unquestioned [since] equity, as a rule, will not take cognizance of
suits to establish title and will not lend its preventive aid by injunction where the
complainant’s title or right is doubtful or disputed. The possibility of irreparable
damage, without proof of violation of an actual existing right, is no ground for
injunction being a mere damnum, absque injuria (Talisay-Silay Milling Company, Inc.
vs. CFI of Negros Occidental, et. al. 42 SCRA 577, 582).
xxxx
For lack of cause of action, the case should be dismissed.
The facts and allegations [necessarily] suggest also that this court may dismiss the
case for want of jurisdiction.
The rule has to be so because it can motu propio dismiss it as its only jurisdiction is to
dismiss it if it has no jurisdiction. This is in line with the ruling in Andaya vs. Abadia, 46
SCAD 1036, G.R. No. 104033, Dec. 27, 1993 where the court may dismiss a complaint
even without a motion to dismiss or answer.
Upon the foregoing considerations, the case is hereby dismissed without costs.
SO ORDERED. 34
Petitioners filed a Motion for Reconsideration 35 to which respondents filed their
respective Oppositions. 36 Petitioners then filed a Motion to Inhibit, which the court
granted. Accordingly, the case was re-raffled to Branch 1 of the RTC of Tuguegarao
City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a Resolution
denying petitioners’ plea for reconsideration. The court found the motion to be a
mere scrap of paper as the notice of hearing was addressed only to the Clerk of Court
in violation of Section 5, Rule 15 of the Rules of Court. As to the merits, the court
sustained the findings of Branch 5 that petitioners lack legal standing to sue and that
the issue involved is political.
Issues

Hence, the present recourse where petitioners argue that:
A. The lower court decided a question of substance in a way not in accord with law
and with the applicable decision of the Supreme Court, and
B. The lower court has so far departed from the accepted and usual course of judicial
proceedings as to call for an exercise of the power of supervision in that:
I. It denied locus standi to petitioners;
II. [It] determined that the matter of contract entered into by the provincial
government is in the nature of a political question;
III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners’ Motion for Reconsideration. 38
Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that public funds are illegally
disbursed, or that the public money is being deflected to any improper purpose, or
that there is wastage of public funds through the enforcement of an invalid or
unconstitutional law. 39 A person suing as a taxpayer, however, must show that the
act complained of directly involves the illegal disbursement of public funds derived
from taxation. 40 He must also prove that he has sufficient interest in preventing the
illegal expenditure of money raised by taxation and that he will sustain a direct injury
because of the enforcement of the questioned statute or contract. 41 In other words,
for a taxpayer’s suit to prosper, two requisites must be met: (1) public funds derived
from taxation are disbursed by a political subdivision or instrumentality and in doing
so, a law is violated or some irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42
In light of the foregoing, it is apparent that contrary to the view of the RTC,
a taxpayer need not be a party to the contract to challenge its validity. 43 As long as
taxes are involved, people have a right to question contracts entered into by the
government.
In this case, although the construction of the town center would be primarily sourced
from the proceeds of the bonds, which respondents insist are not taxpayer’s money,
a government support in the amount of P187 million would still be spent for paying
TAXATION CASES |19
the interest of the bonds. 44 In fact, a Deed of Assignment 45 was executed by the
governor in favor of respondent RCBC over the Internal Revenue Allotment (IRA) and
other revenues of the provincial government as payment and/or security for the
obligations of the provincial government under the Trust Indenture Agreement dated
September 17, 2003. Records also show that on March 4, 2004, the governor
requested the Sangguniang Panlalawigan to appropriate an amount of P25 million for
the interest of the bond. 46 Clearly, the first requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the stringent "direct
injury test" bearing in mind that locus standi is a procedural technicality. 47 By
invoking "transcendental importance", "paramount public interest", or "far-reaching
implications", ordinary citizens and taxpayers were allowed to sue even if they failed
to show direct injury. 48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the court did not hesitate to
give standing to taxpayers. 49
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial. Under the various
agreements entered into by the governor, which were ratified by the Sangguniang
Panlalawigan, the provincial government of Cagayan would incur the following costs:
50
Compensation to Preferred Ventures - P 6,150,000.00
(3% of P205M) 51 Resolution No. 290-2001
Management and Underwriting Fees - 3,075,000.00
(1.5% of P205M) 52
Documentary Tax - 1,537,500.00
(0.75% of P205M) 53
Guarantee Fee 54 - 7,350,000.00
Construction and Design of town center 55 - 213,795,732.39
Total Cost - P231,908,232.39
What is more, the provincial government would be shelling out a total amount of
P187 million for the period of seven years by way of subsidy for the interest of the
bonds. Without a doubt, the resolution of the present petition is of paramount
importance to the people of Cagayan who at the end of the day would bear the brunt
of these agreements.
Another point to consider is that local government units now possess more powers,
authority and resources at their disposal, 56 which in the hands of unscrupulous
officials may be abused and misused to the detriment of the public. To protect the
interest of the people and to prevent taxes from being squandered or wasted under
the guise of government projects, a liberal approach must therefore be adopted in
determining locus standi in public suits.

In view of the foregoing, we are convinced that petitioners have sufficient standing to
file the present suit. Accordingly, they should be given the opportunity to present
their case before the RTC.
Having resolved the core issue, we shall now proceed to the remaining issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be decided by the people in
their sovereign capacity or by the legislative or the executive branch of the
government to which full discretionary authority has been delegated. 57
In filing the instant case before the RTC, petitioners seek to restrain public
respondents from implementing the bond flotation and to declare null and void all
contracts related to the bond flotation and construction of the town center. In the
petition before the RTC, they alleged grave abuse of discretion and clear violations of
law by public respondents. They put in issue the overpriced construction of the town
center; the grossly disadvantageous bond flotation; the irrevocable assignment of the
provincial government’s annual regular income, including the IRA, to respondent
RCBC to cover and secure the payment of the bonds floated; and the lack of
consultation and discussion with the community regarding the proposed project, as
well as a proper and legitimate bidding for the construction of the town center.
Obviously, the issues raised in the petition do not refer to the wisdom but to the
legality of the acts complained of. Thus, we find the instant controversy within the
ambit of judicial review. Besides, even if the issues were political in nature, it would
still come within our powers of review under the expanded jurisdiction conferred
upon us by Section 1, Article VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to excess or lack of
jurisdiction has been committed by any branch or instrumentality of the government.
58
The Motion to Admit Amended Petition was properly denied
However, as to the denial of petitioners’ Motion to Admit Amended Petition, we find
no reason to reverse the same. The inclusion of the province of Cagayan as a
petitioner would not only change the theory of the case but would also result in an
absurd situation. The provincial government, if included as a petitioner, would in
effect be suing itself considering that public respondents are being sued in their
official capacity.
In any case, there is no need to amend the petition because petitioners, as we have
said, have legal standing to sue as taxpayers.
Section 5, Rule 15 of the Rules of Court was substantially complied with
TAXATION CASES |20
This brings us to the fourth and final issue.
A perusal of the Motion for Reconsideration filed by petitioners would show that the
notice of hearing was addressed only to the Clerk of Court in violation of Section 5,
Rule 15 of the Rules of Court, which requires the notice of hearing to be addressed to
all parties concerned. This defect, however, did not make the motion a mere scrap of
paper. The rule is not a ritual to be followed blindly. 59 The purpose of a notice of
hearing is simply to afford the adverse parties a chance to be heard before a motion
is resolved by the court. 60 In this case, respondents were furnished copies of the
motion, and consequently, notified of the scheduled hearing. Counsel for public
respondents in fact moved for the postponement of the hearing, which the court
granted. 61 Moreover, respondents were afforded procedural due process as they
were given sufficient time to file their respective comments or oppositions to the
motion. From the foregoing, it is clear that the rule requiring notice to all parties was
substantially complied with. 62 In effect, the defect in the Motion for Reconsideration
was cured.
We cannot overemphasize that procedural rules are mere tools to aid the courts in
the speedy, just and inexpensive resolution of cases. 63 Procedural defects or lapses,
if negligible, should be excused in the higher interest of justice as technicalities should
not override the merits of the case. Dismissal of cases due to technicalities should also
be avoided to afford the parties the opportunity to present their case. Courts must
be reminded that the swift unclogging of the dockets although a laudable objective
must not be done at the expense of substantial justice. 64
WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27, 2004 Order of
Branch 5 and the August 20, 2004 Resolution of Branch 1 of the Regional Trial Court
of Tuguegarao City are hereby REVERSED and SET ASIDE insofar as the dismissal of
the petition is concerned. Accordingly, the case is hereby REMANDED to the court a
quo for further proceedings.
SO ORDERED.

G.R. No. 191667 April 17, 2013
LAND BANK OF THE PHILIPPINES, Petitioner,
vs.
EDUARDO M. CACAYURAN, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of the Court
of Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification the April 10, 2007
Decision3 of the Regional Trial Court (RTC) of Agoo, La Union, Branch 31, declaring inter alia the
nullity of the loan agreements entered into by petitioner Land Bank of the Philippines (Land
Bank) and the Municipality of Agoo, La Union (Municipality).
The Facts
From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain resolutions to
implement a multi-phased plan (Redevelopment Plan) to redevelop the Agoo Public Plaza (Agoo
Plaza) where the Imelda Garden and Jose Rizal Monument were situated.
To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-20054 on April 19,
2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel) to obtain a loan from Land Bank
and incidental thereto, mortgage a 2,323.75 square meter lot situated at the southeastern
portion of the Agoo Plaza (Plaza Lot) as collateral. To serve as additional security, it further
authorized the assignment of a portion of its internal revenue allotment (IRA) and the monthly
income from the proposed project in favor of Land Bank.5 The foregoing terms were confirmed,
approved and ratified on October 4, 2005 through Resolution No. 139-2005.6 Consequently, on
November 21, 2005, Land Bank extended a ₱4,000,000.00 loan in favor of the Municipality (First
Loan),7 the proceeds of which were used to construct ten (10) kiosks at the northern and
southern portions of the Imelda Garden. After completion, these kiosks were rented out.8
On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the construction of a
commercial center on the Plaza Lot as part of phase II of the Redevelopment Plan. To finance
the project, Mayor Eriguel was again authorized to obtain a loan from Land Bank, posting as
well the same securities as that of the First Loan. All previous representations and warranties of
Mayor Eriguel related to the negotiation and obtention of the new loan 10were ratified on
September 5, 2006 through Resolution No. 128-2006.11 In consequence, Land Bank granted a
second loan in favor of the Municipality on October 20, 2006 in the principal amount of
₱28,000,000.00 (Second Loan).12
TAXATION CASES |21
Unlike phase 1 of the Redevelopment Plan, the construction of the commercial center at the
Agoo Plaza was vehemently objected to by some residents of the Municipality. Led by
respondent Eduardo Cacayuran (Cacayuran), these residents claimed that the conversion of the
Agoo Plaza into a commercial center, as funded by the proceeds from the First and Second
Loans (Subject Loans), were "highly irregular, violative of the law, and detrimental to public
interests, and will result to wanton desecration of the said historical and public park." 13 The
foregoing was embodied in a Manifesto,14 launched through a signature campaign conducted
by the residents and Cacayuran.
In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor Eriguel,
Vice Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB namely, Violeta
Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy, Crisogono Colubong, Ricardo
Fronda, Josephus Komiya, Erwina Eriguel, Felizardo Villanueva, and Gerard Mamuyac
(Implicated Officers), expressing the growing public clamor against the conversion of the Agoo
Plaza into a commercial center. He then requested the foregoing officers to furnish him certified
copies of various documents related to the aforementioned conversion including, among
others, the resolutions approving the Redevelopment Plan as well as the loan agreements for
the sake of public information and transparency.
Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a
Complaint16 against the Implicated Officers and Land Bank, assailing, among others, the validity
of the Subject Loans on the ground that the Plaza Lot used as collateral thereof is property of
public dominion and therefore, beyond the commerce of man.17
Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated Officers and
Land Bank filed their respective Answers.
For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of destroying
the Agoo Plaza. It further asserted that Cacayuran did not have a cause of action against it since
he was not privy to any of the Subject Loans.19
During the pendency of the proceedings, the construction of the commercial center was
completed and the said structure later became known as the Agoo’s People Center (APC).
On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the area where
the APC stood as patrimonial property of the Municipality.
The Ruling of the RTC
In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring the nullity
of the Subject Loans.22 It found that the resolutions approving the said loans were passed in a
highly irregular manner and thus, ultra vires; as such, the Municipality is not bound by the
same.23 Moreover, it found that the Plaza Lot is proscribed from collateralization given its
nature as property for public use.24

Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On the other hand, the
Implicated Officers’ appeal was deemed abandoned and dismissed for their failure to file an
appellants’ brief despite due notice.26 In this regard, only Land Bank’s appeal was given due
course by the CA.
Ruling of the CA
In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s ruling,
excluding Vice Mayor Eslao from any personal liability arising from the Subject Loans.28
It held, among others, that: (1) Cacayuran had locus standi to file his complaint, considering that
(a) he was born, raised and a bona fide resident of the Municipality; and (b) the issue at hand
involved public interest of transcendental importance;29 (2) Resolution Nos. 68-2005, 139-2005,
58-2006, 128-2006 and all other related resolutions (Subject Resolutions) were invalidly passed
due to the SB’s non-compliance with certain sections of Republic Act No. 7160, otherwise
known as the "Local Government Code of 1991" (LGC); (3) the Plaza Lot, which served as
collateral for the Subject Loans, is property of public dominion and thus, cannot be appropriated
either by the State or by private persons;30 and (4) the Subject Loans are ultra vires because
they were transacted without proper authority and their collateralization constituted improper
disbursement of public funds.
Dissatisfied, Land Bank filed the instant petition.
Issues Before the Court
The following issues have been raised for the Court’s resolution: (1) whether Cacayuran has
standing to sue; (2) whether the Subject Resolutions were validly passed; and (3) whether the
Subject Loans are ultra vires.
The Court’s Ruling
The petition lacks merit.
A. Cacayuran’s standing to sue
Land Bank claims that Cacayuran did not have any standing to contest the construction of the
APC as it was funded through the proceeds coming from the Subject Loans and not from public
funds. Besides, Cacayuran was not even a party to any of the Subject Loans and is thus,
precluded from questioning the same.
The argument is untenable.
TAXATION CASES |22
It is hornbook principle that a taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that public money is being deflected to any improper purpose, or that
there is wastage of public funds through the enforcement of an invalid or unconstitutional law.
A person suing as a taxpayer, however, must show that the act complained of directly involves
the illegal disbursement of public funds derived from taxation. In other words, for a taxpayer’s
suit to prosper, two requisites must be met namely, (1) public funds derived from taxation are
disbursed by a political subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed; and (2) the petitioner is directly affected by the alleged act.31
Records reveal that the foregoing requisites are present in the instant case.
First, although the construction of the APC would be primarily sourced from the proceeds of
the Subject Loans, which Land Bank insists are not taxpayer’s money, there is no denying that
public funds derived from taxation are bound to be expended as the Municipality assigned a
portion of its IRA as a security for the foregoing loans. Needless to state, the Municipality’s IRA,
which serves as the local government unit’s just share in the national taxes,32 is in the nature of
public funds derived from taxation. The Court believes, however, that although these funds may
be posted as a security, its collateralization should only be deemed effective during the
incumbency of the public officers who approved the same, else those who succeed them be
effectively deprived of its use.
In any event, it is observed that the proceeds from the Subject Loans had already been
converted into public funds by the Municipality’s receipt thereof. Funds coming from private
sources become impressed with the characteristics of public funds when they are under official
custody.33
Accordingly, the first requisite has been clearly met.
Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by the
conversion of the Agoo Plaza which was funded by the proceeds of the Subject Loans. It is well-
settled that public plazas are properties for public use34 and therefore, belongs to the public
dominion.35 As such, it can be used by anybody and no one can exercise over it the rights of a
private owner.36 In this light, Cacayuran had a direct interest in ensuring that the Agoo Plaza
would not be exploited for commercial purposes through the APC’s construction. Moreover,
Cacayuran need not be privy to the Subject Loans in order to proffer his objections thereto. In
Mamba v. Lara, it has been held that a taxpayer need not be a party to the contract to challenge
its validity; as long as taxes are involved, people have a right to question contracts entered into
by the government.37
Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing to file the
instant suit.
B. Validity of the Subject Resolutions

Land Bank avers that the Subject Resolutions provided ample authority for Mayor Eriguel to
contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC merely requires that
the municipal mayor be authorized by the SB concerned and that such authorization need not
be embodied in an ordinance.38
A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the authorization of the
municipal mayor need not be in the form of an ordinance, the obligation which the said local
executive is authorized to enter into must be made pursuant to a law or ordinance, viz:
Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -
xxxx
(b) For efficient, effective and economical governance the purpose of which is the general
welfare of the municipality and its inhabitants pursuant to Section 16 of this Code, the municipal
mayor shall:
xxxx
(vi) Upon authorization by the sangguniang bayan, represent the municipality in all its business
transactions and sign on its behalf all bonds, contracts, and obligations, and such other
documents made pursuant to law or ordinance; (Emphasis and underscoring supplied)
In the present case, while Mayor Eriguel’s authorization to contract the Subject Loans was not
contained – as it need not be contained – in the form of an ordinance, the said loans and even
the Redevelopment Plan itself were not approved pursuant to any law or ordinance but through
mere resolutions. The distinction between ordinances and resolutions is well-perceived. While
ordinances are laws and possess a general and permanent character, resolutions are merely
declarations of the sentiment or opinion of a lawmaking body on a specific matter and are
temporary in nature.39 As opposed to ordinances, "no rights can be conferred by and be inferred
from a resolution."40 In this accord, it cannot be denied that the SB violated Section 444(b)(1)(vi)
of the LGC altogether.
Noticeably, the passage of the Subject Resolutions was also tainted with other irregularities,
such as (1) the SB’s failure to submit the Subject Resolutions to the Sangguniang Panlalawigan
of La Union for its review contrary to Section 56 of the LGC;41 and (2) the lack of publication and
posting in contravention of Section 59 of the LGC.42
In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the Subject Loans.
C. Ultra vires nature of the Subject
Loans
TAXATION CASES |23
Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts of the
officers who approved the same.
Generally, an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred
upon it by law.43 There are two (2) types of ultra vires acts. As held in Middletown Policemen's
Benevolent Association v. Township of Middletown:44
There is a distinction between an act utterly beyond the jurisdiction of a municipal corporation
and the irregular exercise of a basic power under the legislative grant in matters not in
themselves jurisdictional. The former are ultra vires in the primary sense and void; the latter,
ultra vires only in a secondary sense which does not preclude ratification or the application of
the doctrine of estoppel in the interest of equity and essential justice. (Emphasis and
underscoring supplied)
In other words, an act which is outside of the municipality’s jurisdiction is considered as a void
ultra vires act, while an act attended only by an irregularity but remains within the municipality’s
power is considered as an ultra vires act subject to ratification and/or validation. To the former
belongs municipal contracts which (a) are entered into beyond the express, implied or inherent
powers of the local government unit; and (b) do not comply with the substantive requirements
of law e.g., when expenditure of public funds is to be made, there must be an actual
appropriation and certificate of availability of funds; while to the latter belongs those which (a)
are entered into by the improper department, board, officer of agent; and (b)do not comply
with the formal requirements of a written contract e.g., the Statute of Frauds.45
Applying these principles to the case at bar, it is clear that the Subject Loans belong to the first
class of ultra vires acts deemed as void.
Records disclose that the said loans were executed by the Municipality for the purpose of
funding the conversion of the Agoo Plaza into a commercial center pursuant to the
Redevelopment Plan. However, the conversion of the said plaza is beyond the Municipality’s
jurisdiction considering the property’s nature as one for public use and thereby, forming part of
the public dominion. Accordingly, it cannot be the object of appropriation either by the State or
by private persons.46 Nor can it be the subject of lease or any other contractual undertaking.47 In
Villanueva v. Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court
pronounced that:
x x x Town plazas are properties of public dominion, to be devoted to public use and to be made
available to the public in general. They are outside the commerce of man and cannot be
disposed of or even leased by the municipality to private parties.1âwphi1
In this relation, Article 1409(1) of the Civil Code provides that a contract whose purpose is
contrary to law, morals, good customs, public order or public policy is considered void50 and as
such, creates no rights or obligations or any juridical relations.51 Consequently, given the
 TAXATION CASES |24

unlawful purpose behind the Subject Loans which is to fund the commercialization of the Agoo
Plaza pursuant to the Redevelopment Plan, they are considered as ultra vires in the primary
sense thus, rendering them void and in effect, non-binding on the Municipality.

At this juncture, it is equally observed that the land on which the Agoo Plaza is situated cannot
be converted into patrimonial property – as the SB tried to when it passed Municipal Ordinance
No. 02-200752 – absent any express grant by the national government.53 As public land used for
public use, the foregoing lot rightfully belongs to and is subject to the administration and control
of the Republic of the Philippines.54 Hence, without the said grant, the Municipality has no right
to claim it as patrimonial property.

Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra vires, the
officers who authorized the passage of the Subject Resolutions are personally liable. Case law
states that public officials can be held personally accountable for acts claimed to have been
performed in connection with official duties where they have acted ultra vires,55 as in this case.

