[G.R. No. 149420.

October 8, 2003]
SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM PHIL., INC., respondent.

However, when respondent tried to collect the said credit from Jomero Realty Corporation, the latter
refused to honor the Deed of Assignment because it claimed that petitioner was also indebted to it.
[6] On November 26, 1990, respondent sent a letter [7] to petitioner demanding payment of his obligation, but
petitioner refused to pay claiming that his obligation had been extinguished when they executed the Deed of
Assignment.

DECISION
YNARES-SANTIAGO, J.:

Consequently, on January 10, 1991, respondent filed an action for recovery of a sum of money against
the petitioner before the Regional Trial Court of Makati, Branch 147, which was docketed as Civil Case No. 91074.[8]

Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation engaged in the sale of steel
scaffoldings, while petitioner Sonny L. Lo, doing business under the name and style Sans Enterprises, is a
building contractor. On February 22, 1990, petitioner ordered scaffolding equipments from respondent worth
P540,425.80.[1] He paid a downpayment in the amount of P150,000.00. The balance was made payable in ten
monthly installments.

During the trial, petitioner argued that his obligation was extinguished with the execution of the Deed of
Assignment of credit. Respondent, for its part, presented the testimony of its employee, Almeda Baaga, who
testified that Jomero Realty refused to honor the assignment of credit because it claimed that petitioner had an
outstanding indebtedness to it.

Respondent delivered the scaffoldings to petitioner.[2] Petitioner was able to pay the first two monthly
installments. His business, however, encountered financial difficulties and he was unable to settle his
obligation to respondent despite oral and written demands made against him. [3]
On October 11, 1990, petitioner and respondent executed a Deed of Assignment, [4] whereby petitioner
assigned to respondent his receivables in the amount of P335,462.14 from Jomero Realty
Corporation. Pertinent portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a residential house located
at Greenmeadow Avenue, Quezon City owned by Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the ASSIGNOR purchased on
account scaffolding equipments from the ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the ASSIGNEE for the purchase of the
aforementioned scaffoldings now in the amount of Three Hundred Thirty Five Thousand Four Hundred Sixty
Two and 14/100 Pesos (P335,462.14);

On August 25, 1994, the trial court rendered a decision [9] dismissing the complaint on the ground that
the assignment of credit extinguished the obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the defendant and
against the plaintiff, dismissing the complaint and ordering the plaintiff to pay the defendant attorneys fees in
the amount of P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19, 2001, the appellate court
rendered a decision,[10] the dispositive portion of which reads:
WHEREFORE, finding merit in this appeal, the court REVERSES the appealed Decision and enters judgment
ordering defendant-appellee Sonny Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred Sixty-Two and 14/100 (P335,462.14)
with legal interest of 6% per annum from January 10, 1991 (filing of the Complaint) until fully paid and
attorneys fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.[11]

NOW, THEREFORE, for and in consideration of the sum of Three Hundred Thirty Five Thousand Four
Hundred Sixty Two and 14/100 Pesos (P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR hereby assigns, transfers and sets over
unto the ASSIGNEE all collectibles amounting to the said amount of P335, 462.14;

In finding that the Deed of Assignment did not extinguish the obligation of the petitioner to the
respondent, the Court of Appeals held that (1) petitioner failed to comply with his warranty under the Deed; (2)
the object of the Deed did not exist at the time of the transaction, rendering it void pursuant to Article 1409 of
the Civil Code; and (3) petitioner violated the terms of the Deed of Assignment when he failed to execute and
do all acts and deeds as shall be necessary to effectually enable the respondent to recover the collectibles. [12]

And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and assigns, the full power and
authority to demand, collect, receive, compound, compromise and give acquittance for the same or any part
thereof, and in the name and stead of the said ASSIGNOR;

Petitioner filed a motion for reconsideration of the said decision, which was denied by the Court of
Appeals.[13]

