G.R. No.
L-19342 May 25, 1972 November 14, 1949, the Court appointed him guardian of the
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA,
MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo
R. Rosete, and Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617,
similarly entitled as above, holding that petitioners have constituted an unregistered
partnership and are, therefore, subject to the payment of the deficiency corporate
income taxes assessed against them by respondent Commissioner of Internal
Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5%
surcharge and 1% monthly interest from December 15, 1958, subject to the provisions
of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of
1
Republic Act No. 2343 and the costs of the suit, as well as the resolution of said court
denying petitioners' motion for reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her
surviving spouse, Lorenzo T. Oña and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña the
surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the
administrator submitted the project of partition, which was
approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was
approved, Lorenzo T. Oña, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On
persons and property of the aforenamed minors (See p. 3, BIR
rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.)
shows that the heirs have undivided one-half (1/2) interest in ten
parcels of land with a total assessed value of P87,860.00, six
houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the
amount of P50,000.00, more or less. This amount was not divided
among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of
land aforementioned, two were acquired after the death of the
decedent with money borrowed from the Philippine Trust
Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).
The project of partition also shows that the estate shares equally
with Lorenzo T. Oña, the administrator thereof, in the obligation of
P94,973.00, consisting of loans contracted by the latter with the
approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR
rec.).
Although the project of partition was approved by the Court on
May 16, 1949, no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to
P480,005.20 in 1956 as can be gleaned from the following year-
end balances:
Y I L B
e n a u
a v n i
r e d l
s d
t i
m n
e g

n However, petitioners did not actually receive their shares in the
t yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was
A A
c c
c c
o o
u u
n n
t t
1949 — P87,860.00
1950 P24,657.65 128,566.72
1951 51,301.31 120,349.28
transactions involving them (Exhibit 3, supra; t.s.n., pp. 25-26).
always left in the hands of Lorenzo T. Oña who, as heretofore
A pointed out, invested them in real properties and securities. (See
c Exhibit 3, t.s.n., pp. 50, 102-104).
c
o On the basis of the foregoing facts, respondent (Commissioner of
u Internal Revenue) decided that petitioners formed an unregistered
n partnership and therefore, subject to the corporate income tax,
t pursuant to Section 24, in relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against the petitioners the
amounts of P8,092.00 and P13,899.00 as corporate income taxes
P17,590.00 for 1955 and 1956, respectively. (See Exhibit 5, amended by
Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against
the assessment and asked for reconsideration of the ruling of
96,076.26 respondent that they have formed an unregistered partnership.
Finding no merit in petitioners' request, respondent denied it (See
110,605.11 Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).

1952 67,927.52 87,065.28 152,674.39

The original assessment was as follows:

1953 61,258.27 84,925.68 161,463.83

1955

1954 63,623.37 99,001.20 167,962.04

Net income as per investigation ................ P40,209.89

1955 100,786.00 120,249.78 169,262.52 Income tax due thereon ............................... 8,042.00
25% surcharge .............................................. 2,010.50
1956 175,028.68 135,714.68 169,262.52 Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104) 1956