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

SO ORDERED.
 TAXATION CASES |25

CIR vs. Estate f Toda On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for
P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half
G.R. No. 147188 September 14, 2004 years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10
COMMISSIONER OF INTERNAL REVENUE, petitioner,
and demand letter to the CIC for deficiency income tax for the year 1989 in the
vs.
amount of P79,099,999.22.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna
Kapunan and Mario Luza Bautista, respondents.
The new CIC asked for a reconsideration, asserting that the assessment should be
directed against the old CIC, and not against the new CIC, which is owned by an
DECISION
entirely different set of stockholders; moreover, Toda had undertaken to hold the
buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years
DAVIDE, JR., C.J.:
1987-1989.11
This Court is called upon to determine in this case whether the tax planning scheme adopted by
a corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in
Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for
CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA)
deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed
in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not
as follows:
liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of
Income Tax – 1989
P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the
Net Income per return P75,987,725.00
assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January
1995.
Add: Additional gain on sale of real property taxable under ordinary corporate income
but were substituted with individual capital gains(P200M – 100M)
The case at bar stemmed from a Notice of Assessment sent to CIC by the
100,000,000.00
Commissioner of Internal Revenue for deficiency income tax arising from an alleged
Total Net Taxable Income per investigation P175,987,725.00
simulated sale of a 16-storey commercial building known as Cibeles Building, situated
Tax Due thereof at 35% P 61,595,703.75
on two parcels of land on Ayala Avenue, Makati City.
Less: Payment already made
1. Per return P26,595,704.00
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of
2. Thru Capital Gains Tax made
99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and
by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
the two parcels of land on which the building stands for an amount of not less than
P90 million.4
P 24,999,999.75
Add: 50% Surcharge
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A.
12,499,999.88
Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc.
25% Surcharge
(RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute
6,249,999.94
Sale notarized on the same day by the same notary public.5
Total
P 43,749,999.57
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of
Add: Interest 20% from
P10 million.6
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989,
==============
declaring, among other things, its gain from the sale of real property in the amount
of P75,728.021. After crediting withholding taxes of P254,497.00, it paid
The Estate thereafter filed a letter of protest.13
P26,341,2078 for its net taxable income of P75,987,725.

In the letter dated 19 October 1995,14 the Commissioner dismissed the protest,
stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly
owned and controlled by Toda by covering up the additional gain of P100 million,
which resulted in the change in the income structure of the proceeds of the sale of
the two parcels of land and the building thereon to an individual capital gains, thus
evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging
that the Commissioner erred in holding the Estate liable for income tax deficiency;
that the inference of fraud of the sale of the properties is unreasonable and
unsupported; and that the right of the Commissioner to assess CIC had already
prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that the two
transactions actually constituted a single sale of the property by CIC to RMI, and that
Altonaga was neither the buyer of the property from CIC nor the seller of the same
property to RMI. The additional gain of P100 million (the difference between the
second simulated sale for P200 million and the first simulated sale for P100 million)
realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income
tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false
or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March
1991, the assessment issued on 9 January 1995 was well within the prescriptive
period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986,
which provides that tax may be assessed within ten years from the discovery of the
falsity or fraud. With the sale being tainted with fraud, the separate corporate
personality of CIC should be disregarded. Toda, being the registered owner of the
99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009%
shares registered in the name of the individual directors of CIC, should be held liable
for the deficiency income tax, especially because the gains realized from the sale were
withdrawn by him as cash advances or paid to him as cash dividends. Since he is
already dead, his estate shall answer for his liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to
prove that CIC committed fraud to deprive the government of the taxes due it. It ruled
that even assuming that a pre-conceived scheme was adopted by CIC, the same
constituted mere tax avoidance, and not tax evasion. There being no proof of
fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day
prescribed by law for the filing of the return. Thus, the government’s right to assess
CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the
separate corporate personality of CIC. Hence, the CTA declared that the Estate is not
liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set
aside the assessment issued by the Commissioner on 9 January 1995.
TAXATION CASES |26
In its motion for reconsideration,19 the Commissioner insisted that the sale of the
property owned by CIC was the result of the connivance between Toda and Altonaga.
She further alleged that the latter was a representative, dummy, and a close business
associate of the former, having held his office in a property owned by CIC and derived
his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied20 the motion for reconsideration,
prompting the Commissioner to file a petition for review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the
decision of the CTA, reasoning that the CTA, being more advantageously situated and
having the necessary expertise in matters of taxation, is "better situated to determine
the correctness, propriety, and legality of the income tax assessments assailed by the
Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the
present petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO
FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO
ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that
the sale by CIC of the Cibeles property was in connivance with its dummy Rafael
Altonaga, who was financially incapable of purchasing it. She further points out that
the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale
between Altonaga and RMI was notarized ahead of the alleged sale between CIC and
Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92,
Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989,
CIC received P40 million from RMI, and not from Altonaga. The said amount was
debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building.
The substantial portion of P40 million was withdrawn by Toda through the declaration
of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the
income tax return of Altonaga to prove that the latter is financially incapable of
purchasing the Cibeles property.

To resolve the grounds raised by the Commissioner, the following questions are
pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989
prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the
year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in
escaping from taxation. Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further or additional
civil or criminal liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e.,
the payment of less than that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due; (2) an accompanying state of mind
which is described as being "evil," in "bad faith," "willfull," or "deliberate and not
accidental"; and (3) a course of action or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that as early
as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga
on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That
P40 million was debited by RMI and reflected in its trial balance26 as "other inv. –
Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected
in RMI’s trial balance as "other inv. – Cibeles Bldg." This would show that the real
buyer of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net
The investigation conducted by the BIR disclosed that Altonaga was a close business
associate and one of the many trusted corporate executives of Toda. This information
was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in
the company.27 But Mr. Prieto did not testify on this matter, hence, that information
remains to be hearsay and is thus inadmissible in evidence. It was not verified either,
since the letter-request for investigation of Altonaga was unserved,28 Altonaga
having left for the United States of America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the admission of respondent Estate that
TAXATION CASES |27
the sale to him was part of the tax planning scheme of CIC. That admission is borne
by the records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the proceeds of sale.
Admitted one hundred percent. But isn’t this precisely the definition of tax planning?
Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax
Code exists, allowing tax free transfers of property for stock, changing the structure
of the property and the tax to be paid. As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is not against the law. It is absolutely
allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely
petitioner [sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29
[Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the
subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot
be considered a legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to deceive,
including all acts, omissions, and concealment involving a breach of legal or equitable
duty, trust or confidence justly reposed, resulting in the damage to another, or by
which an undue and unconscionable advantage is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount
of tax to be paid especially that the transfer from him to RMI would then subject the
income to only 5% individual capital gains tax, and not the 35% corporate income tax.
Altonaga’s sole purpose of acquiring and transferring title of the subject properties
on the same day was to create a tax shelter. Altonaga never controlled the property
and did not enjoy the normal benefits and burdens of ownership. The sale to him was
merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the
end in view of reducing the consequent income tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was
prompted more on the mitigation of tax liabilities than for legitimate business
purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax incidence only when it
is consummated.32 The incidence of taxation depends upon the substance of a
transaction. The tax consequences arising from gains from a sale of property are not
finally to be determined solely by the means employed to transfer legal title. Rather,
the transaction must be viewed as a whole, and each step from the commencement
of negotiations to the consummation of the sale is relevant. A sale by one person
cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the transaction to

be disguised by mere formalisms, which exist solely to alter tax liabilities, would
seriously impair the effective administration of the tax policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was made through
another and distinct entity when it is proved that the latter was merely a conduit is to
sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be
disregarded for income tax purposes.34 The two sale transactions should be treated
as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986,
as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is
hereby imposed upon the taxable net income received during each taxable year from
all sources by every corporation organized in, or existing under the laws of the
Philippines, and partnerships, no matter how created or organized but not including
general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one
hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989.
The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635
(now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable.
Hence, the assessment for the deficiency income tax issued by the BIR must be
upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997)
read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to
file a return, the tax may be assessed, or a proceeding in court after 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: Provided, That in a fraud assessment which
has become final and executory, the fact of fraud shall be judicially taken cognizance
of in the civil or criminal action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade
tax; and (3) failure to file a return, the period within which to assess tax is ten years
from discovery of the fraud, falsification or omission, as the case may be.
TAXATION CASES |28
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked
the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus,
the BIR was amply informed of the transactions even prior to the execution of the
necessary documents to effect the transfer. Subsequently, the two sales were openly
made with the execution of public documents and the declaration of taxes for 1989.
However, these circumstances do not negate the existence of fraud. As earlier
discussed those two transactions were tainted with fraud. And even assuming
arguendo that there was no fraud, we find that the income tax return filed by CIC for
the year 1989 was false. It did not reflect the true or actual amount gained from the
sale of the Cibeles property. Obviously, such was done with intent to evade or reduce
tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false
returns is ten years from the discovery of the falsity. The false return was filed on 15
April 1990, and the falsity thereof was claimed to have been discovered only on 8
March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued
on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency
income tax was well within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance
Corporation?
A corporation has a juridical personality distinct and separate from the persons
owning or composing it. Thus, the owners or stockholders of a corporation may not
generally be made to answer for the liabilities of a corporation and vice versa. There
are, however, certain instances in which personal liability may arise. It has been held
in a number of cases that personal liability of a corporate director, trustee, or officer
along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate
action.38
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa,
he knowingly and voluntarily held himself personally liable for all the tax liabilities of
CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale
of Shares of Stocks specifically provides:
 TAXATION CASES |29

g. Except for transactions occurring in the ordinary course of business, Cibeles has no
liabilities or obligations, contingent or otherwise, for taxes, sums of money or
insurance claims other than those reported in its audited financial statement as of
December 31, 1989, attached hereto as "Annex B" and made a part hereof. The
business of Cibeles has at all times been conducted in full compliance with all
applicable laws, rules and regulations. SELLER undertakes and agrees to hold the
BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal
years 1987, 1988 and 1989.39 [Underscoring Supplied].

When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from
any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he
thereby voluntarily held himself personally liable therefor. Respondent estate cannot,
therefore, deny liability for CIC’s deficiency income tax for the year 1989 by invoking
the separate corporate personality of CIC, since its obligation arose from Toda’s
contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The
decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is
REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent
Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of
Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994
until the amount is fully paid.

Costs against respondent.

SO ORDERED.

G.R. No. 196596, November 09, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY,

INC., Respondent.

G.R. No. 198841

DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE,Respondent.

