TAXATION CASES |1
1. Hilado vs CIR
[G.R. No. L-9408. October 31, 1956.]
EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS, Respondents.
DECISION
BAUTISTA ANGELO, J.:
On March 31, 1952, Petitioner filed his income tax return for 1951 with the
treasurer of Bacolod City wherein he claimed, among other things, the
amount of P12,837.65 as a deductible item from his gross income pursuant
to General Circular No. V-123 issued by the Collector of Internal Revenue.
This circular was issued pursuant to certain rules laid down by the
Secretary of Finance On the basis of said return, an assessment notice
demanding the payment of P9,419 was sent to Petitioner, who paid the tax
in monthly installments, the last payment having been made on January 2,
1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the
Collector of Internal Revenue, issued General Circular No. V-139 which not
only revoked and declared void his general Circular No. V- 123 but laid
down the rule that losses of property which occurred during the period of
World War II from fires, storms, shipwreck or other casualty, or from
robbery, theft, or embezzlement are deductible in the year of actual loss or
destruction of said property. As a consequence, the amount of P12,837.65
was disallowed as a deduction from the gross income of Petitioner for
1951 and the Collector of Internal Revenue demanded from him the
payment of the sum of P3,546 as deficiency income tax for said year. When
the petition for reconsideration filed by Petitioner was denied, he filed a
petition for review with the Court of Tax Appeals. In due time, this court
rendered decision affirming the assessment made by Respondent Collector
of Internal Revenue. This is an appeal from said decision.
It appears that Petitioner claimed in his 1951 income tax return the
deduction of the sum of P12,837.65 as a loss consisting in a portion of his
war damage claim which had been duly approved by the Philippine War
Damage Commission under the Philippine Rehabilitation Act of 1946 but
which was not paid and never has been paid pursuant to a notice served
upon him by said Commission that said part of his claim will not be paid
until the United States Congress should make further appropriation. He
claims that said amount of P12,837.65 represents a “business asset” within
the meaning of said Act which he is entitled to deduct as a loss in his return
for 1951. This claim is untenable.
To begin with, assuming that said a mount represents a portion of the 75%
of his war damage claim which was not paid, the same would not be
deductible as a loss in 1951 because, according to Petitioner, the last
installment he received from the War Damage Commission, together with
the notice that no further payment would be made on his claim, was in
1950. In the circumstance, said amount would at most be a proper
deduction from his 1950 gross income. In the second place, said amount
cannot be considered as a “business asset” which can be deducted as a loss
in contemplation of law because its collection is not enforceable as a
matter of right, but is dependent merely upon the generosity and
magnanimity of the U. S. government. Note that, as of the end of 1945,
there was absolutely no law under which Petitioner could claim
compensation for the destruction of his properties during the battle for the
liberation of the Philippines. And under the Philippine Rehabilitation Act of
1946, the payments of claims by the War Damage Commission merely
depended upon its discretion to be exercised in the manner it may see fit,
but the non-payment of which cannot give rise to any enforceable right,
for, under said Act, “All findings of the Commission concerning the amount
of loss or damage sustained, the cause of such loss or damage, the persons
to whom compensation pursuant to this title is payable, and the value of
the property lost or damaged, shall be conclusive and shall not be
reviewable by any court”. (section 113).
It is true that under the authority of section 338 of the National Internal
Revenue Code the Secretary of Finance, in the exercise of his
administrative powers, caused the issuance of General Circular No. V-123
as an implementation or interpretative regulation of section 30 of the same
Code, under which the amount of P12,837.65 was allowed to be deducted
“in the year the last installment was received with notice that no further
payment would be made until the United States Congress makes further
appropriation therefor”, but such circular was found later to be wrong and
was revoked. Thus, when doubts arose as to the soundness or validity of
such circular, the Secretary of Finance sought the advice of the Secretary of
Justice who, accordingly, gave his opinion the pertinent portion of which
reads as follows:chanroblesvirtuallawlibrary
“Yet it might be argued that war losses were not included as deductions for
the year when they were sustained because the taxpayers had prospects
that losses would be compensated for by the United States Government;
chan roblesvirtualawlibrarythat since only uncompensated losses are
deductible, they had to wait until after the determination by the Philippine
War Damage Commission as to the compensability in part or in whole of

their war losses so that they could exclude from the deductions those
compensated for by the said Commission; chan roblesvirtualawlibraryand
that, of necessity, such determination could be complete only much later
than in the year when the loss was sustained. This contention falls to the
ground when it is considered that the Philippine Rehabilitation Act which
authorized the payment by the United States Government of war losses
suffered by property owners in the Philippines was passed only on August
30, 1946, long after the losses were sustained. It cannot be said therefore,
that the property owners had any conclusive assurance during the years
said losses were sustained, that the compensation was to be paid therefor.
Whatever assurance they could have had, could have been based only on
some information less reliable and less conclusive than the passage of the
Act itself. Hence, as diligent property owners, they should adopt the safest
alternative by considering such losses deductible during the year when
they were sustained.”
In line with this opinion, the Secretary of Finance, through the Collector of
Internal Revenue, issued General Circular No. V-139 which not only
revoked and declared void his previous Circular No. V — 123 but laid
down the rule that losses of property which occurred during the period of
World War II from fires, storms, shipwreck or other casualty, or from
robbery, theft, or embezzlement are deductible for income tax purposes in
the year of actual destruction of said property. We can hardly argue
against this opinion. Since we have already stated that the amount claimed
does not represent a “business asset” that may be deducted as a loss in
1951, it is clear that the loss of the corresponding asset or property could
only be deducted in the year it was actually sustained. This is in line with
section 30 (d) of the National Internal Revenue Code which prescribes that
losses sustained are allowable as deduction only within the corresponding
taxable year.
Petitioner’s contention that during the last war and as a consequence of
enemy occupation in the Philippines “there was no taxable year” within the
meaning of our internal revenue laws because during that period they
were unenforceable, is without merit. It is well known that our internal
revenue laws are not political in nature and as such were continued in
force during the period of enemy occupation and in effect were actually
enforced by the occupation government. As a matter of fact, income tax
returns were filed during that period and income tax payment were
effected and considered valid and legal. Such tax laws are deemed to be the
laws of the occupied territory and not of the occupying enemy.
“Furthermore, it is a legal maxim, that excepting that of a political nature,
‘Law once established continues until changed by some competent
legislative power. It is not changed merely by change of sovereignty.’
TAXATION CASES |2
(Joseph H. Beale, Cases on Conflict of Laws, III, Summary section 9, citing
Commonwealth vs. Chapman, 13 Met., 68.) As the same author says, in his
Treatise on the Conflict of Laws (Cambridge, 1916, section
131):chanroblesvirtuallawlibrary ‘There can be no break or interregnun in
law. From the time the law comes into existence with the first-felt
corporateness of a primitive people it must last until the final
disappearance of human society. Once created, it persists until a change
takes place, and when changed it continues in such changed condition until
the next change and so forever. Conquest or colonization is impotent to
bring law to an end; chan roblesvirtualawlibraryinspite of change of
constitution, the law continues unchanged until the new sovereign by
legislative act creates a change.’“ (Co Kim Chan vs. Valdes Tan Keh and
Dizon, 75 Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General
Circular No. V-123 is vested exclusively in our courts in view of the
principle of separation of powers and, therefore, the Secretary of Finance
acted without valid authority in revoking it and approving in lieu thereof
General Circular No. V-139. It cannot be denied, however, that the
Secretary of Finance is vested with authority to revoke, repeal or abrogate
the acts or previous rulings of his predecessor in office because the
construction of a statute by those administering it is not binding on their
successors if thereafter the latter become satisfied that a different
construction should be given. [Association of Clerical Employees vs.
Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109 A.L.R.,
345.]
“When the Commissioner determined in 1937 that the Petitioner was not
exempt and never had been, it was his duty to determine, assess and
collect the tax due for all years not barred by the statutes of limitation. The
conclusion reached and announced by his predecessor in 1924 was not
binding upon him. It did not exempt the Petitioner from tax, This same
point was decided in this way in Stanford University Bookstore, 29 B. T. A.,
1280; chan roblesvirtualawlibraryaffd., 83 Fed. (2d) 710.” (Southern
Maryland Agricultural Fair Association vs. Commissioner of Internal
Revenue, 40 B. T. A., 549, 554).
With regard to the contention that General Circular No. V-139 cannot be
given retroactive effect because that would affect and obliterate the vested
right acquired by Petitioner under the previous circular, suffice it to say
that General Circular No. V-123, having been issued on a wrong
construction of the law, cannot give rise to a vested right that can be
invoked by a taxpayer. The reason is obvious:chanroblesvirtuallawlibrary
a vested right cannot spring from a wrong interpretation. This is too clear
to require elaboration.

“It seems too clear for serious argument that an administrative officer
cannot change a law enacted by Congress. A regulation that is merely an
interpretation of the statute when once determined to have been
erroneous becomes nullity. An erroneous construction of the law by the
Treasury Department or the collector of internal revenue does not
preclude or estop the government from collecting a tax which is legally
due.” (Ben Stocker, et al., 12 B. T. A., 1351.)
“Art. 2254. — No vested or acquired right can arise from acts or omissions
which are against the law or which infringe upon the rights of others.”
(Article 2254, New Civil Code.)
Wherefore, the decision appealed from is affirmed Without
pronouncement as to costs.
2. CIR vs. CA
G.R. No. 115349 April 18, 1997
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and ATENEO
DE MANILA UNIVERSITY, respondents.
PANGANIBAN, J.:
In conducting researches and studies of social organizations and cultural
values thru its Institute of Philippine Culture, is the Ateneo de Manila
University performing the work of an independent contractor and thus
taxable within the purview of then Section 205 of the National Internal
Revenue Code levying a three percent contractor's tax? This question is
answer by the Court in the negative as it resolves this petition assailing the
Decision 1 of the Respondent Court of Appeals 2 in CA-G.R. SP No. 31790
promulgated on April 27, 1994 affirming that of the Court of Tax Appeals. 3
The Antecedent Facts
The antecedents as found by the Court of Appeals are reproduced
hereinbelow, the same being largely undisputed by the parties.
Private respondent is a non-stock, non-profit
educational institution with auxiliary units and
branches all over the Philippines. One such auxiliary
TAXATION CASES |3
unit is the Institute of Philippine Culture (IPC), which
has no legal personality separate and distinct from that
of private respondent. The IPC is a Philippine unit
engaged in social science studies of Philippine society
and culture. Occasionally, it accepts sponsorships for its
research activities from international organizations,
private foundations and government agencies.
On July 8, 1983, private respondent received from
petitioner Commissioner of Internal Revenue a demand
letter dated June 3, 1983, assessing private respondent
the sum of P174,043.97 for alleged deficiency
contractor's tax, and an assessment dated June 27, 1983
in the sum of P1,141,837 for alleged deficiency income
tax, both for the fiscal year ended March 31, 1978.
Denying said tax liabilities, private respondent sent
petitioner a letter-protest and subsequently filed with
the latter a memorandum contesting the validity of the
assessments.
On March 17, 1988, petitioner rendered a letter-
decision canceling the assessment for deficiency income
tax but modifying the assessment for deficiency
contractor's tax by increasing the amount due to
P193,475.55. Unsatisfied, private respondent requested
for a reconsideration or reinvestigation of the modified
assessment. At the same time, it filed in the respondent
court a petition for review of the said letter-decision of
the petitioner. While the petition was pending before
the respondent court, petitioner issued a final decision
dated August 3, 1988 reducing the assessment for
deficiency contractor's tax from P193,475.55 to
P46,516.41, exclusive of surcharge and interest.
On July 12, 1993, the respondent court rendered the
questioned decision which dispositively reads:
WHEREFORE, in view of the
foregoing, respondent's decision is
SET ASIDE. The deficiency
contractor's tax assessment in the
amount of P46,516.41 exclusive of
surcharge and interest for the fiscal