From said investments and properties petitioners derived such Net income as per investigation ................ P69,245.23
incomes as profits from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals and interests (see Income tax due thereon ............................... 13,849.00
p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said 25% surcharge .............................................. 3,462.25
incomes are recorded in the books of account kept by Lorenzo T. Compromise for non-filing .......................... 50.00
Oña where the corresponding shares of the petitioners in the net Total ............................................................... P17,361.25
income for the year are also known. Every year, petitioners
returned for income tax purposes their shares in the net income
derived from said properties and securities and/or from (See Exhibit 13, page 50, BIR records)
 Upon further consideration of the case, the 25% surcharge was
eliminated in line with the ruling of the Supreme Court in Collector
v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958,
so that the questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the "Compromise for
non-filing," the latter item obviously referring to the compromise in
lieu of the criminal liability for failure of petitioners to file the
corporate income tax returns for said years. (See Exh. 17, page
86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
THE PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING
THAT THE PETITIONERS WERE CO-OWNERS OF THE
PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME
TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE AN UNREGISTERED
PARTNERSHIP TO THE EXTENT ONLY THAT THEY
INVESTED THE PROFITS FROM THE PROPERTIES OWNED
IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX
APPEALS ERRED IN NOT DEDUCTING THE VARIOUS
AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL
INCOME TAX ON THEIR RESPECTIVE SHARES OF THE
PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE
UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under
the facts found by the Court of Tax Appeals, should petitioners be considered as co-
owners of the properties inherited by them from the deceased Julia Buñales and the
profits derived from transactions involving the same, or, must they be deemed to have
formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the
National Internal Revenue Code? (2) Assuming they have formed an unregistered
partnership, should this not be only in the sense that they invested as a common fund
the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their
respective shares in the inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered partnership? And (3)
assuming again that they are taxable as an unregistered partnership, should not the
various amounts already paid by them for the same years 1955 and 1956 as individual
income taxes on their respective shares of the profits accruing from the properties
they owned in common be deducted from the deficiency corporate taxes, herein
involved, assessed against such unregistered partnership by the respondent
Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project
of partition of her estate was judicially approved as early as May 16, 1949, and
presumably petitioners have been holding their respective shares in their inheritance
since those dates admittedly under the administration or management of the head of
the family, the widower and father Lorenzo T. Oña, the assessment in question refers
to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of
Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it
was only from 1955 that he considered them as having formed an unregistered
partnership. At least, there is nothing in the record indicating that an earlier
assessment had already been made. Such being the case, and We see no reason
how it could be otherwise, it is easily understandable why petitioners' position that they
are co-owners and not unregistered co-partners, for the purposes of the impugned
assessment, cannot be upheld. Truth to tell, petitioners should find comfort in the fact
that they were not similarly assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased
among themselves pursuant to the project of partition approved in 1949, "the
properties remained under the management of Lorenzo T. Oña who used said
properties in business by leasing or selling them and investing the income derived
therefrom and the proceed from the sales thereof in real properties and securities," as
a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to
P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52
in "building account" in 1956. And all these became possible because, admittedly,
petitioners never actually received any share of the income or profits from Lorenzo T.
Oña and instead, they allowed him to continue using said shares as part of the
common fund for their ventures, even as they paid the corresponding income taxes on
the basis of their respective shares of the profits of their common business as reported
by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely
limit themselves to holding the properties inherited by them. Indeed, it is admitted that
during the material years herein involved, some of the said properties were sold at
considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña,
in the purchase and sale of corporate securities. It is likewise admitted that all the
profits from these ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these circumstances, it
is Our considered view that from the moment petitioners allowed not only the incomes
from their respective shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña as a common fund in undertaking several
transactions or in business, with the intention of deriving profit to be shared by them
proportionally, such act was tantamonut to actually contributing such incomes to a
common fund and, in effect, they thereby formed an unregistered partnership within
the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs
can be considered as co-owners rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming thereby unregistered co-
partners, but it does not necessarily follow that such status as co-owners continues
until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they
might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on
that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in
any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the
National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the
reasons for holding the appellants therein to be unregistered co-partners for tax
purposes, that their common fund "was not something they found already in
existence" and that "it was not a property inherited by them pro indiviso," but it is
certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all
instances where an inheritance is not actually divided, there can be no unregistered
co-partnership. As already indicated, for tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered partnership the moment the
said common properties and/or the incomes derived therefrom are used as a common
fund with intent to produce profits for the heirs in proportion to their respective shares
in the inheritance as determined in a project partition either duly executed in an
extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition,
the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own
without the intervention of the other heirs, and, accordingly he becomes liable
individually for all taxes in connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a single management to be used
with the intent of making profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil
Code, providing that: "The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived," and, for that matter, on
any other provision of said code on partnerships is unavailing. In Evangelista, supra,
this Court clearly differentiated the concept of partnerships under the Civil Code from
that of unregistered partnerships which are considered as "corporations" under
Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto
Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations
which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said
Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most
typical forms of partnerships in this jurisdiction. Likewise, as
defined in section 84(b) of said Code, "the term corporation
includes partnerships, no matter how created or organized." This
qualifying expression clearly indicates that a joint venture need
not be undertaken in any of the standard forms, or in confirmity
with the usual requirements of the law on partnerships, in order
that one could be deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly
registered general co-partnerships" — which are possessed of the
aforementioned personality — have been expressly excluded by
law (sections 24 and 84[b]) from the connotation of the term
"corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership.
Under the term "partnership" it includes not
only a partnership as known in common law
but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization
which carries on any business, financial
operation, or venture, and which is not, within
the meaning of the Code, a trust, estate, or a
corporation. ... . (7A Merten's Law of Federal
Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate,
group, pool, joint venture or other
unincorporated organization, through or by
means of which any business, financial
operation, or venture is carried on. ... . (8
Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal
Revenue Code includes these partnerships — with the exception
only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind
that petitioners herein constitute a partnership, insofar as said
Code is concerned, and are subject to the income tax for
corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of
Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the
Court ruled against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those
acquired by them subsequently, We consider as justified the following ratiocination of
the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there
was an unregistered partnership, the holding should be limited to
the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and
sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived
therefrom were used in the business of buying and selling other
real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from
the purchase and sale of other properties but also the income of
the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties
may be considered as individual income of the respective heirs only so long as the
inheritance or estate is not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common assets of the heirs to be
used in making profits, it is but proper that the income of such shares should be
considered as the part of the taxable income of an unregistered partnership. This, We
hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved
by the Tax Court in the aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this
Honorable Court that the herein petitioners
have formed an unregistered partnership
 and, therefore, have to be taxed as such, it
might be recalled that the petitioners in their
individual income tax returns reported their
shares of the profits of the unregistered
partnership. We think it only fair and
equitable that the various amounts paid by
the individual petitioners as income tax on
their respective shares of the unregistered
partnership should be deducted from the
deficiency income tax found by this
Honorable Court against the unregistered
partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for
Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable
income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for
the years in question, but the income tax due from the partnership
has been correctly assessed. Since the individual income tax
liabilities of petitioners are not in issue in this proceeding, it is not
proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess
they might have paid as individual income tax cannot be credited as part payment of
the taxes herein in question. It is argued that to sanction the view of the Tax Court is
to oblige petitioners to pay double income tax on the same income, and, worse,
considering the time that has lapsed since they paid their individual income taxes, they
may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the
point under discussion is simply that of a taxpayer who has paid the wrong tax,
assuming that the failure to pay the corporate taxes in question was not deliberate. Of
course, such taxpayer has the right to be reimbursed what he has erroneously paid,
but the law is very clear that the claim and action for such reimbursement are subject
to the bar of prescription. And since the period for the recovery of the excess income
taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is
precisely because the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in
their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals
appealed from is affirm with costs against petitioners.
REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF PUBLIC
WORKS AND HIGHWAYS,Petitioners,
vs.
ARLENE R. SORIANO, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of Court assailing
1 2
the Decision dated November 15, 2013 and Order dated March 10, 2014 of the
Regional Trial Court (RTC), Valenzuela City, Branch 270, in Civil Case No. 140-V-10.
The antecedent facts are as follows:
On October 20, 2010, petitioner Republic of the Philippines, represented by the
Department of Public Works and Highways (DPWH), filed a Complaint for
3
expropriation against respondent Arlene R. Soriano, the registered owner of a parcel
of land consisting of an area of 200 square meters, situated at Gen. T De Leon,
4
Valenzuela City, and covered by Transfer Certificate of Title (TCT) No. V-13790. In its
Complaint, petitioner averred that pursuant to Republic Act (RA) No. 8974, otherwise
known as "An Act to Facilitate the Acquisition of Right-Of-Way, Site or Location for
National Government Infrastructure Projects and for other Purposes," the property
sought to be expropriated shall be used in implementing the construction of the North
Luzon Expressway (NLEX)- Harbor Link Project (Segment 9) from NLEX to MacArthur
Highway, Valenzuela City.
5
Petitioner duly deposited to the Acting Branch Clerk of Court the amount of
₱420,000.00 representing 100% of the zonal value of the subject property.
6
Consequently, in an Order dated May 27, 2011, the RTC ordered the issuance of a
Writ of Possession and a Writ of Expropriation for failure of respondent, or any of her
representatives, to appear despite notice during the hearing called for the purpose.
 7
In another Order dated June 21, 2011, the RTC appointed the following members of
the Board of Commissioners for the determination of just compensation: (1) Ms.
Eunice O. Josue, Officer-in-Charge, RTC, Branch 270, Valenzuela City; (2) Atty.
Cecilynne R. Andrade, Acting Valenzuela City Assessor,City Assessor’s Office,
Valenzuela City; and (3) Engr. Restituto Bautista, of Brgy. Bisig,Valenzuela City.
However, the trial court subsequently revoked the appointment of the Board for their
failure to submit a report as to the fair market value of the property to assist the court
in the determination of just compensation and directed the parties to submit their
8 the subject property from the name of the defendant to that of the plaintiff;
respective position papers. Thereafter, the case was set for hearing giving the parties
the opportunity to present and identify all evidence in support of their arguments
therein. According to the RTC, the records of the case reveal that petitioner adduced
evidence to show that the total amount deposited is just, fair, and equitable.
Specifically, in its Position Paper, petitioner alleged that pursuant to a Certification
issued by the Bureau of Internal Revenue (BIR), Revenue Region No. 5, the zonal
value of the subject property in the amount of ₱2,100.00 per square meter is
reasonable, fair, and just to compensate the defendant for the taking of her property in
9
the total area of 200 square meters. In fact, Tax Declaration No. C-018-07994, dated
November 13, 2009 submitted by petitioner, shows that the value of the subject
property is at a lower rate of ₱400.00per square meter. Moreover, as testified to by
Associate Solicitor III Julie P. Mercurio, and as affirmed by the photographs submitted,
the subject property is poorly maintained, covered by shrubs and weeds, and not
concretely-paved. It is located far from commercial or industrial developments in an
area without a proper drainage system, can only be accessed through a narrow dirt
road, and is surrounded by adjacent dwellings of sub-standard materials.
Accordingly, the RTC considered respondent to have waived her right to adduce
evidence and to object to the evidence submitted by petitioner for her continued
absence despite being given several notices to do so.
On November 15, 2013, the RTC rendered its Decision, the dispositive portion of
which reads: WHEREFORE, with the foregoing determination of just compensation,
judgment is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and title to
200 square meters of defendant Arlene R. Soriano’s parcel of land covered
by TCT V-13790 necessary for the construction of the NLEX – Harbor Link
Project(Segment 9) from NLEX to MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the above-
described parcel of land including improvements thereon, if there be any,
free from all liens and encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per
square meter or the sum of Four Hundred Twenty Thousand Pesos
(Php420,000.00) for the 200 square meters as fair, equitable, and just
compensation with legal interest at 12% per annum from the taking of the
possession of the property, subject to the payment of all unpaid real
property taxes and other relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential damages
which shall include the value of the transfer tax necessary for the transfer of
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is
directed to annotate this Decision in Transfer Certificate of Title No. V-
13790 registered under the name of Arlene R. Soriano.
Let a certified true copy of this decision be recorded in the Registry of Deeds of
Valenzuela City.
Records of this case show that the Land Bank Manager’s Check Nos. 0000016913
dated January 21, 2011 in the amount of Php400,000.00 and 0000017263 dated April
28, 2011 in the amount of Php20,000.00 issued by the Department of Public Works
and Highways (DPWH) are already stale. Thus, the said Office is hereby directed to
issue another Manager’s Check in the total amount Php420,000.00 under the name of
the Office of the Clerk of Court, Regional Trial Court, Valenzuela City earmarked for
10
the instant case.
Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko
Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July
1, 2013, the interest rate imposed by the RTC on just compensation should be
11
lowered to 6% for the instant case falls under a loan or forbearance of money. In its
12
Order dated March 10, 2014, the RTC reduced the interest rate to 6% per annum not
on the basis of the aforementioned Circular, but on Article 2209 of the Civil Code, viz.:
However, the case of National Power Corporation v. Honorable Zain B. Angas is
instructive.
In the aforementioned case law, which is similar to the instant case, the Supreme
Court had the occasion to rule that it is well-settled that the aforequoted provision of
Bangko Sentral ng Pilipinas Circular applies only to a loan or forbearance of money,
goods or credits. However, the term "judgments" as used in Section 1 of the Usury
Law and the previous Central Bank Circular No. 416, should be interpreted to mean
only judgments involving loan or forbearance of money, goods or credits, following the
principle of ejusdem generis. And applying said rule on statutory construction, the
general term "judgments" can refer only to judgments in cases involving loans or
forbearance of any money, goods, or credits. Thus, the High Court held that, Art. 2209
of the Civil Code, and not the Central Bank Circular, is the law applicable.
Art. 2009 of the Civil Code reads:
"If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be
the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum."
Further in that case, the Supreme Court explained that the transaction involved is
clearly not a loan or forbearance of money, goods or credits but expropriation of
certain parcels of land for a public purpose, the payment of which is without stipulation
regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for
damages for the delay in the payment thereof. It ultimately held that Art. 2209 of the
13
Civil Code shall apply.
On May 12, 2014, petitioner filed the instant petition invoking the following arguments:
I.
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6%
PER ANNUM ON THE AMOUNT OF JUST COMPENSATION OF THE
SUBJECT PROPERTY AS THERE WAS NO DELAY ON THE PART OF
PETITIONER.
II.
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND
THE LOCAL GOVERNMENT CODE, IT IS RESPONDENT’S OBLIGATION
TO PAY THE TRANSFER TAXES.
Petitioner maintains that if property is taken for public use before compensation is
deposited with the court having jurisdiction over the case, the final compensation must
include interests on its just value computed from the time the property is taken up to
14
the time when compensation is actually paid or deposited with the court. Thus, legal
interest applies only when the property was taken prior to the deposit of payment with
the court and only to the extent that there is delay in payment. In the instant case,
petitioner posits that since it was able to deposit with the court the amount
representing the zonal value of the property before its taking, it cannot be said to be in
delay, and thus, there can be no interest due on the payment of just
15
compensation. Moreover, petitioner alleges that since the entire subject property was
expropriated and not merely a portion thereof, it did not suffer an impairment or
decrease in value, rendering the award of consequential damages nugatory.
Furthermore, petitioner claims that contrary to the RTC’s instruction, transfer taxes, in
the nature of Capital Gains Tax and Documentary Stamp Tax, necessary for the
transfer of the subject property from the name of the respondent to that of the
petitioner are liabilities of respondent and not petitioner.
The petition is partly meritorious.
At the outset, it must be noted that the RTC’s reliance on National Power Corporation
v. Angasis misplaced for the same has already been overturned by our more recent
16
ruling in Republic v. Court of Appeals, wherein we held that the payment of just
compensation for the expropriated property amounts to an effective forbearance on
the part of the State, to wit:
Aside from this ruling, Republic notably overturned the Court’s previous ruling in
National Power Corporation v. Angas which held that just compensation due for
expropriated properties is not a loan or forbearance of money but indemnity for
damages for the delay in payment; since the interest involved is in the nature of
damages rather than earnings from loans, then Art. 2209 of the Civil Code, which fixes
legal interest at 6%, shall apply.
In Republic, the Court recognized that the just compensation due to the landowners
for their expropriated property amounted to an effective forbearance on the part of the
State. Applying the Eastern Shipping Lines ruling, the Court fixed the applicable
interest rate at 12% per annum, computed from the time the property was taken until
the full amount of just compensation was paid, in order to eliminate the issue of the
constant fluctuation and inflation of the value of the currency over time. In the Court’s
own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the
zonal value of the property to be computed from the time petitioner instituted
condemnation proceedings and "took" the property in September 1969. This
allowance of interest on the amount found to be the value of the property as of the
time of the taking computed, being an effective forbearance, at 12% per annum should
help eliminate the issue of the constant fluctuation and inflation of the value of the
currency over time.
We subsequently upheld Republic’s 12% per annum interest rate on the unpaid
expropriation compensation in the following cases: Reyes v. National Housing
Authority, Land Bank of the Philippines v. Wycoco, Republic v. Court of Appeals, Land
Bank of the Philippines v. Imperial, Philippine Ports Authority v. Rosales-Bondoc, and
17
Curata v. Philippine Ports Authority. Effectively, therefore, the debt incurred by the
government on account of the taking of the property subject of an expropriation
18
constitutes a forbearance which runs contrary to the trial court’s opinion that the
same is in the nature of indemnity for damages calling for the application of Article
2209 of the Civil Code. Nevertheless, in line with the recent circular of the Monetary
Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799, Series of 2013, effective
July 1, 2013, the prevailing rate of interest for loans or forbearance of money is six
percent (6%) per annum, in the absence of an express contract as to such rate of
interest.
Notwithstanding the foregoing, We find that the imposition of interest in this case is
unwarranted in view of the fact that as evidenced by the acknowledgment
19
receipt signed by the Branch Clerk of Court, petitioner was able to deposit with the
trial court the amount representing the zonal value of the property before its taking. As
often ruled by this Court, the award of interest is imposed in the nature of damages for
delay in payment which, in effect, makes the obligation on the part of the government
one of forbearance to ensure prompt payment of the value of the land and limit the
20
opportunity loss of the owner. However, when there is no delay in the payment of
just compensation, We have not hesitated in deleting the imposition of interest thereon
21
for the same is justified only in cases where delay has been sufficiently established.
The records of this case reveal that petitioner did not delay in its payment of just
compensation as it had deposited the pertinent amount in full due to respondent on
January 24, 2011, or four (4) months before the taking thereof, which was when the
RTC ordered the issuance of a Writ of Possession and a Writ of Expropriation on May
27, 2011. The amount deposited was deemed by the trial court to be just, fair, and
equitable, taking into account the well-established factors in assessing the value of
land, such as its size, condition, location, tax declaration, and zonal valuation as
determined by the BIR. Considering, therefore, the prompt payment by the petitioner
of the full amount of just compensation as determined by the RTC, We find that the
imposition of interest thereon is unjustified and should be deleted.
Similarly, the award of consequential damages should likewise be deleted in view of
the fact that the entire area of the subject property is being expropriated, and not
merely a portion thereof, wherein such remaining portion suffers an impairment or
decrease in value, as enunciated in Republic of the Philippines v. Bank of the
22
Philippine Islands, thus:
x x x The general rule is that the just compensation to which the owner of the
condemned property is entitled to is the market value. Market value is that sum of
money which a person desirous but not compelled to buy, and an owner willing but not
compelled to sell, would agree on as a price to be paid by the buyer and received by
the seller. The general rule, however, is modified where only a part of a certain
property is expropriated. In such a case, the owner is not restricted to compensation
for the portion actually taken, he is also entitled to recover the consequential damage,
if any, to the remaining part of the property.
xxxx
No actual taking of the building is necessary to grant consequential damages.
Consequential damages are awarded if as a result of the expropriation, the remaining
property of the owner suffers from an impairment or decrease in value. The rules on
expropriation clearly provide a legal basis for the award of consequential damages.
Section 6 of Rule 67 of the Rules of Court provides:
x x x The commissioners shall assess the consequential damages to the property not
taken and deduct from such consequential damages the consequential benefits to be
derived by the owner from the public use or public purpose of the property taken, the
operation of its franchise by the corporation or the carrying on of the business of the
corporation or person taking the property. But in no case shall the consequential
benefits assessed exceed the consequential damages assessed, or the owner be
deprived of the actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain the market value
of the property, to which should be added the consequential damages after deducting
therefrom the consequential benefits which may arise from the expropriation. If the
consequential benefits exceed the consequential damages, these items should be
disregarded altogether as the basic value of the property should be paid in every
23
case.
Considering that the subject property is being expropriated in its entirety, there is no
remaining portion which may suffer an impairment or decrease in value as a result of
the expropriation. Hence, the award of consequential damages is improper.
Anent petitioner’s contention that it cannot be made to pay the value of the transfer
taxes in the nature of capital gains tax and documentary stamp tax, which are
necessary for the transfer of the subject property from the name of the respondent to
that of the petitioner, the same is partly meritorious.
With respect to the capital gains tax, We find merit in petitioner’s posture that pursuant
to Sections 24(D) and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC),
capital gains tax due on the sale of real property is a liability for the account of the
seller, to wit:
Section 24. Income Tax Rates–
xxxx
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B) notwithstanding, a final tax of six
percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified as
capital assets, including pacto de retro sales and other forms of conditional sales, by
individuals, including estates and trusts: Provided, That the tax liability, if any, on gains
from sales or other disposition of real property to the government or any of its political
subdivisions or agencies or to government-owned or controlled corporations shall be
determined either under Section 24(A)or under this Subsection, at the option of the
taxpayer.
xxxx
Section 56. Payment and Assessment of Income Tax for Individuals and Corporations.
– (A) Payment of Tax –
xxxx
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed
under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the
date the return prescribed therefor is filed by the person liable thereto: Provided, That
if the seller submits proof of his intention to avail himself of the benefit of exemption of
capital gains under existing special laws, no such payments shall be required :
Provided, further, That in case of failure to qualify for exemption under such special
laws and implementing rules and regulations, the tax due on the gains realized from
the original transaction shall immediately become due and payable, subject to the
penalties prescribed under applicable provisions of this Code: Provided, finally, That if
the seller, having paid the tax, submits such proof of intent within six (6) months from
the registration of the document transferring the real property, he shall be entitled to a
refund of such tax upon verification of his compliance with the requirements for such
exemption.
Thus, it has been held that since capital gains is a tax on passive income, it is the
24
seller, not the buyer, who generally would shoulder the tax. Accordingly, the BIR, in
its BIR Ruling No. 476-2013, dated December 18, 2013, constituted the DPWH as a
withholding agent to withhold the six percent (6%) final withholding tax in the
expropriation of real property for infrastructure projects. As far as the government is
concerned, therefore, the capital gains tax remains a liability of the seller since it is a
25
tax on the seller's gain from the sale of the real estate.
As to the documentary stamp tax, however, this Court finds inconsistent petitioner’s
denial of liability to the same. Petitioner cites Section 196 of the 1997 NIRC as its
basis in saying that the documentary stamp tax is the liability of the seller, viz.:
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. - On
all conveyances, deeds, instruments, or writings, other than grants, patents or original
certificates of adjudication issued by the Government, whereby any land, tenement or
other realty sold shall be granted, assigned, transferred or otherwise conveyed to the
purchaser, or purchasers, or to any other person or persons designated by such
purchaser or purchasers, there shall be collected a documentary stamp tax, at the
rates herein below prescribed, based on the consideration contracted to be paid for
such realty or on its fair market value determined in accordance with Section 6(E) of
this Code, whichever is higher: Provided, That when one of the contracting parties is
the Government, the tax herein imposed shall be based on the actual consideration:
(a) When the consideration, or value received or contracted to be paid for such realty,
after making proper allowance of any encumbrance, does not exceed One thousand
pesos (₱1,000), Fifteen pesos (₱15.00).
(b) For each additional One thousand pesos (₱1,000), or fractional part thereof in
excess of One thousand pesos (₱1,000) of such consideration or value, Fifteen pesos
(₱15.00).
When it appears that the amount of the documentary stamp tax payable hereunder
has been reduced by an incorrect statement of the consideration in any conveyance,
deed, instrument or writing subject to such tax the Commissioner, provincial or city
Treasurer, or other revenue officer shall, from the assessment rolls or other reliable
source of information, assess the property of its true market value and collect the
proper tax thereon.
Yet, a perusal of the provision cited above does not explicitly impute the obligation to
pay the documentary stamp tax on the seller. In fact, according to the BIR, all the
parties to a transaction are primarily liable for the documentary stamp tax, as provided
26
by Section 2 of BIR Revenue Regulations No. 9-2000, which reads:
SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. –
(a) In General. - The documentary stamp taxes under Title VII of the Code is
a tax on certain transactions.1âwphi1 It is imposed against "the person
 making, signing, issuing, accepting, or transferring" the document or facility G.R. No. 206526 January 28, 2015
evidencing the aforesaid transactions. Thus, in general, it may be imposed
on the transaction itself or upon the document underlying such act. Any of
WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., Petitioner,
the parties thereto shall be liable for the full amount of the tax due:
vs.
Provided, however, that as between themselves, the said parties may agree
COMMISSIONER OF INTERNAL REVENUE, Respondent.
on who shall be liable or how they may share on the cost of the tax.