 TAXATION CASES |30

XIV, Section 4 (3) of the Constitution, which reads:

G.R. No. 198941 chanRoblesvirtualLawlibrary

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE UNIVERSITY, (3) All revenues and assets of non-stock, non-profit educational institutions used actually,
INC., Respondent. directly, and exclusively for educational purposes shall be exempt from taxes and
duties. xxx.
DECISION On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The dispositive
portion of the decision reads:
BRION, J.: chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on the loan
transactions of [DLSU] in the amount of P1,1681,774.00 is hereby CANCELLED. However, [DLSU]
Before the Court are consolidated petitions for review on certiorari:1
is ORDERED TO PAY deficiency income tax, VAT and DST on its lease contracts, plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to
assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount
Tax Appeals (CTA) in En Banc Case No. 622;2 due computed from September 30, 2004 until full payment thereof pursuant to Section
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise penalties imposed
decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and by [the Commissioner] were excluded, there. being no compromise agreement between the
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and parties.
October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA SO ORDERED.9ChanRoblesVirtualawlibrary
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En BancCase No. 622 filed by the Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both stemmed decision.10 On April 6, 2010, the CTA Division denied the Commissioner's motion for
from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No. reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration.11
7303.chanroblesvirtuallawlibrary
The Factual Antecedents On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No. 622)
arguing that DLSU's use of its revenues and assets for non-educational or commercial purposes
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority (LOA) removed these items from the exemption coverage under the Constitution.12
No. 2794 authorizing its revenue officers to examine the latter's books of accounts and other
accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003 and On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
Unverified Prior Years.5 documentary evidence to prove that its rental income was used actually, directly and exclusively
for educational purposes.13The Commissioner did not promptly object to the formal offer of
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6 supplemental evidence despite notice.14

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU
the following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAT) on business income; and
(3) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded the payment
of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced
the amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY GRANTED. [DLSU]
is hereby ORDERED TO PAY for deficiency income tax, VAT and DST plus 25% surcharge for the
fiscal years 2001, 2002 and 2003 in the total adjusted amount of P5,506,456.71...xxx.

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed
on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the...basic
deficiency taxes...until full payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code]...xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the
 TAXATION CASES |31

deficiency taxes, surcharge and deficiency interest which have accrued...from September 30, be governed strictly by the technical rules of evidence.26
2004 until fully paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December
that the CTA Division erred in admitting DLSU's additional evidence.16 10, 2010 decision.27 Thus, she came to this court for relief through a petition for review
on certiorari (G.R. No. 196596).
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for
review with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the CTA En Banc Case No. 671
entire assessment should have been cancelled because it was based on an invalid LOA; (2)
assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment The CTA En Banc partially granted DLSU's petition for review and further reduced its tax
because DLSU submitted evidence similar to those submitted by Ateneo De Manila University liabilities to P2,554,825.47 inclusive of surcharge.28
(Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of DLSU's rental income was not proved to have been On the validity of the Letter of Authority
used actually, directly and exclusively for educational purposes.18chanroblesvirtuallawlibrary
The CTA En Banc Rulings The issue of the LOA's validity was raised during trial;29 hence, the issue was deemed properly
submitted for decision and reviewable on appeal.
CTA En Banc Case No. 622
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period and
The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings that the practice of issuing a LOA covering audit of unverified prior years is prohibited.30 The
of the CTA Division.19 prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90, which provides
that if the audit includes more than one taxable period, the other periods or years shall be
Tax on rental income specifically indicated in the LOA.31

Relying on the findings of the court-commissioned Independent Certified Public Accountant In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable years 2001
assessed rental income was used actually, directly and exclusively for educational purposes; and 2002 are void, but the assessment for taxable year 2003 is valid.32
hence, exempt from tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence
confirming that part of its rental income had indeed been used to pay the loan it obtained to On the applicability of the Ateneo case
build the university's Physical Education - Sports Complex.21
The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that parties, factual settings, bases of assessments, sets of evidence, and defenses.33
was not shown by supporting documents to have been actually, directly and exclusively used
for educational purposes, must be subjected to income tax and VAT.22 On the CTA Division's appreciation of the evidence

DST on loan and mortgage transactions The CTA En Banc affirmed the CTA Division's appreciation of DLSU's evidence. It held that while
DLSU successfully proved that a portion of its rental income was transmitted and used to pay
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST due on its the loan obtained to fund the construction of the Sports Complex, the rental income
loan and mortgage documents.23 The CTA En Banc found that DLSU's DST payments had been from other sources were not shown to have been actually, directly and exclusively used for
remitted to the BIR, evidenced by the stamp on the documents made by a DST imprinting educational purposes.34
machine, which is allowed under Section 200 (D) of the National Internal Revenue Code (Tax
Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25cralawred Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the Commissioner
(G.R. No. 198941) came to this Court for relief.chanroblesvirtuallawlibrary
Admissibility of DLSU's supplemental evidence The Consolidated Petitions

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible G.R. No. 196596
even if DLSU formally offered them only when it moved for reconsideration of the CTA Division's
original decision. Notably, the law creating the CTA provides that proceedings before it shall not The Commissioner submits the following arguments:
 TAXATION CASES |32

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
First, DLSU's rental income is taxable regardless of how such income is derived, used or disposed prohibited.ChanRoblesVirtualawlibrary
of.35 DLSU's operations of canteens and bookstores within its campus even though exclusively it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
serving the university community do not negate income tax liability.36 issued to DLSU follows this format, then any assessment arising from it must
be entirely voided.48
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the income Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
of whatever kind and character of [a non-stock and non-profit educational institution] from any situated parties, the same set of evidence should be appreciated and weighed in the same
of [its] properties, real or personal, or from any of (its] activities conducted for profit regardless manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU's evidence as it did
of the disposition made of such income, shall be subject to tax imposed by this Code.37 to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational
institution.50
The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that revenues however G.R. No. 198941
generated are covered by the constitutional exemption, provided that, the revenues will be
used for educational purposes or will be held in reserve for such purposes.39 The issues and arguments raised by the Commissioner in G.R. No. 198941 petition are exactly
the same as those she raised in her: (1) petition docketed as G.R. No. 196596 and (2) comment
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt on DLSU's petition docketed as G.R. No. 198841.51chanroblesvirtuallawlibrary
only from property tax but not from income tax on the rentals earned from property.40 Thus, Counter-arguments
DLSU's income from the leases of its real properties is not exempt from taxation even if the
income would be used for educational purposes.41 DLSU's Comment on G.R. No. 196596

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it First, DLSU questions the defective verification attached to the petition.52
is not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only to
certain classes of taxpayers under RR No. 9-2000.43 Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets
and revenues of non-stock, non-profit educational institutions used actually, directly and
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence. exclusively for educational purposes are exempt from taxes and duties.53
The belated submission of supplemental evidence reopened the case for trial, and worse, DLSU
offered the supplemental evidence only after it received the unfavorable CTA Division's original On this point, DLSU explains that: (1) the tax exemption of non�stock, non-profit educational
decision.44 In any case, DLSU's submission of supplemental documentary evidence was institutions is novel to the 1987 Constitution and that Section 30 (H) of the 1997 Tax
unnecessary since its rental income was taxable regardless of its disposition.45 Code cannot amend the 1987 Constitution;54 (2) Section 30 of the 1997 Tax Code is almost an
exact replica of Section 26 of the 1977 Tax Code - with the addition of non-stock, non-profit
G.R. No. 198841 educational institutions to the list of tax-exempt entities; and (3) that the 1977 Tax Code was
promulgated when the 1973 Constitution was still in place.
DLSU argues as that:
DLSU elaborates that the tax exemption granted to a private educational institution under the
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified 1973 Constitution was only for real property tax. Back then, the special tax treatment
prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based on income of private educational institutions only emanates from statute, i.e., the 1977 Tax
on such defective LOA must also be void.46 Code. Only under the 1987 Constitution that exemption from tax of all the assets and
revenues of non-stock, non-profit educational institutions used actually, directly and exclusively
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified for educational purposes, was expressly and categorically enshrined.55
Prior Years. On the basis of this defective LOA, the Commissioner assessed DLSU for deficiency
income tax, VAT and DST for taxable years 2001, 2002 and 2003.47 DLSU objects to the CTA En DLSU thus invokes the doctrine of constitutional supremacy, which renders any subsequent law
Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU, when RMO No. that is contrary to the Constitution void and without any force and effect.56 Section 30 (H) of
43-90 provides that: the 1997 Tax Code insofar as it subjects to tax the income of whatever kind and character of a
chanRoblesvirtualLawlibrary non�stock and non-profit educational institution from any of its properties, real or personal,
or from any of its activities conducted for profit regardless of the disposition made of such
 TAXATION CASES |33

income, should be declared without force and effect in view of the constitutionally granted tax I. Whether DLSU's income and revenues proved to have been used actually, directly and
exemption on "all revenues and assets of non-stock, non-profit educational institutions used exclusively for educational purposes are exempt from duties and taxes;chanrobleslaw
actually, directly, and exclusively for educational purposes."57 II. Whether the entire assessment should be voided because of the defective
LOA;chanrobleslaw
DLSU further submits that it complies with the requirements enunciated in the YMCA case, that III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence; and
for an exemption to be granted under Article XIV, Section 4 (3) of the Constitution, the taxpayer IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may be
must prove that: (1) it falls under the classification non-stock, non-profit educational institution; disturbed by the Court.
and (2) the income it seeks to be exempted from taxation is used actually, directly and Our Ruling
exclusively for educational purposes.58 Unlike YMCA, which is not an educational institution,
DLSU is undisputedly a non-stock, non-profit educational institution. It had also submitted As we explain in full below, we rule that:
evidence to prove that it actually, directly and exclusively used its income for educational
purposes.59 I. The income, revenues and assets of non-stock, non-profit educational institutions
proved to have been used actually, directly and exclusively for educational purposes
DLSU also cites the deliberations of the 1986 Constitutional Commission where they recognized are exempt from duties and taxes.
that the tax exemption was granted "to incentivize private educational institutions to share with II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is
the State the responsibility of educating the youth."60 valid.
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and
Third, DLSU highlights that both the CTA En Banc and Division found that the bank that handled IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to have
DLSU's loan and mortgage transactions had remitted to the BIR the DST through an imprinting manifestly overlooked certain relevant facts not disputed by the parties and which, if
machine, a method allowed under RR No. 15-2001.61 In any case, DLSU argues that it cannot be properly considered, would justify a different conclusion.
held liable for DST owmg to the exemption granted under the Constitution.62
The parties failed to convince the Court that the CTA overlooked or failed to consider
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the formal relevant facts. We thus sustain the CTA En Banc's findings that:
offer of supplemental evidence. Because of the Commissioner's failure to timely object, she a. DLSU proved that a portion of its rental income was used actually, directly
became bound by the results of the submission of such supplemental evidence.63 and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting
The CIR's Comment on G.R. No. 198841 machine.
I. The revenues and assets of non-stock, non-profit educational institutions proved to have been
The Commissioner submits that DLSU is estopped from questioning the LOA's validity because used actually, directly, and exclusively for educational purposes are exempt from duties and taxes.
it failed to raise this issue in both the administrative and judicial proceedings.64 That it was asked
on cross�examination during the trial does not make it an issue that the CTA could DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
resolve.65 The Commissioner also maintains that DLSU's rental income is not tax-exempt chanRoblesvirtualLawlibrary
because an educational institution is only exempt from property tax but not from tax on the
income earned from the property.66 (3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and
DLSU's Comment on G.R. No. 198941 duties. Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner provided by
DLSU puts forward the same counter-arguments discussed above.67 law. Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by
In addition, DLSU prays that the Court award attorney's fees in its favor because it was law including restrictions on dividends and provisions for reinvestment [underscoring
constrained to unnecessarily retain the services of counsel in this separate and emphasis supplied]
petition.68chanroblesvirtuallawlibrary
Before fully discussing the merits of the case, we observe that:
Issues
First, the constitutional provision refers to two kinds of educational institutions: (1) non-stock,
Although the parties raised a number of issues, the Court shall decide only the pivotal issues,
which we summarize as follows: non-profit educational institutions and (2) proprietary educational institutions.69
 TAXATION CASES |34

Second, DLSU falls under the first category. Even the Commissioner admits the status of DLSU Constitution. The Court in that case made doctrinal pronouncements that are relevant to the
as a non-stock, non-profit educational institution.70 present case.