And the ASSIGNOR does hereby agree and stipulate to and with said ASSIGNEE, its successors and assigns
that said debt is justly owing and due to the ASSIGNOR for Jomero Realty Corporation and that said
ASSIGNOR has not done and will not cause anything to be done to diminish or discharge said debt, or delay
or to prevent the ASSIGNEE, its successors or assigns, from collecting the same;
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents. xxx[5] (Italics supplied)

In this petition for review, petitioner assigns the following errors:

I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE ERROR IN DECLARING THE DEED
OF ASSIGNMENT (EXH. 4) AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF A MERE
HEARSAY CLAIM.
II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF

ASSIGNMENT (EXH. 4) DID NOT EXTINGUISH PETITIONERS OBLIGATION ON THE WRONG
NOTION THAT PETITIONER FAILED TO COMPLY WITH HIS WARRANTY THEREUNDER.

Hence, we affirm the decision of the Court of Appeals ordering petitioner to pay respondent the sum of
P335,462.14 with legal interest thereon. However, we find that the award by the Court of Appeals of attorneys
fees is without factual basis. No evidence or testimony was presented to substantiate this claim. Attorneys
fees, being in the nature of actual damages, must be duly substantiated by competent proof.

III
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
TRIAL COURT AND IN ORDERING PAYMENT OF INTERESTS AND ATTORNEYS FEES. [14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dacion en pago, exchange or donation, and without the consent of
the debtor, transfers his credit and accessory rights to another, known as the assignee, who acquires the
power to enforce it to the same extent as the assignor could enforce it against the debtor.[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the debtor offers another thing to
the creditor who accepts it as equivalent of payment of an outstanding debt. [16] In order that there be a
valid dation in payment, the following are the requisites: (1) There must be the performance of the prestation in
lieu of payment (animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (2) There must be some difference between the prestation due and that which
is given in substitution (aliud pro alio); (3) There must be an agreement between the creditor and debtor that
the obligation is immediately extinguished by reason of the performance of a prestation different from that due.
[17] The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the
thing or property of the debtor, payment for which is to be charged against the debtors debt. As such, the
vendor in good faith shall be responsible, for the existence and legality of the credit at the time of the sale but
not for the solvency of the debtor, in specified circumstances. [18]
Hence, it may well be that the assignment of credit, which is in the nature of a sale of personal property,
produced the effects of a dation in payment which may extinguish the obligation. [20] However, as in any
other contract of sale, the vendor or assignor is bound by certain warranties. More specifically, the first
paragraph of Article 1628 of the Civil Code provides:
[19]

The vendor in good faith shall be responsible for the existence and legality of the credit at the time of the sale,
unless it should have been sold as doubtful; but not for the solvency of the debtor, unless it has been so
expressly stipulated or unless the insolvency was prior to the sale and of common knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to warrant the existence and
legality of the credit at the time of the sale or assignment. When Jomero claimed that it was no longer indebted
to petitioner since the latter also had an unpaid obligation to it, it essentially meant that its obligation to
petitioner has been extinguished by compensation. [21] In other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioners warranty under the assignment. Therefore, it behooved on
petitioner to make good its warranty and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said ASSIGNOR, his heirs, executors,
administrators, or assigns, shall and will at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and deeds as shall be reasonably
necessary to effectually enable said ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents.[22] (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be deemed to have ensured the
performance thereof in case the same is later found to be inexistent. He should be held liable to pay to
respondent the amount of his indebtedness.

WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals dated April 19, 2001 in
CA-G.R. CV No. 47713, ordering petitioner to pay respondent the sum of P335,462.14 with legal interest of
6% per annum from January 10, 1991 until fully paid is AFFIRMED with MODIFICATION. Upon finality of this
Decision, the rate of legal interest shall be 12% per annum, inasmuch as the obligation shall thereafter
become equivalent to a forbearance of credit. [23] The award of attorneys fees is DELETED for lack of
evidentiary basis.
SO ORDERED.
[G.R. No. 124043. October 14, 1998]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and YOUNG MENS CHRISTIAN ASSOCIATION OF THE PHILIPPINES,
INC., respondents.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Mens 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 Appeals [1] on September 28, 1995 [2] and February 29, 1996 [3] 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 latters 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 if Tax Appeals
(CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
xxx [T]he leasing of private respondents 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] contractors tax in
the amount[s] of P353.15 and P3,129.73, respectively.