DECISION
(b) Exception. - Whenever one of the parties to the taxable transaction is
exempt from the tax imposed under Title VII of the Code, the other party
27
thereto who is not exempt shall be the one directly liable for the tax. MENDOZA, J.:

As a general rule, therefore, any of the parties to a transaction shall be liable for the
full amount of the documentary stamp tax due, unless they agree among themselves
on who shall be liable for the same.
In this case, there is no agreement as to the party liable for the documentary stamp
tax due on the sale of the land to be expropriated. But while petitioner rejects any
28
liability for the same, this Court must take note of petitioner’s Citizen’s Charter, which
functions as a guide for the procedure to be taken by the DPWH in acquiring real
property through expropriation under RA 8974. The Citizen’s Charter, issued by
petitioner DPWH itself on December 4,2013, explicitly provides that the documentary
stamp tax, transfer tax, and registration fee due on the transfer of the title of land in
the name of the Republic shall be shouldered by the implementing agency of the
DPWH, while the capital gains tax shall be paid by the affected property
29
owner. Thus, while there is no specific agreement between petitioner and
respondent, petitioner's issuance of the Citizen's Charter serves as its notice to the
public as to the procedure it shall generally take in cases of expropriation under RA
8974. Accordingly, it will be rather unjust for this Court to blindly accede to petitioner's
vague rejection of liability in the face of its issuance of the Citizen's Charter, which
contains a clear and unequivocal assumption of accountability for the documentary
stamp tax. Had petitioner provided this Court with more convincing basis, apart from a
mere citation of an indefinite provision of the 1997 NIRC, showing that it should be
respondent-seller who shall be liable for the documentary stamp tax due on the sale of
the subject property, its rejection of the payment of the same could have been
sustained. WHEREFORE, premises considered, the instant pet1t10n 1s PARTIALLY
GRANTED. The Decision and Order, dated November 15, 2013 and March 10, 2014,
respectively, of the Regional Trial Court, Valenzuela City, Branch 270, in Civil Case
No. 140-V-10 are hereby MODIFIED, in that the imposition of interest on the payment
of just compensation as well as the award of consequential damages are deleted. In
addition, respondent Arlene R. Soriano is ORDERED to pay for the capital gains tax
due on the transfer of the expropriated property, while the documentary stamp tax,
transfer tax, and registration fee shall be for the account of petitioner.
SO ORDERED.
In this petition for review under Rule 45 of the Rules of Court and Rule 16 of the
Revised Rules of the Court of Tax Appeals, Winebrenner & Ifiigo Insurance Brokers,
1
Inc. (petitioner) seeks the review of the March 22, 2013 Decision of the Court of Tax
Appeals En Banc (CTA-En Banc). In the said decision, the CTA-En Banc affirmed the
denial of petitioner's judicial claim for refund or issuance of tax credit certificate for
excess and unutilized creditable withholding tax (CWT) for the 1st to 4th quarter of
calendar year (CJ} 2003 amounting to ₱4,073,954.00. In denying the refund, the CTA-
En Banc held that petitioner failed to prove that the excess CWT for CY 2003 was not
carried over to the succeeding quarters of the subject taxable year. Under the 1997
National Internal Revenue Code (NJRC), a taxpayer must not have exercised the
option to carryover the excess CWT for a particular taxable year in order to qualify for
refund.
The Factual Antecedents
On April 15, 2004, petitioner filed itsAnnual Income Tax Return for CY 2003.
About two years thereafter or on April 7, 2006, petitioner applied for the administrative
tax credit/refund claiming entitlement to the refund of its excess or unutilized CWT for
CY 2003, by filing BIR Form No. 1914 with the Revenue District Office No. 50 of the
Bureau of Internal Revenue (BIR).
There being no action taken on the said claim, a petition for review was filed by
petitioner before the CTA on April 11, 2006. The case was docketed as CTA Case No.
7440 and was raffled to the Special First Division (CTA Division).
On April 13, 2010, CTA Division partially granted petitioner’s claim for refund of
excess and unutilized CWT for CY 2003 in the reduced amount of ₱2,737,903.34 in its
2
April 13, 2010 Decision (original decision). The dispositive portion of the decision
reads:
In view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount of ₱2,737,903.34
representing its excess/unutilized creditable withholding taxes for the year 2003.
3
SO ORDERED.
Petitioner filed a Motion for Partial Reconsideration with Leave to Submit
Supplemental Evidence. It prayed that an amended decision be issued granting the
entirety of its claim for refund, or in the alternative, that it be allowed to submit and
offer relevant documents as supplemental evidence.
Respondent Commissioner of Internal Revenue (CIR) also moved for reconsideration,
praying for the denial of the entire amount of refund because petitioner failed to
present the quarterly Income Tax Returns (ITRs) for CY 2004. To the CIR, the
presentation of the 2004 quarterly ITRs was indispensable in proving petitioner’s
entitlement to the claimed amount because it would prove that no carry-over of
unutilized and excess CWT for the four (4) quarters of CY 2003 to the succeeding four
(4) quarters of CY 2004 was made. In the absence of said ITRs, no refund could be
granted. In the CIR’s view, this was in accordance with the irrevocability rule under
Section 76 of the NIRC which reads:
SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27
shall file an adjustment return covering the total taxable income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable income of that year,
the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credits; or
(C) Be credited or refunded with the excess amount paid, as the
case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return
may be carried over and credited against the estimated quarterly income tax liabilities
for the taxable quarters of the succeeding taxable years. Once the option to carry-over
and apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor.
4
On July 27, 2011, the CTA-Division reversed itself. In an Amended Decision, it denied
the entire claim of petitioner. It reasoned out that petitioner should have presented as
evidence its first, second and third quarterly ITRs for the year 2004 to prove that the
unutilized CWT being claimed had not been carried over to the succeeding quarters.
Thus:
WHEREFORE,in view of the foregoing, petitioner’s Motion for Partial Reconsideration
is hereby DENIED while respondent’s Motion for Reconsideration is hereby
GRANTED. Accordingly, the Decision dated April 13, 2010 granting petitioner’s claim
in the reduced amount of ₱2,737,903.34 is hereby REVERSED AND SET ASIDE.
Consequently, the instant Petition for Review is hereby DENIEDdue to insufficiency of
evidence.
5
SO ORDERED.
Aggrieved, petitioner elevated the case to the CTA En Bancpraying for the reversal of
the Amended Decision of the CTA Division.
6
In its March 22, 2013 Decision, the CTA-En Bancaffirmed the Amended Decision of
the CTA-Division. It stated that before a cash refund or an issuance of tax credit
certificate for unutilized excess tax credits could be granted, it was essential for
petitioner to establish and prove, by presenting the quarterly ITRs of the succeeding
years, that the excess CWT was not carried over to the succeeding taxable quarters
considering that the option to carry over in the succeeding taxable quarters could not
be modified in the final adjustment returns (FAR).Because petitioner did not present
the first, second and third quarterly ITRsfor CY 2004, despite having offered and
submitted the Annual ITR/FAR for the same year, the CTA-En Banc stated that the
petitioner failed to discharge its burden, hence, no refund could be granted. In
justifying its conclusions, the CTA-En Banccited its own case of Millennium Business
7
Services, Inc.v. Commissioner of Internal Revenue (Millennium) wherein it held as
follows:
Since the burden of proof is upon the claimant to show that the amount claimed was
not utilized or carried over to the succeeding taxable quarters, the presentation of the
succeeding quarterly income tax return and final adjustment return is indispensable to
prove that it did not carry over or utilized the claimed excess creditable withholding
taxes. Absent thereof, there will be no basis for a taxpayer’s claim for refund since
there will be no evidence that the taxpayer did not carry over or utilize the claimed
excess creditable withholding taxes to the succeeding taxable quarters.
Significantly, a taxpayer may amend its quarterly income tax return or annual income
tax return or Final Adjustment Return, which in any case may modify the previous
intention to carry-over, apply as tax credit certificate or refund, as the case may be.
But the option to carry over in the succeeding taxable quarters under the irrevocability
rule cannot be modified in its final adjustment return.
The presentation of the final adjustment return does not shift the burden of proof that
the excess creditable withholding tax was not utilized or carried overto the first three
(3) taxable quarters. It remains with the taxpayer claimant. It goes without saying that
final adjustment returns of the preceding and the succeeding taxable years are not
sufficient to prove that the amount claimed was utilized or carried over to the first three
(3) taxable quarters.
The importance of the presentation of the succeeding quarterly income tax return and
the annual income tax return of the subsequent taxable year need not be overly
emphasized. All corporations subject to income tax, are required to file quarterly
income tax returns, on a cumulative basis for the preceding quarters, upon which
payment of their income tax has been made. In addition to the quarterly income tax
returns, corporations are required to file a final or adjustment return on or before the
fifteenth day of April. The quarterly income tax return, like the final adjustment return,
is the most reliable firsthand evidence of corporate acts pertaining to income taxes, as
it includes the itemization and summary of additions to and deductions from the
income tax due. These entries are not without rhyme or reason. They are required,
because they facilitate the tax administration process, and guide this Court to the
veracity of a petitioner’s claim for refund without which petitioner could not prove with
certainty that the claimed amount was not utilized or carried over to the succeeding
quarters or the option to carry over and apply the excess was effectively chosen
despite the intent to claim a refund.
In the same vein, if the government wants to disprove that the excess creditable
withholding tax was not utilized or carried over to the succeeding taxable quarters, the
presentation of the succeeding quarterly income tax return and the annual income tax
return of the subsequent taxable year indicating utilization or carrying over are [sic]
indispensible. However, the claimant must first establish its claim for refund, such that
it did not utilize or carry over or that it opted to utilize and carry over to the 1 st, 2nd,
3rd quarters and final adjustment return of the succeeding taxable year.
Concomitantly, the presentation of the quarterly income tax return and the annual
income tax return to prove the fact that excess creditable withholding tax was not
utilized or carried over or opted to be utilized and carried over to the 1st, 2nd, 3rd
quarters and final adjustment return of the succeeding taxable quarter is not only for
convenience to facilitate the tax administration process but it is part of the requisites to
establish the claim for refund. Section 76 of the NIRC of 1997 provides that if the
taxpayer claimant carries over and applies the excess quarterly income tax against the
income tax due for the taxable quarters of the succeeding taxable years, the same is
irrevocable and no application for cash refund or issuance of a tax credit certificate
8
shall be allowed.
Hence, this petition.
Noteworthy is the fact that the CTA-En Bancruling was met with two dissents from
Associate Justices Juanito C. Castañeda (Justice Castañeda) and Esperanza R.
Fabon-Victorino (Justice Fabon-Victorino).
9
In his Dissenting Opinion which was concurred in by Justice FabonVictorino, Justice
Castañeda expressed the view that the CTA-En Banc should have reinstated the
CTA-Division’s original decision because in the cases of Philam Asset Management
10
Inc. v. Commissioner of Internal Revenue (Philam); State Land Investment
11
Corporation v. Commissioner of Internal Revenue (State Land); Commissioner of
12
Internal Revenue v. PERF Realty Corporation (PERF Realty); and Commissioner of
13
Internal Revenue v. Mirant (Philippines) Operations, Corporation (Mirant), this Court
already ruled that requiring the ITR or the FAR for the succeeding year in a claim for
refund had no basis in law and jurisprudence. According to him, the submission of the
FAR of the succeeding taxable year was not required under the law to prove the
claimant’s entitlement to excess or unutilized CWT, and by following logic, the
submission of quarterly income tax returns for the subsequent taxable period was
likewise unnecessary. He found no justifiable reason not to follow the existing rulings
of this Court. Petitioner’s reasoning in this petition echoes the dissenting opinion of
Justice Castaneda. It further submits that despite the non-presentation of the quarterly
ITRs, it has sufficiently shown that the excess CWT for CY 2003 was not carried over
or applied to itsincome tax liabilities for CY 2004, as shown in the Annual ITR for 2004
it submitted. Thus, petitioner insists that its refund should have been granted.
14
Petitioner further avers, in its Reply, that even if Millennium Business case was
applicable, such must be given prospective effect considering that this case was
litigated on the basis of the doctrines laid down in Philam, State Landand PERF Realty
cases wherein the submission of quarterly ITRs in a case for tax refund was held by
this Court as not mandatory.
15
In its Comment, the CIR counters that even if the taxpayer signifies the option for
either tax refund or carry-over as tax credit, this does not ipso facto confer the right to
avail of the option immediately. There is a need, according to the CIR, for an
investigation to ascertain the correctness of the corporate returns and the amount
sought to be credited; and part of which is to look into the quarterly returns so that it
may be determined whether or not excess and unutilized CWT was carried over into
the succeeding quarters of the next taxable year. Because the pertinent quarterly ITRs
were not presented, the CIR submits that the petitioner failed to prove its right to a tax
refund.
Issue Petitioner disagrees, as the dissents did, that the non-submission of quarterly ITRs is
fatal to its claim.
The sole issue here is whether the submission and presentation of the quarterly ITRs
of the succeeding quarters of a taxable year is indispensable in a claim for refund. Hence, the issue on the indispensability of quarterly ITRs of the succeeding taxable
year in a claim for refund.
The Court’s Ruling
The Court finds for the petitioner.
The Court recognizes, as it always has, that the burden of proof to establish
16
entitlement to refund is on the claimant taxpayer. Being in the nature of a claim for There is no question that those who claim must not only prove its entitlement to the
17
exemption, refund is construed in strictissimi juris against the entity claiming the excess credits, but likewise must prove that no carry-over has been made in cases
18
refund and in favor of the taxing power. This is the reason why a claimant must where refund is sought.
positively show compliance with the statutory requirements provided for under the
NIRC in order to successfully pursue one’s claim. As implemented by the applicable
In this case, the fact of havingcarried over petitioner’s 2003 excess credits to
rules and regulations and as interpreted in a vast array of decisions, a taxpayer who
succeeding taxable year isin issue. According to the CTA-En Bancand the CIR, the
seeks a refund of excess and unutilized CWT must:
only evidence that can sufficiently show that carrying over has been made is to
present the quarterly ITRs. Some members of this Court adhere to the same view.
1) File the claim with the CIR within the two year period from the date of
payment of the tax;
The Court however cannot.