Third, while DLSU's claim for tax exemption arises from and is based on the Constitution, the The issue in YMCA was whether the income derived from rentals of real property owned by the
Constitution, in the same provision, also imposes certain conditions to avail of the exemption. YMCA, established as a "welfare, educational and charitable non-profit corporation," was
We discuss below the import of the constitutional text vis-a-vis the Commissioner's counter- subject to income tax under the Tax Code and the Constitution.72
arguments.
The Court denied YMCA's claim for exemption on the ground that as a charitable
Fourth, there is a marked distinction between the treatment of non�stock, non-profit institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is not tax-
educational institutions and proprietary educational institutions. The tax exemption granted to exempt per se; "what is exempted is not the institution itself...those exempted from real estate
non-stock, non-profit educational institutions is conditioned only on the actual, direct and taxes are lands, buildings and improvements actually, directly and exclusively used for religious,
exclusive use of their revenues and assets for educational purposes. While tax exemptions may charitable or educational purposes."74
also be granted to proprietary educational institutions, these exemptions may be subject to
limitations imposed by Congress. The Court held that the exemption claimed by the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section 30) of the Tax Code, which mandates that the
As we explain below, the marked distinction between a non-stock, non-profit and a proprietary income of exempt organizations from any of their properties, real or personal, are subject to
educational institution is crucial in determining the nature and extent of the tax exemption the same tax imposed by the Tax Code, regardless of how that income is used. The Court ruled
granted to non-stock, non-profit educational institutions. that the last paragraph of Section 27 unequivocally subjects to tax the rent income of the YMCA
from its property.75
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section 30 (H) of the
Tax Code. The relevant text reads: In short, the YMCA is exempt only from property tax but not from income tax.
chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in respect to As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked the tax
income received by them as such: privilege granted under Article XIV, Section 4 (3) of the Constitution.
xxxx
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the Constitution
(H) A non-stock and non-profit educational institution holding that the term educational institution, when used in laws granting tax exemptions, refers
xxxx to the school system (synonymous with formal education); it includes a college or an
educational establishment; it refers to the hierarchically structured and chronologically graded
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and learnings organized and provided by the formal school system.76
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 The Court then significantly laid down the requisites for availing the tax exemption under Article
be subject to tax imposed under this Code. [underscoring and emphasis XIV, Section 4 (3), namely: (1) the taxpayer falls under the classification non-stock, non-profit
supplied]ChanRoblesVirtualawlibrary educational institution; and (2) the income it seeks to be exempted from taxation is used
The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted to non- actually, directly and exclusively for educational purposes.77
stock, non-profit educational institutions such that the revenues and income they derived from
their assets, or from any of their activities conducted for profit, are taxable even if these We now adopt YMCA as precedent and hold that:
revenues and income are used for educational purposes.
1. The last paragraph of Section 30 of the Tax Code is without force and effect with
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-stock, non- respect to non-stock, non-profit educational institutions, provided, that the non-
profit educational institutions? stock, non-profit educational institutions prove that its assets and revenues are used
actually, directly and exclusively for educational purposes.
We answer in the negative. 2. The tax-exemption constitutionally-granted to non-stock, non� profit educational
institutions, is not subject to limitations imposed by law.
While the present petition appears to be a case of first impression,71 the Court in the YMCA case The tax exemption granted by the Constitution to non-stock, non-profit educational institutions
had in fact already analyzed and explained the meaning of Article XIV, Section 4 (3) of the is conditioned only on the actual, direct and exclusive use of their assets, revenues and
 TAXATION CASES |35

income78for educational purposes. specific tax from which the entity shall be exempted from shall depend on whether the item is
an item of revenue or asset.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable
institutions, churches, parsonages or convents, mosques, and non-profit cemeteries), which To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
exempts from tax only the assets, i.e., "all lands, buildings, and improvements, actually, directly, leased portion is not actually, directly and exclusively used for educational purposes, even if the
and exclusively used for religious, charitable, or educational purposes...," Article XIV, Section 4 bookstore or canteen caters only to university students, faculty and staff.
(3) categorically states that "[a]ll revenues and assets... used actually, directly, and exclusively
for educational purposes shall be exempt from taxes and duties." The leased portion of the building may be subject to real property tax, as held in Abra Valley
College, Inc. v. Aquino.90 We ruled in that case that the test of exemption from taxation is the
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the use of the property for purposes mentioned in the Constitution. We also held that the
Constitution is not without significance. exemption extends to facilities which are incidental to and reasonably necessary for the
accomplishment of the main purposes.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from the
records of the 1986 Constitutional Commission79 to provide broader tax privilege to non-stock, In concrete terms, the lease of a portion of a school building for commercial purposes, removes
non-profit educational institutions as recognition of their role in assisting the State provide a such asset from the property tax exemption granted under the Constitution.91 There is no
public good. The tax exemption was seen as beneficial to students who may otherwise be exemption because the asset is not used actually, directly and exclusively for educational
charged unreasonable tuition fees if not for the tax exemption extended to all revenues and purposes. The commercial use of the property is also not incidental to and reasonably necessary
assets of non-stock, non-profit educational institutions.80 for the accomplishment of the main purpose of a university, which is to educate its students.

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from educational activities
or activities related to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long as the revenues and
income are used actually, directly and exclusively for educational purposes, then said revenues
and income shall be exempt from taxes and duties.81
We find it helpful to discuss at this point the taxation of revenues versus the taxation of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of business
operations.82 It may refer to the sale of goods, rendition of services, or the return of an
investment. Revenue is a component of the tax base in income tax,83 VAT,84 and local business
tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a person or
entity.86 It may refer to real estate, cash deposit in a bank, investment in the stocks of a
corporation, inventory of goods, or any property from which the person or entity may derive
income or use to generate the same. In Philippine taxation, the fair market value of real property
is a component of the tax base in real property tax (RPT).87 Also, the landed cost of imported
goods is a component of the tax base in VAT on importation88 and tariff duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its assets in
the form of real property for educational purposes, it shall be exempted from RPT.
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues shall be
exempt from taxes and duties. The tax exemption no longer hinges on the use of the asset from
which the revenues were earned, but on the actual, direct and exclusive use of the revenues for
educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational institution not used
actually, directly and exclusively for educational purposes are not exempt from duties and taxes.
To avail of the exemption, the taxpayer must factually prove that it used actually, directly and
exclusively for educational purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the revenues. These
are two things that must be viewed and treated separately. But so long as the assets or revenues
are used actually, directly and exclusively for educational purposes, they are exempt from duties
and taxes.
The tax exemption granted by the Constitution to non-stock, non-profit educational institutions,
unlike the exemption that may be availed of by proprietary educational institutions, is not subject
to limitations imposed by law.
That the Constitution treats non-stock, non-profit educational institutions differently from
proprietary educational institutions cannot be doubted. As discussed, the privilege granted to
the former is conditioned only on the actual, direct and exclusive use of their revenues and
assets for educational purposes. In clear contrast, the tax privilege granted to the latter may be
subject to limitations imposed by law.

To be clear, proving the actual use of the taxable item will result in an exemption, but the We spell out below the difference in treatment if only to highlight the privileged status of non-
 TAXATION CASES |36

stock, non-profit educational institutions compared with their proprietary counterparts. accordance with Section 5 of the Tax Code, which gives the CIR the power to obtain information,
to summon/examine, and take testimony of persons. The LOA commences the audit
While a non-stock, non-profit educational institution is classified as a tax-exempt entity under process97 and informs the taxpayer that it is under audit for possible deficiency tax assessment.
Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational
institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations). Given the purposes of a LOA, is there basis to completely nullify the LOA issued to DLSU, and
consequently, disregard the BIR and the CTA's findings of tax deficiency for taxable year 2003?
To be specific, Section 30 provides that exempt organizations like non-stock, non-profit
educational institutions shall not be taxed on income received by them as such. We answer in the negative.

Section 27 (B), on the other hand, states that [p]roprietary educational institutions...which are The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which reads:
nonprofit shall pay a tax of ten percent (10%) on their taxable income...Provided, that if the chanRoblesvirtualLawlibrary
gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the
total gross income derived by such educational institutions...[the regular corporate income tax 3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable
of 30%] shall be imposed on the entire taxable income...92 year. The practice of issuing [LOAs] covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
By the Tax Code's clear terms, a proprietary educational institution is entitled only to the other periods or years shall be specifically indicated in the [LOA].98
reduced rate of 10% corporate income tax. The reduced rate is applicable only if: (1) the What this provision clearly prohibits is the practice of issuing LOAs covering audit of unverified
proprietary educational institution is non� profit and (2) its gross income from unrelated trade, prior years. RMO 43-90 does not say that a LOA which contains unverified prior years is void. It
business or activity does not exceed 50% of its total gross income. merely prescribes that if the audit includes more than one taxable period, the other periods or
years must be specified. The provision read as a whole requires that if a taxpayer is audited for
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not apply to more than one taxable year, the BIR must specify each taxable year or taxable period on
non-stock, non-profit educational institutions. separate LOAs.

