Tax

G.R. No.
134062 April 17, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998
in CA-G.R. SP No. 41025 which reversed and set aside the decision3 and resolution4 of the Court of Tax
Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary stamp taxes
for the year 1986 in the total amount of ₱129,488,656.63:
1986 – Deficiency Percentage Tax
Deficiency percentage tax ₱ 7, 270,892.88

Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to 10-28-88 3,215,825.03
15,000.00
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE ₱12,319,441.13
1986 – Deficiency Documentary Stamp Tax
Deficiency percentage tax ₱93,723,372.40

Add: 25% surcharge 23,430,843.10
15,000.00
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE ₱117,169,215.50.5
Both notices of assessment contained the following note:
Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown
above. Said assessment has been based on return – (filed by you) – (as verified) – (made by this Office)
– (pending investigation) – (after investigation). You are requested to pay the above amount to this Office
or to our Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even
in the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency
assessment is to inform taxpayer why he has incurred a deficiency so that he can make an
intelligent decision on whether to pay or to protest the assessment. This is all the more so when
the assessment involves astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the briefest form,
why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the
percentage tax, it is important that the taxpayer be informed also as to what particular percentage
tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged
between your office and the Bankers Association of the Philippines [BAP] on this issue and of
BPI’s submission of its computations under this compromise. There is therefore no basis
whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the
other hand, if it relates to documentary stamp tax on some other issue, we should like to be
informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what particular
percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we shall inform you of the taxpayer’s
decision on whether to pay or protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
… although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85
and therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity
of our assessment… still we obliged to explain the basis of the assessments.
xxx xxx xxx
… this constitutes the final decision of this office on the matter. 8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIR’s May 8, 1991
letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992. 10
On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated November 16,
1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final
and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National
Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied
reconsideration in a resolution dated May 27, 1996.13
On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the
CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared
that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons
for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA on time.17 The
CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and documentary
stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.

The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. — When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the
taxpayer fails to respond, the [CIR] shall issue an assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices19 were valid assessments.
If they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter, received
by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the
findings which the CIR denied in his December 12, 1991 letter, received by BPI on January 21, 1992.
Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well within
the 30-day period provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments.
He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the
precise purpose of notifying taxpayers of the assessed amounts due and demanding payment
thereof.21 He contends that there was no law or jurisprudence then that required notices to state the
reasons for assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the assessments were
based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228),
specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due
process requires even under the former Section 270.
BPI’s contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however,
That a preassessment notice shall not be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the
deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of
the tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to
its amendment by RA 8424 (also known as the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we held
that:
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment
of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the
Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the
taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the
assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required under the old law was no longer
sufficient under the new law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement
was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written
statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot
read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing
less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an
affirmation of what the law required under the former Section 270. The amendment introduced by RA
8424 was an innovation and could not be reasonably inferred from the old law.29 Clearly, the legislature
intended to insert a new provision regarding the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the
legal and factual basis of the former’s decision to charge the latter for deficiency documentary stamp and
gross receipts taxes.31
In other words, the CA’s theory was that BPI was deprived of due process when the CIR failed to inform it
in writing of the factual and legal bases of the assessments —even if these were not called for under the
old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall
be deprived of his property without due process of law."32 We note, however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to
discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI] ignored)
but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the
issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this
Court that they did not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary
to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of the
Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain his
analysis regarding the findings of the [CIR’s] examiner, Mr. San Pedro and that the same worksheets
were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and
basis of the assessments, and was given all the opportunity to contest the same but ignored it despite the
notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final
and unappealable if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and
dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client. 33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to
the consideration of tax problems, has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or improvident exercise of authority.
Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there
is a showing of gross error or abuse on the part of the [CTA].34
Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision: 35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation in such form and manner as may be prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by
the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said
decision; otherwise, the decision shall become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the
same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify
as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter
of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the
assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the
October 28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that would reopen the question of its liability on
the merits.37 Not only that. There arose a presumption of correctness when BPI failed to protest the
assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the
duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers
will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to
have failed to appeal the CIR’s final decision regarding the disputed assessments within the 30-day
period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision … on
the matter." BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal
but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on
February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its
omission. We have already declared that:
… the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the disputed
assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his
statement indubitably showing that the Commissioner's communicated action is his final decision on the
contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the
opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to
appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually
delay the finality of the assessment — and, consequently, the collection of the amount demanded as
taxes — by repeated requests for recomputation and reconsideration. On the part of the [CIR], this would
encourage his office to conduct a careful and thorough study of every questioned assessment and render
a correct and definite decision thereon in the first instance. This would also deter the [CIR] from unfairly
making the taxpayer grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair
play, regularity, and orderliness in administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject
tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a considerable
amount of money. Be that as it may, we cannot legally presume the existence of something which was
never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will
not be held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure.
A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence
of the state whose social contract with its citizens obliges it to promote public interest and common good.
The theory behind the exercise of the power to tax emanates from necessity; without taxes, government
cannot fulfill its mandate of promoting the general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in
CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. L-22734 September 15, 1967
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.
BENGZON, J.P., J.:
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the
eldest of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance
of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income
tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said
returns for the estate on the basis of information and data obtained from the aforesaid estate proceedings
and issued an assessment for the following:
1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from
November 30, 1953 to
April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late
payment 40.00
Total amount due P2,707.44

===========
Additional residence tax for P14.50
2.
1945 ===========
3. Real Estate dealer's tax for the
fourth quarter of 1946 and the P207.50
whole year of 1947 ===========
Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to
him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The
Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes for
1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on August 24, 1953;
assessments for both taxable years were made within five years therefrom or on October 19, 1953; and
the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable
year 1947, however, the return was filed on March 1, 1948; the assessment was made on October 19,
1953, more than five years from the date the return was filed; hence, the right to assess income tax for
1947 had prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate
proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for
the payment corresponding to his share of the following taxes:
Deficiency income tax
P135.8
1945
3
1946 436.95
Real estate dealer's
fixed tax 4th quarter of
1946 and whole year
of 1947 P187.50
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda
liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount
of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphîl.nèt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax
due the estate only up to the extent of and in proportion to any share he received. He relies
on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an
estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims
against the estate in proportion to the amount or value of the property they have respectively received
from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share
he received from the inheritance.3 His liability, however, cannot exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property
in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from
the estate as his share in the inheritance, for unpaid income taxes 4a for which said estate is liable,
pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or

insurance company liable to pay the income tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of the Government of the Philippines from the time
when the assessment was made by the Commissioner of Internal Revenue until paid with
interest, penalties, and costs that may accrue in addition thereto upon all property and rights to
property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e.,
the P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda
will have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each
heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs
and collecting from each one of them the amount of the tax proportionate to the inheritance received. This
remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part which remains after the settlement of all lawful
claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in
case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is
to achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each
heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights
to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate
which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second
remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal
Revenue should be given, in instances like the case at bar, the necessary discretion to avail itself of the
most expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code
above quoted, because taxes are the lifeblood of government and their prompt and certain availability is
an imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective:
payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as
lessened by the tax, is left to await the suit for contribution by the heir from whom the Government
recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and
real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice
to his right of contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando,
JJ., concur.
G.R. No. L-28896 February 17, 1988

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On
the other hand, such collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income
tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of
the Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18,
1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the
same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was
presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to
receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who
deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was
not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as
a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a
request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request
deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of
this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of
distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax
authorities. During the intervening period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the date the assessment was received,
viz., January 14, 1965. The period started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said protest and the warrant was finally
served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period
had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was
not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the
Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting
this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the
persons among whom it was distributed It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories
and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel
Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it.14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale,
Algue received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals.16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the
same family in control of Algue. It is argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough substantiation of such payments. In short,
the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump
sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered
that this was a family corporation where strict business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed,
each payee made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable,
however, in view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from
the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed
as deductions —
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and deductibility in
the case of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be further stated
and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers of
employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were
they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of
the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond
in the form of tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel
the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the
awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate,
as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with
the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction
by the private respondent was permitted under the Internal Revenue Code and should therefore not have
been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
G.R. No. 124043 October 14, 1998

