G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion
of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed
the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in
its income tax returns. The corollary issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was made on time and in accordance with
law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the petitioner
assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and
1959.1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter
was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of
distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest
in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a
photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty.
Guevara was finally informed that the BIR was not taking any action on the protest and it was only
then that he accepted the warrant of distraint and levy earlier sought to be served.5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125,
the appeal may be made within thirty days after receipt of the decision or ruling challenged.7 It is true
that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and
renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a special circumstance in the case at
bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the
petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the warrant was premature and
could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on January
18, 1965, when it was filed, the reglementary period which started on the date the assessment was
received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the
private respondent was definitely informed of the implied rejection of the said protest and the warrant
was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because
it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had
seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment was in the form of promotional fees.
These were collected by the Payees for their work in the creation of the Vegetable Oil Investment
Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees
to be personal holding company income 12 but later conformed to the decision of the respondent
court rejecting this assertion.13 In fact, as the said court found, the amount was earned through the
joint efforts of the persons among whom it was distributed It has been established that the Philippine
Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell
its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of
the Vegetable Oil Investment Corporation, inducing other persons to invest in it.14 Ultimately, after its
incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income
tax returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after
examining the evidence, that no distribution of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of
the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made
in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict business procedures were not applied
and immediate issuance of receipts was not required. Even so, at the end of the year, when the
books were to be closed, each payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among the persons in
the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did practically everything, from the
formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord with the following provision of the
Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ... 22

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

SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. .
. . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity
of the claimed deduction. In the present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve themselves in a new business
requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person who
is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the
taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,

vs.
RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA,
Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner,
Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO,
Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of
Finance, respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding 1 on the
validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further
amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable
compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the
net profits of taxable partnership, (f) adjusted gross income. 2 Petitioner 3 as taxpayer alleges that by virtue thereof, "he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-visthose which
are imposed upon fixed income or salaried individual taxpayers. 4 He characterizes the above sction as arbitrary amounting to class
legislation, oppressive and capricious in character 5 For petitioner, therefore, there is a transgression of both the equal protection and due
process clauses 6 of the Constitution as well as of the rule requiring uniformity in taxation. 7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days
from notice. Such an answer, after two extensions were granted the Office of the Solicitor General,
was filed on May 28, 1982. 8The facts as alleged were admitted but not the allegations which to their
mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them]
being those stated [in their] Special and Affirmative Defenses." 9 The answer then affirmed: "Batas
Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited
while correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for the dismissal of the
petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so
clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private
enterprise and initiative and which the government was called upon to enter optionally, and only
'because it was better equipped to administer for the public welfare than is any private individual or
group of individuals,' continue to lose their well-defined boundaries and to be absorbed within
activities that the government must undertake in its sovereign capacity if it is to meet the increasing
social challenges of the times." 11 Hence the need for more revenues. The power to tax, an inherent prerogative, has to be
availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes
being the lifeblood of the government, their prompt and certain availability is of the essence. 12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of
government." 13 It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The
Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay
properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to
the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy." 14 In a separate opinion in Graves v. New
York, 15 Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the
intellectual fashion of the times following] a free use of absolutes." 16 This is merely to emphasize that it is riot and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed
away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits." 17 So it is in the
Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any
legislative or executive, act that runs counter to it. In any case therefore where it can be
demonstrated that the challenged statutory provision — as petitioner here alleges — fails to abide by
its command, then this Court must so declare and adjudge it null. The injury thus is centered on the
question of whether the imposition of a higher tax rate on taxable net income derived from business
or profession than on compensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation,
as here. does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void or its face, he has not
made out a case. This is merely to adhere to the authoritative doctrine that were the due process
and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad
standards, there is a need for of such persuasive character as would lead to such a conclusion.
Absent such a showing, the presumption of validity must prevail. 18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power.
It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly
calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the
state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process
grounds. 19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the
assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far
from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds
no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed.
Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person
under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class
should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest." 20 That same formulation
applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of
the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very
essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the
'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws
are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties,
address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact
or opinion to be treated in law as though they were the same." 21 Hence the constant reiteration of the view that classification if rational in
character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta, 22 this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for taxation, or exemption infringe no constitutional limitation.'" 23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The
rule of taxation shag be uniform and equitable." 24 This requirement is met according to Justice
Laurel in Philippine Trust Company v. Yatco,25 decided in 1940, when the tax "operates with the
same force and effect in every place where the subject may be found. " 26 He likewise added: "The
rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable." 27 The problem of classification did not present itself in that case. It did not arise until nine
years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable
articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of taxation, ... . 28 As
clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical
dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." 29 There is quite a similarity then to the standard of equal protection for all that is
required is that the tax "applies equally to all persons, firms and corporations placed in similar
situation."30
8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the applicable tax
rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the
classification must rest upon substantial distinctions that make real differences. In the case of the
gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification
is the susceptibility of the income to the application of generalized rules removing all deductible
items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of
them. Taxpayers who are recipients of compensation income are set apart as a class. As there is
practically no overhead expense, these taxpayers are e not entitled to make deductions for income
tax purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or
expenses necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of net income
taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of
factual foundation to show the arbitrary character of the assailed provision; 31 (2) the force of
controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the
reasonableness of the distinction between compensation and taxable net income of professionals
and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