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for Read in this light, the requirement to specify the taxable period covered by the LOA is simply to
being contrary to the Constitution insofar as it subjects to tax the income and revenues of non- inform the taxpayer of the extent of the audit and the scope of the revenue officer's authority.
stock, non-profit educational institutions used actually, directly and exclusively for educational Without this rule, a revenue officer can unduly burden the taxpayer by demanding random
purpose. We make this declaration in the exercise of and consistent with our duty 93 to uphold accounting records from random unverified years, which may include documents from as far
the primacy of the Constitution.94 back as ten years in cases of fraud audit.99

Finally, we stress that our holding here pertains only to non-stock, non-profit educational In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior
institutions and does not cover the other exempt organizations under Section 30 of the Tax Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified prior
Code. years. This does not mean, however, that the entire LOA is void.

For all these reasons, we hold that the income and revenues of DLSU proven to have been used As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable
actually, directly and exclusively for educational purposes are exempt from duties and taxes. period is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year
2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid. been unspecified on separate LOAs as required under RMO No. 43-90.

DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year 2003 and Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's validity at the
insists that the entire LOA should be voided for being contrary to RMO No. 43-90, which CTA Division, and thus, should not have been entertained on appeal, is not accurate.
provides that if tax audit includes more than one taxable period, the other periods or years shall
be specifically indicated in the LOA. On the contrary, the CTA En Banc found that the issue of the LOA's validity came up during the
trial.100 DLSU then raised the issue in its memorandum and motion for partial
A LOA is the authority given to the appropriate revenue officer to examine the books of account reconsideration with the CTA Division. DLSU raised it again on appeal to the CTA En Banc. Thus,
and other accounting records of the taxpayer in order to determine the taxpayer's correct the CTA En Banc could, as it did, pass upon the validity of the LOA.101 Besides, the Commissioner
internal revenue liabilities95 and for the purpose of collecting the correct amount oftax,96 in had the opportunity to argue for the validity of the LOA at the CTA En Banc but she chose not
 TAXATION CASES |37

to file her comment and memorandum despite notice.102 as in the present case, did not oppose the taxpayer's motion for reconsideration and the
admission of the Final Adjustment Return.110 We thus admitted and gave weight to the Final
III. The CTA correctly admitted the supplemental evidence formally offered by DLSU. Adjustment Return although it was only submitted upon motion for reconsideration.

The Commissioner objects to the CTA Division's admission of DLSU's supplemental pieces of We held that while it is true that strict procedural rules generally frown upon the submission of
documentary evidence. documents after the trial, the law creating the CTA specifically provides that proceedings before
it shall not be governed strictly by the technical rules of evidence111 and that the paramount
To recall, DLSU formally offered its supplemental evidence upon filing its motion for consideration remains the ascertainment of truth. We ruled that procedural rules should not
reconsideration with the CTA Division.103 The CTA Division admitted the supplemental evidence, bar courts from considering undisputed facts to arrive at a just determination of a
which proved that a portion of DLSU's rental income was used actually, directly and exclusively controversy.112
for educational purposes. Consequently, the CTA Division reduced DLSU's tax liabilities.
We applied the same reasoning in the subsequent cases of Filinvest Development Corporation
We uphold the CTA Division's admission of the supplemental evidence on distinct but mutually v. Commissioner of Internal Revenue113 and Commissioner of Internal Revenue v. PERF Realty
reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the formal offer of Corporation,114 where the taxpayers also submitted the supplemental supporting document
supplemental evidence; and (2) the CTA is not governed strictly by the technical rules of evidence. only upon filing their motions for reconsideration.

First, the failure to object to the offered evidence renders it admissible, and the court cannot, Although the cited cases involved claims for tax refunds, we also dispense with the strict
on its own, disregard such evidence.104 application of the technical rules of evidence in the present tax assessmentcase. If anything, the
liberal application of the rules assumes greater force and significance in the case of a taxpayer
The Court has held that if a party desires the court to reject the evidence offered, it must so who claims a constitutionally granted tax exemption. While the taxpayers in the cited cases
state in the form of a timely objection and it cannot raise the objection to the evidence for the claimed refund of excess tax payments based on the Tax Code,115 DLSU is claiming tax
first time on appeal.105 exemption based on the Constitution. If liberality is afforded to taxpayers who paid more than
they should have under a statute, then with more reason that we should allow a taxpayer to
Because of a party's failure to timely object, the evidence offered becomes part of the evidence prove its exemption from tax based on the Constitution.
in the case. As a consequence, all the parties are considered bound by any outcome arising from
the offer of evidence properly presented.106 Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not only
because the Commissioner failed to promptly object, but more so because the strict application
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal offer of of the technical tules of evidence may defeat the intent of the Constitution.
evidence despite notice.107 The Commissioner objected to the admission of the supplemental
evidence only when the case was on appeal to the CTA En Banc. By the time the Commissioner IV. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons
raised her objection, it was too late; the formal offer, admission and evaluation of the justify otherwise.
supplemental evidence were all fait accompli.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the CTA which,
We clarify that while the Commissioner's failure to promptly object had no bearing on the by the very nature of its function of being dedicated exclusively to the resolution of tax
materiality or sufficiency of the supplemental evidence admitted, she was bound by the problems, has developed an expertise on the subject, unless there has been an abuse or
outcome of the CTA Division's assessment of the evidence.108 improvident exercise of authority.116 We thus accord the findings of fact by the CTA with the
highest respect. These findings of facts can only be disturbed on appeal if they are not
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA Division's supported by substantial evidence or there is a showing of gross error or abuse on the part of
admission of the formal offer of supplemental evidence, without prompt objection from the the CTA. In the absence of any clear and convincing proof to the contrary, this Court must
Commissioner, was thus justified. presume that the CTA rendered a decision which is valid in every respect.117

Notably, this Court had in the past admitted and considered evidence attached to the taxpayers' We sustain the factual findings of the CTA.
motion for reconsideration.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU had used
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant attached actually, directly and exclusively for educational purposes a portion of its assessed income and
to its motion for reconsideration with the CTA its Final Adjustment Return. The Commissioner, that it had remitted the DST payments though an online imprinting machine.
 TAXATION CASES |38

a. DLSU used actually, directly, and exclusively for educational purposes a portion of its The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for taxable
assessed income. years 2001 and 2002 due to the defective LOA.124
To see how the CTA arrived at its factual findings, we review the process undertaken, from
which it deduced that DLSU successfully proved that it used actually, directly and exclusively for The Court finds that the above fact-finding process undertaken by the CTA shows that it based
educational purposes a portion of its rental income. its ruling on the evidence on record, which we reiterate, were examined and verified by the
Independent CPA. Thus, we see no persuasive reason to deviate from these factual findings.
The CTA reduced DLSU's deficiency income tax and VAT liabilities in view of the submission of
the supplemental evidence, which consisted of statement of receipts, statement of However, while we generally respect the factual findings of the CTA, it does not mean that we
disbursement and fund balance and statement of fund changes.118 are bound by its conclusions. In the present case, we do not agree with the method used by the
CTA to arrive at DLSU's unsubstantiated rental income (i.e., income not proved to have been
These documents showed that DLSU borrowed P93.86 Million,119 which was used to build the actually, directly and exclusively used for educational purposes).
university's Sports Complex. Based on these pieces of evidence, the CTA found that DLSU's
rental income from its concessionaires were indeed transmitted and used for the payment of To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in taxable year
this loan. The CTA held that the degree of preponderance of evidence was sufficiently met to 2003.125 DLSU earned this income from leasing a portion of its premises to: 1) MTO-Sports
prove actual, direct and exclusive use for educational purposes. Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri International, and 6) MTO
Bookstore.126
The CTA also found that DLSU's rental income from other concessionaires, which were allegedly
deposited to a fund (CF-CPA Account),120 intended for the university's capital projects, was not To prove that its rental income was used for educational purposes, DLSU identified the
proved to have been used actually, directly and exclusively for educational purposes. The CTA transactions where the rental income was expended, viz.: 1) P4,007,724.00127 used to pay the
observed that "[DLSU]...failed to fully account for and substantiate all the disbursements from loan obtained by DLSU to build the Sports Complex; and 2) P6,602,655.00 transferred to the CF-
the [fund]." Thus, the CTA "cannot ascertain whether rental income from the [other] CPA Account.128
concessionaires was indeed used for educational purposes."121
DLSU also submitted documents to the Independent CPA to prove that the P6,602,655.00
To stress, the CTA's factual findings were based on and supported by the report of the transferred to the CF-CPA Account was used actually, directly and exclusively for educational
Independent CPA who reviewed, audited and examined the voluminous documents submitted purposes. According to the Independent CPA' findings, DLSU was able to substantiate
by DLSU. disbursements from the CF-CPA Account amounting to P6,259,078.30.

Under the CTA Revised Rules, an Independent CPA's functions include: (a) examination and
verification of receipts, invoices, vouchers and other long accounts; (b) reproduction of, and
comparison of such reproduction with, and certification that the same are faithful copies of
original documents, and pre-marking of documentary exhibits consisting of voluminous
documents; (c) preparation of schedules or summaries containing a chronological listing of the
numbers, dates and amounts covered by receipts or invoices or other relevant documents and
the amount(s) of taxes paid; (d) making findings as to compliance with substantiation
requirements under pertinent tax laws, regulations and jurisprudence; (e) submission of a formal
report with certification of authenticity and veracity of findings and conclusions in the
performance of the audit; (f) testifying on such formal report; and (g) performing such other
functions as the CTA may direct.122
Based on the Independent CPA's report and on its own appreciation of the evidence, the CTA
held that only the portion of the rental income pertaining to the substantiated
disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was
considered as used actually, directly and exclusively for educational purposes. Consequently,
the unaccounted and unsubstantiated disbursements must be subjected to income tax and
VAT.123
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus, subject to
income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%.130The CTA held
as follows:
chanRoblesvirtualLawlibrary
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp., Capri
International and MTO Bookstore, which were transmitted to the CF-CPA Account, petitioner
again failed to fully account for and substantiate all the disbursements from the CF-CPA
Account; thus failing to prove that the rental income derived therein were actually, directly and
exclusively used for educational purposes. Likewise, the findings of the Court-Commissioned
Independent CPA show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to P-6,259,078.30 only. Hence, this portion of the rental income, being the
substantiated disbursements of the CF-CPA Account, was considered by the Special First
Division as used actually, directly and exclusively for educational purposes. Since for fiscal year
2003, the total disbursements per voucher is P6,259,078.3 (Exhibit "LL-25-C"), and the total
disbursements per subsidiary ledger amounts to P23,463,543.02 (Exhibit "LL-29-C"), the ratio
 TAXATION CASES |39