2) Show on the return that the income received was declared as part of the
Proving that no carry-over has been made does not absolutely require the
gross income; and
presentation of the quarterly ITRs.

3) Establish the fact of withholding by a copy of a statement duly issued by

the payor to the payee showing the amount paid and the amount of tax
19
withheld.
The original decision of the CTA-Division made plain that the petitioner complied with
the above requisites in so far as the reduced amount of ₱2,737,903.34 was
concerned. In the amended decision, however, it was pointed out that because
petitioner failed to present the quarterly ITRs of the subsequent year, there was an
impossibility of determining compliance with the irrevocability rule under Section 76 of
the NIRC as in those documents could be found evidence of whether the excess CWT
was applied to its income tax liabilities in the quarters of 2004. The irrevocability rule
under Section 76 of the NIRC means that once an option, either for refund or issuance
of tax credit certificate or carry-over of CWT has been exercised, the same can no
20
longer be modified for the succeeding taxable years. For said reason, the CTA-En
Banc affirmed the conclusion in the amended decision that because of the said
impossibility, the claim for refund was not substantiated.
The CIR agrees with the disposition of the CTA-En Banc, stressing that the petitioner
failed to carry out the burden of showing that no carryover was made when it did not
present the quarterly ITRs for CY 2004.
In Philam, the petitioner therein sought for recognition of its right to the claimed refund
of unutilized CWT. The CIR opposed the claim, on the grounds similar to the caseat
hand, that no proof was provided showing the non-carry over of excess CWT to the
subsequent quarters of the subject year. In a categorical manner, the Court ruled that
the presentation of the quarterly ITRs was not necessary. Therein, it was written:
Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law merely requires the
filing of the FAR for the preceding – not the succeeding – taxable year. Indeed, any
refundable amount indicated in the FAR of the preceding taxable year may be credited
against the estimated income tax liabilities for the taxable quarters of the succeeding
taxable year. However, nowhere is there even a tinge of a hint in any provisions of the
[NIRC] that the FAR of the taxable year following the period to which the tax credits
are originally being applied should also be presented to the BIR.
Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides
that claims for refund of income taxes deducted and withheld from income payments
shall be given due course only (1) when it is shown on the ITR that the income gross income and the fact of withholding is established bya copy of the
payment received is being declared part of the taxpayer’s gross income; and (2) when withholding tax statement duly issued by the payer to the payee showing the
the fact of withholding is established by a copy of the withholding tax statement, duly amount paid and the amount of tax withheld therefrom.
issued by the payor to the payee, showing the amount paid and the income tax
withheld from that amount.
xxx xxx xxx

It has been submitted that Philam cannot be cited as a precedent to hold that the
Evident from the above is the absence of any categorical pronouncement of requiring
presentation of the quarterly income tax return is not indispensable as it appears that
the presentation of the succeeding quarterly ITRs in order to prove the fact of non-
the quarterly returns for the succeeding year were presented when the petitioner
carrying over. To say the least, the Court rules that as to the means of proving it, Ithas
therein filed an administrative claim for the refund of its excess taxes withheld in 1997.
no power to unduly restrict it.

It appears however that there is misunderstanding in the ruling of the Court in Philam.
In this case, it confounds the Court why the CTA did not recognize and discuss in
That factual distinction does not negate the proposition that subsequent quarterly ITRs 21
detail the sufficiency of the annual ITR for 2004, which was submitted by the
are not indispensable. The logic in not requiring quarterly ITRs of the succeeding
petitioner. The CTA in fact said:
taxable years to be presented remains true to this day. What Section 76 requires, just
like in all civil cases, is to prove the prima facie entitlement to a claim, including the
fact of not having carried over the excess credits to the subsequent quarters or In the present case, while petitioner did offer its Annual ITR/Final Adjustment Return
taxable year. It does not say that to prove such a fact, succeeding quarterly ITRs are for taxable year 2004, it appears that petitioner miserably failed to submit and offer as
absolutely needed. part of its evidence the first, second, and third Quarterly ITRs for the year 2004.
Consequently, petitioner was not able to prove that it did not exercise its option to
22
carry-over its excess CWT.
This simply underscores the rulethat any document, other than quarterly ITRs may be
used to establish that indeed the non-carry over clause has been complied with,
provided that such is competent, relevant and part of the records. The Court is thusnot Petitioner claims that the requirement of proof showing the non-carry over has been
prepared to make a pronouncement as to the indispensability of the quarterly ITRs in established in said document.
a claim for refund for no court can limit a party to the means of proving a fact for as
long as they are consistent with the rules of evidence and fair play. The means of
Indeed, an annual ITR contains the total taxable income earned for the four (4)
ascertainment of a fact is best left to the party that alleges the same. The Court’s
quarters of a taxable year, as well as deductions and tax credits previously reported or
power is limited only to the appreciation of that means pursuant to the prevailing rules
of evidence. To stress, what the NIRC merely requires is to sufficiently prove the carried over in the quarterly income tax returns for the subject period. A quick look
atthe Annual ITR reveals this fact:
existence of the non-carry over of excess CWT in a claim for refund.

The implementing rules similarly support this conclusion, particularly Section 2.58.3 of Aggregate Income Tax Due
Revenue Regulation No. 2-98 thereof. There, it provides as follows:
Less Tax Credits/Payments
SECTION 2.58.3. Claim for Tax Credit or Refund.
Prior Year’s excess Credits – Taxes withheld
(A) The amount of creditable tax withheld shall be allowed as a tax credit
against the income tax liability of the payee in the quarter of the taxable year Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than
in which income was earned or received. MCIT