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN ASSOCIATION OF
THE PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Men's Christian Association of the
Philippines, Inc. (YMCA) — established as "a welfare, educational and charitable non-profit corporation"
— subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging two
Resolutions issued by the Court of Appeals1 on September 28, 19952 and February 29, 19963 in CA-GR
SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the
YMCA to claim tax exemption on the latter's income from the lease of its real property.
The Facts
The facts are undisputed.4 Private Respondent YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion
of its premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from
parking fees collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR)
issued an assessment to private respondent, in the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded withholding taxes on rentals and professional
fees and deficiency withholding tax on wages. Private respondent formally protested the assessment and,
as a supplement to its basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied the
claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA)
on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service the needs of its members
and their guests. The rentals were minimal as for example, the barbershop was only
charged P300 per month. He also testified that there was actually no lot devoted for
parking space but the parking was done at the sides of the building. The parking was
primarily for members with stickers on the windshields of their cars and they charged
P.50 for non-members. The rentals and parking fees were just enough to cover the costs
of operation and maintenance only. The earning[s] from these rentals and parking
charges including those from lodging and other charges for the use of the recreational
facilities constitute [the] bulk of its income which [is] channeled to support its many
activities and attainment of its objectives. As pointed out earlier, the membership dues
are very insufficient to support its program. We find it reasonably necessary therefore for
[private respondent] to make [the] most out [of] its existing facilities to earn some income.
It would have been different if under the circumstances, [private respondent] will
purchase a lot and convert it to a parking lot to cater to the needs of the general public for
a fee, or construct a building and lease it out to the highest bidder or at the market rate
for commercial purposes, or should it invest its funds in the buy and sell of properties,
real or personal. Under these circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably necessary to the pursuit of the
objectives of the association and therefore, will fall under the last paragraph of Section 27
of the Tax Code and any income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition of [a]
deficiency fixed tax and [a] contractor's tax in the amount[s] of P353.15 and P3,129.73,
respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax — P353,15;
1980 Deficiency Contractor's Tax — P3,129.23;
1980 Deficiency Income Tax — P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax — P1,798.93;
1980 Deficiency Withholding Tax on Wages — P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not
to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the National Internal
Revenue Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of
February 16, 1994, the CA6 initially decided in favor of the CIR and disposed of the appeal in the following
manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that
"the leasing of petitioner's (herein respondent's) facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the
petitioners, and the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the

assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
The findings of facts of the Public Respondent Court of Tax Appeals being supported by
substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the
income on rentals of small shops and parking fees [are] in accord with the applicable law
and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the rental
from small shops and parking fees do not result in the loss of the exemption. Not even
the petitioner would hazard the suggestion that YMCA is designed for profit.
Consequently, the little income from small shops and parking fees help[s] to keep its
head above the water, so to speak, and allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's
decision is AFFIRMED in toto.9
The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in
its second assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the
Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of private
respondent from rentals of small shops and parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the
CTA. On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the
leasing of private respondent's facilities to small shop owners, to restaurant and canteen operators and
the operation of parking lots are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the private respondent and that the income derived therefrom are tax
exempt." 12 Petitioner insists that what the appellate court reversed was the legal conclusion, not the
factual finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial
evidence, will be disturbed on appeal unless it is shown that the said court committed gross error in the
appreciation of facts. 14 In the present case, this Court finds that the February 16, 1994 Decision of the
CA did not deviate from this rule. The latter merely applied the law to the facts as found by the CTA and
ruled on the issue raised by the CIR: "Whether or not the collection or earnings of rental income from the
lease of certain premises and income earned from parking fees shall fall under the last paragraph of
Section 27 of the National Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed
it was expected to. That it did so in a manner different from that of the CTA did not necessarily imply a
reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here
is a question of law in a given case when the doubt or difference arises as to what the law is on a certain
state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of
alleged facts." 16 In the present case, the CA did not doubt, much less change, the facts narrated by the
CTA. It merely applied the law to the facts. That its interpretation or conclusion is different from that of the
CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At
the outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. — The following organizations shall not be
taxed under this Title in respect to income received by them as such —
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any private
stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit, regardless of the disposition made of
such income, shall be subject to the tax imposed under this Code. (as amended by Pres.
Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27 (now
Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to income received by
them as such," the exemption does not apply to income derived ". . . from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the disposition made of such
income . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties,
real or personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively
used for the accomplishment of its objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it is based. Thus, the
claimed exemption "must expressly be granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of
the last paragraph of then Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax
imposed by the same Code. Because the last paragraph of said section unequivocally subjects to tax the
rent income of the YMCA from its real property, 20 the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be
applied. 21 Parenthetically, a consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict construction or a liberal one on statutes
that grant tax exemptions to "religious, charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the
income from the properties must arise from activities 'conducted for profit' before it may be considered
taxable." 23 This argument is erroneous. As previously stated, a reading of said paragraph ineludibly
shows that the income from any property of exempt organizations, as well as that arising from any activity
it conducts for profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify
the word "properties." This makes from the property of the organization taxable, regardless of how that
income is used — whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when
it allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out
its real property, on the solitary but unconvincing ground that the said income is not collected for profit but
is merely incidental to its operation. The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI,
Section 28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not
only of property taxes but also of income tax from any source. 25 In support of its novel theory, it
compares the use of the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other
hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two categories: (1)
"[c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and non-
profit cemeteries," the incomes of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands,
buildings and improvements actually and directly used for religious, charitable or educational purposes,"
which are exempt only from property taxes. 28 Second, Lladoc v. Commissioner of Internal
Revenue, 29 which limited the exemption only to the payment of property taxes, referred to the provision
of the 1935 Constitution and not to its counterparts in the 1973 and the 1987 Constitutions. 30 Third, the
phrase "actually, directly and exclusively used for religious, charitable or educational purposes" refers not
only to "all lands, buildings and improvements," but also to the above-quoted first category which includes
charitable institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the
Constitution reveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such
intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of
this Court, stressed during the Concom debates that ". . . what is exempted is not the institution itself . . .;
those exempted from real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of
the Concom, adhered to the same view that the exemption created by said provision pertained only to
property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
coversproperty taxes only." 35 Indeed, the income tax exemption claimed by private respondent finds no
basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA
"is a non-stock, non-profit educational institution whose revenues and assets are used actually, directly
and exclusively for educational purposes so it is exempt from taxes on its properties and income." 37 We
reiterate that private respondent is exempt from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a non-stock, non-profit educational institution
is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the
YMCA to be granted the exemption it claims under the aforecited provision, it must prove with substantial
evidence that (1) it falls under the classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly, and exclusively for educational
purposes. However, the Court notes that not a scintilla of evidence was submitted by private respondent
to prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the
Constitution? We rule that it is not. The term "educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the members of the Constitutional Commission are
deemed cognizant. 38 Under the Education Act of 1982, such term refers to schools. 39 The school system
is synonymous with formal education, 40 which "refers to the hierarchically structured and chronologically
graded learnings organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher levels." 41 The Court
has examined the "Amended Articles of Incorporation" and "By-Laws"43 of the YMCA, but found nothing in
them that even hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-
based and "private auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is
settled that the term "educational institution," when used in laws granting tax exemptions, refers to a ". . .
school seminary, college or educational establishment . . . ." 46 Therefore, the private respondent cannot
be deemed one of the educational institutions covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in
its broadest and best sense education embraces all forms and phases of instruction,
improvement and development of mind and body, and as well of religious and moral
sentiments, yet in the common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is given by methods
common to schools and institutions of learning. That we conceive to be the true intent
and scope of the term [educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also
notes that the former did not submit proof of the proportionate amount of the subject income that was
actually, directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-
laws, which formed part of the evidence submitted, is patently insufficient, since the same merely signified
that "[t]he net income derived from the rentals of the commercial buildings shall be apportioned to the
Federation and Member Associations as the National Board may decide." 48 In sum, we find no basis for
granting the YMCA exemption from income tax under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of
Internal Revenue 50 and Abra Valley College, Inc. v. Aquino 51 are not applicable, because the
controversy in both cases involved exemption from the payment of property tax, not income tax.Hospital
de San Juan de Dios, Inc. v. Pasay City 52 is not in point either, because it involves a claim for exemption
from the payment of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of
Pasay City — an issue not at all related to that involved in a claimed exemption from the payment of
income taxes imposed on property leases. In Jesus Sacred Heart College v. Com. of Internal
Revenue, 53 the party therein, which claimed an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that the income subject of the controversy
had been devoted or used solely for educational purposes. On the other hand, the private respondent in
the present case has not given any proof that it is an educational institution, or that part of its rent income
is actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates
the nobility of its cause. However, the Court's power and function are limited merely to applying the law
fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations.
Otherwise, it would be overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It
needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given
its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative
belongs to the political departments of government. Indeed, some of the members of the Court may even
believe in the wisdom and prudence of granting more tax exemptions to private respondent. But such
belief, however well-meaning and sincere, cannot bestow upon the Court the power to change or amend
the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28,
1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of
Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by
petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., Vitug and Quisumbing, JJ., concur.
Bellosillo, J., Please see Dissenting Opinion.
Separate Opinions
BELLOSILLO, J., dissenting;
I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals when
supported by substantial evidence will not be disturbed on appeal unless it is shown that the court
committed grave error in the appreciation of facts.1 In the instant case, there is no dispute as to the
validity of the findings of the Court of Tax Appeals that private respondent Young Men's Christian
Association (YMCA) is an association organized and operated exclusively for the promotion of social
welfare and other non-profitable purposes, particularly the physical and character development of the
youth.2 The enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness of