1980 Deficiency Income Tax P 353.15

1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect. [7]
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
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]

xxxxxxxxx
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 Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:

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 CTAs findings of fact, as they are supported by evidence beyond what is
considered as substantial.
xxxxxxxxx
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.

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 CA [6] 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 petitioners (herein respondent)
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:

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 CTAs decision is AFFIRMED in
toto.[9]
The internal revenue commissioners 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:
I

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 Courts 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 respondents 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 not 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 --

xxxxxxxxx
(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;
xxxxxxxxx
Notwithstanding the provision in the preceding paragraphs, the income of whatever kind and character of the
foregoing organization 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)
Petitioners 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 xxx from any if their properties, real or personal, or
from any of their activities conducted for profit, regardless, of the disposition made of such income xxx.
Petitioner adds that rented 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
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 imposed by the same
Code. Because the last paragraph of said section unequivocally subjects to tax the rent income f the YMCA
from its rental 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 literal 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 income 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 used or disposed of. Where the law does not distinguish, neither
should we.

Constitutional Provisions

Amended Articles of Incorporation[42] 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]

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 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 nonprofit 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 xxx what is exempted is not the institution itself xxx;
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
covers property taxes only."[35] Indeed, the income tax exemption claimed by private respondent finds no basis
in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, [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.

Furthermore, under the Education Act of 1982, even non-formal education is understood to be schoolbased 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 xxx school
seminary, college or educational establishment xxx. [46] Therefore, the private respondent cannot be deemed
one of the educational institutions covered by the constitutional provision under consideration.
xxx 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 phrases 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 if 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 had not given any proof that it is an
educational institution, or that of its rent income is actually, directly and exclusively used for educational
purposes.
Epilogue

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 chronological 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

In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates
the nobility its cause. However, the Courts 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 member of the Court may even believe in the
wisdom and prudence of granting more tax exemptions to private respondent. But such belief, however wellmeaning 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 dated February 16, 1995 is REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income
tax. No pronouncement as to costs.

air-conditioning system installed by petitioner did not comply with the agreed plans and specifications. Hence,
private respondent prayed for the amount of P2 10,000.00 representing the rectification cost, P100,000.00 as
damages and P15,000.00 as attorneys fees.
Petitioner moved to dismiss the complaint, alleging that the prescriptive period of six months had set in
pursuant to Articles 1566 and 1567, in relation to Article 1571 of the Civil Code, regarding the responsibility of
a vendor for any hidden faults or defects in the thing sold.

