SISON vs ANCHETA
protection clauses inay properly be invoked, all petitioner does, to
Petitioner: Antero M. Sison Jr
Respondent: 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
Citation: 269 SCRA 564
Date of Promulgation: July 25, 1984
Ponente: Fernando, CJ
FACTS:
Petitioner filed a suit for declaratory relief or prohibition
proceeding on the validity of Sec. 1 of BP 135 upon showing
of its constitutional infirmity
Sec. 1 of BP 135 amends Sec. 21 of the National Internal
Revenue Code 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 substitute 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
Petitioner alleges that by virtue thereof,
1. 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--vis
those which are imposed upon fixed income or
salaried taxpayers
2. such is arbitrary amounting to class legislation,
oppressive and capricious in character
3. there is transgression of both the equal and due
process clauses of the Constitution as well as the
rule requiring uniformity in Taxation
Resolution (Jan. 26, 1982) required respondents to file an
Answer, to which the OSG answered after asking for two
extensions
Answer
1. facts alleged were admitted but not the allegations to
which to their mind are mere arguments, opinions or
conclusions on the part of the petitioner
2. Affirmed that BP 135 is a valid exercise of the States
power to tax
ISSUES: W/N the imposition of a higher tax rate on taxable net
income derived from business or profession than on
compensation is constitutionally infirm.
HELD:
NO.
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
paraphrase a recent decision, taxes being the lifeblood of the
government, their prompt and certain availability is of the
essence.
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
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 are 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.
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.
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.'"
7. Petitioner likewise invoked the kindred concept of
uniformity. According to the Constitution: "The rule of taxation
shag be uniform and equitable." This requirement is met
according to Justice Laurel in Philippine Trust Company v. Yatco,
decided in 1940, when the tax "operates with the same force and
effect in every place where the subject may be found. " He
likewise added: T"he rule of uniformity does not call for perfect
uniformity or perfect equality, because this is hardly attainable."
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, 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. "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."
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.
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.
CIR vs ALGUE
Petitioner: Commissioner of Internal Revenue
Respondents: Algue Inc., and CTA
Citation: 158 SCRA 9
Date of Promulgation: February 17, 1988
Ponente: Cruz, J
FACTS:
Algue Inc a domestic corporation engaged in the
engineering, construction and other allied activities
Jan. 14, 1965 Algue received a letter from CIR asserting it
in the amount of PhP 83, 183. 85 as delinquency income
taxes for the years of 1958 and 1959
Jan. 18, 1965 Algue filed a Letter of Protest or request for
reconsideration, which letter was stamp received on the same
day by CIR
March 12, 1965 a warrant of distraint and levy was
presented to Algue through its counsel, Atty. Alberto
Guevarra Jr, who refused to receive it on the ground of a
pending protest
A search of the protest in the dockets of the case proved
fruitless
Atty. Guevarra produced his file copy and gave a Photostat
to BIR agent Ramon Reyes who deferred service of warrant
April 7, 1965 Atty. G 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
April 23, 1965 Algue filed a PetRev of the decision of CIR
with the CA
ISSUE:
1) W/N the CIR correctly disallowed the PhP 75, 000
deduction claimed by Algue Inc as legitimate business
expenses in its income tax returns?
2) W/N the appeal of the Algue Inc from the decision of CIR
was made on time and in accordance with law?
HELD:
1.
No.
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 but later conformed to the decision of the
respondent court rejecting this assertion. 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. 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.
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. The Court of Tax Appeals also
found, after examining the evidence, that no distribution of
dividends was involved.
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. 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.
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. After 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.
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.
2.
Yes. 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.