Makasiar, Concepcion, Jr., Guerero, Melencio-Herrera, Escolin, Relova, Gutierrez, Jr., De la Fuente
and Cuevas, JJ., concur.

Teehankee, J., concurs in the result.

Plana, J., took no part.

Separate Opinions

AQUINO, J., concurring:

I concur in the result. The petitioner has no cause of action for prohibition.

ABAD SANTOS, J., dissenting:

This is a frivolous suit. While the tax rates for compensation income are lower than those for net
income such circumtance does not necessarily result in lower tax payments for these receiving
compensation income. In fact, the reverse will most likely be the case; those who file returns on the
basis of net income will pay less taxes because they claim all sort of deduction justified or not I vote
for dismissal.

Separate Opinions

AQUINO, J., concurring:

I concur in the result. The petitioner has no cause of action for prohibition.

ABAD SANTOS, J., dissenting:

This is a frivolous suit. While the tax rates for compensation income are lower than those for net
income such circumtance does not necessarily result in lower tax payments for these receiving
compensation income. In fact, the reverse will most likely be the case; those who file returns on the
basis of net income will pay less taxes because they claim all sort of deduction justified or not I vote
for dismissal.
G.R. No. 144104 June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision1 dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the
decision of the Central Board of Assessment Appeals holding that the lot owned by the petitioner
and its hospital building constructed thereon are subject to assessment for purposes of real property
tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on
January 16, 1981 by virtue of Presidential Decree No. 1823.2 It is the registered owner of a parcel of
land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon
Avenue corner Elliptical Road, Central District, Quezon City. The lot has an area of 121,463 square
meters and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of Deeds of
Quezon City. Erected in the middle of the aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to private parties, for canteen and small
store spaces, and to medical or professional practitioners who use the same as their private clinics
for their patients whom they charge for their professional services. Almost one-half of the entire area
on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the
right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-
patients, both paying and non-paying. Aside from its income from paying patients, the petitioner
receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real
property taxes in the amount of ₱4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land
and the hospital building, respectively.4 On August 25, 1993, the petitioner filed a Claim for
Exemption5 from real property taxes with the City Assessor, predicated on its claim that it is a
charitable institution. The petitioner’s request was denied, and a petition was, thereafter, filed before
the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of
the resolution of the City Assessor. The petitioner alleged that under Section 28, paragraph 3 of the
1987 Constitution, the property is exempt from real property taxes. It averred that a minimum of 60%
of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital
operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as
such, is exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition
and holding the petitioner liable for real property taxes.6

The QC-LBAA’s decision was, likewise, affirmed on appeal by the Central Board of Assessment
Appeals of Quezon City (CBAA, for brevity)7 which ruled that the petitioner was not a charitable
institution and that its real properties were not actually, directly and exclusively used for charitable
purposes; hence, it was not entitled to real property tax exemption under the constitution and the
law. The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the
decision of the CBAA.8