year ended March 31, 1978 is hereby
CANCELED. No pronouncement as to
cost.
SO ORDERED.
Not in accord with said decision, petitioner has come to this
Court via the present petition for review raising the following
issues:
1) WHETHER OR NOT PRIVATE
RESPONDENT FALLS UNDER THE
PURVIEW OF INDEPENDENT
CONTRACTOR PURSUANT TO
SECTION 205 OF THE TAX CODE;
and
2) WHETHER OR NOT PRIVATE
RESPONDENT IS SUBJECT TO 3%
CONTRACTOR'S TAX UNDER
SECTION 205 OF THE TAX CODE.
The pertinent portions of Section 205 of the National Internal Revenue
Code, as amended, provide:
Sec. 205. Contractor, proprietors or operators of
dockyards, and others. — A contractor's tax of three per
centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other
independent contractors except
persons, associations and
corporations under contract for
embroidery and apparel for export,
as well as their agents and
contractors and except gross receipts
of or from a pioneer industry
registered with the Board of
TAXATION CASES |4
Investments under Republic Act No.
5186:
xxx xxx xxx
The term "independent contractors"
include persons (juridical or natural)
not enumerated above (but not
including individuals subject to the
occupation tax under Section 12 of
the Local Tax Code) whose activity
consists essentially of the sale of all
kinds of services for a fee regardless
of whether or not the performance of
the service calls for the exercise or
use of the physical or mental
faculties of such contractors or their
employees.
xxx xxx xxx
Petitioner contends that the respondent court erred in
holding that private respondent is not an "independent
contractor" within the purview of Section 205 of the Tax
Code. To petitioner, the term "independent contractor",
as defined by the Code, encompasses all kinds of
services rendered for a fee and that the only exceptions
are the following:
a. Persons, association and corporations under contract
for embroidery and apparel for export and gross
receipts of or from pioneer industry registered with the
Board of Investment under R.A. No. 5186;
b. Individuals occupation tax under Section 12 of the
Local Tax Code (under the old Section 182 [b] of the Tax
Code); and
c. Regional or area headquarters established in the
Philippines by multinational corporations, including
their alien executives, and which headquarters do not
earn or derive income from the Philippines and which

act as supervisory, communication and coordinating
centers for their affiliates, subsidiaries or branches in
the Asia Pacific Region (Section 205 of the Tax Code).
Petitioner thus submits that since private respondent
falls under the definition of an "independent contractor"
and is not among the aforementioned exceptions,
private respondent is therefore subject to the 3%
contractor's tax imposed under the same Code. 4
The Court of Appeals disagreed with the Petitioner Commissioner of
Internal Revenue and affirmed the assailed decision of the Court of Tax
Appeals. Unfazed, petitioner now asks us to reverse the CA through this
petition for review.
The Issues
Petitioner submits before us the following issues:
1) Whether or not private respondent falls under the
purview of independent contractor pursuant to Section
205 of the Tax Code.
2) Whether or not private respondent is subject to 3%
contractor's tax under Section 205 of the Tax Code. 5
In fine, these may be reduced to a single issue: Is Ateneo de Manila
University, through its auxiliary unit or branch — the Institute of
Philippine Culture — performing the work of an independent contractor
and, thus, subject to the three percent contractor's tax levied by then
Section 205 of the National Internal Revenue Code?
The Court's Ruling
The petition is unmeritorious.
Interpretation of Tax Laws
The parts of then Section 205 of the National Internal Revenue Code
germane to the case before us read:
TAXATION CASES |5
Sec. 205. Contractors, proprietors or operators of
dockyards, and others. — A contractor's tax of three per
centum of the gross receipts is hereby imposed on the
following:
xxx xxx xxx
(16) Business agents and other independent
contractors, except persons, associations and
corporations under contract for embroidery and
apparel for export, as well as their agents and
contractors, and except gross receipts of or from a
pioneer industry registered with the Board of
Investments under the provisions of Republic Act No.
5186;
xxx xxx xxx
The term "independent contractors" include persons
(juridical or natural) not enumerated above (but not
including individuals subject to the occupation tax
under Section 12 of the Local Tax Code) whose activity
consists essentially of the sale of all kinds of services for
a fee regardless of whether or not the performance of
the service calls for the exercise or use of the physical or
mental faculties of such contractors or their employees.
The term "independent contractor" shall not include
regional or area headquarters established in the
Philippines by multinational corporations, including
their alien executives, and which headquarters do not
earn or derive income from the Philippines and which
act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
The term "gross receipts" means all amounts received
by the prime or principal contractor as the total
contract price, undiminished by amount paid to the
subcontractor, shall be excluded from the taxable gross
receipts of the subcontractor.

Petitioner Commissioner of Internal Revenue contends that Private
Respondent Ateneo de Manila University "falls within the definition" of an
independent contractor and "is not one of those mentioned as excepted";
hence, it is properly a subject of the three percent contractor's tax levied
by the foregoing provision of law. 6 Petitioner states that the "term
'independent contractor' is not specifically defined so as to delimit the
scope thereof, so much so that any person who . . . renders physical and
mental service for a fee, is now indubitably considered an independent
contractor liable to 3% contractor's tax." 7 According to petitioner, Ateneo
has the burden of proof to show its exemption from the coverage of the law.
We disagree. Petitioner Commissioner of Internal Revenue erred in
applying the principles of tax exemption without first applying the well-
settled doctrine of strict interpretation in the imposition of taxes. It is
obviously both illogical and impractical to determine who are exempted
without first determining who are covered by the aforesaid provision. The
Commissioner should have determined first if private respondent was
covered by Section 205, applying the rule of strict interpretation of laws
imposing taxes and other burdens on the populace, before asking Ateneo
to prove its exemption therefrom. The Court takes this occasion to
reiterate the hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does so clearly,
expressly, and unambiguously . . . (A) tax cannot be imposed without clear
and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be
extended by implication." 8 Parenthetically, in answering the question of
who is subject to tax statutes, it is basic that "in case of doubt, such statutes
are to be construed most strongly against the government and in favor of
the subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly
import." 9
To fall under its coverage, Section 205 of the National Internal Revenue
Code requires that the independent contractor be engaged in the business
of selling its services. Hence, to impose the three percent contractor's tax
on Ateneo's Institute of Philippine Culture, it should be sufficiently proven
that the private respondent is indeed selling its services for a fee in pursuit
of an independent business. And it is only after private respondent has
been found clearly to be subject to the provisions of Sec. 205 that the
question of exemption therefrom would arise. Only after such coverage is
shown does the rule of construction — that tax exemptions are to be
strictly construed against the taxpayer — come into play, contrary to
TAXATION CASES |6
petitioner's position. This is the main line of reasoning of the Court of Tax
Appeals in its decision, 10 which was affirmed by the CA.
The Ateneo de Manila University Did Not Contract
for the Sale of the Service of its Institute of Philippine Culture
After reviewing the records of this case, we find no evidence that Ateneo's
Institute of Philippine Culture ever sold its services for a fee to anyone or
was ever engaged in a business apart from and independently of the
academic purposes of the university.
Stressing that "it is not the Ateneo de Manila University per se which is
being taxed," Petitioner Commissioner of Internal Revenue contends that
"the tax is due on its activity of conducting researches for a fee. The tax is due
on the gross receipts made in favor of IPC pursuant to the contracts the
latter entered to conduct researches for the benefit primarily of its clients.
The tax is imposed on the exercise of a taxable activity. . . . [T]he sale of
services of private respondent is made under a contract and the various
contracts entered into between private respondent and its clients are
almost of the same terms, showing, among others, the compensation and
terms of payment." 11 (Emphasis supplied.)
In theory, the Commissioner of Internal Revenue may be correct. However,
the records do not show that Ateneo's IPC in fact contracted to sell its
research services for a fee. Clearly then, as found by the Court of Appeals
and the Court of Tax Appeals, petitioner's theory is inapplicable to the
established factual milieu obtaining in the instant case.
In the first place, the petitioner has presented no evidence to prove its bare
contention that, indeed, contracts for sale of services were ever entered
into by the private respondent. As appropriately pointed out by the latter:
An examination of the Commissioner's Written Formal
Offer of Evidence in the Court of Tax Appeals shows that
only the following documentary evidence was
presented:
Exhibit 1 BIR letter of authority no. 331844
2 Examiner's Field
Audit Report

3 Adjustments to
Sales/Receipts
4 Letter-decision
of BIR
Commissioner
Bienvenido A. Tan
Jr.
None of the foregoing evidence even comes close to
purport to be contracts between private respondent
and third parties. 12
Moreover, the Court of Tax Appeals accurately and correctly declared that
the " funds received by the Ateneo de Manila University are technically not a
fee. They may however fall as gifts or donations which are tax-exempt" as
shown by private respondent's compliance with the requirement of
Section 123 of the National Internal Revenue Code providing for the
exemption of such gifts to an educational institution. 13
Respondent Court of Appeals elucidated on the ruling of the Court of Tax
Appeals:
To our mind, private respondent hardly fits into the
definition of an "independent contractor".
For one, the established facts show that IPC, as a unit of
the private respondent, is not engaged in business.
Undisputedly, private respondent is mandated by law to
undertake research activities to maintain its university
status. In fact, the research activities being carried out
by the IPC is focused not on business or profit but on
social sciences studies of Philippine society and culture.
Since it can only finance a limited number of IPC's
research projects, private respondent occasionally
accepts sponsorship for unfunded IPC research projects
from international organizations, private foundations
and governmental agencies. However, such sponsorships
are subject to private respondent's terms and conditions,
among which are, that the research is confined to topics
consistent with the private respondent's academic
agenda; that no proprietary or commercial purpose
TAXATION CASES |7
research is done; and that private respondent retains not
only the absolute right to publish but also the ownership
of the results of the research conducted by the IPC. Quite
clearly, the aforementioned terms and conditions belie
the allegation that private respondent is a contractor or
is engaged in business.
For another, it bears stressing that private respondent
is a non-stock, non-profit educational corporation. The
fact that it accepted sponsorship for IPC's unfunded
projects is merely incidental. For, the main function of
the IPC is to undertake research projects under the
academic agenda of the private respondent. Moreover
the records do not show that in accepting sponsorship
of research work, IPC realized profits from such work.
On the contrary, the evidence shows that for about 30
years, IPC had continuously operated at a loss, which
means that sponsored funds are less than actual
expenses for its research projects. That IPC has been
operating at a loss loudly bespeaks of the fact that
education and not profit is the motive for undertaking
the research projects.
Then, too, granting arguendo that IPC made profits from
the sponsored research projects, the fact still remains
that there is no proof that part of such earnings or
profits was ever distributed as dividends to any
stockholder, as in fact none was so distributed because
they accrued to the benefit of the private respondent
which is a non-profit educational institution. 14
Therefore, it is clear that the funds received by Ateneo's Institute of
Philippine Culture are not given in the concept of a fee or price in exchange
for the performance of a service or delivery of an object. Rather, the
amounts are in the nature of an endowment or donation given by IPC's
benefactors solely for the purpose of sponsoring or funding the research
with no strings attached. As found by the two courts below, such
sponsorships are subject to IPC's terms and conditions. No proprietary or
commercial research is done, and IPC retains the ownership of the results
of the research, including the absolute right to publish the same. The
copyrights over the results of the research are owned by
Ateneo and, consequently, no portion thereof may be reproduced without
its permission. 15 The amounts given to IPC, therefore, may not be deemed,