individuals, and the promotion of unity among Christians and understanding among
peoples of all faiths, to the end that the Brotherhood of Man under the Fatherhood of God
may be fostered in an atmosphere of mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of the youth,
with emphasis on reverence for God, social discipline, responsibility for the common
good, respect for human dignity, and the observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the Philippines
to participate loyally in the life of their respective churches; to bring these churches closer
together; and to participate in the effort to realize the church Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian Associations in
the Philippines and to foster the extension of the Youth Men's Christian Associations to
new areas;
(e) To help its Member Associations develop and adopt their programs to the needs of
the youth;
(f) To assist the Member Associations in developing and maintaining a high standard of
management, operation and practice; and
(g) To undertake and sponsor national and international programs and activities in
pursuance of its purposes and objectives. 3
Pursuant to these objectives, YMCA has continuously organized and undertaken throughout the country
various programs for the youth through actual workshops, seminars, training, sports and summer camps,
conferences on the cultivation of Christian moral values, drug addiction, out-of-school youth, those with
handicap and physical defects and youth alcoholism. To fulfill these multifarious projects and attain the
laudable objectives of YMCA, fund raising has become an indispensable and integral part of the activities
of the Association. YMCA derives its funds from various sources such as membership dues, charges on
the use of facilities like bowling and billiards, lodging, interest income, parking fees, restaurant and
canteen. Since the membership dues are very minimal, the Association derives funds from rentals of
small shops, restaurant, canteen and parking fees. For the taxable year ending December 1980, YMCA
earned gross rental income of P676,829.00 and P44,259.00 from parking fees which became the subject
of the questioned assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of petitioner's
facilities to small shop owners and to restaurant and canteen operators in addition to the operation of a
parking lot are reasonably necessary for and incidental to the accomplishment of the objectives of
YMCA. 4 In fact, these facilities are leased to members in order to service their needs and those of their
guests. The rentals are minimal, such as, the rent of P300.00 for the barbershop. With regard to parking
space, there is no lot actually devoted therefor and the parking is done only along the sides of the
building. The parking is primarily for members with car stickers but to non-members, parking fee is P0.50
only. The rentals and parking fees are just enough to cover the operation and maintenance costs of these
facilities. The earnings which YMCA derives from these rentals and parking fees, together with the
charges for lodging and use of recreational facilities, constitute the bulk or majority of its income used to
support its programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in departing from the
findings of the Court of Tax Appeals by declaring that the leasing of YMCA's facilities to shop owners and
restaurant operators and the operation of a parking lot are used for commercial purposes or for profit,
which fact takes YMCA outside the coverage of tax exemption. In later granting the motion for
reconsideration filed by respondent YMCA, the Court of Appeals correctly reversed its earlier decision
and upheld the findings of the Court of Tax Appeals by ruling that YMCA is not designed for profit and the
little income it derives from rentals and parking fees helps maintain its noble existence for the fulfillment of
its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions of Sec. 27,
pars. (g) and (h), of the National Internal Revenue Code, to wit:
taxed under this Title in respect to income received by them as such — . . . (g) civic
league or organization not organized for profit but operated exclusively for the promotion
of social welfare; (h) club organized and operated exclusively for pleasure, recreation and
other non-profitable purposes, no part of the net income of which inures to the benefit of
any private stockholder or member . . . . Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.
The majority of the Court accepted petitioner's view that while the income of organizations enumerated in
Sec. 27 are exempt from income tax, such exemption does not however extend to their income of
whatever kind or character from any of their properties real or personal regardless of the disposition made
of such income; that based on the wording of the law which is plain and simple and does not need any
interpretation, any income of a tax exempt entity from any of its properties is a taxable income; hence, the
rental income derived by a tax exempt organization from the lease of its properties is not therefore
exempt from income taxation even if such income is exclusively used for the accomplishment of its
objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in solitude,
a word or phrase such as, in this case, "the income of whatever kind and character . . . from any of their
properties" might easily convey a meaning quite different from the one actually intended and evident
when a word or phrase is considered with those with which it is associated. 5 It is a rule in statutory
construction that every part of the statute must be interpreted with reference to the context, that every
part of the statute must be considered together with the other parts and kept subservient to the general
intent of the whole enactment.6 A close reading of the last paragraph of Sec. 27 of the National Internal
Revenue Code, in relation to the whole section on tax exemption of the organizations enumerated
therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27 qualifies, limits and
describes "the income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities" in order to make such income taxable. It is the
exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other property is not conducted for profit, then
it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the word "income"
which is derived from property, real or personal, provided in the last paragraph of Sec. 27 means the
amount of money coming to a person or corporation within a specified time as profit from investment; the
return in money from one's business or capital invested.7 Income from property also means gains and
profits derived from the sale or other disposition of capital assets; the money which any person or
corporation periodically receives either as profits from business, or as returns from investments 8 The
word "income" as used in tax statutes is to be taken in its ordinary sense as gain or profit. 9
Clearly, therefore, income derived from property whether real or personal connotes profit from business or
from investment of the same. If we are to apply the ordinary meaning of income from property as profit to
the language of the last paragraph of Sec. 27 of the NIRC, then only those profits arising from business
and investment involving property are taxable. In the instant case, there is no question that in leasing its
facilities to small shop owners and in operating parking spaces, YMCA does not engage in any profit-
making business. Both the Court of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities conducted on YMCA's property were aimed not
only at fulfilling the needs and requirements of its members as part of YMCA's youth program but, more
importantly, at raising funds to finance the multifarious projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition fees and other
fees for the different services it renders to the students does not in itself make the school a profit-making
enterprise that would place it beyond the purview of the law exempting it from taxation. The mere
realization of profits out of its operation does not automatically result in the loss of an educational
institution's exemption from income tax as long as no part of its profits inures to the benefit of any
stockholder or individual.10 In order to claim exemption from income tax, a corporation or association must
show that it is organized and operated exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and that no part of its income inures to the
benefit of any private stockholder or individual. 11 The main evidence of the purpose of a corporation
should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in
the articles of incorporation, and the by-laws outline the administrative organization of the corporation
which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt corporations from their property. The
criterion or test in order to make such income taxable is when it arises from purely profit-making business.
Otherwise, when the income derived from use of property is reasonable and incidental to the charitable,
benevolent, educational or religious purpose for which the corporation or association is created, such
income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held —
In this connection, it should be noted that respondent therein is a corporation organized