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO

REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER

ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED
UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of
the 1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact
that it admits paying patients and renders medical services to them, leases portions of the land to
private parties, and rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out that for the years 1995
to 1999, 100% of its out-patients were charity patients and of the hospital’s 282-bed capacity, 60%
thereof, or 170 beds, is allotted to charity patients. It asserts that the fact that it receives subsidies
from the government attests to its character as a charitable institution. It contends that the
"exclusivity" required in the Constitution does not necessarily mean "solely." Hence, even if a portion
of its real estate is leased out to private individuals from whom it derives income, it does not lose its
character as a charitable institution, and its exemption from the payment of real estate taxes on its
real property. The petitioner cited our ruling in Herrera v. QC-BAA9 to bolster its pose. The petitioner
further contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity.
The petitioner’s real property is not exempt from the payment of real estate taxes under P.D. No.
1823 and even under the 1987 Constitution because it failed to prove that it is a charitable institution
and that the said property is actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its administrative officer, and Zenaida Rivera,
the proprietress of the Elliptical Orchids and Garden Center, for entering into a lease contract over
7,663.13 square meters of the property in 1990 for only ₱20,000 a month, when the monthly rental
should be ₱357,000 a month as determined by the Commission on Audit; and that instead of
complying with the directive of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on March 13, 1995 for a monthly
rental of only ₱24,000. They assert that the petitioner uses the subsidies granted by the government
for charity patients and uses the rest of its income from the property for the benefit of paying
patients, among other purposes. They aver that the petitioner failed to adduce substantial evidence
that 100% of its out-patients and 170 beds in the hospital are reserved for indigent patients. The
respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is that it
is pay-patient and required to pay a certain amount as deposit. That even if a patient is living
below the poverty line, he is charged with high hospital bills. And, without these bills being
 first settled, the poor patient cannot be allowed to leave the hospital or be discharged without
first paying the hospital bills or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that even the remains of deceased
poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as
free or charity patient, one must undergo a series of interviews and must submit all the
requirements needed by the Center, usually accompanied by endorsement by an influential
agency or person known only to the Center. These facts were heard and admitted by the
Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA.
These are the reasons of indigent patients, instead of seeking treatment with the Center,
they prefer to be treated at the Quezon Institute. Can such practice by the Center be called
charitable?10

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within
the context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section
234(b) of Republic Act No. 7160; and (b) whether the real properties of the petitioner are exempt
from real property taxes.

The Court’s Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973
and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not,
the elements which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the
use and occupation of the properties.11

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing
laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to establish themselves in life or
otherwise lessening the burden of government.12 It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the improvement and promotion of
the happiness of man.13 The word "charitable" is not restricted to relief of the poor or sick.14 The test
of a charity and a charitable organization are in law the same. The test whether an enterprise is
charitable or not is whether it exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippines with
the Ministry of Health and the Ministry of Human Settlements. It was organized for the welfare and
benefit of the Filipino people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison d’etre for the creation of the petitioner is stated in the
decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the total
annual deaths from all causes, thus, exacting a tremendous toll on human resources, which
ailments are likely to increase and degenerate into serious lung diseases on account of
unabated pollution, industrialization and unchecked cigarette smoking in the country; lavv ph!l.net
 Whereas, the more common lung diseases are, to a great extent, preventable, and curable
with early and adequate medical care, immunization and through prompt and intensive
prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies
and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and related activities and provide tertiary-
level care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial
support towards the establishment and maintenance of a Lung Center for the welfare and
benefit of the Filipino people.15

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation,
thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated

medical institution which shall specialize in the treatment, care, rehabilitation and/or
relief of lung and allied diseases in line with the concern of the government to assist
and provide material and financial support in the establishment and maintenance of a
lung center primarily to benefit the people of the Philippines and in pursuance of the
policy of the State to secure the well-being of the people by providing them
specialized health and medical services and by minimizing the incidence of lung
diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of

lung or pulmonary ailments and the care of lung patients, including the holding of a
series of relevant congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the

biological, demographic, social, economic, eugenic and physiological aspects of lung
or pulmonary diseases and their control; and to collect and publish the findings of
such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on

lung consciousness or awareness, and the development of fact-finding, information
and reporting facilities for and in aid of the general purposes or objects aforesaid,
especially in human lung requirements, general health and physical fitness, and
other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers

and medical and technical personnel in the practical and scientific implementation of
services to lung patients;

6. To assist universities and research institutions in their studies about lung diseases,
to encourage advanced training in matters of the lung and related fields and to
support educational programs of value to general health;
 7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and activities for
the purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be given
to the organization;

9. To extend, whenever possible and expedient, medical services to the public and,
in general, to promote and protect the health of the masses of our people, which has
long been recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because of race, creed, color or
political belief of the persons helped; and to enable them to obtain treatment when
such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and

carried on to promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from
time to time, deem proper and best, under the particular circumstances, to serve its
general and non-profit purposes and objectives; lavvphil.net

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose
of properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the

accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.16

Hence, the medical services of the petitioner are to be rendered to the public in general in any and
all walks of life including those who are poor and the needy without discrimination. After all, any
person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of
charity.17