it bears stressing as fees or gross receipts that can be subjected to the
three percent contractor's tax.
It is also well to stress that the questioned transactions of Ateneo's
Institute of Philippine Culture cannot be deemed either as a contract of
sale or a contract of a piece of work. "By the contract of sale, one of the
contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent." 16 By its very nature, a contract of sale requires a
transfer of ownership. Thus, Article 1458 of the Civil Code "expressly
makes the obligation to transfer ownership as an essential element of the
contract of sale, following modern codes, such as the German and the
Swiss. Even in the absence of this express requirement, however, most
writers, including Sanchez Roman, Gayoso, Valverde, Ruggiero, Colin and
Capitant, have considered such transfer of ownership as the primary
purpose of sale. Perez and Alguer follow the same view, stating that the
delivery of the thing does not mean a mere physical transfer, but is a
means of transmitting ownership. Transfer of title or an agreement to
transfer it for a price paid or promised to be paid is the essence of sale." 17
In the case of a contract for a piece of work, "the contractor binds himself
to execute a piece of work for the employer, in consideration of a certain
price or compensation. . . . If the contractor agrees to produce the work
from materials furnished by him, he shall deliver the thing produced to the
employer and transfer dominion over the thing, . . ." 18 Ineludably, whether
the contract be one of sale or one for a piece of work, a transfer of
ownership is involved and a party necessarily walks away with an object.
19 In the case at bench, it is clear from the evidence on record that there
was no sale either of objects or services because, as adverted to earlier,
there was no transfer of ownership over the research data obtained or the
results of research projects undertaken by the Institute of Philippine
Culture.
Furthermore, it is clear that the research activity of the Institute of
Philippine Culture is done in pursuance of maintaining Ateneo's university
status and not in the course of an independent business of selling such
research with profit in mind. This is clear from a reading of the regulations
governing universities:
31. In addition to the legal requisites an institution must
meet, among others, the following requirements before
an application for university status shall be considered:
xxx xxx xxx
TAXATION CASES |8
(e) The institution must undertake research and operate
with a competent qualified staff at least three graduate
departments in accordance with the rules and standards
for graduate education. One of the departments shall be
science and technology. The competence of the staff shall
be judged by their effective teaching, scholarly
publications and research activities published in its
school journal as well as their leadership activities in the
profession.
(f) The institution must show evidence of adequate and
stable financial resources and support, a reasonable
portion of which should be devoted to institutional
development and research. (emphasis supplied)
xxx xxx xxx
32. University status may be withdrawn, after due
notice and hearing, for failure to maintain satisfactorily
the standards and requirements therefor. 20
Petitioner's contention that it is the Institute of Philippine Culture that is
being taxed and not the Ateneo is patently erroneous because the former is
not an independent juridical entity that is separate and distinct form the
latter.
Factual Findings and Conclusions of the Court of Tax Appeals
Affirmed by the Court of Appeals Generally Conclusive
In addition, we reiterate that the "Court of Tax Appeals is a highly
specialized body specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent to determine the
issue of whether" 21 Ateneo de Manila University may be deemed a subject
of the three percent contractor's tax "through the evidence presented
before it." Consequently, "as a matter of principle, this Court will not set
aside the conclusion reached by . . . the Court of Tax Appeals which is, by
the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise
on the subject unless there has been an abuse or improvident exercise of
authority . . ." 22 This point becomes more evident in the case before us
where the findings and conclusions of both the Court of Tax Appeals and
the Court of Appeals appear untainted by any abuse of authority, much less

grave abuse of discretion. Thus, we find the decision of the latter affirming
that of the former free from any palpable error.
Public Service, Not Profit, is the Motive
The records show that the Institute of Philippine Culture conducted its
research activities at a huge deficit of P1,624,014.00 as shown in its
statements of fund and disbursements for the period 1972 to 1985. 23 In
fact, it was Ateneo de Manila University itself that had funded the research
projects of the institute, and it was only when Ateneo could no longer
produce the needed funds that the institute sought funding from outside.
The testimony of Ateneo's Director for Accounting Services, Ms. Leonor
Wijangco, provides significant insight on the academic and nonprofit
nature of the institute's research activities done in furtherance of the
university's purposes, as follows:
Q Now it was testified to earlier by Miss Thelma Padero
(Office Manager of the Institute of Philippine Culture)
that as far as grants from sponsored research it is
possible that the grant sometimes is less than the actual
cost. Will you please tell us in this case when the actual
cost is a lot less than the grant who shoulders the
additional cost?
A The University.
Q Now, why is this done by the University?
A Because of our faculty development program as a
university, because a university has to have its own
research institute. 24
So, why is it that Ateneo continues to operate and conduct researches
through its Institute of Philippine Culture when it undisputedly loses not
an insignificant amount in the process? The plain and simple answer is
that private respondent is not a contractor selling its services for a fee but
an academic institution conducting these researches pursuant to its
commitments to education and, ultimately, to public service. For the
institute to have tenaciously continued operating for so long despite its
accumulation of significant losses, we can only agree with both the Court of
Tax Appeals and the Court of Appeals that "education and not profit is
TAXATION CASES |9
[IPC's] motive for undertaking the research
projects." 25
WHEREFORE, premises considered, the petition is DENIED and the
assailed Decision of the Court of Appeals is hereby AFFIRMED in full.
SO ORDERED.
respects, with costs against the defendant-appellant. So ordered.
3. Domingo vs. Hon. Garlitos
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the
Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking
to annul certain orders of the court and for an order in this Court directing
the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue
taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No.
L-14674, January 30, 1960, this Court declared as final and executory the
order for the payment by the estate of the estate and inheritance taxes,
charges and penalties, amounting to P40,058.55, issued by the Court of
First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a petition dated
June 21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the execution is
not justifiable as the Government is indebted to the estate under

administration in the amount of P262,200. The orders of the court below
dated August 20, 1960 and September 28, 1960, respectively, are as
follows:
Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.
Price, Administratrix of the estate of her late husband Walter Scott Price
and Director Zoilo Castrillo of the Bureau of Lands dated September 19,
1956 and acknowledged before Notary Public Salvador V. Esguerra, legal
adviser in Malacañang to Executive Secretary De Leon dated December 14,
1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum
ofP368,140.00, and an extract of page 765 of Republic Act No. 2700
appropriating the sum of P262.200.00 for the payment to the Leyte
Cadastral Survey, Inc., represented by the administratrix Simeona K. Price,
as directed in the above note of the President. Considering these facts, the
Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this
Court on July 5, 1960 in accordance with the order of the Supreme Court
promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her
without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960
and it orders that the payment of the claim of the Collector of Internal
Revenue be deferred until the Government shall have paid its accounts to
the administratrix herein amounting to P262,200.00. It may not be amiss
to repeat that it is only fair for the Government, as a debtor, to its accounts
to its citizens-creditors before it can insist in the prompt payment of the
latter's account to it, specially taking into consideration that the amount
due to the Government draws interests while the credit due to the present
state does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the
execution of the claim of the Government against the estate must be denied
for lack of merit. The ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased person, as an inheritance tax,
is for the claimant to present a claim before the probate court so that said
court may order the administrator to pay the amount thereof. To such
effect is the decision of this Court in Aldamiz vs. Judge of the Court of First
Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of
Court for the payment of debts and expenses of administration. The proper
TAXATION CASES |10
procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and
devisees residing in the Philippines, according to Rule 89, section 3, and
Rule 90, section 2. And when sale or mortgage of real estate is to be made,
the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët
Execution may issue only where the devisees, legatees or heirs have
entered into possession of their respective portions in the estate prior to
settlement and payment of the debts and expenses of administration and it
is later ascertained that there are such debts and expenses to be paid, in
which case "the court having jurisdiction of the estate may, by order for
that purpose, after hearing, settle the amount of their several liabilities,
and order how much and in what manner each person shall contribute,
and may issue execution if circumstances require" (Rule 89, section 6; see
also Rule 74, Section 4; Emphasis supplied.) And this is not the instant
case.
The legal basis for such a procedure is the fact that in the testate or
intestate proceedings to settle the estate of a deceased person, the
properties belonging to the estate are under the jurisdiction of the court
and such jurisdiction continues until said properties have been distributed
among the heirs entitled thereto. During the pendency of the proceedings
all the estate is in custodia legis and the proper procedure is not to allow
the sheriff, in case of the court judgment, to seize the properties but to ask
the court for an order to require the administrator to pay the amount due
from the estate and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact
that the court having jurisdiction of the estate had found that the claim of
the estate against the Government has been recognized and an amount of
P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances,
both the claim of the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both

debts to the concurrent amount, eventhough the creditors and debtors are
not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott Price.
Furthermore, the petition for certiorari and mandamus is not the proper
remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.
4. Francia vs. IAC
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
GUTIERREZ, JR., J.:
The petitioner invokes legal and equitable grounds to reverse the
questioned decision of the Intermediate Appellate Court, to set aside the
auction sale of his property which took place on December 5, 1977, and to
allow him to recover a 203 square meter lot which was, sold at public
auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-
story house built upon it situated at Barrio San Isidro, now District of Sta.
Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square
meters, is described and covered by Transfer Certificate of Title No. 4739
(37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property
was expropriated by the Republic of the Philippines for the sum of
P4,116.00 representing the estimated amount equivalent to the assessed
value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes.
Thus, on December 5, 1977, his property was sold at public auction by the
City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree
TAXATION CASES |11
No. 464 known as the Real Property Tax Code in order to satisfy a tax
delinquency of P2,400.00. Ho Fernandez was the highest bidder for the
property.
Francia was not present during the auction sale since he was in Iligan City
at that time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No.
1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho
Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the
issuance in his name of a new certificate of title. Upon verification through
his lawyer, Francia discovered that a Final Bill of Sale had been issued in
favor of Ho Fernandez by the City Treasurer on December 11, 1978. The
auction sale and the final bill of sale were both annotated at the back of
TCT No. 4739 (37795) by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He
later amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
dismissing the amended complaint and ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate
of Title in favor of the defendant Ho Fernandez over the parcel of land
including the improvements thereon, subject to whatever encumbrances
appearing at the back of TCT No. 4739 (37795) and ordering the same TCT
No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as
attorney's fees. (p. 30, Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court
in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave
errors of law:
I