SO ORDERED.
[G.R. No. 52267. January 24, 1996]
ENGINEERING & MACHINERY CORPORATION, petitioner, vs. COURT OF APPEALS and PONCIANO L.
ALMEDA, respondents.
DECISION
PANGANIBAN, J.:
Is a contract for the fabrication and installation of a central air-conditioning system in a building, one of
sale or for a piece of work? What is the prescriptive period for filing actions for breach of the terms of such
contract?
These are the legal questions brought before this Court in this Petition for review on certiorari under
Rule 45 of the Rules of Court, to set aside the Decision [1] of the Court of Appeals[2]in CA-G.R. No. 58276-R
promulgated on November 28, 1978 (affirming in toto the decision[3] dated April 15, 1974 of the then Court of
First Instance of Rizal, Branch II,[4] in Civil Case No. 14712, which ordered petitioner to pay private respondent
the amount needed to rectify the faults and deficiencies of the air-conditioning system installed by petitioner in
private respondents building, plus damages, attorneys fees and costs).
By a resolution of the First Division of this Court dated November 13, 1995, this case was transferred to
the Third. After deliberating on the various submissions of the parties, including the petition, record on appeal,
private respondents comment and briefs for the petitioner and the private respondent, the Court assigned the
writing of this Decision to the undersigned, who took his oath as a member of the Court on October 10, 1995.
The Facts
Pursuant to the contract dated September 10, 1962 between petitioner and private respondent, the
former undertook to fabricate, furnish and install the air-conditioning system in the latters building
along Buendia Avenue, Makati in consideration of P210,000.00. Petitioner was to furnish the materials, labor,
tools and all services required in order to so fabricate and install said system. The system was completed in
1963 and accepted by private respondent, who paid in full the contract price.
On September 2, 1965, private respondent sold the building to the National Investment and
Development Corporation (NIDC). The latter took possession of the building but on account of NIDCs
noncompliance with the terms and conditions of the deed of sale, private respondent was able to secure
judicial rescission thereof. The ownership of the building having been decreed back to private respondent, he
re-acquired possession sometime in 1971. It was then that he learned from some NIDC employees of the
defects of the air-conditioning system of the building.

Private respondent countered that the contract dated September 10, 1962 was not a contract of sale
but a contract for a piece of work under Article 1713 of the Civil Code. Thus, in accordance with Article 1144
(1) of the same Code, the complaint was timely brought within the ten-year prescriptive period.
In its reply, petitioner argued that Article 1571 of the Civil Code providing for a six-month prescriptive
period is applicable to a contract for a piece of work by virtue of Article 1714, which provides that such a
contract shall be governed by the pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale.[6]
The trial court denied the motion to dismiss. In its answer to the complaint, petitioner reiterated its claim
of prescription as an affirmative defense. It alleged that whatever defects might have been discovered in the
air-conditioning system could have been caused by a variety of factors, including ordinary wear and tear and
lack of proper and regular maintenance. It pointed out that during the one-year period that private respondent
withheld final payment, the system was subjected to very rigid inspection and testing and corrections or
modifications effected by petitioner. It interposed a compulsory counterclaim suggesting that the complaint
was filed to offset the adverse effects of the judgment in Civil Case No. 71494, Court of First Instance of
Manila, involving the same parties, wherein private respondent was adjudged to pay petitioner the balance of
the unpaid contract price for the air-conditioning system installed in another building of private respondent,
amounting to P138,482.25.
Thereafter, private respondent filed an ex-parte motion for preliminary attachment on the strength of
petitioners own statement to the effect that it had sold its business and was no longer doing business
in Manila. The trial court granted the motion and, upon private respondents posting of a bond of P50,000.00,
ordered the issuance of a writ of attachment.
In due course, the trial court rendered a decision finding that petitioner failed to install certain parts and
accessories called for by the contract, and deviated from the plans of the system, thus reducing its operational
effectiveness to the extent that 35 window-type units had to be installed in the building to achieve a fairly
desirable room temperature. On the question of prescription, the trial court ruled that the complaint was filed
within the ten-year prescriptive period although the contract was one for a piece of work, because it involved
the installation of an air-conditioning system which the defendant itself manufactured, fabricated, designed and
installed.
Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. Hence, it
instituted the instant petition.
The Submissions of the Parties

Acting on this information, private respondent commissioned Engineer David R. Sapico to render a
technical evaluation of the system in relation to the contract with petitioner. In his report, Sapico enumerated
the defects of the system and concluded that it was not capable of maintaining the desired room temperature
of 76F - 2F (Exhibit C)[5]

In the instant Petition, petitioner raised three issues. First, it contended that private respondents
acceptance of the work and his payment of the contract price extinguished any liability with respect to the
defects in the air-conditioning system. Second, it claimed that the Court of Appeals erred when it held that the
defects in the installation were not apparent at the time of delivery and acceptance of the work considering
that private respondent was not an expert who could recognize such defects. Third, it insisted that,
assuming arguendo that there were indeed hidden defects, private respondents complaint was barred by
prescription under Article 1571 of the Civil Code, which provides for a six-month prescriptive period.