for "charitable, educational and religious purposes"; that no part of its net income inures
to the benefit of any private individual; that it is exempt from paying income tax; that it
operates a hospital in which MEDICAL assistance is given to destitute persons free of
charge; that it maintains a pharmacy department within the premises of said hospital, to
supply drugs and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them, for which
they are charged the cost of the medicines, plus an additional 10% thereof, to partly
offset the cost of medicines supplied free of charge to charity patients. Under these facts
we are of the opinion and so hold that the Hospital may not be regarded as engaged in
"business" by reason of said sale of medicines to its paying patients . . . (W)e held that
the UST Hospital was not established for profit-making purposes, despite the fact that it
had 140 paying beds, because the same were maintained only to partly finance the
expenses of the free wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained —
It is claimed however that the institution is run as a business in that it keeps a lodging and
boarding house. It may be admitted that there are 64 persons occupying rooms in the
main building as lodgers or roomers and that they take their meals at the restaurant
below. These facts however are far from constituting a business in the ordinary
acceptation of the word. In the first place, no profit is realized by the association in any
sense. In the second place it is undoubted, as it is undisputed, that the purpose of the
association is not primarily to obtain the money which comes from the lodgers and
boarders. The real purpose is to keep the membership continually within the sphere of
influence of the institution; and thereby to prevent, as far as possible, the opportunities
which vice presents to young men in foreign countries who lack home or other similar
influences.
The majority, if not all, of the income of the organizations covered by the exemption provided in Sec. 27,
pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we are to interpret the
last paragraph of Sec. 27 to the effect that all income of whatever kind from the properties of said
organization, real or personal, are taxable, even if not conducted for profit, then Sec. 27, pars. (g) and (h),
would be rendered ineffective and nugatory. As this Court elucidated inJesus Sacred Heart College v.
Collector of Internal Revenue, 15 every responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially its regular income. It should
always strive whenever possible to have a surplus. If the benefits of the exemption would be limited to
institutions which do not hope or propose to have such surplus, then the exemption would apply only to
schools which are on the verge of bankruptcy. Unlike the United States where a substantial number of
institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such
as Harvard, the trust fund of which has been steadily increasing with the years, there are and there have
always been very few educational enterprises in the Philippines which are supported by donations, and
these organizations usually have a very precarious existence. 16
Finally, the non-taxability of all income and properties of educational institutions finds enduring support in
Art. XIV, Sec. 4, par. 3, of the 1987 Constitution —
(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and found YMCA to be
an educational institution exclusively devoted to educational and charitable purposes and not operated for
profit. The purposes of the Association as set forth in its charter and constitution are "to develop the
Christian character and usefulness of its members, to improve the spiritual, intellectual, social and
physical condition of young men and to acquire, hold, mortgage and dispose of the necessary lands,
buildings and personal property for the use of said corporation exclusively for religious, charitable and
educational purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase the mental
efficiency and wage-earning capacity of young men, prepare them in special lines of business and offer
them special lines of study. We ruled therein that YMCA cannot be said to be an institution used
exclusively for religious purposes or an institution devoted exclusively for charitable purposes or an
institution devoted exclusively to educational purposes, but it can be truthfully said that it is an institution
used exclusively for all three purposes and that, as such, it is entitled to be exempted from taxation.
Separate Opinions
BELLOSILLO, J., dissenting;
I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax Appeals when
supported by substantial evidence will not be disturbed on appeal unless it is shown that the court
committed grave error in the appreciation of facts.1 In the instant case, there is no dispute as to the
validity of the findings of the Court of Tax Appeals that private respondent Young Men's Christian
Association (YMCA) is an association organized and operated exclusively for the promotion of social
welfare and other non-profitable purposes, particularly the physical and character development of the
youth.2 The enduring objectives of respondent YMCA as reflected in its Constitution and By-laws are:
(a) To develop well-balanced Christian personality, mission in life, usefulness of
individuals, and the promotion of unity among Christians and understanding among
peoples of all faiths, to the end that the Brotherhood of Man under the Fatherhood of God
may be fostered in an atmosphere of mutual respect and understanding;
(b) To promote on equal basis the physical, mental, and spiritual welfare of the youth,
with emphasis on reverence for God, social discipline, responsibility for the common
good, respect for human dignity, and the observance of the Golden Rule;
(c) To encourage members of the Young Men's Christian Associations in the Philippines
to participate loyally in the life of their respective churches; to bring these churches closer
together; and to participate in the effort to realize the church Universal;
(d) To strengthen and coordinate the work of the Young Men's Christian Associations in
the Philippines and to foster the extension of the Youth Men's Christian Associations to
new areas;
(e) To help its Member Associations develop and adopt their programs to the needs of
the youth;
(f) To assist the Member Associations in developing and maintaining a high standard of
management, operation and practice; and
(g) To undertake and sponsor national and international programs and activities in
pursuance of its purposes and objectives. 3
Pursuant to these objectives, YMCA has continuously organized and undertaken throughout the country
various programs for the youth through actual workshops, seminars, training, sports and summer camps,
conferences on the cultivation of Christian moral values, drug addiction, out-of-school youth, those with
handicap and physical defects and youth alcoholism. To fulfill these multifarious projects and attain the
laudable objectives of YMCA, fund raising has become an indispensable and integral part of the activities
of the Association. YMCA derives its funds from various sources such as membership dues, charges on
the use of facilities like bowling and billiards, lodging, interest income, parking fees, restaurant and
canteen. Since the membership dues are very minimal, the Association derives funds from rentals of
small shops, restaurant, canteen and parking fees. For the taxable year ending December 1980, YMCA
earned gross rental income of P676,829.00 and P44,259.00 from parking fees which became the subject
of the questioned assessment by petitioner.
The majority of this Court upheld the findings of the Court of Tax Appeals that the leasing of petitioner's
facilities to small shop owners and to restaurant and canteen operators in addition to the operation of a
parking lot are reasonably necessary for and incidental to the accomplishment of the objectives of
YMCA. 4 In fact, these facilities are leased to members in order to service their needs and those of their
guests. The rentals are minimal, such as, the rent of P300.00 for the barbershop. With regard to parking
space, there is no lot actually devoted therefor and the parking is done only along the sides of the
building. The parking is primarily for members with car stickers but to non-members, parking fee is P0.50
only. The rentals and parking fees are just enough to cover the operation and maintenance costs of these
facilities. The earnings which YMCA derives from these rentals and parking fees, together with the
charges for lodging and use of recreational facilities, constitute the bulk or majority of its income used to
support its programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus committed grave error in departing from the
findings of the Court of Tax Appeals by declaring that the leasing of YMCA's facilities to shop owners and
restaurant operators and the operation of a parking lot are used for commercial purposes or for profit,
which fact takes YMCA outside the coverage of tax exemption. In later granting the motion for
reconsideration filed by respondent YMCA, the Court of Appeals correctly reversed its earlier decision
and upheld the findings of the Court of Tax Appeals by ruling that YMCA is not designed for profit and the
little income it derives from rentals and parking fees helps maintain its noble existence for the fulfillment of
its goals for the Christian development of the youth.
Respondent YMCA is undoubtedly exempt from corporate income tax under the provisions of Sec. 27,
pars. (g) and (h), of the National Internal Revenue Code, to wit:
taxed under this Title in respect to income received by them as such — . . . (g) civic
league or organization not organized for profit but operated exclusively for the promotion
of social welfare; (h) club organized and operated exclusively for pleasure, recreation and
other non-profitable purposes, no part of the net income of which inures to the benefit of
any private stockholder or member . . . . Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax imposed
under this Code.
The majority of the Court accepted petitioner's view that while the income of organizations enumerated in
Sec. 27 are exempt from income tax, such exemption does not however extend to their income of
whatever kind or character from any of their properties real or personal regardless of the disposition made
of such income; that based on the wording of the law which is plain and simple and does not need any
interpretation, any income of a tax exempt entity from any of its properties is a taxable income; hence, the
rental income derived by a tax exempt organization from the lease of its properties is not therefore
exempt from income taxation even if such income is exclusively used for the accomplishment of its
objectives.
Income derived from its property by a tax exempt organization is not absolutely taxable. Taken in solitude,
a word or phrase such as, in this case, "the income of whatever kind and character . . . from any of their
properties" might easily convey a meaning quite different from the one actually intended and evident
when a word or phrase is considered with those with which it is associated. 5 It is a rule in statutory
construction that every part of the statute must be interpreted with reference to the context, that every
part of the statute must be considered together with the other parts and kept subservient to the general
intent of the whole enactment.6 A close reading of the last paragraph of Sec. 27 of the National Internal
Revenue Code, in relation to the whole section on tax exemption of the organizations enumerated
therein, shows that the phrase "conducted for profit" in the last paragraph of Sec. 27 qualifies, limits and
describes "the income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities" in order to make such income taxable. It is the
exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other property is not conducted for profit, then
it is not taxable.
Even taken alone and understood according to its plain, simple and literal meaning, the word "income"
which is derived from property, real or personal, provided in the last paragraph of Sec. 27 means the
amount of money coming to a person or corporation within a specified time as profit from investment; the
return in money from one's business or capital invested.7 Income from property also means gains and
profits derived from the sale or other disposition of capital assets; the money which any person or
corporation periodically receives either as profits from business, or as returns from investments 8 The
word "income" as used in tax statutes is to be taken in its ordinary sense as gain or profit.9
Clearly, therefore, income derived from property whether real or personal connotes profit from business or
from investment of the same. If we are to apply the ordinary meaning of income from property as profit to
the language of the last paragraph of Sec. 27 of the NIRC, then only those profits arising from business
and investment involving property are taxable. In the instant case, there is no question that in leasing its
facilities to small shop owners and in operating parking spaces, YMCA does not engage in any profit-
making business. Both the Court of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities conducted on YMCA's property were aimed not
only at fulfilling the needs and requirements of its members as part of YMCA's youth program but, more
importantly, at raising funds to finance the multifarious projects of the Association.
As the Court has ruled in one case, the fact that an educational institution charges tuition fees and other
fees for the different services it renders to the students does not in itself make the school a profit-making
enterprise that would place it beyond the purview of the law exempting it from taxation. The mere
realization of profits out of its operation does not automatically result in the loss of an educational
institution's exemption from income tax as long as no part of its profits inures to the benefit of any
stockholder or individual.10 In order to claim exemption from income tax, a corporation or association must
show that it is organized and operated exclusively for religious, charitable, scientific, athletic, cultural or
educational purposes or for the rehabilitation of veterans, and that no part of its income inures to the
benefit of any private stockholder or individual. 11 The main evidence of the purpose of a corporation
should be its articles of incorporation and by-laws, for such purpose is required by statute to be stated in
the articles of incorporation, and the by-laws outline the administrative organization of the corporation
which, in turn, is supposed to insure or facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt corporations from their property. The
criterion or test in order to make such income taxable is when it arises from purely profit-making business.
Otherwise, when the income derived from use of property is reasonable and incidental to the charitable,
benevolent, educational or religious purpose for which the corporation or association is created, such
income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held —
In this connection, it should be noted that respondent therein is a corporation organized