of substantiated disbursements for fiscal year 2003 is 26.68% million which was transferred to the CF-CPA which in turn made disbursements of P23.46
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of CF-CPA Disbursements for million for various general purposes, among them the P6.60 million transferred by DLSU.
fiscal year 2003, arrived at by multiplying the ratio of 26.68% with the total rent income added
to and used in the CF-CPA Account in the amount of P6,602,655.00 ts Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for
P1,761,588.35.131 (emphasis supplied)ChanRoblesVirtualawlibrary educational purposes in year 2003 in the amount P6.26 million. Based on these given figures,
For better understanding, we summarize the CTA's computation as follows: the CTA concluded that the expenses for educational purposes that had been coursed through
the CF-CPA should be prorated so that only the portion that P6.26 million bears to the total
1. The CTA subtracted the rent income used in the construction of the Sports Complex CF�-CPA disbursements should be credited to DLSU for tax exemption.
(P4,007,724.00) from the rental income (P10,610,379.00) earned from the
abovementioned concessionaries. The difference (P6,602,655.00) was the portion This approach, in our view, is flawed given the constitutional requirement that
claimed to have been deposited to the CF-CPA Account. revenues actually and directly used for educational purposes should be tax-exempt. As already
2. The CTA then subtracted the supposed substantiated portion of CF-CPA mentioned above, DLSU is not claiming that the whole P23.46 million CF-CPA disbursement had
disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at the supposed been used for educational purposes; it only claims that P6.60 million transferred to CF-CPA had
unsubstantiated portion of the rental income (P4,841,066.65).132 been used for educational purposes. This was what DLSU needed to prove to have actually and
3. The substantiated portion of CF-CPA disbursements (P1,761,308.37)133 was derived directly used for educational purposes.
by multiplying the rental income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total That this fund had been first deposited into a separate fund (the CF�-CPA established to fund
disbursements (P23,463,543.02). capital projects) lends peculiarity to the facts of this case, but does not detract from the fact
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from that the deposited funds were DLSU revenue funds that had been confirmed and proven to
the CF-CPA Account as found by the Independent CPA (P6,259,078.30) by the total have been actually and directly used for educational purposes via the CF-CPA. That the CF-CPA
disbursements (P23,463,543.02) from the same account. might have had other sources of funding is irrelevant because the assessment in the present
We find that this system of calculation is incorrect and does not truly give effect to the case pertains only to the rental income which DLSU indisputably earned as revenue in 2003.
constitutional grant of tax exemption to non-stock, non�profit educational institutions. The That the proven CF-CPA funds used for educational purposes should not be prorated as part of
CTA's reasoning is flawed because it required DLSU to substantiate an amount that is greater its total CF-�CPA disbursements for purposes of crediting to DLSU is also logical because no
than the rental income deposited in the CF-CPA Account in 2003. claim whatsoever had been made that the totality of the CF-CPA disbursements had been for
educational purposes. No prorating is necessary; to state the obvious, exemption is based
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds of its on actual and direct use and this DLSU has indisputably proven.
rental income (which amounted to a total of P10.61 million)135 were used for educational
purposes. This amount was divided into two parts: (a) the P4.01 million, which was used to pay Based on these considerations, DLSU should therefore be liable only for the difference between
the loan obtained for the construction of the Sports Complex; and (b) the P6.60 million,136 which what it claimed and what it has proven. In more concrete terms, DLSU only had to prove that
was transferred to the CF-CPA account. its rental income for taxable year 2003 (P10,610,379.00) was used for educational purposes.
Hence, while the total disbursements from the CF-CPA Account amounted to P23,463,543.02,
For year 2003, the total disbursement from the CF-CPA account amounted to P23.46 DLSU only had to substantiate its P10.6 million rental income, part of which was the
million.137 These figures, read in light of the constitutional exemption, raises the question: does P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 million was
DLSU claim that the whole total CF-CPA disbursement of P23.46 million is tax-exempt so that it is substantiated to have been used for educational purposes.
required to prove that all these disbursements had been made for educational purposes?
To summarize, we thus revise the tax base for deficiency income tax and VAT for taxable year
We answer in the negative. 2003 as follows:
chanRoblesvirtualLawlibrary
The records show that DLSU never claimed that the total CF-CPA disbursements of P23.46
� CTA Decision138 Revised
million had been for educational purposes and should thus be tax-exempt; DLSU only claimed
P10.61 million for tax�exemption and should thus be required to prove that this amount had
Rental income 10,610,379.00 10,610,379.00
been used as claimed.
Less: Rent income used in construction of
Of this amount, P4.01 had been proven to have been used for educational purposes, as 4,007,724.00 4,007,724.00
the Sports Complex
confirmed by the Independent CPA. The amount in issue is therefore the balance of P6.60
 TAXATION CASES |40

was not.143
� � �
Thus, although both Ateneo and DLSU claimed that they used their rental income actually,
Rental income deposited to the CF-CPA
6,602,655.00 6,602.655.00 directly and exclusively for educational purposes by submitting similar evidence, e.g., the
Account
testimony of their employees on the use of university revenues, the report of the Independent
CPA, their income summaries, financial statements, vouchers, etc., the fact remains that DLSU
� � �
failed to prove that a portion of its income and revenues had indeed been used for educational
purposes.
Less: Substantiated portion of CF-CPA
1,761,588.35 6,259,078.30
disbursements
The CTA significantly found that some documents that could have fully supported DLSU's claim
were not produced in court. Indeed, the Independent CPA testified that some disbursements
� � � had not been proven to have been used actually, directly and exclusively for educational
purposes.144
Tax base for deficiency income tax and VAT 4,841,066.65 343,576.70

On DLSU's argument that the CTA should have appreciated its evidence in the same way as it
did with the evidence submitted by Ateneo in another separate case, the CTA explained that
the issue in the Ateneo case was not the same as the issue in the present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay income
taxes and VAT under certain BIR and Department of Finance issuances139that required the
educational institution to own and operate the canteens, or other commercial enterprises
within its campus, as condition for tax exemption. The CTA held that the Constitution does not
require the educational institution to own or operate these commercial establishments to avail
of the exemption.140
Given the lack of complete identity of the issues involved, the CTA held that it had to evaluate
the separate sets of evidence differently. The CTA likewise stressed that DLSU and Ateneo gave
distinct defenses and that its wisdom "cannot be equated on its decision on two different cases
with two different issues."141
DLSU disagrees with the CTA and argues that the entire assessment must be cancelled because
it submitted similar, if not stronger sets of evidence, as Ateneo. We reject DLSU's argument for
being non sequitur. Its reliance on the concept of uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and
materiality of the evidence supporting their respective claims for tax exemption would
necessarily differ because their attendant issues and facts differ.
The final nail on the question of evidence is DLSU's own admission that the original of these
documents had not in fact been produced before the CTA although it claimed that there was no
bad faith on its part.145 To our mind, this admission is a good indicator of how the Ateneo and
the DLSU cases varied, resulting in DLSU's failure to substantiate a portion of its claimed
exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised Rules on Evidence, that the
contents of the missing supporting documents were proven by its recital in some other
authentic documents on record,146 can no longer be entertained at this late stage of the
proceeding. The CTA did not rule on this particular claim. The CTA also made no finding on
DLSU's assertion of lack of bad faith. Besides, it is not our duty to go over these documents to
test the truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and uniformity of
taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate.147 A tax is uniform when it operates with the same force and effect in every place
where the subject of it is found.148 The concept requires that all subjects of taxation similarly
situated should be treated alike and placed in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them alike
because their income proved to have been used actually, directly and exclusively for educational
purposes were exempted from taxes. The CTA equally applied the requirements in
the YMCA case to test if they indeed used their revenues for educational purposes.

To state the obvious, the amount of income received by DLSU and by Ateneo during the taxable DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
years they were assessed varied. The amount of tax assessment also varied. The amount of despite proving that it used actually, directly and exclusively for educational purposes its
income proven to have been used for educational purposes also varied because the amount income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU secured a
substantiated varied.142 Thus, the amount of tax assessment cancelled by the CTA varied. different result happened because it failed to fully prove that it used actually, directly and
exclusively for educational purposes its revenues and income.
On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for taxable
years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a total deficiency tax On this point, we remind DLSU that the rule on uniformity of taxation does not mean that
of P8,864,042.35 for the same period. Notably, DLSU was assessed deficiency DST, while Ateneo subjects of taxation similarly situated are treated in literally the same way in all and every
 TAXATION CASES |41

occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit educational We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and the petition
institutions, does not mean that the CTA or this Court would similarly decide every case for (or of the Commissioner of Internal Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
against) both universities. Success in tax litigation, like in any other litigation, depends to a large decision and October 4, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
extent on the sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA was correct Banc Case No. 671, with the MODIFICATIONthat the base for the deficiency income tax and VAT
in not fully cancelling its tax liabilities. for taxable year 2003 is P343,576.70.

b. DLSU proved its payment of the DST SO ORDERED.

The CTA affirmed DLSU's claim that the DST due on its mortgage and loan transactions were
paid and remitted through its bank's On-Line Electronic DST Imprinting Machine. The
Commissioner argues that DLSU is not allowed to use this method of payment because an
educational institution is excluded from the class of taxpayers who can use the On-Line
Electronic DST Imprinting Machine.

We sustain the findings of the CTA. The Commissioner's argument lacks basis in both the Tax
Code and the relevant revenue regulations.