On the basis of this report, private respondent filed on May 8, 1971 an action for damages against
petitioner with the then Court of First Instance of Rizal (Civil Case No. 14712). The complaint alleged that the

Private respondent, on the other hand, averred that the issues raised by petitioner, like the question of
whether there was an acceptance of the work by the owner and whether the hidden defects in the installation

could have been discovered by simple inspection, involve questions of fact which have been passed upon by
the appellate court.

on the basis of some plan, taking into account the work he will employ personally or through another, there is a
contract for a piece of work.[13]

The Courts Ruling

Clearly, the contract in question is one for a piece of work. It is not petitioners line of business to
manufacture air-conditioning systems to be sold off-the-shelf. Its business and particular field of expertise is
the fabrication and installation of such systems as ordered by customers and in accordance with the particular
plans and specifications provided by the customers. Naturally, the price or compensation for the system
manufactured and installed will depend greatly on the particular plans and specifications agreed upon with the
customers.

The Supreme Court reviews only errors of law in petitions for review on certiorari under Rule 45. It is
not the function of this Court to re-examine the findings of fact of the appellate court unless said findings are
not supported by the evidence on record or the judgment is based on a misapprehension of facts. [7]
The Court has consistently held that the factual findings of the trial court, as well as the Court of Appeals, are
final and conclusive and may not be reviewed on appeal. Among the exceptional circumstances where a
reassessment of facts found by the lower courts is allowed are when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; when the inference made is manifestly absurd, mistaken or
impossible; when there is grave abuse of discretion in the appreciation of facts; when the judgment is
premised on a misapprehension of facts; when the findings went beyond the issues of the case and the same
are contrary to the admissions of both appellant and appellee. After a careful study of the case at bench, we
find none of the above grounds present to justify the re-evaluation of the findings of fact made by the courts
below.[8]
We see no valid reason to discard the factual conclusions of the appellate court. x x x (I)t is not the function of
this Court to assess and evaluate all over again the evidence, testimonial and documentary, adduced by the
parties, particularly where, such as here, the findings of both the trial court and the appellate court on the
matter coincide.[9] (Italics supplied)
Hence, the first two issues will not be resolved as they raise questions of fact.
Thus, the only question left to be resolved is that of prescription. In their submissions, the parties
argued lengthily on the nature of the contract entered into by them, viz., whether it was one of sale or for a
piece of work.
Article 1713 of the Civil Code defines a contract for a piece of work thus:
By the contract for a piece of work the contractor binds himself to execute a piece of work for the employer, in
consideration of a certain price or compensation. The contractor may either employ only his labor or skill, or
also furnish the material.
A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the
inquiry as to whether the thing transferred is one not in existence and which would never have existed but for
the order of the person desiring it. [10] In such case, the contract is one for a piece of work, not a sale. On the
other hand, if the thing subject of the contract would have existed and been the subject of a sale to some other
person even if the order had not been given, then the contract is one of sale. [11]
Thus, Mr. Justice Vitug[12] explains that
A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his
business manufactures or procures for the general market, whether the same is on hand at the time or not is a
contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order,
and not for the general market, it is a contract for a piece of work (Art. 1467, Civil Code).The mere fact alone
that certain articles are made upon previous orders of customers will not argue against the imposition of the
sales tax if such articles are ordinarily manufactured by the taxpayer for sale to the public (Celestino Co vs.
Collector, 99 Phil. 841).
To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if
the parties intended that at some future date an object has to be delivered, without considering the work or
labor of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the undertaking