for "charitable, educational and religious purposes"; that no part of its net income inures
to the benefit of any private individual; that it is exempt from paying income tax; that it
operates a hospital in which MEDICAL assistance is given to destitute persons free of
charge; that it maintains a pharmacy department within the premises of said hospital, to
supply drugs and medicines only to charity and paying patients confined therein; and that
only the paying patients are required to pay the medicines supplied to them, for which
they are charged the cost of the medicines, plus an additional 10% thereof, to partly
offset the cost of medicines supplied free of charge to charity patients. Under these facts
we are of the opinion and so hold that the Hospital may not be regarded as engaged in
"business" by reason of said sale of medicines to its paying patients . . . (W)e held that
the UST Hospital was not established for profit-making purposes, despite the fact that it
had 140 paying beds, because the same were maintained only to partly finance the
expenses of the free wards containing 203 beds for charity patients.
In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained —
It is claimed however that the institution is run as a business in that it keeps a lodging and
boarding house. It may be admitted that there are 64 persons occupying rooms in the
main building as lodgers or roomers and that they take their meals at the restaurant
below. These facts however are far from constituting a business in the ordinary
acceptation of the word. In the first place, no profit is realized by the association in any
sense. In the second place it is undoubted, as it is undisputed, that the purpose of the
association is not primarily to obtain the money which comes from the lodgers and
boarders. The real purpose is to keep the membership continually within the sphere of
influence of the institution; and thereby to prevent, as far as possible, the opportunities
which vice presents to young men in foreign countries who lack home or other similar
influences.
The majority, if not all, of the income of the organizations covered by the exemption provided in Sec. 27,
pars. (g) and (h), of the NIRC are derived from their properties, real or personal. If we are to interpret the
last paragraph of Sec. 27 to the effect that all income of whatever kind from the properties of said
organization, real or personal, are taxable, even if not conducted for profit, then Sec. 27, pars. (g) and (h),
would be rendered ineffective and nugatory. As this Court elucidated inJesus Sacred Heart College v.
Collector of Internal Revenue, 15 every responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially its regular income. It should
always strive whenever possible to have a surplus. If the benefits of the exemption would be limited to
institutions which do not hope or propose to have such surplus, then the exemption would apply only to
schools which are on the verge of bankruptcy. Unlike the United States where a substantial number of
institutions of learning are dependent upon voluntary contributions and still enjoy economic stability, such
as Harvard, the trust fund of which has been steadily increasing with the years, there are and there have
always been very few educational enterprises in the Philippines which are supported by donations, and
these organizations usually have a very precarious existence. 16
Finally, the non-taxability of all income and properties of educational institutions finds enduring support in
Art. XIV, Sec. 4, par. 3, of the 1987 Constitution —
(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly and exclusively for educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such institutions, their
assets shall be disposed of in the manner provided by law.
In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and found YMCA to be
an educational institution exclusively devoted to educational and charitable purposes and not operated for
profit. The purposes of the Association as set forth in its charter and constitution are "to develop the
Christian character and usefulness of its members, to improve the spiritual, intellectual, social and
physical condition of young men and to acquire, hold, mortgage and dispose of the necessary lands,
buildings and personal property for the use of said corporation exclusively for religious, charitable and
educational purposes, and not for investment or profit." YMCA has an educational department, the aim of
which is to furnish, at much less than cost, instructions on subjects that will greatly increase the mental
efficiency and wage-earning capacity of young men, prepare them in special lines of business and offer
them special lines of study. We ruled therein that YMCA cannot be said to be an institution used
exclusively for religious purposes or an institution devoted exclusively for charitable purposes or an
institution devoted exclusively to educational purposes, but it can be truthfully said that it is an institution
used exclusively for all three purposes and that, as such, it is entitled to be exempted from taxation.
[G.R. No. 112024. January 28, 1999]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,

vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution[1] of the Court of Appeals dated September 22,
1993, affirming the Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the
claims of the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED
due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for
1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond
the reglementary period. The 1986 claim for refund amounting to P234,077.69 is
likewise denied since petitioner has opted and in all likelihood automatically credited
the same to the succeeding year. The petition for review is dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws, filed its quarterly income tax returns for the
first and second quarters of 1985, reported profits, and paid the total income tax
of P5,016,954.00. The taxes due were settled by applying PBComs tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and
0747-85 for P3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby
showing no income tax liability. For the succeeding year, ending December 31, 1986, the
petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for
the year.
But during these two years, PBCom earned rental income from leased properties. The
lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985
and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among
others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and
second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld
by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals
(CTA). The petition was docketed as CTA Case No. 4309 entitled: Philippine Bank of
Communications vs. Commissioner of Internal Revenue.
The losses petitioner incurred as per the summary of petitioners claims for refund and tax
credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:
1985 1986
Net Income (Loss) (P25,317,228.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax P5,299,749.50*=========== P234,077.69===========
Payments === ===
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five

centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground
that it was filed beyond the two-year reglementary period provided for by law. The petitioners
claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that
it was automatically credited by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but
the same was denied due course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA
with the Court of Appeals. However on September 22, 1993, the Court of Appeals
affirmed in toto the CTAs resolution dated July 20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of
BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for
review asking for the refund/tax credit of its 1985-86 excess quarterly income tax
payments -- can be prejudiced by the subsequent BIR rejection, applied retroactively,
of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax
credit of excess quarterly income tax payments is not two years but ten (10).[7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which
denied PBComs claim for the refund of P234,077.69 income tax overpaid in 1986 on
the mere speculation, without proof, that there were taxes due in 1987 and that
PBCom availed of tax-crediting that year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying
the plea for tax refund or tax credits on the ground of prescription, despite petitioners reliance on
RMC No. 7-85, changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive
period under the tax Code and that taxpayers may claim refund or tax credits for the excess
quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil
Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS

CORPORATE INCOME TAX RESULTING FROM THE
FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos.

10-77 which provide:
xxxxxxxxx
It has been observed, however, that because of the excess tax payments, corporations
file claims for recovery of overpaid income tax with the Court of Tax Appeals within
the two-year period from the date of payment, in accordance with Sections 292 and
295 of the National Internal Revenue Code. It is obvious that the filing of the case in
court is to preserve the judicial right of the corporation to claim the refund or tax
credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax
under the provisions of Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund
of the overpaid income tax or claim for automatic tax credit. To insure prompt action
on corporate annual income tax returns showing refundable amounts arising from
overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the procedure in processing said
returns. Under these procedures, the returns are merely pre-audited which consist
mainly of checking mathematical accuracy of the figures of the return. After which,
the refund or tax credit is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.
In this regard, therefore, there is no need to file petitions for review in the Court
of Tax Appeals in order to preserve the right to claim refund or tax credit within
the two-year period. As already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess income tax paid under the
provisions of Section 86 of the Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article 1144 of the Civil
Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting
Corporation vs. Court of Tax Appeals[10] petitioner claims that rulings or circulars promulgated
by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to
taxpayers. In ABS-CBN case, the Court held that the government is precluded from adopting a
position inconsistent with one previously taken where injustice would result therefrom or where
there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides
for this rule as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of

any of the rules and regulations promulgated in accordance with the preceding section
or any of the rulings or circulars promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification, or reversal will be prejudicial
to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or
in any document required of him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that
the two-year prescriptive period for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is
generally done on April 15 following the close of the calendar year. As precedents, respondent
Commissioner cited cases which adhered to this principle, to wit: ACCRA Investments Corp. vs.
Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et
al..[12] Respondent Commissioner also states that since the Final Adjusted Income Tax Return of
the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had
only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same
was filed beyond the time fixed by law, and such failure is fatal to petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the matter, we find that,
contrary to the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not
warranted as it disregards the two-year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal.[13] Due process of law under the Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon taxation that the government chiefly relies
to obtain the means to carry on its operations and it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be summary and interfered with as little
as possible.[14]
From the same perspective, claims for refund or tax credit should be exercised within the
time fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of
1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:
Sec. 230. 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; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be begun after the expiration of two
years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment; Provided however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of
the return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner
of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this
Court explained the application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the
refund is ascertained, which can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and two years from this date would
be April 16, 1986. x x x As we have earlier said in the TMX Sales case, Sections 68,[16] 69,[17] and
70[18] on Quarterly Corporate Income Tax Payment and Section 321 should be considered in
conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will
be ignored if judicially found to be erroneous.[20] Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and provisions of the
latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was for
any single period of time not exceeding five years duration, FAO No. 37-1 fixed no
period, that is to say, it establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the
part of Secretary of Agriculture and Natural Resources. Of course, in case of
discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to
implement a law cannot go beyond the terms and provisions of the latter. x x x In this
connection, the attention of the technical men in the offices of Department Heads who
draft rules and regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they intended to implement, this
to avoid any possible misunderstanding or confusion as in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents.[24] As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating
RMC No. 7-85, is estopped by the principle of non-retroactivity of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that a taxpayer may recover the
excess income tax paid within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting Commissioner of Internal
Revenue. On the other hand, the decision, stating that the taxpayer should still file a
claim for a refund or tax credit and the corresponding petition for review within the
two-year prescription period, and that the lengthening of the period of limitation on
refund from two to ten years would be adverse to public policy and run counter to the
positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the
Court of Tax Appeals. Estoppel has no application in the case at bar because it was
not the Commissioner of Internal Revenue who denied petitioners claim of refund or
tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is out of harmony with or
contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence,
cannot be given weight for to do so would in effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes
as part of the legal system of the country. But administrative decisions do not enjoy that level of
recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with
a shield against judicial action. For there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same.[27] Moreover, the non-
retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in
affirming CTAs decision denying its claim for refund of P 234,077.69 (tax overpaid in 1986),
based on mere speculation, without proof, that PBCom availed of the automatic tax credit in
1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the
option box provided in the BIR form) its intention, whether to request for a refund or claim for
an automatic tax credit for the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to apply for automatic tax
credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax
return was not offered by the petitioner as evidence) by the CTA in concluding that
petitioner had indeed availed of and applied the automatic tax credit to the succeeding
year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and
tax credit are alternative.[30]
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977
NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we
must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as
evidence to controvert said fact. Thus, we are bound by the findings of fact by respondent courts,
there being no showing of gross error or abuse on their part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals in
CA-G.R. SP No. 49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No.
5200. Also assailed is the April 3, 2001 Resolution3 denying the motion for reconsideration.
The facts of the case are as follows:
On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement4 with Baguio Gold Mining Company ("Baguio Gold") for the former to manage and
operate the latter’s mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet
Province. The parties’ agreement was denominated as "Power of Attorney" and provided for the
following terms:
4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make
available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the MANAGERS
within the said 3-year period, for use in the MANAGEMENT of the STO. NINO MINE. The
said ELEVEN MILLION PESOS (P11,000,000.00) shall be deemed, for internal audit
purposes, as the owner’s account in the Sto. Nino PROJECT. Any part of any income of the
PRINCIPAL from the STO. NINO MINE, which is left with the Sto. Nino PROJECT, shall be
added to such owner’s account.
5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to
the Sto. Nino PROJECT, in accordance with the following arrangements:
(a) The properties shall be appraised and, together with the cash, shall be carried by
the Sto. Nino PROJECT as a special fund to be known as the MANAGERS’ account.
(b) The total of the MANAGERS’ account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the compensation of
the MANAGERS as herein provided cannot be paid in cash from the Sto. Nino
PROJECT, the amount not so paid in cash shall be added to the MANAGERS’
account.
(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.
(d) The MANAGERS’ account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation of
property, upon a projected termination of this Agency, the ratio which the
MANAGERS’ account has to the owner’s account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the
claims, shall be transferred to the MANAGERS, except that such transferred assets
shall not include mine development, roads, buildings, and similar property which will
be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property originally transferred by them to the
Sto. Nino PROJECT be re-transferred to them. Until such assets are transferred to
the MANAGERS, this Agency shall remain subsisting.
xxxx
12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the
Sto. Nino PROJECT before income tax. It is understood that the MANAGERS shall pay
income tax on their compensation, while the PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction therefrom of the MANAGERS’
compensation.
xxxx
16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the
future, may incur other obligations in favor of the MANAGERS. This Power of Attorney has
been executed as security for the payment and satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS’ account. After all obligations of the
PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency
shall be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.
17. Notwithstanding any agreement or understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-
month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to
the PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be
operative in case of the MANAGERS’ withdrawal.
x x x x5
In the course of managing and operating the project, Philex Mining made advances of cash and
property in accordance with paragraph 5 of the agreement. However, the mine suffered continuing
losses over the years which resulted to petitioner’s withdrawal as manager of the mine on January
28, 1982 and in the eventual cessation of mine operations on February 20, 1982.6
Thereafter, on September 27, 1982, the parties executed a "Compromise with Dation in
Payment"7 wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio Gold’s
tangible assets to petitioner, transferring to the latter Baguio Gold’s equitable title in its Philodrill
assets and finally settling the remaining liability through properties that Baguio Gold may acquire in
the future.
On December 31, 1982, the parties executed an "Amendment to Compromise with Dation in
Payment"8 where the parties determined that Baguio Gold’s indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors that
petitioner had assumed as guarantor. These liabilities pertained to long-term loans amounting to
US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay petitioner in two segments by first assigning its tangible
assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that were
set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as "loss on settlement of receivables from Baguio Gold against reserves and
allowances."9 However, the Bureau of Internal Revenue (BIR) disallowed the amount as deduction
for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.
Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites
for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within the taxable year when it was
determined to be worthless.
Petitioner emphasized that the debt arose out of a valid management contract it entered into with
Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to
the management contract, formed part of Baguio Gold’s "pecuniary obligations" to petitioner. It also
included payments made by petitioner as guarantor of Baguio Gold’s long-term loans which legally
entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s irreversible losses, it became evident that it would
not be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt
to be considered worthless, petitioner claimed that it was neither required to institute a judicial action
for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It
is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable
means to collect.
On October 28, 1994, the BIR denied petitioner’s protest for lack of legal and factual basis. It held
that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and
had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting
debt considering that, under the management contract, petitioner was to be paid fifty percent (50%)
of the project’s net profit.10
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for
lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income
tax in the amount of P62,811,161.39 is hereby AFFIRMED.
ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY

respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from February 10, 1995, which is the date after the 20-
day grace period given by the respondent within which petitioner has to pay the deficiency
amount x x x up to actual date of payment.
SO ORDERED.11
The CTA rejected petitioner’s assertion that the advances it made for the Sto. Nino mine were in the
nature of a loan. It instead characterized the advances as petitioner’s investment in a partnership
with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the
"Power of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement.
Since the advanced amount partook of the nature of an investment, it could not be deducted as a
bad debt from petitioner’s gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio
Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio
Gold was not in default since its loans were not yet due and demandable. What petitioner did was to
pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was merely
demanding payment of the installment and interests due. Moreover, Citibank imposed and collected
a "pre-termination penalty" for the pre-payment.
The Court of Appeals affirmed the decision of the CTA.12 Hence, upon denial of its motion for
reconsideration,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
I.
The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the nature
of an investment rather than a loan.
II.
The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto.
Nino Mine indicates that Philex is a partner of Baguio Gold in the development of the Sto.
Nino Mine notwithstanding the clear absence of any intent on the part of Philex and Baguio
Gold to form a partnership.
III.
The Court of Appeals erred in relying only on the Power of Attorney and in completely
disregarding the Compromise Agreement and the Amended Compromise Agreement when it
construed the nature of the advances made by Philex.
IV.
The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad
debts write-off.14
Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we
should not only rely on the "Power of Attorney", but also on the subsequent "Compromise with
Dation in Payment" and "Amended Compromise with Dation in Payment" that the parties executed in
1982. These documents, allegedly evinced the parties’ intent to treat the advances and payments as
a loan and establish a creditor-debtor relationship between them.
The petition lacks merit.
The lower courts correctly held that the "Power of Attorney" is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold. Before
resort may be had to the two compromise agreements, the parties’ contractual intent must first be
discovered from the expressed language of the primary contract under which the parties’ business
relations were founded. It should be noted that the compromise agreements were mere collateral
documents executed by the parties pursuant to the termination of their business relationship created
under the "Power of Attorney". On the other hand, it is the latter which established the juridical
relation of the parties and defined the parameters of their dealings with one another.
The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties’ true intent. The compromise agreements were
executed eleven years after the "Power of Attorney" and merely laid out a plan or procedure by
which petitioner could recover the advances and payments it made under the "Power of Attorney".
The parties entered into the compromise agreements as a consequence of the dissolution of their
business relationship. It did not define that relationship or indicate its real character.
An examination of the "Power of Attorney" reveals that a partnership or joint venture was indeed
intended by the parties. Under a contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of dividing the profits
among themselves.15 While a corporation, like petitioner, cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has been held that it may enter into a joint
venture which is akin to a particular partnership:
The legal concept of a joint venture is of common law origin. It has no precise legal definition,
but it has been generally understood to mean an organization formed for some temporary
purpose. x x x It is in fact hardly distinguishable from the partnership, since their elements
are similar – community of interest in the business, sharing of profits and losses, and a
mutual right of control. x x x The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with some degree of
continuity, while the joint venture is formed for the execution of a single transaction, and is
thus of a temporary nature. x x x This observation is not entirely accurate in this jurisdiction,
since under the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem therefore that
under Philippine law, a joint venture is a form of partnership and should be governed by the
law of partnerships. The Supreme Court has however recognized a distinction between
these two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with others. x x x (Citations
omitted) 16
Perusal of the agreement denominated as the "Power of Attorney" indicates that the parties had
intended to create a partnership and establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing in the income of the mine.
Under the "Power of Attorney", petitioner and Baguio Gold undertook to contribute money, property
and industry to the common fund known as the Sto. Niño mine.17 In this regard, we note that there is
a substantive equivalence in the respective contributions of the parties to the development and
operation of the mine. Pursuant to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold
were to contribute equally to the joint venture assets under their respective accounts. Baguio Gold
would contribute P11M under its owner’s account plus any of its income that is left in the project, in
addition to its actual mining claim. Meanwhile, petitioner’s contribution would consist of
its expertise in the management and operation of mines, as well as the manager’s account which is
comprised of P11M in funds and property and petitioner’s "compensation" as manager that cannot
be paid in cash.
However, petitioner asserts that it could not have entered into a partnership agreement with Baguio
Gold because it did not "bind" itself to contribute money or property to the project; that under
paragraph 5 of the agreement, it was only optional for petitioner to transfer funds or property to the
Sto. Niño project "(w)henever the MANAGERS shall deem it necessary and convenient in
connection with the MANAGEMENT of the STO. NIÑO MINE."18
The wording of the parties’ agreement as to petitioner’s contribution to the common fund does not
detract from the fact that petitioner transferred its funds and property to the project as specified in
paragraph 5, thus rendering effective the other stipulations of the contract, particularly paragraph
5(c) which prohibits petitioner from withdrawing the advances until termination of the parties’
business relations. As can be seen, petitioner became bound by its contributions once the transfers
were made. The contributions acquired an obligatory nature as soon as petitioner had chosen to
exercise its option under paragraph 5.
There is no merit to petitioner’s claim that the prohibition in paragraph 5(c) against withdrawal of
advances should not be taken as an indication that it had entered into a partnership with Baguio
Gold; that the stipulation only showed that what the parties entered into was actually a contract of
agency coupled with an interest which is not revocable at will and not a partnership.
In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both
principal and agent.19 In this case, the non-revocation or non-withdrawal under paragraph 5(c)
applies to the advances made by petitioner who is supposedly the agent and not the principal under
the contract. Thus, it cannot be inferred from the stipulation that the parties’ relation under the
agreement is one of agency coupled with an interest and not a partnership.
Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the
parties was one of agency and not a partnership. Although the said provision states that "this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS’ account," it does not necessarily follow that the parties
entered into an agency contract coupled with an interest that cannot be withdrawn by Baguio Gold.
It should be stressed that the main object of the "Power of Attorney" was not to confer a power in
favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business
relationship between petitioner and Baguio Gold, in which the former was to manage and operate
the latter’s mine through the parties’ mutual contribution of material resources and industry. The
essence of an agency, even one that is coupled with interest, is the agent’s ability to represent his
principal and bring about business relations between the latter and third persons.20 Where
representation for and in behalf of the principal is merely incidental or necessary for the proper
discharge of one’s paramount undertaking under a contract, the latter may not necessarily be a
contract of agency, but some other agreement depending on the ultimate undertaking of the
parties.21
In this case, the totality of the circumstances and the stipulations in the parties’ agreement
indubitably lead to the conclusion that a partnership was formed between petitioner and Baguio
Gold.
First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made
by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the
parties’ business relations, "the ratio which the MANAGER’S account has to the owner’s account will
be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE,
excluding the claims" shall be transferred to petitioner.22As pointed out by the Court of Tax Appeals,
petitioner was merely entitled to a proportionate return of the mine’s assets upon dissolution of the
parties’ business relations. There was nothing in the agreement that would require Baguio Gold to
make payments of the advances to petitioner as would be recognized as an item of obligation or
"accounts payable" for Baguio Gold.
Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the
Sto. Niño mine upon termination, a provision that is more consistent with a partnership than a
creditor-debtor relationship. It should be pointed out that in a contract of loan, a person who receives
a loan or money or any fungible thing acquires ownership thereof and is bound to pay the creditor
an equal amount of the same kind and quality.23 In this case, however, there was no stipulation for
Baguio Gold to actually repay petitioner the cash and property that it had advanced, but only the
return of an amount pegged at a ratio which the manager’s account had to the owner’s account.
In this connection, we find no contractual basis for the execution of the two compromise agreements
in which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the
termination of their business relations over the Sto. Nino mine. The "Power of Attorney" clearly
provides that petitioner would only be entitled to the return of a proportionate share of the mine
assets to be computed at a ratio that the manager’s account had to the owner’s account. Except to
provide a basis for claiming the advances as a bad debt deduction, there is no reason for Baguio
Gold to hold itself liable to petitioner under the compromise agreements, for any amount over and
above the proportion agreed upon in the "Power of Attorney".
Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds
of millions of pesos to another corporation with neither security, or collateral, nor a specific deed
evidencing the terms and conditions of such loans. The parties also did not provide a specific
maturity date for the advances to become due and demandable, and the manner of payment was
unclear. All these point to the inevitable conclusion that the advances were not loans but capital
contributions to a partnership.
The strongest indication that petitioner was a partner in the Sto Niño mine is the fact that it would
receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety
of the parties’ contractual stipulations simply leads to no other conclusion than that petitioner’s
"compensation" is actually its share in the income of the joint venture.
Article 1769 (4) of the Civil Code explicitly provides that the "receipt by a person of a share in the
profits of a business is prima facie evidence that he is a partner in the business." Petitioner asserts,
however, that no such inference can be drawn against it since its share in the profits of the Sto Niño
project was in the nature of compensation or "wages of an employee", under the exception provided
in Article 1769 (4) (b).24
On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who
will be paid "wages" pursuant to an employer-employee relationship. To begin with, petitioner was
the manager of the project and had put substantial sums into the venture in order to ensure its
viability and profitability. By pegging its compensation to profits, petitioner also stood not to be
remunerated in case the mine had no income. It is hard to believe that petitioner would take the risk
of not being paid at all for its services, if it were truly just an ordinary employee.
Consequently, we find that petitioner’s "compensation" under paragraph 12 of the agreement