(B) Claims for tax credit or refund of any creditable income tax which was xxx xxx xxx
deducted and withheld on income payments shall be given due course only
when it is shown that the income payment has been declared as part of the
Creditable Tax Withheld for the Previous Quarter (s)
Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter
xxx xxx xxx
23
It goes without saying that the annual ITR (including any other proof that may be
sufficient to the Court)can sufficiently reveal whether carry over has been made in
subsequent quarters even if the petitioner has chosen the option of tax credit or refund
inthe immediately 2003 annual ITR. Section 76 of the NIRC requires a corporation to
file a Final Adjustment Return (or Annual ITR) covering the total taxable income for the
preceding calendar or fiscal year. The total taxable income contains the combined
income for the four quarters of the taxable year, as well as the deductions and excess
tax credits carried over in the quarterly income tax returns for the same period.
If the excess tax credits of the preceding year were deducted, whether in whole or in
part, from the estimated income tax liabilities of any of the taxable quarters of the
succeeding taxable year, the total amount of the tax credits deducted for the entire
taxable year should appear in the Annual ITR under the item "Prior Year’s Excess
Credits." Otherwise, or if the tax credits were carried over to the succeeding quarters
and the corporation did not report it in the annual ITR, there would be a discrepancy in
the amounts of combined income and tax credits carried over for all quarters and the
corporation would end up shouldering a bigger tax payable. It must be remembered
that taxes computed in the quarterly returns are mere estimates. It is the annual ITR
which shows the aggregate amounts of income, deductions, and credits for all
quarters of the taxable year. It is the final adjustment return which shows whether a
24
corporation incurred a loss or gained a profit during the taxable quarter. Thus, the
presentation of the annual ITR would suffice in proving that prior year’s excess credits
were not utilized for the taxable year in order to make a final determination of the total
tax due.
In this case, petitioner reported an overpayment in the amount of ₱7,194,213.00 in its
annual ITR for the year ended December 2003:
Annual ITR 2003
Income Tax Due 1,259,259.00
Less: Prior Year’s Excess Credits (2002 Annual ITR) (4,379,518.00)
Creditable Tax Withheld for the 4th Quarter (4,073,954.00)
Tax Payable / (Overpayment) (7,194,213.00)
For the overpayment, petitioner chose the option "To be issued a Tax Credit
Certificate." In its Annual ITR for the year ended December 2004, petitioner did not
report the Creditable Tax Withheld for the 4th quarter of 2003 in the amount of
₱4,073,954.00 as prior year’s excess credits. As shown in the 2004 ITR:
Annual ITR 2004
Income Tax Due 1,321,409.00
Less: Prior Year’s Excess Credits -
Creditable Tax Withheld for the 4th (3,689,419.00)
Quarter
Tax Payable / (Overpayment) (2,368,010.00)
Verily, the absence of any amount written in the Prior Year excess Credit – Tax
Withheld portion of petitioner’s 2004 annual ITR clearly shows that no prior excess
credits were carried over in the first four quarters of 2004. And since petitioner was
able to sufficiently prove that excess tax credits in 2003 were not carried over to
taxable year 2004 by leaving the item "Prior Year’s Excess Credits" as blank in its
2004 annual ITR, then petitioner is entitled to a refund. Unfortunately, the CTA, in
denying entirely the claim, merely relied on the absence of the quarterly ITRs despite
being able to verify the truthfulness of the declaration that no carry over was indeed
effected by simply looking at the 2004 annual ITR.
At this point, worth mentioning is the fact that subsequent cases affirm the proposition
as correctly pointed out by petitioner. State Land, PERF and Mirantreiterated the rule
that the presentation of the quarterly ITRs of the subsequent year is not mandatory on
the part of the claimant to prove its claims.
There are some who challenges the applicability of PERF in the case at bar. It is said
that PERFis not in point because the Annual ITR for the succeeding year had actually
been attached to PERF’s motion for reconsideration with the CTA and had formed part
of the records of the case. Clearly, if the Annual ITR has been recognized by this
Court in PERF, why then would the submitted 2004 Annual ITR in this case be
insufficient despite the absence of the quarterly ITRs? Why then would this Court
require more than what is enough and deny a claim even if the minimum burden has
been overcome? At best, the existence of quarterly ITRs would have the effect of
strengthening a proven fact. And as such, may only be considered corroborative
evidence, obviously not indispensable in character. PERF simply affirms that quarterly
ITRs are not indispensable, provided that there is sufficient proof that carrying over
excess CWT was not effected.
Stateland and Mirantare equally challenged. In all these cases however, the factual
distinctions only serve to bolster the proposition that succeeding quarterly ITRs are not
indispensable. Implicit from all these cases is the Court’s recognition that proving
carry-over is an evidentiary matter and that the submission of quarterly ITRs is but a
means to prove the fact of one’s entitlement to a refund and not a condition sine qua
non for the success of refund. True, it would have been better, easier and more
efficient for the CTA and the CIR to have as basis the quarterly ITRs, but it is not the
only way considering further that in this case, the Annual ITR for 2004 is sufficient.
Courts are here to painstakingly weigh evidence so that justice and equity in the end
will prevail.
It must be emphasized that once the requirements laid down by the NIRC have been
met, a claimant should be considered successful in discharging its burden of proving
its right to refund. Thereafter, the burden of going forward with the evidence, as
25
distinct from the general burden of proof, shifts to the opposing party, that is, the
CIR. It is then the turn of the CIR to disprove the claim by presenting contrary
evidence which could include the pertinent ITRs easily obtainable from its own files.
All along, the CIR espouses the viewthat it must be given ample opportunity to
investigate the veracity of the claims. Thus, the Court asks: In the process of
investigation at the administrative level to determine the right of the petitioner to the
claimed amount, did the CIR, with all its resources even attempt to verify the quarterly
ITRsit had in its files? Certainly, it did not as the application was met by the inaction of
the CIR. And if desirous in its effort to clearly verify petitioner’s claim, it should have
had the time, resources and the liberty to do so. Yet, nothing was produced during trial
to destroy the prima facie right of the petitioner by counterchecking the claims with the
quarterly ITRs the CIR has on its file. To the Court, it seems that the CIR languished
on its duties to ascertain the veracity of the claims and just hoped that the burden
would fall on the petitioner’s head once the issue reaches the courts.
This mindset ignores the rule that the CIR has the equally important responsibility of
contradicting petitioner’s claim by presenting proof readily on hand once the burden of
evidence shifts to its side. Claims for refund are civil in nature and as such, petitioner,
as claimant, though having a heavy burden of showing entitlement, need only prove
preponderance of evidence in order to recover excess credit in cold cash. To review,
"[P]reponderance of evidence is [defined as] the weight, credit, and value of the
aggregate evidence on either sideand is usually considered to be synonymous with
the term ‘greater weight of the evidence’ or ‘greater weight of the credible evidence.’ It
is evidence which is more convincing to the court asworthy of belief than that which is
26
offered in opposition thereto.
The CIR must then be reminded that in Philam, the CIR’s "failure to present[the
quarterly ITRs and AFR] to support its contention against the grant of a tax refund to
[a claimant] is certainly fatal." PERF reinforces this with a sweeping statement holding
that the verification process is not incumbent on PERF[or any claimant for that matter];
[but] is the duty of the CIR to verify whether xxx excess incometaxes [have been
carried over].
And should there be a possibility that a claimant may have violated the irrevocability
rule and thereafter claim twice from its credits, no one is to be blamed but the CIR for
not discharging its burden of evidence to destroy a claimant’s right to a refund. At any
rate, a claimant who defrauds the government cannot escape liability be it criminal or
civil in nature.
Verily, with the petitioner having complied with the requirements for refund, and
without the CIR showing contrary evidence other than its bare assertion of the
absence of the quarterly ITRs, copies of which are easily verifiable by its very own
records, the burden of proof of establishing the propriety of the claim for refund has
been sufficiently discharged. Hence, the grant of refund is proper.
The Court does not, and cannot, however, grant the entire claimed amount as it finds
no error in the original decision of the CTA Division granting refund to the reduced
amount of ₱2,737,903.34. This finding of fact is given respect, if not finality, as the
27
CTA, which by the very nature of its functions of dedicating itself exclusively to the
consideration of the tax problems has necessarily developed an expertise on the
28
subject. It being the case, the Court partly grants this petition to the extent of
reinstating the April 23, 2010 original decision of the CTA Division.
The Court reminds the CIR that substantial justice, equity and fair play take
precedence over technicalities and legalisms.1âwphi1 The government must keep in
mind that it has no right to keep the rponey not belonging to it, thereby enriching itself
29
at the expense of the law-abiding citizen or entities who have complied with the
requirements of the law in order to forward the claim for refund. Under the principle of
solution ihdebiti provided in Article 2154 of the Civil Code, the CIR must return
30
anythihg it has received.
Finally, even assuming that the Court reverses itself and pronounces the
indispensability of presenting the quarterly ITRs to prove entitlement to the claimed
refund, petitioner should not be Brejudiced for relying on Philam. The CTA En Banc
merely based its pronouncement on a case that does not enjoy the benefit of stare
decis et non quieta movere which means "to adhere to precedents, and not to unsettle The Facts
31
things which are established." As between a CTA En Banc Decision (Millennium)
and this Court's Decision (Philam), it is elementary that the latter should prevail.
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. Under its articles of incorporation, among its corporate
WHEREFORE, the Court partly grants the petition. The March 22, 2013 Decision of purposes are:
the Court of Tax Appeals En Banc is REVERSED. The April 13, 2010 Decision of the
Court of Tax Appeals Special First Division is REINSTATED. Respondent
(a) To establish, equip, operate and maintain a non-stock, non-profit
Commissioner of Internal Revenue is ordered to REFUND to petitioner the amount of
Christian, benevolent, charitable and scientific hospital which shall give
₱2,737,903.34 as excess creditable withholding tax paid for taxable year 2003.
curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be
SO ORDERED. performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;

G.R. No. 195909 September 26, 2012

(b) To provide a career of health science education and provide medical
services to the community through organized clinics in such specialties as
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, the facilities and resources of the corporation make possible;
vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
(c) To carry on educational activities related to the maintenance and
promotion of health as well as provide facilities for scientific and medical
x-----------------------x researches which, in the opinion of the Board of Trustees, may be justified
by the facilities, personnel, funds, or other requirements that are available;
G.R. No. 195960
(d) To cooperate with organized medical societies, agencies of both
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER, government and private sector; establish rules and regulations consistent
vs. with the highest professional ethics;
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
3
xxxx
DECISION
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
CARPIO, J.: deficiency taxes amounting to ₱76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the
The Case First Division of the CTA.
4

1
These are consolidated petitions for review on certiorari under Rule 45 of the Rules
of Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals
2
(CTA) En Banc and its Resolution of 1 March 2011 in CTA Case No. 6746. This
Court resolves this case on a pure question of law, which involves the interpretation of
Section 27(B) vis-à-vis Section 30(E) and (G) of the National Internal Revenue Code
of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
hospitals.
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the
deficiency tax assessments. The BIR did not act on the protest within the 180-day
period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section 26 of the
5
1997 Tax Code x x x." It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
6
profit charitable institutions and civic organizations promoting social welfare.
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only
13% of its revenues came from charitable purposes. Moreover, the hospital's board of
trustees, officers and employees directly benefit from its profits and assets. St. Luke's
had total revenues of ₱1,730,367,965 or approximately ₱1.73 billion from patient
7
services in 1998.
St. Luke's contended that the BIR should not consider its total revenues, because its
free services to patients was ₱218,187,498 or 65.20% of its 1998 operating income
8
(i.e., total revenues less operating expenses) of ₱334,642,615. St. Luke's also
claimed that its income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole
issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals
out of the income tax exemption under Section 30 of the NIRC and instead, imposes a
preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be
ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment
9
and withholding of a part of its income, as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual
10 11
review. Under the Constitution and the Rules of Court, this Court's review power is
12
generally limited to "cases in which only an error or question of law is involved." This
Court cannot depart from this limitation if a party fails to invoke a recognized
exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of ₱110,000.00 is hereby CANCELLED and
WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income
tax and deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency
interest on the total amount of ₱6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
13
SO ORDERED.
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared as
14
"Other Income-Net") came from charitable activities. The CTA cancelled the
remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the 10%
tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
15
applicable to St. Luke's.
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income
derived by St. Luke's from services to its patients, whether paying or non-paying. The
CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner
16
of Internal Revenue, which examined the primary purposes of St. Luke's under its
17
articles of incorporation and various documents identifying St. Luke's as a charitable
institution.
18
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, which
states that "a charitable institution does not lose its charitable character and its
consequent exemption from taxation merely because recipients of its benefits who are
able to pay are required to do so, where funds derived in this manner are devoted to
19
the charitable purposes of the institution x x x." The generation of income from
paying patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
20
Revenue, which ruled that the old NIRC (Commonwealth Act No. 466, as
21
amended) "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net
22
income." The NIRC of 1997 substantially reproduces the provision on charitable
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure its existence, by
operating within the limits of its own resources, especially its regular income. In other
23
words, it should always strive, whenever possible, to have a surplus."
The CTA held that Section 27(B) of the present NIRC does not apply to St.
24
Luke's. The CTA explained that to apply the 10% preferential rate, Section 27(B)
requires a hospital to be "non-profit." On the other hand, Congress specifically used
the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is
clear that non-stock, non-profit hospitals operated exclusively for charitable purpose
are exempt from income tax on income received by them as such, applying the
25
provision of Section 30(E) of the NIRC of 1997, as amended."
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960
because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of
Court, "[t]he petition shall raise only questions of law which must be distinctly set
26
forth." St. Luke's cites Martinez v. Court of Appeals which permits factual review
"when the Court of Appeals [in this case, the CTA] manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would
27
justify a different conclusion."
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being
28
allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." This is not
a case of overlooking or failing to consider relevant evidence. The CTA obviously
considered the evidence and concluded that it is self-serving. The CTA declared that it
has "gone through the records of this case and found no other evidence aside from
29
the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x."
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the
25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the
deficiency tax within the time prescribed for its payment in the notice of
30
assessment[.]" St. Luke's is also liable to pay 20% delinquency interest under
31
Section 249(C)(3) of the NIRC. As explained by the CTA En Banc, the amount of
₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes
only deficiency interest under Section 249(A) and (B) of the NIRC and not delinquency
32
interest.
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section
33
30(E) of the NIRC of 1997. Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: Provided, That if
the gross income from unrelated trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such educational institutions or hospitals
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A 'proprietary educational
institution' is any private school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical
Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends
that it is a charitable institution and an organization promoting social welfare. The
arguments of St. Luke's focus on the wording of Section 30(E) exempting from income
 34
tax non-stock, non-profit charitable institutions. St. Luke's asserts that the legislative
intent of introducing Section 27(B) was only to remove the exemption for "proprietary
35
non-profit" hospitals. The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary
non-profit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the other hand, can be construed together without the
removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit
36
educational institutions and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to
Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals
or groups" with a government permit. "Non-profit" means no net income or asset
accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v.
37
Club Filipino Inc. de Cebu, this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The club
was primarily funded by membership fees and dues. If it had profits, they were used
38
for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
39
making enterprise.
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not
charitable. The Court defined "charity" in Lung Center of the Philippines v. Quezon
40
City 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
41
[by] otherwise lessening the burden of government." A non-profit club for the benefit
of its members fails this test. An organization may be considered as non-profit if it
does not distribute any part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided in the last paragraph of
Section 30.
To be a charitable institution, however, an organization must meet the substantive test
of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from
the Treasury.
42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
43
Congress." The requirements for a tax exemption are strictly construed against the
 44
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This ruling
45
uses the same premise as Hospital de San Juan and Jesus Sacred Heart
46
College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.
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
47
benefit of the persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that "[c]haritable
institutions, churches and personages 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
48
from taxation." The test of exemption is not strictly a requirement on the intrinsic
nature or character of the institution. The test requires that the institution use the
property in a certain way, i.e. for a charitable purpose. Thus, the Court held that the
Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property
not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article
VI of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be
devoted "exclusively" for charitable purposes. The organization of the institution refers
to its corporate form, as shown by its articles of incorporation, by-laws and other
constitutive documents. Section 30(E) of the NIRC specifically requires that the
corporation or association be non-stock, which is defined by the Corporation Code as
"one where no part of its income is distributable as dividends to its members, trustees,
49
or officers" and that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or
50
purposes for which the corporation was organized." However, under Lung Center,
any profit by a charitable institution must not only be plowed back "whenever
necessary or proper," but must be "devoted or used altogether to the charitable object
51
which it is intended to achieve."
The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that "no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person." The use of lands, buildings and improvements of the institution is but a part of
its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution requires
that a charitable institution use the property "actually, directly and exclusively" for
charitable purposes. To be exempt from income taxes, Section 30(E) of the NIRC
requires that a charitable institution must be "organized and operated exclusively" for
charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the
NIRC requires that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized
and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied) ₱1,395,725,350.00

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as its INCOME FROM OPERATIONS ₱334,642,615.00 100%
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the "[n]on-stock corporation or association [must be] organized and Free Services -218,187,498.00 -
operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the 65.20%
requirement in Section 30(G) that the civic organization must be "operated
exclusively" for the promotion of social welfare. INCOME FROM OPERATIONS, Net of FREE ₱116,455,117.00 34.80%
SERVICES
Thus, even if the charitable institution must be "organized and operated exclusively"
for charitable purposes, it is nevertheless allowed to engage in "activities conducted
for profit" without losing its tax exempt status for its not-for-profit activities. The only OTHER INCOME 17,482,304.00
consequence is that the "income of whatever kind and character" of a charitable
institution "from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax." Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary corporate EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00
rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now
10%.