DST on documents, loan agreements, and papers shall be levied, collected and paid for by the
person making, signing, issuing, accepting, or transferring the same.150The Tax Code provides LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS, in
that whenever one party to the document enjoys exemption from DST, the other party not his capacity as City Assessor of Quezon City, respondents.
exempt from DST shall be directly liable for the tax. Thus, it is clear that DST shall be payable by
any party to the document, such that the payment and compliance by one shall mean the full DECISION
settlement of the DST due on the document.
CALLEJO, SR., J.:
In the present case, DLSU entered into mortgage and loan agreements with banks. These This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended,
agreements are subject to DST.151 For the purpose of showing that the DST on the loan of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
agreement has been paid, DLSU presented its agreements bearing the imprint showing that DST affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned
on the document has been paid by the bank, its counterparty. The imprint should be sufficient by the petitioner and its hospital building constructed thereon are subject to assessment for
proof that DST has been paid. Thus, DLSU cannot be further assessed for deficiency DST on the purposes of real property tax.
said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers who can
pay and remit DST through the On-Line Electronic DST Imprinting Machine under RR No. 9-2000. The Antecedents
As correctly held by the CTA, this is irrelevant because it was not DLSU who used the On-Line
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
Electronic DST Imprinting Machine but the bank that handled its mortgage and loan
established on January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is the registered
transactions. RR No. 9-2000 expressly includes banks in the class of taxpayers that can use
owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495,
the On-Line Electronic DST Imprinting Machine.
located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The lot has an
area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT) No. 261320
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of the assessed
of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital
DST deficiency, except for the unpaid balance of P13,265.48.152
known as the Lung Center of the Philippines. A big space at the ground floor is being leased to
private parties, for canteen and small store spaces, and to medical or professional practitioners
WHEREFORE, premises considered, we DENY the petition of the Commissioner of Internal
who use the same as their private clinics for their patients whom they charge for their
Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
professional services. Almost one-half of the entire area on the left side of the building
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622, except for the total
along Quezon Avenue is vacant and idle, while a big portion on the right side, at the corner
amount of deficiency tax liabilities of De La Salle University, Inc., which had been reduced.
of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private
enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed
for real property taxes in the amount of P4,554,860 by the City Assessor of Quezon
City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A)
were issued for the land and the hospital building, respectively.[4] On August 25, 1993, the
petitioner filed a Claim for Exemption[5] from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioners request was denied, and
a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City
(QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The petitioner
alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is exempt
from real property taxes. It averred that a minimum of 60% of its hospital beds are exclusively
used for charity patients and that the major thrust of its hospital operation is to serve charity
patients. The petitioner contends that it is a charitable institution and, as such, is exempt from
real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the petitioner was
not a charitable institution and that its real properties were not actually, directly and exclusively
used for charitable purposes; hence, it was not entitled to real property tax exemption under
the constitution and the law. The petitioner sought relief from the Court of Appeals, which
rendered judgment affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO
REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY
AND EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER
ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED
UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of Section 28(3),
Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is not
altered by the fact that it admits paying patients and renders medical services to them, leases
portions of the land to private parties, and rents out portions of the hospital to private medical
practitioners from which it derives income to be used for operational expenses. The petitioner
points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and
of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the government attests to its character as a
charitable institution. It contends that the exclusivity required in the Constitution does not
necessarily mean solely. Hence, even if a portion of its real estate is leased out to private
individuals from whom it derives income, it does not lose its character as a charitable institution,
TAXATION CASES |42
and its exemption from the payment of real estate taxes on its real property. The petitioner
cited our ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends that
even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it is not
precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is not a
charitable entity. The petitioners real property is not exempt from the payment of real estate
taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove that
it is a charitable institution and that the said property is actually, directly and exclusively used
for charitable purposes. The respondents noted that in a newspaper report, it appears that graft
charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden
Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990
for only P20,000 a month, when the monthly rental should be P357,000 a month as determined
by the Commission on Audit; and that instead of complying with the directive of the COA for
the cancellation of the contract for being grossly prejudicial to the government, the petitioner
renewed the same on March 13, 1995 for a monthly rental of only P24,000. They assert that
the petitioner uses the subsidies granted by the government for charity patients and uses the
rest of its income from the property for the benefit of paying patients, among other
purposes. They aver that the petitioner failed to adduce substantial evidence that 100% of its
out-patients and 170 beds in the hospital are reserved for indigent patients. The respondents
further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is that it
is pay-patient and required to pay a certain amount as deposit. That even if a patient is living
below the poverty line, he is charged with high hospital bills. And, without these bills being first
settled, the poor patient cannot be allowed to leave the hospital or be discharged without first
paying the hospital bills or issue a promissory note guaranteed and indorsed by an influential
agency or person known only to the Center; that even the remains of deceased poor patients
suffered the same fate.Moreover, before a patient is admitted for treatment as free or charity
patient, one must undergo a series of interviews and must submit all the requirements needed
by the Center, usually accompanied by endorsement by an influential agency or person known
only to the Center. These facts were heard and admitted by the Petitioner LCP during the
hearings before the Honorable QC-BAA and Honorable CBAA. These are the reasons of indigent
patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real properties
of the petitioner are exempt from real property taxes.

The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within the context
of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered include the statute creating
the enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the
properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of government.[12] It may be applied to
almost anything that tend to promote the well-doing and well-being of social man. It embraces
the improvement and promotion of the happiness of man.[13] The word charitable is not
restricted to relief of the poor or sick.[14] The test of a charity and a charitable organization are
in law the same. The test whether an enterprise is charitable or not is whether it exists to carry
out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or
private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the President of
the Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines. The raison detre for the creation
of the petitioner is stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the total
annual deaths from all causes, thus, exacting a tremendous toll on human resources, which
ailments are likely to increase and degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable, and curable with
early and adequate medical care, immunization and through prompt and intensive prevention
and health education programs;
Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and
efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;
TAXATION CASES |43
Whereas, to achieve this purpose, the Government intends to provide material and financial
support towards the establishment and maintenance of a Lung Center for the welfare and
benefit of the Filipino people.[15]
The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated medical
institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung and
allied diseases in line with the concern of the government to assist and provide material and
financial support in the establishment and maintenance of a lung center primarily to benefit the
people of the Philippines and in pursuance of the policy of the State to secure the well-being of
the people by providing them specialized health and medical services and by minimizing the
incidence of lung diseases in the country and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention of lung or
pulmonary ailments and the care of lung patients, including the holding of a series of relevant
congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the biological,
demographic, social, economic, eugenic and physiological aspects of lung or pulmonary
diseases and their control; and to collect and publish the findings of such research for public
consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on lung
consciousness or awareness, and the development of fact-finding, information and reporting
facilities for and in aid of the general purposes or objects aforesaid, especially in human lung
requirements, general health and physical fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses, health officers, social workers and medical
and technical personnel in the practical and scientific implementation of services to lung
patients;
6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial and/or city and
local levels; and to coordinate their various efforts and activities for the purpose of achieving a
more effective programmatic approach on the common problems relative to the objectives
enumerated herein;

8. To seek and obtain assistance in any form from both international and local foundations and
organizations; and to administer grants and funds that may be given to the organization;
9. To extend, whenever possible and expedient, medical services to the public and, in general,
to promote and protect the health of the masses of our people, which has long been recognized
as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the
people in any and all walks of life, including those who are poor and needy, all without regard
to or discrimination, because of race, creed, color or political belief of the persons helped; and
to enable them to obtain treatment when such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and carried on to
promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational materials
and supplies by purchase, donation, or otherwise and to dispose of and distribute the same in
such manner, and, on such basis as the Center shall, from time to time, deem proper and best,
under the particular circumstances, to serve its general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or convenient for the accomplishment of any
of the powers herein set forth and to do every other act and thing incidental thereto or
connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public in general
in any and all walks of life including those who are poor and the needy without
discrimination.After all, any person, the rich as well as the poor, may fall sick or be injured or
wounded and become a subject of charity.[17]
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the State Supreme
Court of Illinois held, thus:
[A]n institution does not lose its charitable character, and consequent exemption from taxation,
by reason of the fact that those recipients of its benefits who are able to pay are required to do
so, where no profit is made by the institution and the amounts so received are applied in
furthering its charitable purposes, and those benefits are refused to none on account of inability
to pay therefor. The fundamental ground upon which all exemptions in favor of charitable
TAXATION CASES |44
institutions are based is the benefit conferred upon the public by them, and a consequent relief,
to some extent, of the burden upon the state to care for and advance the interests of its
citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
Association of South Dakota v. Baker:[21]
[T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to enhance
the usefulness of the institution to the poor; for it is a matter of common observation amongst
those who have gone about at all amongst the suffering classes, that the deserving poor can
with difficulty be persuaded to enter an asylum of any kind confined to the reception of objects
of charity; and that their honest pride is much less wounded by being placed in an institution in
which paying patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money thus received
is devoted altogether to the charitable object which the institution is intended to further.[22]
The money received by the petitioner becomes a part of the trust fund and must be
devoted to public trust purposes and cannot be diverted to private profit or benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in the form
of subsidies granted by the government. As held by the State Supreme Court of Utah
in Yorgason v. County Board of Equalization of Salt Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus, those payments
are like a gift or donation of any other kind except they come from the government. In
both Intermountain Health Care and the present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from the exchange between St. Marks
Tower and the tenants by making a contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients income supplements had come from
private individuals rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the
government rather than private charitable contributions does not dictate the denial of a
charitable exemption if the facts otherwise support such an exemption, as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its income, including
the subsidies from the government for 1991 and 1992 for its patients and for the operation of
the hospital. It even incurred a net loss in 1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent the second
issue, that those portions of its real property that are leased to private entities are not exempt
from real property taxes as these are not actually, directly and exclusively used for charitable
purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly
shown and based on language in the law too plain to be mistaken.[26] As held in Salvation Army
v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing power of the
state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of incorporation,
it is to be construed strictly against the property owner and in favor of the public. This principle
applies with peculiar force to a claim of exemption from taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines,
all donations, contributions, endowments and equipment and supplies to be imported by
authorized entities or persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from income
and gift taxes, the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with respect
to equipment purchases made by, or for the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation
of the rule is principle that what is expressed puts an end to that which is implied. Expressium
facit cessare tacitum. Thus, where a statute, by its terms, is expressly limited to certain matters,
it may not, by interpretation or construction, be extended to other matters.
...
TAXATION CASES |45
The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human
mind. They are predicated upon ones own voluntary act and not upon that of others. They
proceed from the premise that the legislature would not have made specified enumeration in
a statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant at all, and
that unless the privilege is limited to the very terms of the statute the favor would be intended
beyond what was meant.[31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually,directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.[32]
The tax exemption under this constitutional provision covers property taxes only.[33] As
Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission,
explained: . . . what is exempted is not the institution itself . . .; those exempted from real estate
taxes are lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b) of Republic
Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment
of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,
non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and improvements used
exclusively for charitable purposes shall be exempt from taxation.[36] However, under the 1973
and the present Constitutions, for lands, buildings, and improvements of the charitable
institution to be considered exempt, the same should not only be exclusively used for charitable
purposes; it is required that such property be used actually and directly for such purposes.[37]
In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely
on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated
on September 30, 1961 before the 1973 and 1987 Constitutions took effect.[38] As this Court
held in Province of Abra v. Hernando:[39]
 TAXATION CASES |46

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation. The present Constitution added charitable
institutions, mosques, and non-profit cemeteries and required that for the exemption of lands,
buildings, and improvements, they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The Constitution is worded differently. The change
should not be ignored. It must be duly taken into consideration. Reliance on past decisions
would have sufficed were the words actually as well as directly not added. There must be proof
therefore of the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it
is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Exclusive is defined as
possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment;
and exclusively is defined, in a manner to exclude; as enjoying a privilege exclusively.[40] If real
property is used for one or more commercial purposes, it is not exclusively used for the
exempted purposes but is subject to taxation.[41] The words dominant use or principal use
cannot be substituted for the words used exclusively without doing violence to the Constitutions
and the law.[42] Solely is synonymous with exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals for
their clinics and a canteen. Further, a portion of the land is being leased to a private individual
for her business enterprise under the business name Elliptical Orchids and Garden Center.
Indeed, the petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991
and P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes.[45] On
the other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent
Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions
of the land and the area thereof which are leased to private persons, and to compute the real
property taxes due thereon as provided for by law.

SO ORDERED.