actually constitutes its share in the net profits of the partnership. Indeed, petitioner would not be
entitled to an equal share in the income of the mine if it were just an employee of Baguio Gold.25 It is
not surprising that petitioner was to receive a 50% share in the net profits, considering that the
"Power of Attorney" also provided for an almost equal contribution of the parties to the St. Nino mine.
The "compensation" agreed upon only serves to reinforce the notion that the parties’ relations were
indeed of partners and not employer-employee.
All told, the lower courts did not err in treating petitioner’s advances as investments in a partnership
known as the Sto. Nino mine. The advances were not "debts" of Baguio Gold to petitioner inasmuch
as the latter was under no unconditional obligation to return the same to the former under the "Power
of Attorney". As for the amounts that petitioner paid as guarantor to Baguio Gold’s creditors, we find
no reason to depart from the tax court’s factual finding that Baguio Gold’s debts were not yet due
and demandable at the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold’s
outstanding loans to its bank creditors and this conclusion is supported by the evidence on record.26
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income.
Deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to the
deduction claimed.27 In this case, petitioner failed to substantiate its assertion that the advances
were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it
could not claim the advances as a valid bad debt deduction.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No.
49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case
No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency
tax on its 1982 income in the amount of P62,811,161.31, with 20% delinquency interest computed
from February 10, 1995, which is the due date given for the payment of the deficiency income tax,
up to the actual date of payment.
SO ORDERED.

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G.R. No.

134062 April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

1986 – Deficiency Percentage Tax

Deficiency percentage tax ₱ 7, 270,892.88

TOTAL AMOUNT DUE AND COLLECTIBLE ₱12,319,441.13

1986 – Deficiency Documentary Stamp Tax

Deficiency percentage tax ₱93,723,372.40

TOTAL AMOUNT DUE AND COLLECTIBLE ₱117,169,215.50.5

Both notices of assessment contained the following note:

xxx xxx xxx

… this constitutes the final decision of this office on the matter. 8

This petition raises the following issues:

2) whether or not BPI was liable for the said taxes.

xxx xxx xxx (emphasis supplied)

Were the October 28, 1988 Notices Valid Assessments?

xxx xxx xxx

xxx xxx xxx (emphasis supplied)

xxx xxx xxx

xxx xxx xxx

The CA never disputed these findings of fact by the CTA:

Sec. 270. Protesting of assessment.1a\^/phi1.net

xxx xxx xxx

Such assessment may be protested administratively by filing a request for reconsideration or

Implications Of A Valid Assessment

G.R. No. L-22734 September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

Office of the Solicitor General for petitioner.

BENGZON, J.P., J.:

1. Deficiency income tax

Total amount due P2,707.44

Deficiency income tax

If any person, corporation, partnership, joint-account (cuenta en participacion), association, or

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

We deal first with the procedural question.

Now for the substantive question.

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

G.R. No. 124043 October 14, 1998

COMMISSIONER OF INTERNAL REVENUE, petitioner,

xxx xxx xxx

1980 Deficiency Fixed Tax — P353,15;

1980 Deficiency Contractor's Tax — P3,129.23;

1980 Deficiency Income Tax — P372,578.20.

While the following assessments are hereby sustained:

1980 Deficiency Expanded Withholding Tax — P1,798.93;

1980 Deficiency Withholding Tax on Wages — P33,058.82

WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractor's Tax P 3,129.23, &

1980 Deficiency Income Tax P 372,578.20

but the same is AFFIRMED in all other respect. 7

xxx xxx xxx

This Court's Ruling

The petition is meritorious.

xxx xxx xxx

xxx xxx xxx

Cases Cited by Private

Davide, Jr., Vitug and Quisumbing, JJ., concur.

Bellosillo, J., Please see Dissenting Opinion.

BELLOSILLO, J., dissenting;

(a) To develop well-balanced Christian personality, mission in life, usefulness of

In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held —

In this connection, it should be noted that respondent therein is a corporation organized