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE
ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY
P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE
AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE
FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE
AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT
PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS
PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER
COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN
NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT
HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE
AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the
petitioner's allegations that his property was sold at public auction
without notice to him and that the price paid for the property was
shockingly inadequate, amounting to fraud and deprivation without due
process of law.
A careful review of the case, however, discloses that Mr. Francia brought
the problems raised in his petition upon himself. While we commiserate
with him at the loss of his property, the law and the facts militate against
the grant of his petition. We are constrained to dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been
extinguished by legal compensation. He claims that the government owed
him P4,116.00 when a portion of his land was expropriated on October 15,
1977. Hence, his tax obligation had been set-off by operation of law as of
October 15, 1977.
There is no legal basis for the contention. By legal compensation,
obligations of persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). The
TAXATION CASES |12
circumstances of the case do not satisfy the requirements provided by
Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no merit. We have
consistently ruled that there can be no off-setting of taxes against the
claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court
ruled that Internal Revenue Taxes can not be the subject of set-off or
compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action
or any indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued
on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy
is well-settled that no set-off admissible against demands for taxes levied
for general or local governmental purposes. The reason on which the
general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of duty to, and are the positive
acts of the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by
the collector because he has a claim against the governmental body not
included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331)
where we stated that: "... internal revenue taxes can not be the subject of
compensation: Reason: government and taxpayer are not mutually

creditors and debtors of each other' under Article 1278 of the Civil Code
and a "claim for taxes is not such a debt, demand, contract or judgment as
is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The
tax was due to the city government while the expropriation was effected
by the national government. Moreover, the amount of P4,116.00 paid by
the national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public
auction of his remaining property. Notice of the deposit dated September
28, 1977 was received by the petitioner on September 30, 1977. The
petitioner admitted in his testimony that he knew about the P4,116.00
deposited with the bank but he did not withdraw it. It would have been an
easy matter to withdraw P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as
well be shown later, he claimed that he pocketed the notice of the auction
sale without reading it.
Petitioner contends that "the auction sale in question was made without
complying with the mandatory provisions of the statute governing tax sale.
No evidence, oral or otherwise, was presented that the procedure outlined
by law on sales of property for tax delinquency was followed. ... Since
defendant Ho Fernandez has the affirmative of this issue, the burden of
proof therefore rests upon him to show that plaintiff was duly and
properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at
the auction sale, has the burden of proof to show that there was
compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be
established by proof and the general rule is that the purchaser of a tax title
is bound to take upon himself the burden of showing the regularity of all
proceedings leading up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action
which results in depriving a taxpayer of his property through a tax sale.
(Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19
TAXATION CASES |13
Phil. 261). This is actually an exception to the rule that administrative
proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all
legal prerequisites have been complied with, the petitioner can not,
however, deny that he did receive the notice for the auction sale. The
records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he
was not properly notified of the auction sale. Surprisingly, however, he
admitted in his testimony that he received the letter dated November 21,
1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He
claimed further that he was not present on December 5, 1977 the date of
the auction sale because he went to Iligan City. As long as there was
substantial compliance with the requirements of the notice, the validity of
the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination,
to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez
notified you that the property in question shall be sold at public auction to
the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464.
Will you tell the Court whether you received the original of this letter?
A. I just signed it because I was not able to read the same. It was just sent
by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed
upon receipt thereof but you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence
on his part when he ignored such notice. By his very own admission that
he received the notice, his now coming to court assailing the validity of the
auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a
general rule, gross inadequacy of price is not material (De Leon v.

Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See
also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held
that "alleged gross inadequacy of price is not material when the law gives
the owner the right to redeem as when a sale is made at public auction,
upon the theory that the lesser the price, the easier it is for the owner to
effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands
were sold are unconscionable considering the wide divergence between
their assessed values and the amounts for which they had been actually
sold. However, while in ordinary sales for reasons of equity a transaction
may be invalidated on the ground of inadequacy of price, or when such
inadequacy shocks one's conscience as to justify the courts to interfere,
such does not follow when the law gives to the owner the right to redeem,
as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it
was aptly said: "When there is the right to redeem, inadequacy of price
should not be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he
claims to have suffered by reason of the price obtained at the auction sale."
The reason behind the above rulings is well enunciated in the case of
Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for
taxes, the collection of taxes in this manner would be greatly embarrassed,
if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.)
238, the correct rule is stated as follows: "where land is sold for taxes, the
inadequacy of the price given is not a valid objection to the sale." This rule
arises from necessity, for, if a fair price for the land were essential to the
sale, it would be useless to offer the property. Indeed, it is notorious that
the prices habitually paid by purchasers at tax sales are grossly out of
proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash.
307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al.
v. Bean, et al. (267 P. 555):
Like most cases of this character there is here a certain element of
hardship from which we would be glad to relieve, but do so would unsettle
long-established rules and lead to uncertainty and difficulty in the
collection of taxes which are the life blood of the state. We are convinced
TAXATION CASES |14
that the present rules are just, and that they bring hardship only to those
who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot
has greatly appreciated in value. Precisely because of the widening of
Buendia Avenue in Pasay City, which necessitated the expropriation of
adjoining areas, real estate values have gone up in the area. However, the
price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on
equitable grounds, there are no strong considerations of substantial justice
in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to
the date of the auction sale. He claims to have pocketed the notice of sale
without reading it which, if true, is still an act of inexplicable negligence.
He did not withdraw from the expropriation payment deposited with the
Philippine National Bank an amount sufficient to pay for the back taxes.
The petitioner did not pay attention to another notice sent by the City
Treasurer on November 3, 1978, during the period of redemption,
regarding his tax delinquency. There is furthermore no showing of bad
faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the
property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is
DISMISSED. The decision of the respondent court is affirmed.
SO ORDERED.
5. Philex vs CIR
G.R. No. 125704 August 28, 1998
PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE
COURT OF TAX APPEALS, respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the

Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995
2 ordering it to pay the amount of P110,677,668.52 as excise tax liability
for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex
asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991
as well as the 1st and 2nd quarter of 1992 in the total amount of
P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
————— ————— —————— ——————
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
————— ————— —————— ——————
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
————— ————— —————— ——————
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
————— ————— —————— ——————
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 3
========= ========= ========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for
payment of the tax liabilities stating that it has pending claims for VAT
input credit/refund for the taxes it paid for the years 1989 to 1991 in the
TAXATION CASES |15
amount of P119,977,037.02 plus interest. Therefore these claims for tax
credit/refund should be applied against the tax liabilities, citing our ruling
in Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in
Philex's position. Since these pending claims have not yet been established
or determined with certainty, it follows that no legal compensation can
take place. Hence, the BIR reiterated its demand that Philex settle the
amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input
credit/refund against its excise tax obligation, Philex raised the issue to the
Court of Tax Appeals on November 6, 1992. 7 In the course of the
proceedings, the BIR issued Tax Credit Certificate SN 001795 in the
amount of P13,144,313.88 which, applied to the total tax liabilities of
Philex of P123,821,982.52; effectively lowered the latter's tax obligation to
P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to
pay the remaining balance of P110,677,688.52 plus interest, elucidating its
reason, to wit:
Thus, for legal compensation to take place, both obligations must be
liquidated and demandable. "Liquidated" debts are those where the exact
amount has already been determined (PARAS, Civil Code of the
Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case,
the claims of the Petitioner for VAT refund is still pending litigation, and
still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori,
the liquidated debt of the Petitioner to the government cannot, therefore,
be set-off against the unliquidated claim which Petitioner conceived to
exist in its favor (see Compañia General de Tabacos vs. French and Unson,
No. 14027, November 8, 1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to
set-off on compensation since claim for taxes is not a debt or contract." 9
The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of
merit and Petitioner is hereby ORDERED to PAY the Respondent the
amount of P110,677,668.52 representing excise tax liability for the period
from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid pursuant to Section 248 and
249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of
Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless, on April 8,
1996, the Court of Appeals a Affirmed the Court of Tax Appeals
observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby
DISMISSED and the decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless, denied
in a Resolution dated July 11, 1996. 13
However, a few days after the denial of its motion for reconsideration,
Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994, computed as
follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01
1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends
that the same should, ipso jure, off-set its excise tax liabilities 15 since both
had already become "due and demandable, as well as fully liquidated;" 16
hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the
pronouncement that taxes cannot be subject to compensation for the
simple reason that the government and the taxpayer are not creditors and
debtors of each other. 17 There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while
TAXATION CASES |16
taxes are due to the Government in its sovereign capacity. 18 We find no
cogent reason to deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court,
19 we categorically held that taxes cannot be subject to set-off or
compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. v. Commission on Audit, 20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending
refund may be set off against an existing tax liability even though the
refund has not yet been approved by the Commissioner, 21 is no longer
without any support in statutory law.
It is important to note, that the premise of our ruling in the
aforementioned case was anchored on Section 51 (d) of the National
Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which the Itogon-
Suyoc pronouncement was based was omitted. 22 Accordingly, the
doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts
that the imposition of surcharge and interest for the non-payment of the
excise taxes within the time prescribed was unjustified. Philex posits the
theory that it had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR. 23
We fail to see the logic of Philex's claim for this is an outright disregard of
the basic principle in tax law that taxes are the lifeblood of the government

and so should be collected without unnecessary hindrance. 24 Evidently,
to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in
jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax
liabilities on the ground that it has a pending tax claim for refund or credit
against the government which has not yet been granted. It must be noted
that a distinguishing feature of a tax is that it is compulsory rather than a
matter of bargain. 25 Hence, a tax does not depend upon the consent of the
taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse
to pay his taxes when they fall due simply because he has a claim against
the government or that the collection of the tax is contingent on the result
of the lawsuit it filed against the government. 27 Moreover, Philex's theory
that would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit and
offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input
claim/refund with the government is immaterial for the imposition of
charges and penalties prescribed under Section 248 and 249 of the Tax
Code of 1977. The payment of the surcharge is mandatory and the BIR is
not vested with any authority to waive the collection thereof. 28 The same
cannot be condoned for flimsy reasons, 29 similar to the one advanced by
Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the
National Internal Revenue Code of 1977, which requires the refund of
input taxes within 60 days, 31 when it took five years for the latter to grant
its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a
claimant has the burden of proof to establish the factual basis of his or her
claim for tax credit or refund, 33 however, once the claimant has
submitted all the required documents it is the function of the BIR to assess
these documents with purposeful dispatch. After all, since taxpayers owe
honestly to government it is but just that government render fair service to
the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to 1991
but the refund of these erroneously paid taxes was only granted in 1996.
TAXATION CASES |17
Obviously, had the BIR been more diligent and judicious with their duty, it
could have granted the refund earlier. We need not remind the BIR that
simple justice requires the speedy refund of wrongly-held taxes. 35 Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the
latter's discharge of its function. As aptly held in Roxas v. Court of Tax
Appeals: 36
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg" And,
in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.
Despite our concern with the lethargic manner by which the BIR handled
Philex's tax claim, it is a settled rule that in the performance of
governmental function, the State is not bound by the neglect of its agents
and officers. Nowhere is this more true than in the field of taxation. 37
Again, while we understand Philex's predicament, it must be stressed that
the same is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against
public servants or employees, especially BIR examiners who, in
investigating tax claims are seen to drag their feet needlessly. First, if the
BIR takes time in acting upon the taxpayer's claim for refund, the latter can
seek judicial remedy before the Court of Tax Appeals in the manner
prescribed by law. 38 Second, if the inaction can be characterized as willful
neglect of duty, then recourse under the Civil Code and the Tax Code can
also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss because a public
servant or employee refuses or neglects, without just cause, to perform his
official duty may file an action for damages and other relief against the
latter, without prejudice to any disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act of
1997 states:
xxx xxx xxx