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil
Code, which provide:
Art. 1714. If the contractor agrees to produce the work from material furnished by him, he shall deliver the
thing produced to the employer and transfer dominion over the thing. This contract shall be governed by the
following articles as well as by the pertinent provisions on warranty of title and against hidden defects and the
payment of price in a contract of sale.
Art. 1715. The contractor shall execute the work in such a manner that it has the qualities agreed upon and
has no defects which destroy or lessen its value or fitness for its ordinary or stipulated use. Should the work be
not of such quality, the employer may require that the contractor remove the defect or execute another work. If
the contractor fails or refuses to comply with this obligation, the employer may have the defect removed or
another work executed, at the contractors cost.
The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found in
Articles 1561 and 1566, which read as follows:
Art. 1561. The vendor shall be responsible for warranty against the hidden defects which the thing sold may
have, should they render it unfit for the use for which it is intended, or should they diminish its fitness for such
use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have
given a lower price for it; but said vendor shall not be answerable for patent defects or those which may be
visible, or for those which are not visible if the vendee is an expert who, by reason of his trade or profession,
should have known them.
xxx xxx xxx
Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the thing sold, even
though he was not aware thereof.
This provision shall not apply if the contrary has been stipulated, and the vendor was not aware of the hidden
faults or defects in the thing sold.
The remedy against violations of the warranty against hidden defects is either to withdraw from the
contract (redhibitory action) or to demand a proportionate reduction of the price(accion quanti minoris), with
damages in either case.[14]
In Villostas vs. Court of Appeals, [15] we held that, while it is true that Article 1571 of the Civil Code
provides for a prescriptive period of six months for a redhibitory action, a cursory reading of the ten preceding
articles to which it refers will reveal that said rule may be applied only in case of implied warranties; and where
there is an express warranty in the contract, as in the case at bench, the prescriptive period is the one
specified in the express warranty, and in the absence of such period, the general rule on rescission of
contract, which is four years (Article 1389, Civil Code) shall apply.[16]

Consistent with the above discussion, it would appear that this suit is barred by prescription because
the complaint was filed more than four years after the execution of the contract and the completion of the airconditioning system.
However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not
really for enforcement of the warranties against hidden defects, but one for breach of the contract itself. It
alleged[17] that the petitioner, in the installation of the air-conditioning system did not comply with the
specifications provided in the written agreement between the parties, and an evaluation of the air-conditioning
system as installed by the defendant showed the following defects and violations of the specifications of the
agreement, to wit:
GROUND FLOOR:
A. RIGHT WING:
Equipped with Worthington Compressor, Model 2VC4 directly driven by an Hp Elm electric
motor 1750 rmp, 3 phase, 60 cycles, 220 volts, complete with starter evaporative condenser,
circulating water pump, air handling unit air ducts.
Defects Noted:
1. Deteriorated evaporative condenser panels, coils are full of scales and heavy
corrosion is very evident.
2. Defective gauges of compressors;
3. No belt guard on motor;
4. Main switch has no cover;
5. Desired room temperature not attained;
Aside from the above defects, the following were noted not installed although provided in the
specifications.
1. Face and by-pass damper of G.I. sheets No. 16. This damper regulates the flow of
cooled air depending on room condition.
2. No fresh air intake provision were provided which is very necessary for efficient
comfort cooling.
3. No motor to regulate the face and by-pass damper.
4. Liquid level indicator for refrigerant not provided.
5. Suitable heat exchanger is not installed. This is an important component to increase
refrigeration efficiency.
6. Modulating thermostat not provided.
7. Water treatment device for evaporative condenser was not provided.