As a general principle, a charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as the money received is devoted
or used altogether to the charitable object which it is intended to achieve; and no money inures to
the private benefit of the persons managing or operating the institution.18 In Congregational Sunday
School, etc. v. Board of Review,19 the State Supreme Court of Illinois held, thus:

… [A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the institution and the amounts so received are
applied in furthering its charitable purposes, and those benefits are refused to none on
account of inability to pay therefor. The fundamental ground upon which all exemptions in
 favor of charitable institutions are based is the benefit conferred upon the public by them,
and a consequent relief, to some extent, of the burden upon the state to care for and
advance the interests of its citizens.20

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of
South Dakota v. Baker:21

… [T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to
enhance the usefulness of the institution to the poor; for it is a matter of common observation
amongst those who have gone about at all amongst the suffering classes, that the deserving
poor can with difficulty be persuaded to enter an asylum of any kind confined to the reception
of objects of charity; and that their honest pride is much less wounded by being placed in an
institution in which paying patients are also received. The fact of receiving money from some
of the patients does not, we think, at all impair the character of the charity, so long as the
money thus received is devoted altogether to the charitable object which the institution is
intended to further.22

The money received by the petitioner becomes a part of the trust fund and must be devoted to public
trust purposes and cannot be diverted to private profit or benefit.23

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies
granted by the government. As held by the State Supreme Court of Utah in Yorgason v. County
Board of Equalization of Salt Lake County:24

Second, the … government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the government.
In both Intermountain Health Careand the present case, the crux is the presence or absence
of material reciprocity. It is entirely irrelevant to this analysis that the government, rather than
a private benefactor, chose to make up the deficit resulting from the exchange between St.
Mark’s Tower and the tenants by making a contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the patients’ income supplements had come
from private individuals rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the
government rather than private charitable contributions does not dictate the denial of a
charitable exemption if the facts otherwise support such an exemption, as they do here.25

In this case, the petitioner adduced substantial evidence that it spent its income, including the
subsidies from the government for 1991 and 1992 for its patients and for the operation of the
hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that
those portions of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation. Hence, a
claim for exemption from tax payments must be clearly shown and based on language in the law too
plain to be mistaken.26 As held in Salvation Army v. Hoehn:27
 An intention on the part of the legislature to grant an exemption from the taxing power of the
state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in favor of the
public. This principle applies with peculiar force to a claim of exemption from taxation . …28

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that
the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

organized primarily to help combat the high incidence of lung and pulmonary diseases in the
Philippines, all donations, contributions, endowments and equipment and supplies to be
imported by authorized entities or persons and by the Board of Trustees of the Lung Center
of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt
from income and gift taxes, the same further deductible in full for the purpose of determining
the maximum deductible amount under Section 30, paragraph (h), of the National Internal
Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and
fees imposed by the Government or any political subdivision or instrumentality thereof with
respect to equipment purchases made by, or for the Lung Center.29

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges under
Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is the principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is expressly
limited to certain matters, it may not, by interpretation or construction, be extended to other
matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human
mind. They are predicated upon one’s own voluntary act and not upon that of others. They
proceed from the premise that the legislature would not have made specified enumeration in
a statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.30

The exemption must not be so enlarged by construction since the reasonable presumption is that the
State has granted in express terms all it intended to grant at all, and that unless the privilege is
limited to the very terms of the statute the favor would be intended beyond what was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.32

The tax exemption under this constitutional provision covers property taxes only.33 As Chief Justice
Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: ". . . what is
exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for religious, charitable or educational
purposes."34

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No.
7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from
payment of the real property tax:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusivelyused for religious, charitable or
educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used
‘exclusively’ for … charitable … purposes shall be exempt from taxation."36 However, under the 1973
and the present Constitutions, for "lands, buildings, and improvements" of the charitable institution to
be considered exempt, the same should not only be "exclusively" used for charitable purposes; it is
required that such property be used "actually" and "directly" for such purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our
ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on
September 30, 1961 before the 1973 and 1987 Constitutions took effect.38 As this Court held
in Province of Abra v. Hernando:39

… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents

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

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

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

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals for their clinics and a canteen.
Further, a portion of the land is being leased to a private individual for her business enterprise under
the business name "Elliptical Orchids and Garden Center." Indeed, the petitioner’s evidence shows
that it collected ₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28 for 1992 from the said lessees.

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

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

SO ORDERED.

Davide, Jr., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio,

Austria-Martinez, Corona, Carpio Morales, Azcuna, and Tinga, JJ., concur.