(c) Wilfully neglecting to give receipts, as by law required for any sum
collected in the performance of duty or wilfully neglecting to perform, any
other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and
unreasonable delay in the performance of official duties. 39 In no
uncertain terms must we stress that every public employee or servant
must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The
BIR, being the government collecting arm, must and should do no less. It
simply cannot be apathetic and laggard in rendering service to the
taxpayer if it wishes to remain true to its mission of hastening the
country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove
its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in
performing its duties, still, the same cannot justify Philex's non-payment of
its tax liabilities. The adage "no one should take the law into his own
hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April 8,
1996 is hereby AFFIRMED.
SO ORDERED.
6. ABS CBN vs. Court of Tax Appeals
G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of
Tax Appeals in C.T.A. Case No. 2809, dated November 29, 1979, which
affirmed the assessment by the Commissioner of Internal Revenue, dated
April 16, 1971, of a deficiency withholding income tax against petitioner,
ABS-CBN Broadcasting Corporation, for the years 1965, 1966, 1967 and
TAXATION CASES |18
1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00
and P222, 260.64, or a total of P525,897.06.
During the period pertinent to this case, petitioner corporation was
engaged in the business of telecasting local as well as foreign films
acquired from foreign corporations not engaged in trade or business
within the Philippines. for which petitioner paid rentals after withholding
income tax of 30%of one-half of the film rentals.
In so far as the income tax on non-resident corporations is concerned,
section 24 (b) of the National Internal Revenue Code, as amended by
Republic Act No. 2343 dated June 20, 1959, used to provide:
(b) Tax on foreign corporations.—(1) Non-resident corporations.— There
shall be levied, collected, and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from an sources within the Philippines, as interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical gains, profits, and income, a tax equal to thirty per centum of
such amount. (Emphasis supplied)
On April 12, 1961, in implementation of the aforequoted provision, the
Commissioner of Internal Revenue issued General Circular No. V-334
reading thus:
In connection with Section 24 (b) of Tax Code, the amendment introduced
by Republic Act No. 2343, under which an income tax equal to 30% is
levied upon the amount received by every foreign corporation not engaged
in trade or business within the Philippines from all sources within this
country as interest, dividends, rents, salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or other fixed or
determinable annual or periodical gains, profits, and income, it has been
determined that the tax is still imposed on income derived from capital, or
labor, or both combined, in accordance with the basic principle of income
taxation (Sec. 39, Income Tax Regulations), and that a mere return of
capital or investment is not income (Par. 5,06, 1 Mertens Law of Federal
'Taxation). Since according to the findings of the Special Team who
inquired into business of the non-resident foreign film distributors, the
distribution or exhibition right on a film is invariably acquired for a
consideration, either for a lump sum or a percentage of the film rentals,
whether from a parent company or an independent outside producer,

apart of the receipts of a non-resident foreign film distributor derived from
said film represents, therefore, a return of investment.
xxx xxx xxx
4. The local distributor should withhold 30% of one-half of the film rentals
paid to the non-resident foreign film distributor and pay the same to this
office in accordance with law unless the non- resident foreign film
distributor makes a prior settlement of its income tax liability. (Emphasis
ours).
Pursuant to the foregoing, petitioner dutifully withheld and turned over to
the Bureau of Internal Revenue the amount of 30% of one-half of the film
rentals paid by it to foreign corporations not engaged in trade or business
within the Philippines. The last year that petitioner withheld taxes
pursuant to the foregoing Circular was in 1968.
On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the
Tax Code increasing the tax rate from 30 % to 35 % and revising the tax
basis from "such amount" referring to rents, etc. to "gross income," as
follows:
(b) Tax on foreign corporations.—(1) Non-resident corporations.—A
foreign corporation not engaged in trade or business in the Philippines
including a foreign life insurance company not engaged in the life
insurance business in the Philippines shall pay a tax equal to thirty-five per
cent of the gross income received during each taxable year from all sources
within the Philippines, as interests, dividends, rents, royalties, salaries,
wages, premiums, annuities, compensations, remunerations for technical
services or otherwise, emoluments or other fixed or determinable annual,
periodical or casual gains, profits, and income, and capital gains, Provided
however, That premiums shah not include reinsurance premiums.
(Emphasis supplied)
On February 8, 1971, the Commissioner of Internal Revenue issued
Revenue Memorandum Circular No. 4-71, revoking General Circular No. V-
334, and holding that the latter was "erroneous for lack of legal basis,"
because "the tax therein prescribed should be based on gross income
without deduction whatever," thus:
After a restudy and analysis of Section 24 (b) of the National Internal
Revenue Code, as amended by Republic Act No. 5431, and guided by the
interpretation given by tax authorities to a similar provision in the Internal
Revenue Code of the United States, on which the aforementioned provision
TAXATION CASES |19
of our Tax Code was patterned, this Office has come to the conclusion that
the tax therein prescribed should be based on gross income without t
deduction whatever. Consequently, the ruling in General Circular No. V-
334, dated April 12, 1961, allowing the deduction of the proportionate cost
of production or exhibition of motion picture films from the rental income
of non- resident foreign corporations, is erroneous for lack of legal basis.
In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby
revoked and henceforth, local films distributors and exhibitors shall
deduct and withhold 35% of the entire amount payable by them to non-
resident foreign corporations, as film rental or royalty, or whatever such
payment may be denominated, without any deduction whatever, pursuant
to Section 24 (b), and pay the withheld taxes in accordance with Section 54
of the Tax Code, as amended.
All rulings inconsistent with this Circular is likewise revoked. (Emphasis
ours)
On the basis of this new Circular, respondent Commissioner of Internal
Revenue issued against petitioner a letter of assessment and demand
dated April 15, 1971, but allegedly released by it and received by
petitioner on April 12, 1971, requiring them to pay deficiency withholding
income tax on the remitted film rentals for the years 1965 through 1968
and film royalty as of the end of 1968 in the total amount of P525,897.06
computed as follows:
1965
Total amount remitted
P 511,059.48
Withholding tax due thereon
153,318.00
Less: Amount already assessed
89,000.00
Balance
P64,318.00
 TAXATION CASES |20

Add: 1/2% mo. int. fr. 4-16-66 to 4-16-69

71,448.00

11,577.24 Balance

Total amount due & collectible

108,900.00
P 75,895.24
Add: 1/2% mo. int. fr. 4-16-68 to 4-16-71
1966

Total amount remitted 19,602.00

P373,492.24
Withholding tax due thereon Total amount due & collectible
112,048.00
Less: Amount already assessed
27,947.00 P128,502.00
Balance
84,101.00 1968

Add: 11/2%mo. int. fr. 4-16-67 to 4-116-70 Total amount remitted

15,138.18 P881,816.92

Total amount due & collectible Withholding tax due thereon

P99,239.18 291,283.00

1967 Less: Amount already assessed

Total amount remitted

92,886.00

P601,160.65 Balance

Withholding tax due thereon

P198,447.00

180,348.00 Add: 1/2% mo. int. fr. 4-16-69 to 4-29-71

Less: Amount already assessed

23,813.64

Total amount due & collectible
P222,260.44 1
On May 5, 1971, petitioner requested for a reconsideration and
withdrawal of the assessment. However, without acting thereon,
respondent, on April 6, 1976, issued a warrant of distraint and levy over
petitioner's personal as well as real properties. The petitioner then filed its
Petition for Review with the Court of Tax Appeals whose Decision, dated
November 29, 1979, is, in turn, the subject of this review. The Tax Court
held:
For the reasons given, the Court finds the assessment issued by
respondent on April 16, 1971 against petitioner in the amounts of
P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a total of
P525,897.06 as deficiency withholding income tax for the years 1965,
1966, 1967 and 1968, respectively, in accordance with law. As prayed for,
the petition for review filed in this case is dismissed, and petitioner ABS-
CBN Broadcasting Corporation is hereby ordered to pay the sum of
P525,897.06 to respondent Commissioner of Internal Revenue as
deficiency withholding income tax for the taxable years 1965 thru 1968,
plus the surcharge and interest which have accrued thereon incident to
delinquency pursuant to Section 51 (e) of the National Internal Revenue
Code, as amended.
WHEREFORE, the decision appealed from is hereby affirmed at petitioner's
cost.
SO ORDERED. 2
The issues raised are two-fold:
I. Whether or not respondent can apply General Circular No. 4-71
retroactively and issue a deficiency assessment against petitioner in the
amount of P 525,897.06 as deficiency withholding income tax for the years
1965, 1966, 1967 and 1968.
II. Whether or not the right of the Commissioner of Internal Revenue to
assess the deficiency withholding income tax for the year 196,5 has
prescribed. 3
Upon the facts and circumstances of the case, review is warranted.
TAXATION CASES |21
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by
Republic Act No. 6110 on August 9, 1969, it provides:
Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or
reversal of and of the rules and regulations promulgated in accordance
with the preceding section or any of the rulings or circulars promulgated
by the Commissioner of Internal Revenue shall not be given retroactive
application if the relocation, modification, or reversal will be prejudicial to
the taxpayers, except in the following cases: (a) where the taxpayer
deliberately mis-states or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue: (b) where
the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based; or (c)
where the taxpayer acted in bad faith. (italics for emphasis)
It is clear from the foregoing that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive application where
to so apply them would be prejudicial to taxpayers. The prejudice to
petitioner of the retroactive application of Memorandum Circular No. 4-71
is beyond question. It was issued only in 1971, or three years after 1968,
the last year that petitioner had withheld taxes under General Circular No.
V-334. The assessment and demand on petitioner to pay deficiency
withholding income tax was also made three years after 1968 for a period
of time commencing in 1965. Petitioner was no longer in a position to
withhold taxes due from foreign corporations because it had already
remitted all film rentals and no longer had any control over them when the
new Circular was issued. And in so far as the enumerated exceptions are
concerned, admittedly, petitioner does not fall under any of them.
Respondent claims, however, that the provision on non-retroactivity is
inapplicable in the present case in that General Circular No. V-334 is a
nullity because in effect, it changed the law on the matter. The Court of Tax
Appeals sustained this position holding that: "Deductions are wholly and
exclusively within the power of Congress or the law-making body to grant,
condition or deny; and where the statute imposes a tax equal to a specified
rate or percentage of the gross or entire amount received by the taxpayer,
the authority of some administrative officials to modify or change, much
less reduce, the basis or measure of the tax should not be read into law." 4
Therefore, the Tax Court concluded, petitioner did not acquire any vested
right thereunder as the same was a nullity.
The rationale behind General Circular No. V-334 was clearly stated therein,
however: "It ha(d) been determined that the tax is still imposed on income