8. Liquid receiver not provided by sight glass.

B. LEFT WING:
Worthington Compressor Model 2VC4 is installed complete with 15 Hp electric motOr, 3 phase,
220 volts 60 cycles with starter.
Defects Noted:
Same as right wing. except No. 4. All other defects on right wing are common to the left wing.
SECOND FLOOR: (Common up to EIGHT FLOORS)
Compressors installed are MELCO with 7.5 Hp V-belt driven by 1800 RPM, 220 volts, 60
cycles, 3 phase, Thrige electric motor with starters.
As stated in the specifications under Section No. IV, the MELCO compressors do not satisfy the
conditions stated therein due to the following:
1. MELCO Compressors are not provided with automatic capacity unloader.
2. Not provided with oil pressure safety control.
3. Particular compressors do not have provision for renewal sleeves.
Out of the total 15 MELCO compressors installed to serve the 2nd floor up to 8th floors, only six
(6) units are in operation and the rest were already replaced. Of the remaining six (6) units,
several of them have been replaced with bigger cranks hafts.
NINTH FLOOR:
Two (2) Worthington 2VC4 driven by 15 Hp, 3 phase, 220 volts, 60 cycles, 1750 rpm, Higgs
motors with starters.
Defects Noted are similar to ground floor.
GENERAL REMARKS:
Under Section III, Design conditions of specification for air conditioning work, and taking into
account A & B same, the present systems are not capable of maintaining the desired room
temperature of 76 = 2F (sic).
The present tenant have installed 35 window type air conditioning units distributed among the
different floor levels. Temperature measurements conducted on March 29, 1971, revealed that
78F room (sic) is only maintained due to the additional window type units.
The trial court, after evaluating the evidence presented, held that, indeed, petitioner failed to install
items and parts required in the contract and substituted some other items which were not in accordance with
the specifications,[18] thus:

From all of the foregoing, the Court is persuaded to believe the plaintiff that not only had the defendant failed
to install items and parts provided for in the specifications of the air-conditioning system be installed, like face
and by-pass dampers and modulating thermostat and many others, but also that there are items, parts and
accessories which were used and installed on the air-conditioning system which were not in full accord with
contract specifications. These omissions to install the equipments, parts and accessories called for in the
specifications of the contract, as well as the deviations made in putting into the air-conditioning system
equipments, parts and accessories not in full accord with the contract specification naturally resulted to
adversely affect the operational effectiveness of the air-conditioning system which necessitated the installation
of thirty-five window type of air-conditioning units distributed among the different floor levels in order to be able
to obtain a fairly desirable room temperature for the tenants and actual occupants of the building. The Court
opines and so holds that the failure of the defendant to follow the contract specifications and said omissions
and deviations having resulted in the operational ineffectiveness of the system installed makes the defendant
liable to the plaintiff in the amount necessary to rectify to put the air conditioning system in its proper
operational condition to make it serve the purpose for which the plaintiff entered into the contract with the
defendant.

What about petitioners contention that acceptance of the work by the employer relieves the contractor
of liability for any defect in the work? This was answered by respondent Court [19]as follows:
As the breach of contract which gave rise to the instant case consisted in appellants omission to install the
equipments (sic), parts and accessories not in accordance with the plan and specifications provided for in the
contract and the deviations made in putting into the air conditioning system parts and accessories not in
accordance with the contract specifications, it is evident that the defect in the installation was not apparent at
the time of the delivery and acceptance of the work, considering further that plaintiff is not an expert to
recognize the same. From the very nature of things, it is impossible to determine by the simple inspection of
air conditioning system installed in an 8-floor building whether it has been furnished and installed as per
agreed specifications.
Verily, the mere fact that the private respondent accepted the work does not, ipso facto, relieve the
petitioner from liability for deviations from and violations of the written contract, as the law gives him ten (10)
years within which to file an action based on breach thereof.

The respondent Court affirmed the trial courts decision thereby making the latters findings also its own.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. No costs.
Having concluded that the original complaint is one for damages arising from breach of a written
contract - and not a suit to enforce warranties against hidden defects - we herewith declare that the governing
law is Article 1715 (supra). However, inasmuch as this provision does not contain a specific prescriptive
period, the general law on prescription, which is Article 1144 of the Civil Code, will apply. Said provision
states, inter alia, that actions upon a written contract prescribe in ten (10) years. Since the governing contract
was executed on September 10, 1962 and the complaint was filed on May 8, 1971, it is clear that the action
has not prescribed.

SO ORDERED.