In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying In Lung Center, this Court declared:
patients. It cannot be disputed that a hospital which receives approximately ₱1.73
billion from paying patients is not an institution "operated exclusively" for charitable
purposes. Clearly, revenues from paying patients are income received from "activities "[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred
52
conducted for profit." Indeed, St. Luke's admits that it derived profits from its paying from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude;
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to Patients" as enjoying a privilege exclusively." x x x The words "dominant use" or "principal use"
in contrast to its "Free Services" expenditure of ₱218,187,498. In its Comment in G.R. cannot be substituted for the words "used exclusively" without doing violence to the
54
No. 195909, St. Luke's showed the following "calculation" to support its claim that Constitution and the law. Solely is synonymous with exclusively.
65.20% of its "income after expenses was allocated to free or charitable services" in
53
1998. The Court cannot expand the meaning of the words "operated exclusively" without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a "purpose to make profit over and
REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00 55
above the cost" of services. The ₱1.73 billion total revenues from paying patients is
not even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying
patients.
OPERATING EXPENSES
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its
Professional care of patients ₱1,016,608,394.00 operating income in 1998. However, if a part of the remaining 34.80% of the operating
income is reinvested in property, equipment or facilities used for services to paying
Administrative 287,319,334.00 and non-paying patients, then it cannot be said that the income is "devoted or used
56
altogether to the charitable object which it is intended to achieve." The income is
plowed back to the corporation not entirely for charitable purposes, but for profit as
Household and Property 91,797,622.00
well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies that
income from activities for profit is taxable "regardless of the disposition made of such
income."
Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee of
Conference for the Senate, which introduced the phrase "or from any activity
conducted for profit."
P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no
cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?
xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa;
pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posición social económica, lo que se paga por
estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos
57
tenido para insertar las palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution
like the College of Medicine of the University of Santo Tomas. Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one
of the reasons Congress inserted the phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an educational
58
institution. However, it is applicable to charitable institutions because Senator
Cuenco's response shows an intent to focus on the activities of charitable institutions.
Activities for profit should not escape the reach of taxation. Being a non-stock and
non-profit corporation does not, by this reason alone, completely exempt an institution
from tax. An institution cannot use its corporate form to prevent its profitable activities
from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if
it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section
27(B).
A tax exemption is effectively a social subsidy granted by the State because an
exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social welfare. A
profit-making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.1âwphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-
profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of
its profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is "a corporation for purely charitable
60
and social welfare purposes"59 and thus exempt from income tax. In Michael J.
61
Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that "good faith
and honest belief that one is not subject to tax on the basis of previous interpretation
of government agencies tasked to implement the tax law, are sufficient justification to
62
delete the imposition of surcharges and interest."
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909 is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc
dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No.
6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the
deficiency income tax in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution of
the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section 1, Rule 45 of the Rules of Court.
SO ORDERED.
G.R. No. 196596 G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R.
COMMISSIONER OF INTERNAL REVENUE, Petitioner
No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed by
vs.
DLSU to also challenge CTA Case No. 7303.
DE LA SALLE UNIVERSITY, INC., Respondent

The Factual Antecedents

x-----------------------x

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
G.R. No. 198841
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's books
of accounts and other accounting records for all internal revenue taxes for the
5
DE LA SALLE UNIVERSITY INC., Petitioner, period Fiscal Year Ending 2003 and Unverified Prior Years.
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent. 6
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.

x-----------------------x
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
G.R. No. 198941 earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAI) on business income; and (3) documentary stamp tax
(DSI) on loans and lease contracts. The BIR demanded the payment
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years
vs. 7
2001, 2002 and 2003.
DE LA SALLE UNIVERSITY, INC., Respondent.

DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DECISION 8
DLSU filed on August 3, 2005 a petition for review with the CTA Division.

BRION, J.:
1
Before the Court are consolidated petitions for review on certiorari:
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to
assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of
2
Tax Appeals (CTA) in En Banc Case No. 622;
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8,
3
2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671; and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and
4
October 4, 2011 resolution in CTA En Banc Case No. 671.
DLSU, a non-stock, non-profit educational institution, principally anchored its petition
on Article XIV, Section 4 (3)of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The
dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total
amount due computed from September 30, 2004 until full payment thereof pursuant to
Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner] were excluded, there being no compromise
agreement between the parties.
9 cancelled Ateneo's tax assessment; and (3) the CTA Division erred in finding that
SO ORDERED.
Both the Commissioner and DLSU moved for the reconsideration of the January 5,
10
2010 decision. On April 6, 2010, the CTA Division denied the Commissioner's motion
for reconsideration while it held in abeyance the resolution on DLSU's motion for
11
reconsideration.
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption
12
coverage under the Constitution.
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used actually, directly and
13
exclusively for educational purposes. The Commissioner did not promptly object to
14
the formal offer of supplemental evidence despite notice.
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
reduced the amount of DLSU's tax deficiencies. The dispositive portion of
the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and
DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted
amount of ₱5,506,456.71 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on
the ... basic deficiency taxes ... until full payment thereof pursuant to Section 249(B) of
the [National Internal Revenue Code] ... xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on
the deficiency taxes, surcharge and deficiency interest which have accrued ... from
15
September 30, 2004 until fully paid.
Consequently, the Commissioner supplemented its petition with the CTA En Banc and
16
argued that the CTA Division erred in admitting DLSU's additional evidence.
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition
for review with the CTA En Banc (CTA En Banc Case No. 671) on the following
grounds: (1) the entire assessment should have been cancelled because it was based
on an invalid LOA; (2) assuming the LOA was valid, the CTA Division should still have
cancelled the entire assessment because DLSU submitted evidence similar to those
submitted by Ateneo De Manila University (Ateneo) in a separate case where the CTA
17
a portion of DLSU's rental income was not proved to have been used actually, directly
18
and exclusively for educational purposes.
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review and sustained the
19
findings of the CTA Division.
Tax on rental income
Relying on the findings of the court-commissioned Independent Certified Public
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove
that a portion of the assessed rental income was used actually, directly and
20
exclusively for educational purposes; hence, exempt from tax. The CTA En
Banc was satisfied with DLSU's supporting evidence confirming that part of its rental
income had indeed been used to pay the loan it obtained to build the university's
21
Physical Education – Sports Complex.
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually, directly
and exclusively used for educational purposes, must be subjected to income tax and
22
VAT.
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU froved its remittance of the DST
23
due on its loan and mortgage documents. The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on the documents
made by a DST imprinting machine, which is allowed under Section 200 (D) of the
24
National Internal Revenue Code (Tax Code) and Section 2 of Revenue Regulations
25
(RR) No. 15-2001.
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary evidence were
admissible even if DLSU formally offered them only when it moved for reconsideration
of the CTA Division's original decision. Notably, the law creating the CTA provides that
proceedings before it shall not be governed strictly by the technical rules of
26
evidence.
The Commissioner moved but failed to obtain a reconsideration of the CTA En
27
Banc's December 10, 2010 decision. Thus, she came to this court for relief through a
petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further reduced its
28
tax liabilities to ₱2,554,825.47inclusive of surcharge.
On the validity of the Letter of Authority
29
The issue of the LOA' s validity was raised during trial; hence, the issue was deemed
properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
period and that the practice of issuing a LOA covering audit of unverified prior years is
30
prohibited. The prohibition is consistent with Revenue Memorandum Order (RMO)
No. 43-90, which provides that if the audit includes more than one taxable period, the
31
other periods or years shall be specifically indicated in the LOA.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
DST for taxable years 2001 and 2002 are void, but the assessment for taxable
32
year 2003 is valid.
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence,
33
and defenses.
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It
held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the Sports
Complex, the rental income from other sources were not shown to have been actually,
34
directly and exclusively used for educational purposes.
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is derived, used
35
or disposed of. DLSU's operations of canteens and bookstores within its campus
even though exclusively serving the university community do not negate income tax
36
liability.
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be
37
subject to tax imposed by this Code.
The Commissioner argues that the CTA En Banc misread and misapplied the case
38
of Commissioner of Internal Revenue v. YMCA to support its conclusion that
revenues however generated are covered by the constitutional exemption, provided
that, the revenues will be used for educational purposes or will be held in reserve for
39
such purposes.
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals earned from
40
property. Thus, DLSU's income from the leases of its real properties is not exempt
41
from taxation even if the income would be used for educational purposes.
Second, the Commissioner insists that DLSU did not prove the fact of DST
42
payment and that it is not qualified to use the On-Line Electronic DST Imprinting
Machine, which is available only to certain classes of taxpayers under RR No. 9-
43
2000.
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of
evidence. The belated submission of supplemental evidence reopened the case for
trial, and worse, DLSU offered the supplemental evidence only after it received the
44
unfavorable CTA Division's original decision. In any case, DLSU's submission of
supplemental documentary evidence was unnecessary since its rental income was
45
taxable regardless of its disposition.
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
46
assessment issued based on such defective LOA must also be void.
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002
47
and 2003. DLSU objects to the CTA En Banc's conclusion that the LOA is valid for
taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since
the LOA issued to DLSU follows this format, then any assessment arising from it must
48
be entirely voided.
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for
similarly situated parties, the same set of evidence should be appreciated and
49
weighed in the same manner. The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo,
50
also a non-stock, non-profit educational institution.
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
are exactly the same as those she raised in her: (1) petition docketed as G.R. No.
51
196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.
Counter-arguments
DLSU's Comment on G.R. No. 196596
52
First, DLSU questions the defective verification attached to the petition.
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes and
53
duties.
On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
54
the 1997 Tax Code cannot amend the 1987 Constitution; (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with
the addition of non-stock, non-profit educational institutions to the list of tax-exempt
entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special tax
treatment on income of private educational institutions only emanates from
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption from
tax of all the assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes, was expressly and
55
categorically enshrined.
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
56
effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income
of whatever kind and character of a non-stock and non-profit educational institution
from any of its properties, real or personal, or from any of its activities conducted for
profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues
and assets of non-stock, non-profit educational institutions used actually, directly, and
57
exclusively for educational purposes."
DLSU further submits that it complies with the requirements enunciated in
the YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3) of
the Constitution, the taxpayer must prove 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
58
purposes. Unlike YMCA, which is not an educational institution, DLSU is
undisputedly a non-stock, non-profit educational institution. It had also submitted
evidence to prove that it actually, directly and exclusively used its income for II. Whether the entire assessment should be voided because of the
59
educational purposes. defective LOA;

DLSU also cites the deliberations of the 1986 Constitutional Commission where they III. Whether the CTA correctly admitted DLSU's supplemental pieces of
recognized that the tax exemption was granted "to incentivize private educational evidence; and
60
institutions to share with the State the responsibility of educating the youth."
IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence
Third, DLSU highlights that both the CTA En Banc and Division found that the bank may be disturbed by the Court.
that handled DLSU' s loan and mortgage transactions had remitted to the BIR the DST
61
through an imprinting machine, a method allowed under RR No. 15-2001. In any
Our Ruling
case, DLSU argues that it cannot be held liable for DST owing to the exemption
62
granted under the Constitution.
As we explain in full below, we rule that:
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the
formal offer of supplemental evidence. Because of the Commissioner's failure to timely I. The income, revenues and assets of non-stock, non-profit educational
object, she became bound by the results of the submission of such supplemental institutions proved to have been used actually, directly and exclusively for
63
evidence. educational purposes are exempt from duties and taxes.

The CIR's Comment on G.R. No. 198841 II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
The Commissioner submits that DLSU is estopped from questioning the LOA's validity
because it failed to raise this issue in both the administrative and judicial III. The CTA correctly admitted DLSU's formal offer of supplemental
64
proceedings. That it was asked on cross-examination during the trial does not make evidence; and
65
it an issue that the CTA could resolve. The Commissioner also maintains that
DLSU's rental income is not tax-exempt because an educational institution is only
exempt from property tax but not from tax on the income earned from the property.
66 IV. The CTA's appreciation of evidence is conclusive unless the CTA is
shown to have manifestly overlooked certain relevant facts not disputed by
the parties and which, if properly considered, would justify a different
DLSU's Comment on G.R. No. 198941 conclusion.

67
DLSU puts forward the same counter-arguments discussed above. In addition, The parties failed to convince the Court that the CTA overlooked or failed to consider
DLSU prays that the Court award attorney's fees in its favor because it was relevant facts. We thus sustain the CTA En Banc's findings that:
68
constrained to unnecessarily retain the services of counsel in this separate petition.
a. DLSU proved that a portion of its rental income was used actually,
Issues directly and exclusively for educational purposes; and

Although the parties raised a number of issues, the Court shall decide only the pivotal b. DLSU proved the payment of the DST through its bank's on-line
issues, which we summarize as follows: imprinting machine.

I. Whether DLSU' s income and revenues proved to have been used I. The revenues and assets of non-stock,
actually, directly and exclusively for educational purposes are exempt from non-profit educational institutions
duties and taxes; proved to have been used actually,
directly, and exclusively for educational The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
purposes are exempt from duties and 30 (H) of the Tax Code. The relevant text reads:
taxes.
The following organizations shall not be taxed under this Title [Tax on
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
Income] in respect to income received by them as such:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
xxxx
purposes shall be exempt from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets shall be disposed of in the
manner provided by law. (H) A non-stock and non-profit educational institution

Proprietary educational institutions, including those cooperatively owned, may xxxx

likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and provisions for
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
reinvestment. [underscoring and emphasis supplied]
kind and character of the foregoing organizations from any of their properties, real
or personal, or from any of their activities conducted for
Before fully discussing the merits of the case, we observe that: profit regardless of the disposition made of such income shall be subject to tax
imposed under this Code. [underscoring and emphasis supplied]
First, the constitutional provision refers to two kinds of educational institutions: (1) non-
69
stock, non-profit educational institutions and (2) proprietary educational institutions. The Commissioner posits that the 1997 Tax Code qualified the tax exemption granted
to non-stock, non-profit educational institutions such that the revenues and income
they derived from their assets, or from any of their activities conducted for profit, are
Second, DLSU falls under the first category. Even the Commissioner admits the status
70 taxable even if these revenues and income are used for educational purposes.
of DLSU as a non-stock, non-profit educational institution.

Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-stock,
Third, while DLSU's claim for tax exemption arises from and is based on the
non-profit educational institutions?
Constitution, the Constitution, in the same provision, also imposes certain conditions
to avail of the exemption. We discuss below the import of the constitutional text vis-a-
vis the Commissioner's counter-arguments. We answer in the negative.

Fourth, there is a marked distinction between the treatment of non-stock, non-profit
educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational institutions,
these exemptions may be subject to limitations imposed by Congress.
As we explain below, the marked distinction between a non-stock, non-profit and a
proprietary educational institution is crucial in determining the nature and extent of the
tax exemption granted to non-stock, non-profit educational institutions.
71
While the present petition appears to be a case of first impression, the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property
owned by the YMCA, established as a "welfare, educational and charitable non-profit
72
corporation," was subject to income tax under the Tax Code and the Constitution.
The Court denied YMCA's claim for exemption on the ground that as a charitable
73
institution falling under Article VI, Section 28 (3) of the Constitution, the YMCA is
not tax-exempt per se; " what is exempted is not the institution itself... those on the actual, direct and exclusive use of
78
exempted from real estate taxes are lands, buildings and improvements actually, their assets, revenues and income for
74
directly and exclusively used for religious, charitable or educational purposes." educational purposes.

The Court held that the exemption claimed by the YMCA is expressly disallowed by
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties, real or
personal, are subject to the same tax imposed by the Tax Code, regardless of how
that income is used. The Court ruled that the last paragraph of Section 27
75
unequivocally subjects to tax the rent income of the YMCA from its property.
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked
the tax privilege granted under Article XIV, Section 4 (3) of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws granting
tax exemptions, refers to the school system (synonymous with formal education); it
includes a college or an educational establishment; it refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal
76
school system.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit
cemeteries), which exempts from tax only the assets,
i.e., "all lands, buildings, and improvements, actually, directly, and exclusively used
for religious, charitable, or educational purposes ... ," Article XIV, Section 4
(3) categorically states that "[a]ll revenues and assets ... used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible from
79
the records of the 1986 Constitutional Commission to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of their role in assisting the
State provide a public good. The tax exemption was seen as beneficial to students
who may otherwise be charged unreasonable tuition fees if not for the tax exemption
extended to all revenues and assets of non-stock, non-profit educational
80
institutions.

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3)
The Court then significantly laid down the requisites for availing the tax exemption
does not require that the revenues and income must have also been sourced from
under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the
educational activities or activities related to the purposes of an educational institution.
classification non-stock, non-profit educational institution; and (2) the income it
The phrase all revenues is unqualified by any reference to the source of revenues.
seeks to be exempted from taxation is used actually, directly and exclusively for
77 Thus, so long as the revenues and income are used actually, directly and exclusively
educational purposes.
for educational purposes, then said revenues and income shall be exempt from taxes
81
and duties.
We now adopt YMCA as precedent and hold that:
We find it helpful to discuss at this point the taxation of revenues versus the taxation
1. The last paragraph of Section 30 of the Tax Code is without force and effect with of assets.
respect to non-stock, non-profit educational institutions, provided, that the non-stock,
non-profit educational institutions prove that its assets and revenues are used actually,
Revenues consist of the amounts earned by a person or entity from the conduct of
directly and exclusively for educational purposes. 82
business operations. It may refer to the sale of goods, rendition of services, or the
return of an investment. Revenue is a component of the tax base in income
83 84 85
2. The tax-exemption constitutionally-granted to non-stock, non-profit educational tax, VAT, and local business tax (LBT).
institutions, is not subject to limitations imposed by law.
Assets, on the other hand, are the tangible and intangible properties owned by a
86
The tax exemption granted by the person or entity. It may refer to real estate, cash deposit in a bank, investment in the
Constitution to non-stock, non-profit stocks of a corporation, inventory of goods, or any property from which the person or
educational institutions is conditioned only entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property The crucial point of inquiry then is on the use of the assets or on the use of the
87
tax (RPT). Also, the landed cost of imported goods is a component of the tax base in revenues. These are two things that must be viewed and treated separately. But so
88 89
VAT on importation and tariff duties. long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.
Thus, when a non-stock, non-profit educational institution proves that it uses
its revenues actually, directly, and exclusively for educational purposes, it shall be The tax exemption granted by the
exempted from income tax, VAT, and LBT. On the other hand, when it also shows that Constitution to non-stock, non-profit
it uses its assets in the form of real property for educational purposes, it shall be educational institutions, unlike the exemption
exempted from RPT. that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.
To be clear, proving the actual use of the taxable item will result in an exemption, but
the specific tax from which the entity shall be exempted from shall depend on whether
the item is an item of revenue or asset. That the Constitution treats non-stock, non-profit educational institutions differently
from proprietary educational institutions cannot be doubted. As discussed, the
privilege granted to the former is conditioned only on the actual, direct and exclusive
To illustrate, if a university leases a portion of its school building to a bookstore or
use of their revenues and assets for educational purposes. In clear contrast, the tax
cafeteria, the leased portion is not actually, directly and exclusively used for
privilege granted to the latter may be subject to limitations imposed by law.
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff.
We spell out below the difference in treatment if only to highlight the privileged status
of non-stock, non-profit educational institutions compared with their proprietary
The leased portion of the building may be subject to real property tax, as held in Abra
90 counterparts.
Valley College, Inc. v. Aquino. We ruled in that case that the test of exemption from
taxation is the use of the property for purposes mentioned in the Constitution. We also
held that the exemption extends to facilities which are incidental to and reasonably While a non-stock, non-profit educational institution is classified as a tax-exempt entity
necessary for the accomplishment of the main purposes. under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations).
In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the
91
Constitution. There is no exemption because the asset is not used actually, directly To be specific, Section 30 provides that exempt organizations like non-stock, non-
and exclusively for educational purposes. The commercial use of the property is profit educational institutions shall not be taxed on income received by them as such.
also not incidental to and reasonably necessary for the accomplishment of the main
purpose of a university, which is to educate its students.
Section 27 (B), on the other hand, states that "[p]roprietary educational institutions ...
which are nonprofit shall pay a tax of ten percent (10%) on their taxable income .. .
However, if the university actually, directly and exclusively uses for educational Provided, that if the gross income from unrelated trade, business or other activity
purposes the revenues earned from the lease of its school building, such revenues exceeds fifty percent (50%) of the total gross income derived by such educational
shall be exempt from taxes and duties. The tax exemption no longer hinges on the use institutions ... [the regular corporate income tax of 30%] shall be imposed on the entire
92
of the asset from which the revenues were earned, but on the actual, direct and taxable income ... "
exclusive use of the revenues for educational purposes.
By the Tax Code's clear terms, a proprietary educational institution is entitled only to
Parenthetically, income and revenues of non-stock, non-profit educational the reduced rate of 10% corporate income tax. The reduced rate is applicable only if:
institution not used actually, directly and exclusively for educational purposes are not (1) the proprietary educational institution is nonprofit and (2) its gross income from
exempt from duties and taxes. To avail of the exemption, the taxpayer must factually unrelated trade, business or activity does not exceed 50% of its total gross income.
prove that it used actually, directly and exclusively for educational purposes the
revenues or income sought to be exempted.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do not The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which
apply to non-stock, non-profit educational institutions. reads:

Thus, we declare the last paragraph of Section 30 of the Tax Code without force and 3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable
effect for being contrary to the Constitution insofar as it subjects to tax the income and year. The practice of issuing [LO As] covering audit of unverified prior years is hereby
revenues of non-stock, non-profit educational institutions used actually, directly and prohibited. If the audit of a taxpayer shall include more than one taxable period, the
98
exclusively for educational purpose. We make this declaration in the exercise of and other periods or years shall be specifically indicated in the [LOA].
93 94
consistent with our duty to uphold the primacy of the Constitution.
What this provision clearly prohibits is the practice of issuing LOAs covering audit
Finally, we stress that our holding here pertains only to non-stock, non-profit of unverified prior years. RMO 43-90 does not say that a LOA which contains
educational institutions and does not cover the other exempt organizations under unverified prior years is void. It merely prescribes that if the audit includes more than
Section 30 of the Tax Code. one taxable period, the other periods or years must be specified. The provision read
as a whole requires that if a taxpayer is audited for more than one taxable year, the
BIR must specify each taxable year or taxable period on separate LOAs.
For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes. Read in this light, the requirement to specify the taxable period covered by the LOA is
simply to inform the taxpayer of the extent of the audit and the scope of the revenue
officer's authority. Without this rule, a revenue officer can unduly burden the taxpayer
II. The LOA issued to DLSU is
by demanding random accounting records from random unverified years, which may
not entirely void. The 99
include documents from as far back as ten years in cases of fraud audit.
assessment for taxable year
2003 is valid.
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because it
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year
includes unverified prior years. This does not mean, however, that the entire LOA is
2003 and insists that the entire LOA should be voided for being contrary to RMO No.
void.
43-90, which provides that if tax audit includes more than one taxable period, the other
periods or years shall be specifically indicated in the LOA.
As the CTA correctly held, the assessment for taxable year 2003 is valid because this
taxable period is specified in the LOA. DLSU was fully apprised that it was being
A LOA is the authority given to the appropriate revenue officer to examine the books
audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and
of account and other accounting records of the taxpayer in order to determine the
95 2002 are void for having been unspecified on separate LOAs as required under RMO
taxpayer's correct internal revenue liabilities and for the purpose of collecting the
96 No. 43-90.
correct amount of tax, in accordance with Section 5 of the Tax Code, which gives the
CIR the power to obtain information, to summon/examine, and take testimony of
97
persons. The LOA commences the audit process and informs the taxpayer that it is Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s
under audit for possible deficiency tax assessment. validity at the CTA Division, and thus, should not have been entertained on appeal, is
not accurate.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency On the contrary, the CTA En Banc found that the issue of the LOA's validity came up
100
for taxable year 2003? during the trial. DLSU then raised the issue in its memorandum and motion for
partial reconsideration with the CTA Division. DLSU raised it again on appeal to the
CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
We answer in the negative. 101
LOA. Besides, the Commissioner had the opportunity to argue for the validity of the
LOA at the CTA En Banc but she chose not to file her comment and memorandum
102
despite notice.
III.The CTA correctly admitted Notably, this Court had in the past admitted and considered evidence attached to the
the supplemental evidence taxpayers' motion for reconsideration.1âwphi1
formally offered by DLSU.
109
In the case of BPI-Family Savings Bank v. Court of Appeals, the tax refund claimant
The Commissioner objects to the CTA Division's admission of DLSU's supplemental attached to its motion for reconsideration with the CT A its Final Adjustment
pieces of documentary evidence. Return. The Commissioner, as in the present case, did not oppose the taxpayer's
110
motion for reconsideration and the admission of the Final Adjustment Return. We
thus admitted and gave weight to the Final Adjustment Return although it was only
To recall, DLSU formally offered its supplemental evidence upon filing its motion for
103 submitted upon motion for reconsideration.
reconsideration with the CTA Division. The CTA Division admitted the supplemental
evidence, which proved that a portion of DLSU's rental income was used actually,
directly and exclusively for educational purposes. Consequently, the CTA Division We held that while it is true that strict procedural rules generally frown upon the
reduced DLSU's tax liabilities. submission of documents after the trial, the law creating the CTA specifically provides
that proceedings before it shall not be governed strictly by the technical rules of
111
evidence and that the paramount consideration remains the ascertainment of truth.
We uphold the CTA Division's admission of the supplemental evidence on distinct but
We ruled that procedural rules should not bar courts from considering undisputed
mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the 112
facts to arrive at a just determination of a controversy.
formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the
technical rules of evidence.
We applied the same reasoning in the subsequent cases of Filinvest Development
113
Corporation v. Commissioner of Internal Revenue and Commissioner of Internal
First, the failure to object to the offered evidence renders it admissible, and the court 114
104 Revenue v. PERF Realty Corporation, where the taxpayers also submitted the
cannot, on its own, disregard such evidence.
supplemental supporting document only upon filing their motions for reconsideration.