derived from capital, or labor, or both combined, in accordance with the
basic principle of income taxation ...and that a mere return of capital or
investment is not income ... ." "A part of the receipts of a non-resident
foreign film distributor derived from said film represents, therefore, a
return of investment." The Circular thus fixed the return of capital at 50%
to simplify the administrative chore of determining the portion of the
rentals covering the return of capital." 5
Were the "gross income" base clear from Sec. 24 (b), perhaps, the
ratiocination of the Tax Court could be upheld. It should be noted,
however, that said Section was not too plain and simple to understand. The
fact that the issuance of the General Circular in question was rendered
necessary leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the
basis of General Circular No. V-334, was just one in a series of enactments
regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on
June 22, 1963 without changing the basis but merely adding a proviso (in
bold letters).
(b) Tax on foreign corporation.—(1) Non-resident corporations. — There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premiums annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical gains,
profits, and income, a tax equal to thirty per centum of such amount:
PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE
REINSURANCE PREMIUMS. (double emphasis ours).
Republic Act No. 3841, dated likewise on June 22, 1963, followed after,
omitting the proviso and inserting some words (also in bold letters).
(b) Tax on foreign corporations.—(1) Non-resident corporations.—There
shall be levied, collected and paid for each taxable year, in lieu of the tax
imposed by the preceding paragraph, upon the amount received by every
foreign corporation not engaged in trade or business within the
Philippines, from all sources within the Philippines, as interest, dividends,
rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or
periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a
TAXATION CASES |22
tax equal to thirty per centum of such amount. 6 (double emphasis
supplied)
The principle of legislative approval of administrative interpretation by re-
enactment clearly obtains in this case. It provides that "the re-enactment of
a statute substantially unchanged is persuasive indication of the adoption
by Congress of a prior executive construction. 7 Note should be taken of
the fact that this case involves not a mere opinion of the Commissioner or
ruling rendered on a mere query, but a Circular formally issued to "all
internal revenue officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which
became the basis of Revenue Memorandum Circular No. 4-71, that Sec. 24
(b) was amended to refer specifically to 35% of the "gross income."
This Court is not unaware of the well-entrenched principle that the
Government is never estopped from collecting taxes because of mistakes
or errors on the part of its
agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like
other principles of law, this also admits of exceptions in the interest of
justice and fairplay. The insertion of Sec. 338-A into the National Internal
Revenue Code, as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative
of legislative intention to support the principle of good faith. In fact, in the
United States, from where Sec. 24 (b) was patterned, it has been held that
the Commissioner of Collector is precluded from adopting a position
inconsistent with one previously taken where injustice would result
therefrom, 11 or where there has been a misrepresentation to the
taxpayer. 12
We have also noted that in its Decision, the Court of Tax Appeals further
required the petitioner to pay interest and surcharge as provided for in
Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of
P 525,897.06. This additional requirement is much less called for because
the petitioner relied in good faith and religiously complied with no less
than a Circular issued "to all internal revenue officials" by the highest
official of the Bureau of Internal Revenue and approved by the then
Secretary of Finance. 13
With the foregoing conclusions arrived at, resolution of the issue of
prescription becomes unnecessary.
WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed,
and the questioned assessment set aside. No costs.

SO ORDERED.
7. CIR vs. Proctor and Gamble
G.R. No. L-66838 December 2, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and
THE COURT OF TAX APPEALS, respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year
1975 ending 30 June 1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends
payable to its parent company and sole stockholder, Procter and Gamble
Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which
dividends the amount of P8,457,731.21 representing the thirty-five
percent (35%) withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner
Commissioner of Internal Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other things, that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as
amended by Presidential Decree No. 369, the applicable rate of
withholding tax on the dividends remitted was only fifteen percent (15%)
(and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-
Phil., on 13 July 1977, filed a petition for review with public respondent
Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31
January 1984, the CTA rendered a decision ordering petitioner
Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
TAXATION CASES |23
On appeal by the Commissioner, the Court through its Second Division
reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party
to claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code
that allows a credit against the US tax due from P&G-USA of taxes deemed
to have been paid in the Philippines equivalent to twenty percent (20%)
which represents the difference between the regular tax of thirty-five
percent (35%) on corporations and the tax of fifteen percent (15%) on
dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions
necessary in order that "the dividends received by its non-resident parent
company in the US (P&G-USA) may be subject to the preferential tax rate of
15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-
consideration and we will deal with them seriatim in this Resolution
resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of
P&G-Phil. to bring the present claim for refund or tax credit, which need to
be examined. This question was raised for the first time on appeal, i.e., in
the proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the
Commissioner on the administrative level, and neither was it raised by him
before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be
allowed to defeat an otherwise valid claim for refund by raising this
question of alleged incapacity for the first time on appeal before this Court.
This is clearly a matter of procedure. Petitioner does not pretend that P&G-
Phil., should it succeed in the claim for refund, is likely to run away, as it
were, with the refund instead of transmitting such refund or tax credit to
its parent and sole stockholder. It is commonplace that in the absence of
explicit statutory provisions to the contrary, the government must follow
the same rules of procedure which bind private parties. It is, for instance,
clear that the government is held to compliance with the provisions of
Circular No. 1-88 of this Court in exactly the same way that private
litigants are held to such compliance, save only in respect of the matter of

filing fees from which the Republic of the Philippines is exempt by the
Rules of Court.
More importantly, there arises here a question of fairness should the BIR,
unlike any other litigant, be allowed to raise for the first time on appeal
questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible
opportunity, i.e., at the administrative level, demanded that P&G-Phil.
produce an express authorization from its parent corporation to bring the
claim for refund, then P&G-Phil. would have been able forthwith to secure
and produce such authorization before filing the action in the instant case.
The action here was commenced just before expiration of the two (2)-year
prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund
has substantive dimensions as well which, as will be seen below, also
ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with
the Commissioner of Internal Revenue is essential for maintenance of a
suit for recovery of taxes allegedly erroneously or illegally assessed or
collected:
Sec. 306. Recovery of tax erroneously or illegally collected. — No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive
or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner of Internal Revenue; but such
suit or proceeding may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress. In any case, no such suit or
proceeding shall be begun after the expiration of two years from the date
of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund
Taxes.—The Commissioner may:
xxx xxx xxx
TAXATION CASES |24
(3) credit or refund taxes erroneously or illegally received, . . . No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2)
years after the payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises
is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term
"taxpayer" is defined in our NIRC as referring to "any person subject to tax
imposed by the Title [on Tax on Income]." 2 It thus becomes important to
note that under Section 53 (c) of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made " personally liable for
such tax" and indeed is indemnified against any claims and demands which
the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the
provisions of the NIRC. The withholding agent, P&G-Phil., is directly and
independently liable 3 for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and
penalties should the amount of the tax withheld be finally found to be less
than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." 4 The terms liable for tax" and "subject
to tax" both connote legal obligation or duty to pay a tax. It is very difficult,
indeed conceptually impossible, to consider a person who is statutorily
made "liable for tax" as not "subject to tax." By any reasonable standard,
such a person should be regarded as a party in interest, or as a person
having sufficient legal interest, to bring a suit for refund of taxes he
believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal
Revenue, 5 this Court pointed out that a withholding agent is in fact the
agent both of the government and of the taxpayer, and that the
withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding
agent to attach. The reason is to compel the withholding agent to withhold
the tax under all circumstances. In effect, the responsibility for the
collection of the tax as well as the payment thereof is concentrated upon
the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the
taxpayer. With respect to the collection and/or withholding of the tax, he is
the Government's agent. In regard to the filing of the necessary income tax

return and the payment of the tax to the Government, he is the agent of the
taxpayer. The withholding agent, therefore, is no ordinary government
agent especially because under Section 53 (c) he is held personally liable
for the tax he is duty bound to withhold; whereas the Commissioner and
his deputies are not made liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an
agent of the beneficial owner of the dividends with respect to the filing of
the necessary income tax return and with respect to actual payment of the
tax to the government, such authority may reasonably be held to include
the authority to file a claim for refund and to bring an action for recovery
of such claim. This implied authority is especially warranted where, is in
the instant case, the withholding agent is the wholly owned subsidiary of
the parent-stockholder and therefore, at all times, under the effective
control of such parent-stockholder. In the circumstances of this case, it
seems particularly unreal to deny the implied authority of P&G-Phil. to
claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from
requiring P&G-Phil. to show some written or telexed confirmation by P&G-
USA of the subsidiary's authority to claim the refund or tax credit and to
remit the proceeds of the refund., or to apply the tax credit to some
Philippine tax obligation of, P&G-USA, before actual payment of the refund
or issuance of a tax credit certificate. What appears to be vitiated by basic
unfairness is petitioner's position that, although P&G-Phil. is directly and
personally liable to the Government for the ataxes and any deficiency
assessments to be collected, the Government is not legally liable for a
refund simply because it did not demand a written confirmation of P&G-
Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-
Phil. is properly regarded as a "taxpayer" within the meaning of Section
309, NIRC, and as impliedly authorized to file the claim for refund and the
suit to recover such claim.
II
1. We turn to the principal substantive question before us: the applicability
to the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent
(15%) tax rate provided for in the following portion of Section 24 (b) (1) of
the NIRC:
(b) Tax on foreign corporations.—
TAXATION CASES |25
(1) Non-resident corporation. — A foreign corporation not engaged in
trade and business in the Philippines, . . ., shall pay a tax equal to 35% of
the gross income receipt during its taxable year from all sources within the
Philippines, as . . . dividends . . . Provided, still further, that on dividends
received from a domestic corporation liable to tax under this Chapter, the
tax shall be 15% of the dividends, which shall be collected and paid as
provided in Section 53 (d) of this Code, subject to the condition that the
country in which the non-resident foreign corporation, is domiciled shall
allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent
to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend
remittances to non-resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if the country of domicile
of the foreign stockholder corporation "shall allow" such foreign
corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign
stockholder corporation. In other words, in the instant case, the reduced
fifteen percent (15%) dividend tax rate is applicable if the USA "shall
allow" to P&G-USA a tax credit for "taxes deemed paid in the Philippines"
applicable against the US taxes of P&G-USA. The NIRC specifies that such
tax credit for "taxes deemed paid in the Philippines" must, as a minimum,
reach an amount equivalent to twenty (20) percentage points which
represents the difference between the regular thirty-five percent (35%)
dividend tax rate and the preferred fifteen percent (15%) dividend tax
rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that
the US must give a "deemed paid" tax credit for the dividend tax (20
percentage points) waived by the Philippines in making applicable the
preferred divided tax rate of fifteen percent (15%). In other words, our
NIRC does not require that the US tax law deem the parent-corporation to
have paid the twenty (20) percentage points of dividend tax waived by the
Philippines. The NIRC only requires that the US "shall allow" P&G-USA a
"deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement?
The relevant provisions of the US Intemal Revenue Code ("Tax Code") are
the following:

Sec. 901 — Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. — If the taxpayer chooses to have the benefits of
this subpart, the tax imposed by this chapter shall, subject to the applicable
limitation of section 904, be credited with the amounts provided in the
applicable paragraph of subsection (b) plus, in the case of a corporation,
the taxes deemed to have been paid under sections 902 and 960. Such
choice for any taxable year may be made or changed at any time before the
expiration of the period prescribed for making a claim for credit or refund
of the tax imposed by this chapter for such taxable year. The credit shall
not be allowed against the tax imposed by section 531 (relating to the tax
on accumulated earnings), against the additional tax imposed for the
taxable year under section 1333 (relating to war loss recoveries) or under
section 1351 (relating to recoveries of foreign expropriation losses), or
against the personal holding company tax imposed by section 541.
(b) Amount allowed. — Subject to the applicable limitation of section 904,
the following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. — In the case of a citizen of the
United States and of a domestic corporation, the amount of any income,
war profits, and excess profits taxes paid or accrued during the taxable
year to any foreign country or to any possession of the United States; and
xxx xxx xxx
Sec. 902. — Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. — For purposes of
this subject, a domestic corporation which owns at least 10 percent of the
voting stock of a foreign corporation from which it receives dividends in
any taxable year shall —
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or
excess profits taxes paid or deemed to be paid by such foreign corporation
to any foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such dividends
bears to the amount of such accumulated profits.
TAXATION CASES |26
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. — For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
profits, or income computed without reduction by the amount of the
income, war profits, and excess profits taxes imposed on or with respect to
such profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
profits, or income in excess of the income, war profits, and excess profits
taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid,
treating dividends paid in the first 20 days of any year as having been paid
from the accumulated profits of the preceding year or years (unless to his
satisfaction shows otherwise), and in other respects treating dividends as
having been paid from the most recently accumulated gains, profits, or
earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7
shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
amount of the dividend tax actually paid (i.e., withheld) from the dividend
remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid'
tax credit 8 for a proportionate part of the corporate income tax actually
paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the
Philippine corporate income tax although that tax was actually paid by its
Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid"
concept merely reflects economic reality, since the Philippine corporate
income tax was in fact paid and deducted from revenues earned in the
Philippines, thus reducing the amount remittable as dividends to P&G-USA.
In other words, US tax law treats the Philippine corporate income tax as if
it came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the

medium of P&G-Phil. and here earning profits. What is, under US law,
deemed paid by P&G- USA are not "phantom taxes" but instead Philippine
corporate income taxes actually paid here by P&G-Phil., which are very
real indeed.
It is also useful to note that both (i) the tax credit for the Philippine
dividend tax actually withheld, and (ii) the tax credit for the Philippine
corporate income tax actually paid by P&G Phil. but "deemed paid" by
P&G-USA, are tax credits available or applicable against the US corporate
income tax of P&G-USA. These tax credits are allowed because of the US
congressional desire to avoid or reduce double taxation of the same
income stream. 9
In order to determine whether US tax law complies with the requirements
for applicability of the reduced or preferential fifteen percent (15%)
dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax
waived by the Philippine government under Section 24 (b) (1), NIRC, and
which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax
law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by
US law is at least equal to the amount of the dividend tax waived by the
Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine
government is arithmetically determined in the following manner:
P100.00 — Pretax net corporate income earned by P&G-Phil.
x 35% — Regular Philippine corporate income tax rate
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.
P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA
P65.00 — Dividends remittable to P&G-USA
x 35% — Regular Philippine dividend tax rate under Section 24
TAXATION CASES |27
——— (b) (1), NIRC
P22.75 — Regular dividend tax
P65.00 — Dividends remittable to P&G-USA
x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax
P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income
earned by P&G-Phil. Amount (a) is also the minimum amount of the
"deemed paid" tax credit that US tax law shall allow if P&G-USA is to
qualify for the reduced or preferential dividend tax rate under Section 24
(b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which
US tax law allows under Section 902, Tax Code, may be computed
arithmetically as follows:
P65.00 — Dividends remittable to P&G-USA
- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA
P35.00 — Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at
the rate of 15%) by P&G-Phil. to its US parent P&G-USA, a tax credit of
P29.75 is allowed by Section 902 US Tax Code for Philippine corporate

income tax "deemed paid" by the parent but actually paid by the wholly-
owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax
waived by the Philippine government), Section 902, US Tax Code,
specifically and clearly complies with the requirements of Section 24 (b)
(1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901
and 902 of the US Tax Code is identical with the reading of the BIR of
Sections 901 and 902 of the US Tax Code is identical with the reading of
the BIR of Sections 901 and 902 as shown by administrative rulings issued
by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by
then Acting Commissioner of Intemal Revenue Efren I. Plana, later
Associate Justice of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company
case and the provisions of Section 901 and 902 of the U.S. Internal Revenue
Code, we find merit in your contention that our computation of the credit
which the U.S. tax law allows in such cases is erroneous as the amount of
tax "deemed paid" to the Philippine government for purposes of credit
against the U.S. tax by the recipient of dividends includes a portion of the
amount of income tax paid by the corporation declaring the dividend in
addition to the tax withheld from the dividend remitted. In other words,
the U.S. government will allow a credit to the U.S. corporation or recipient
of the dividend, in addition to the amount of tax actually withheld, a
portion of the income tax paid by the corporation declaring the dividend.
Thus, if a Philippine corporation wholly owned by a U.S. corporation has a
net income of P100,000, it will pay P25,000 Philippine income tax thereon
in accordance with Section 24(a) of the Tax Code. The net income, after
income tax, which is P75,000, will then be declared as dividend to the U.S.
corporation at 15% tax, or P11,250, will be withheld therefrom. Under the
aforementioned sections of the U.S. Internal Revenue Code, U.S.
corporation receiving the dividend can utilize as credit against its U.S. tax
payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as
follows:
P75,000 x P25,000 = P18,750
———
100,000 **
TAXATION CASES |28
(2) The amount of 15% of
P75,000 withheld = 11,250
———
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax
on the dividends received by the U.S. corporation from a Philippine
subsidiary is clearly more than 20% requirement of Presidential Decree
No. 369 as 20% of P75,000.00 the dividends to be remitted under the
above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10,
1975 is hereby amended in the sense that the dividends to be remitted by
your client to its parent company shall be subject to the withholding tax at
the rate of 15% only.
This ruling shall have force and effect only for as long as the present
pertinent provisions of the U.S. Federal Tax Code, which are the bases of
the ruling, are not revoked, amended and modified, the effect of which will
reduce the percentage of tax deemed paid and creditable against the U.S.
tax on dividends remitted by a foreign corporation to a U.S. corporation.
(Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981
addressed to Basic Foods Corporation and BIR Ruling dated 20 October
1987 addressed to Castillo, Laman, Tan and Associates. In other words, the
1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the
case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax
credit, which is embodied in Section 902, US Tax Code, is exactly the same
"deemed paid" tax credit found in our NIRC and which Philippine tax law
allows to Philippine corporations which have operations abroad (say, in
the United States) and which, therefore, pay income taxes to the US
government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.—In computing net income,
there shall be allowed as deductions — . . .
(c) Taxes. — . . .

xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. — If the taxpayer
signifies in his return his desire to have the benefits of this paragraphs, the
tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. — In the case of a citizen of the
Philippines and of domestic corporation, the amount of net income, war
profits or excess profits, taxes paid or accrued during the taxable year to
any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to
a Philippine corporation for taxes actually paid by it to the US
government—e.g., for taxes collected by the US government on dividend
remittances to the Philippine corporation. This Section of the NIRC is the
equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US
Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. — For the purposes of this subsection a
domestic corporation which owns a majority of the voting stock of a
foreign corporation from which it receives dividends in any taxable year
shall be deemed to have paid the same proportion of any income, war-
profits, or excess-profits taxes paid by such foreign corporation to any
foreign country, upon or with respect to the accumulated profits of such
foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated
profits: Provided, That the amount of tax deemed to have been paid under
this subsection shall in no case exceed the same proportion of the tax
against which credit is taken which the amount of such dividends bears to
the amount of the entire net income of the domestic corporation in which
such dividends are included. The term "accumulated profits" when used in
this subsection reference to a foreign corporation, means the amount of its
gains, profits, or income in excess of the income, war-profits, and excess-
profits taxes imposed upon or with respect to such profits or income; and
the Commissioner of Internal Revenue shall have full power to determine
from the accumulated profits of what year or years such dividends were
paid; treating dividends paid in the first sixty days of any year as having
been paid from the accumulated profits of the preceding year or years
(unless to his satisfaction shown otherwise), and in other respects treating
dividends as having been paid from the most recently accumulated gains,
profits, or earnings. In the case of a foreign corporation, the income, war-
profits, and excess-profits taxes of which are determined on the basis of an
TAXATION CASES |29
accounting period of less than one year, the word "year" as used in this
subsection shall be construed to mean such accounting period. (Emphasis
supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax
credit to a Philippine parent corporation for taxes "deemed paid" by it, that
is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent
corporation. The Philippine parent or corporate stockholder is "deemed"
under our NIRC to have paid a proportionate part of the US corporate
income tax paid by its US subsidiary, although such US tax was actually
paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC,
must be allowed by US law to P&G-USA, is the same "deemed paid" tax
credit that Philippine law allows to a Philippine corporation with a wholly-
or majority-owned subsidiary in (for instance) the US. The "deemed paid"
tax credit allowed in Section 902, US Tax Code, is no more a credit for
"phantom taxes" than is the "deemed paid" tax credit granted in Section 30
(c) (8), NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend
tax rate in the instant case was the regular thirty-five percent (35%) rate
rather than the reduced rate of fifteen percent (15%), held that P&G-Phil.
had failed to prove that its parent, P&G-USA, had in fact been given by the
US tax authorities a "deemed paid" tax credit in the amount required by
Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal
question before this Court from questions of administrative
implementation arising after the legal question has been answered. The
basic legal issue is of course, this: which is the applicable dividend tax rate
in the instant case: the regular thirty-five percent (35%) rate or the
reduced fifteen percent (15%) rate? The question of whether or not P&G-
USA is in fact given by the US tax authorities a "deemed paid" tax credit in
the required amount, relates to the administrative implementation of the
applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that
the "deemed paid" tax credit shall have actually been granted before the
applicable dividend tax rate goes down from thirty-five percent (35%) to
fifteen percent (15%). As noted several times earlier, Section 24 (b) (1),