The Court has held that if a party desires the court to reject the evidence offered, it
Although the cited cases involved claims for tax refunds, we also dispense with the
must so state in the form of a timely objection and it cannot raise the objection to the
105 strict application of the technical rules of evidence in the present tax assessment case.
evidence for the first time on appeal. Because of a party's failure to timely object,
If anything, the liberal application of the rules assumes greater force and significance
the evidence offered becomes part of the evidence in the case. As a consequence, all
in the case of a taxpayer who claims a constitutionally granted tax exemption. While
the parties are considered bound by any outcome arising from the offer of evidence
106 the taxpayers in the cited cases claimed refund of excess tax payments based on the
properly presented. 115
Tax Code, DLSU is claiming tax exemption based on the Constitution. If liberality is
afforded to taxpayers who paid more than they should have under a statute, then with
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal more reason that we should allow a taxpayer to prove its exemption from tax based on
107
offer of evidence despite notice. The Commissioner objected to the admission of the the Constitution.
supplemental evidence only when the case was on appeal to the CTA En Banc. By
the time the Commissioner raised her objection, it was too late; the formal offer,
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not
admission and evaluation of the supplemental evidence were all fait accompli.
only because the Commissioner failed to promptly object, but more so because the
strict application of the technical rules of evidence may defeat the intent of the
We clarify that while the Commissioner's failure to promptly object had no bearing on Constitution.
the materiality or sufficiency of the supplemental evidence admitted, she was bound
108
by the outcome of the CTA Division's assessment of the evidence.
IV. The CTA's appreciation of
evidence is generally binding on
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA the Court unless compelling
Division's admission of the formal offer of supplemental evidence, without prompt reasons justify otherwise.
objection from the Commissioner, was thus justified.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has developed an expertise on the subject, unless there
116
has been an abuse or improvident exercise of authority. We thus accord
the findings of fact by the CTA with the highest respect. These findings of facts can
only be disturbed on appeal if they are not supported by substantial evidence or there
is a showing of gross error or abuse on the part of the CTA. In the absence of any
clear and convincing proof to the contrary, this Court must presume that the CTA
117
rendered a decision which is valid in every respect.
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU
had used actually, directly and exclusively for educational purposes a portion of its
assessed income and that it had remitted the DST payments though an online
imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of
its assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken,
from which it deduced that DLSU successfully proved that it used actually, directly and
exclusively for educational purposes a portion of its rental income.
The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of receipts,
118
statement of disbursement and fund balance and statement of fund changes.
119
These documents showed that DLSU borrowed ₱93.86 Million, which was used to
build the university's Sports Complex. Based on these pieces of evidence, the CTA
found that DLSU' s rental income from its concessionaires were indeed transmitted
and used for the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct and exclusive
use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which
120
were allegedly deposited to a fund (CF-CPA Account), intended for the university's
capital projects, was not proved to have been used actually, directly and
exclusively for educational purposes. The CTA observed that "[DLSU] ... failed to
fully account for and substantiate all the disbursements from the [fund]." Thus, the
CTA "cannot ascertain whether rental income from the [other] concessionaires was
121
indeed used for educational purposes."
To stress, the CTA's factual findings were based on and supported by the report of the
Independent CPA who reviewed, audited and examined the voluminous documents
submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a)
examination and verification of receipts, invoices, vouchers and other long accounts;
(b) reproduction of, and comparison of such reproduction with, and certification that
the same are faithful copies of original documents, and pre-marking of documentary
exhibits consisting of voluminous documents; (c) preparation of schedules or
summaries containing a chronological listing of the numbers, dates and amounts
covered by receipts or invoices or other relevant documents and the amount(s) of
taxes paid; (d) making findings as to compliance with substantiation
requirements under pertinent tax laws, regulations and jurisprudence; (e)
submission of a formal report with certification of authenticity and veracity of findings
and conclusions in the performance of the audit; (f) testifying on such formal report;
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and (g) performing such other functions as the CTA may direct.
Based on the Independent CPA's report and on its own appreciation of the evidence,
the CTA held that only the portion of the rental income pertaining to the substantiated
disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-CPA Account was
considered as used actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements must be
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subjected to income tax and VAT.
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
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taxable years 2001 and 2002 due to the defective LOA.
The Court finds that the above fact-finding process undertaken by the CTA shows that
it based its ruling on the evidence on record, which we reiterate, were examined and
verified by the Independent CPA. Thus, we see no persuasive reason to deviate from
these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean
that we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU' s unsubstantiated rental
income (i.e., income not proved to have been actually, directly and exclusively used
for educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in
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taxable year 2003. DLSU earned this income from leasing a portion of its premises
to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5)
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Capri International, and 6) MTO Bookstore.
To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was
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expended, viz.: 1) ₱4,007,724.00 used to pay the loan obtained by DLSU to build
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the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account.
DLSU also submitted documents to the Independent CPA to prove that the
₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA' findings,
DLSU was able to substantiate disbursements from the CF-CPA Account amounting
to ₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus,
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subject to income tax and VAT.
The CTA then concluded that the ratio of substantiated disbursements to the total
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disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%. The
CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp.,
Capri International and MTO Bookstore, which were transmitted to the CF-CPA
Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental income
derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the
disbursements from the CF-CPA Account for fiscal year 2003 amounts to
₱6,259,078.30 only. Hence, this portion of the rental income, being the substantiated
disbursements of the CF-CPA Account, was considered by the Special First Division
as used actually, directly and exclusively for educational purposes. Since for fiscal
year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-25-C"),
and the total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit
"LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with
the total rent income added to and used in the CF-CPA Account in the amount of
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₱6,602,655.00 is ₱1,761,588.35. (emphasis supplied)
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports Complex
(₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the
abovementioned concessionaries. The difference (₱6,602,655.00) was the portion
claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed
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unsubstantiated portion of the rental income (₱4,841,066.65).
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3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37) was derived
by multiplying the rental income claimed to have been added to the CF-CPA Account
(₱6,602,655.00) by 26.68% or the ratio of substantiated disbursements to total
disbursements (₱23,463,543.02).
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4. The 26.68% ratio was the result of dividing the substantiated disbursements from
the CF-CPA Account as found by the Independent CPA (₱6,259,078.30) by the total
disbursements (₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to the
constitutional grant of tax exemption to non-stock, non-profit educational institutions.
The CTA's reasoning is flawed because it required DLSU to substantiate an amount
that is greater than the rental income deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the proceeds
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of its rental income (which amounted to a total of ₱10.61 million) were used for
educational purposes. This amount was divided into two parts: (a) the ₱4.0l million,
which was used to pay the loan obtained for the construction of the Sports Complex;
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and (b) the ₱6.60 million, which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
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million. These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of ₱23.46
million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements of
₱23.46 million had been for educational purposes and should thus be tax-exempt;
DLSU only claimed ₱10.61 million for tax-exemption and should thus be required to
prove that this amount had been used as claimed.
Of this amount, ₱4.01 had been proven to have been used for educational purposes,
as confirmed by the Independent CPA. The amount in issue is therefore the balance
of ₱6.60 million which was transferred to the CF-CPA which in turn made
disbursements of ₱23.46 million for various general purposes, among them the ₱6.60
million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements
Less: Rent income used in construction of the 4,007,724.00 4,007,724.00
for educational purposes in year 2003 in the amount ₱6.26 million. Based on these
given figures, the CT A concluded that the expenses for educational purposes that Sports Complex
had been coursed through the CF-CPA should be prorated so that only the portion
that ₱6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.
Rental income deposited to the CF-CPA Account 6,602,655.00 6,602,655.00
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt.
As already mentioned above, DLSU is not claiming that the whole ₱23.46 million CF-
CPA disbursement had been used for educational purposes; it only claims that ₱6.60 Less: Substantiated portion of CF-CPA 1,761,588.35 6,259,078.30
million transferred to CF-CPA had been used for educational purposes. This was what disbursements
DLSU needed to prove to have actually and directly used for educational purposes.

That this fund had been first deposited into a separate fund (the CF -CPA established
to fund capital projects) lends peculiarity to the facts of this case, but does not detract
from the fact that the deposited funds were DLSU revenue funds that had been
confirmed and proven to have been actually and directly used for educational
purposes via the CF-CPA. That the CF-CPA might have had other sources of funding
is irrelevant because the assessment in the present case pertains only to the rental
income which DLSU indisputably earned as revenue in 2003. That the proven CF-
CPA funds used for educational purposes should not be prorated as part of its total
CF-CPA disbursements for purposes of crediting to DLSU is also logical because no
claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious,
exemption is based on actual and direct use and this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the
difference between what it claimed and what it has proven. In more concrete terms,
DLSU only had to prove that its rental income for taxable year 2003 (₱10,610,379.00)
was used for educational purposes. Hence, while the total disbursements from the CF-
CPA Account amounted to ₱23,463,543.02, DLSU only had to substantiate its Pl0.6
million rental income, part of which was the ₱6,602,655.00 transferred to the CF-CPA
account. Of this latter amount, ₱6.259 million was substantiated to have been used for
educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows:
Tax base for deficiency income tax and VAT 4,841,066.65 343.576.70
On DLSU' s argument that the CTA should have appreciated its evidence in the same
way as it did with the evidence submitted by Ateneo in another separate case, the
CTA explained that the issue in the Ateneo case was not the same as the issue in the
present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
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income taxes and VAT under certain BIR and Department of Finance issuances that
required the educational institution to own and operate the canteens, or other
commercial enterprises within its campus, as condition for tax exemption. The CTA
held that the Constitution does not require the educational institution to own or operate
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these commercial establishments to avail of the exemption.
Given the lack of complete identity of the issues involved, the CTA held that it had to
evaluate the separate sets of evidence differently. The CTA likewise stressed that
DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on
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its decision on two different cases with two different issues."
DLSU disagrees with the CTA and argues that the entire assessment must be
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo. We
reject DLSU's argument for being non sequitur. Its reliance on the concept of
uniformity of taxation is also incorrect.

CTA
138 First, even granting that Ateneo and DLSU submitted similar
Decision Revised
evidence, the sufficiency and materiality of the evidence supporting their respective
claims for tax exemption would necessarily differ because their attendant issues and
Rental income 10,610,379.00 10,610,379.00 facts differ.

To state the obvious, the amount of income received by DLSU and by Ateneo during
the taxable years they were assessed varied. The amount of tax assessment
also varied. The amount of income proven to have been used for educational
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purposes also varied because the amount substantiated varied. Thus, the amount
of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a
total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU was
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assessed deficiency DST, while Ateneo was not.
Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
evidence, e.g., the testimony of their employees on the use of university revenues, the
report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income
and revenues had indeed been used for educational purposes.
The CTA significantly found that some documents that could have fully supported
DLSU's claim were not produced in court. Indeed, the Independent CPA testified that
some disbursements had not been proven to have been used actually, directly and
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exclusively for educational purposes.
The final nail on the question of evidence is DLSU's own admission that the original of
these documents had not in fact been produced before the CTA although it claimed
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that there was no bad faith on its part. To our mind, this admission is a good
indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to
substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised
Rules on Evidence, that the contents of the missing supporting documents were
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proven by its recital in some other authentic documents on record, can no longer be
entertained at this late stage of the proceeding. The CTA did not rule on this particular
claim. The CTA also made no finding on DLSU' s assertion of lack of bad faith.
Besides, it is not our duty to go over these documents to test the truthfulness of their
contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.
Equality and uniformity of taxation means that all taxable articles or kinds of property
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of the same class shall be taxed at the same rate. A tax is uniform when it operates
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with the same force and effect in every place where the subject of it is found. The
concept requires that all subjects of taxation similarly situated should be treated alike
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and placed in equal footing.
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them
alike because their income proved to have been used actually, directly and exclusively
for educational purposes were exempted from taxes. The CTA equally applied the
requirements in the YMCA case to test if they indeed used their revenues for
educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes
its income and revenues, the CTA still affirmed the imposition of taxes. That the DLSU
secured a different result happened because it failed to fully prove that it used
actually, directly and exclusively for educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean
that subjects of taxation similarly situated are treated in literally the same way in all
and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-profit
educational institutions, does not mean that the CTA or this Court would similarly
decide every case for (or against) both universities. Success in tax litigation, like in
any other litigation, depends to a large extent on the sufficiency of evidence. DLSU's
evidence was wanting, thus, the CTA was correct in not fully cancelling its tax
liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank's On-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
method of payment because an educational institution is excluded from the class of
taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both
the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid
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for by the person making, signing, issuing, accepting, or transferring the same. The
Tax Code provides that whenever one party to the document enjoys exemption from
DST, the other party not exempt from DST shall be directly liable for the tax. Thus, it is
clear that DST shall be payable by any party to the document, such that the payment
and compliance by one shall mean the full settlement of the DST due on the
document.
In the present case, DLSU entered into mortgage and loan agreements with banks.
151
These agreements are subject to DST. For the purpose of showing that the DST on
the loan agreement has been paid, DLSU presented its agreements bearing the
imprint showing that DST on the document has been paid by the bank, its
counterparty. The imprint should be sufficient proof that DST has been paid. Thus,
DLSU cannot be further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the class of taxpayers
who can pay and remit DST through the On-Line Electronic DST Imprinting
Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant
because it was not DLSU who used the On-Line Electronic DST Imprinting
Machine but the bank that handled its mortgage and loan transactions. RR No. 9-2000
expressly includes banks in the class of taxpayers that can use the On-Line Electronic
DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the

payment of the assessed DST deficiency, except for the unpaid balance of

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₱13,265.48.

WHEREFORE, premises considered, we DENY the petition of the Commissioner of

Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La
Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841 and
the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of
Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION that
the base for the deficiency income tax and VAT for taxable year 2003 is ₱343,576.70.

SO ORDERED.