NIRC, merely requires, in the case at bar, that the USA "shall allow a credit
against the
tax due from [P&G-USA for] taxes deemed to have been paid in the
Philippines . . ." There is neither statutory provision nor revenue
regulation issued by the Secretary of Finance requiring the actual grant of
the "deemed paid" tax credit by the US Internal Revenue Service to P&G-
USA before the preferential fifteen percent (15%) dividend rate becomes
applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor
does it provide a tax credit; it is a provision which specifies when a
particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division
results in a severe practical problem of administrative circularity. The
Second Division in effect held that the reduced dividend tax rate is not
applicable until the US tax credit for "deemed paid" taxes is actually given
in the required minimum amount by the US Internal Revenue Service to
P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US
tax authorities unless dividends have actually been remitted to the US,
which means that the Philippine dividend tax, at the rate here applicable,
was actually imposed and collected. 11 It is this practical or operating
circularity that is in fact avoided by our BIR when it issues rulings that the
tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12
Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in
Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax
rate. Once such a ruling is rendered, the Philippine subsidiary begins to
withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly
imposed as a condition for the applicability, as a matter of law, of a
particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to
prevent the BIR from issuing implementing regulations that would require
P&G Phil., or any Philippine corporation similarly situated, to certify to the
BIR the amount of the "deemed paid" tax credit actually subsequently
granted by the US tax authorities to P&G-USA or a US parent corporation
for the taxable year involved. Since the US tax laws can and do change,
such implementing regulations could also provide that failure of P&G-Phil.
to submit such certification within a certain period of time, would result in
the imposition of a deficiency assessment for the twenty (20) percentage
points differential. The task of this Court is to settle which tax rate is
applicable, considering the state of US law at a given time. We should leave
details relating to administrative implementation where they properly
belong — with the BIR.
TAXATION CASES |30
2. An interpretation of a tax statute that produces a revenue flow for the
government is not, for that reason alone, necessarily the correct reading of
the statute. There are many tax statutes or provisions which are designed,
not to trigger off an instant surge of revenues, but rather to achieve longer-
term and broader-gauge fiscal and economic objectives. The task of our
Court is to give effect to the legislative design and objectives as they are
written into the statute even if, as in the case at bar, some revenues have to
be foregone in that process.
The economic objectives sought to be achieved by the Philippine
Government by reducing the thirty-five percent (35%) dividend rate to
fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369
which amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the
requirements of a developing economy foremost of which is the financing
of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the
Philippines are taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large
projects an appropriate tax need be imposed on dividends received by
non-resident foreign corporations in the same manner as the tax imposed
on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the tax cost of
earning profits here and thereby increasing the net dividends remittable to
the investor. The foreign investor, however, would not benefit from the
reduction of the Philippine dividend tax rate unless its home country gives
it some relief from double taxation (i.e., second-tier taxation) (the home
country would simply have more "post-R.P. tax" income to subject to its
own taxing power) by allowing the investor additional tax credits which
would be applicable against the tax payable to such home country.
Accordingly, Section 24 (b) (1), NIRC, requires the home or domiciliary
country to give the investor corporation a "deemed paid" tax credit at least
equal in amount to the twenty (20) percentage points of dividend tax
foregone by the Philippines, in the assumption that a positive incentive
effect would thereby be felt by the investor.

The net effect upon the foreign investor may be shown arithmetically in
the following manner:
P65.00 — Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 — Reduced R.P. dividend tax withheld by P&G-Phil.
———
P55.25 — Dividends actually remitted to P&G-USA
P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits
P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.
P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)
- 0 - — US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 — Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US
Tax Code, could offset the US corporate income tax payable on the
dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA
would after US tax credits, still wind up with P55.25, the full amount of the
TAXATION CASES |31
dividends remitted to P&G-USA net of Philippine taxes. In the calculation of
the Philippine Government, this should encourage additional investment
or re-investment in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States
Convention "With Respect to Taxes on Income," 15 the Philippines, by a
treaty commitment, reduced the regular rate of dividend tax to a maximum
of twenty percent (20%) of the gross amount of dividends paid to US
parent corporations:
Art 11. — Dividends
xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends
derived from sources within that Contracting State by a resident of the
other Contracting State shall not exceed —
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of
the dividend if during the part of the paying corporation's taxable year
which precedes the date of payment of the dividend and during the whole
of its prior taxable year (if any), at least 10 percent of the outstanding
shares of the voting stock of the paying corporation was owned by the
recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on
the part of the United States that it "shall allow" to a US parent corporation
receiving dividends from its Philippine subsidiary "a [tax] credit for the
appropriate amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary] —.16 This is, of course, precisely the "deemed
paid" tax credit provided for in Section 902, US Tax Code, discussed above.
Clearly, there is here on the part of the Philippines a deliberate
undertaking to reduce the regular dividend tax rate of twenty percent
(20%) is a maximum rate, there is still a differential or additional
reduction of five (5) percentage points which compliance of US law
(Section 902) with the requirements of Section 24 (b) (1), NIRC, makes
available in respect of dividends from a Philippine subsidiary.
 TAXATION CASES |32

We conclude that private respondent P&G-Phil, is entitled to the tax refund 1950 12,813.00 Feb. 16, 1953
or tax credit which it seeks.
due and payable on dates indicated in the accompanying notices of
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private assessment. The assessments for 1948 and 1950 carried the surcharge of
respondent's Motion for Reconsideration dated 11 May 1988, to SET 50% authorized under Section 72 of the Tax Code for the filing of
ASIDE the Decision of the and Division of the Court promulgated on 15 fraudulent returns.
April 1988, and in lieu thereof, to REINSTATE and AFFIRM the Decision of
the Court of Tax Appeals in CTA Case No. 2883 dated 31 January 1984 and Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the
to DENY the Petition for Review for lack of merit. No pronouncement as to Bureau of Internal Revenue reduced the assessments for the year 1947
costs. from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to
P8,542.00, imposed the 50% surcharge for the year 1947 and eliminated
8. Republic vs. Ker & Company the same surcharge from the assessment for the year 1950. The
assessments for years 1948 and 1949 remained the same.
G.R. No. L-21609 September 29, 1966
On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, petition for review with preliminary injunction. No preliminary injunction
vs. was issued, for said court dismissed the appeal for having been instituted
KER & COMPANY, LTD., defendant-appellant. beyond the 30-day period provided for in Section 11 of Republic Act 1125.
We affirmed the order of dismissal of L-12396. 1
Office of the Solicitor General for plaintiff-appellant.
Leido, Andrada, Perez and Associates for defendant-appellant. On March 15, 1962, the Bureau of Internal Revenue demanded payment of
the aforesaid assessments together with a surcharge of 5% for late
payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to
pay, instead in its letters dated March 28, 1962 and April 10, 1962 it set up
BENGZON, J.P., J.: the defense of prescription of the Commissioner's right to collect the tax.
Subsequently, the Republic of the Philippines filed on March 27, 1962 a
Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the complaint with the Court of First Instance of Manila seeking collection of
years 1947, 1948, 1949 and 1950 on the following dates: the aforesaid deficiency income tax for the years 1947, 1948, 1949 and
Year Date Filed 1950. The complaint did not allege fraud in the filing of any of the income
1947 April 12, 1948 tax returns for the years involved, nor did it pray for the payment of the
1948 April 30, 1949 corresponding 50% surcharge, but it prayed for the payment of 5%
1949 May 15, 1950 surcharge for late payment and interest of 1% per month without however
1950 May 9, 1951 specifying from what date interest started to accrue.

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and Summons was served not on the defendant taxpayer but upon Messrs.
June 30, 1950, respectively. Leido and Associates, its counsel in the proceedings before the Bureau of
Internal Revenue and the Court of Tax Appeals.
In 1953 the Bureau of Internal Revenue examined and audited Ker & Co.,
Ltd.'s returns and books of accounts and subsequently issued the following On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez
assessments for deficiency income tax: & Associates, moved for the dismissal of the complaint on the ground that
Year Amount Date Assessed the court did not acquire jurisdiction over the person of the defendant and
1947 P42,342.30 July 25, 1953 that plaintiff's cause of action has prescribed. This motion was denied and
1948 18,651.87 Feb. 16, 1953 defendant filed a motion for reconsideration. Resolution on said motion,
1949 139.67 Feb. 16, 1953 however, was deferred until trial of the case on the merits.

On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint
interposing therein the defense set up in its motion to dismiss of April 14,
1962.
On September 18, 1962 the Republic of the Philippines amended its
complaint, in answer to which Ker & Co., Ltd. adopted the same answer
which it had filed on May 18, 1962.
On January 30, 1963 the Court of First Instance rendered judgment, the
dispositive portion of which states:
WHEREFORE, this Court dismisses the claim for the collection of deficiency
income taxes for 1947, but orders defendant taxpayer to pay the deficiency
income taxes for 1948, 1949 and 1950, in the amounts of P18,651.87,
P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each
amount and interest of 1% a month computed from March 27, 1962 and
until full payment thereof is made, plus the costs of suit.
On February 20, 1963 the Republic of the Philippines filed a motion for
reconsideration contending that the right of the Commissioner of Internal
Revenue to collect the deficiency assessment for 1947 has not prescribed
by a lapse of merely five years and three months, because the taxpayer's
income tax return was fraudulent in which case prescription sets in ten
years from October 31, 1951, the date of discovery of the fraud, pursuant
to Section 332 (a) of the Tax Codes and that the payment of delinquency
interest of 1% per month should commence from the date it fell due as
indicated in the assessment notices instead of on the date the complaint
was filed.
On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration
reiterating its assertion that the Court of First Instance did not acquire
jurisdiction over its person, and maintaining that since the complaint was
filed nine years, one month and eleven days after the deficiency
assessments for 1948, 1949 and 1950 were made and since the filing of its
petition for review in the Court of Tax Appeals did not stop the running of
the period of limitations, the right of the Commissioner of Internal
Revenue to collect the tax in question has prescribed.
The two motions for reconsideration having been denied, both parties
appealed directly to this Court.
The issues in this case are:
TAXATION CASES |33
1. Did the Court of First Instance acquire jurisdiction over the person of
defendant Ker & Co., Ltd.? .
2. Did the right of the Commissioner of Internal Revenue to assess
deficiency income tax for the year 1947 prescribe? .
3. Did the filing of a petition for review by the taxpayer in the Court of Tax
Appeals suspend the running of the statute of limitations to collect the
deficiency income for the years 1948, 1949 and 1950?
4. When did the delinquency interest on the deficiency income tax for the
years 1948, 1949 and 1950 accrue?
First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction
over its person inasmuch as summons was not served upon it but upon
Messrs. Leido and Associates who do not come under any of the class of
persons upon whom summons should be served as enumerated in Section
13, Rule 7 of the Rules of Court, 2 which reads:
SEC. 13. Service upon private domestic corporation or partnership.—If the
defendant is a corporation formed under the laws of the Philippines or a
partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent, or any of its directors.
Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this
tax case was in its administrative stage. The same counsel represented Ker
& Co., Ltd., when it appealed said case to the Court of Tax Appeals and later
to this Court. Subsequently, when the Deputy Commissioner of Internal
Revenue, by letter dated March 15, 1962, demanded the payment of the
deficiency income tax in question, it was Messrs. Leido, Andrada, Perez &
Associates who replied in behalf of Ker & Co., Ltd. in two letters, dated
March 28, 1962 and April 10, 1962, both after the complaint in this case
was filed. At least therefore on April 2, 1962 when Messrs. Leido and
Associates received the summons, they were still acting for and in behalf of
Ker & Co., Ltd. in connection with its tax liability involved in this case.
Perforce, they were the taxpayer's agent when summons was served.
Under Section 13 of Rule 7, aforequoted, service upon the agent of a
corporation is sufficient.
We observe that the motion to dismiss filed on April 14, 1962, aside from
disputing the lower court's jurisdiction over defendant's person, prayed
for dismissal of the complaint on the ground that plaintiff's cause of action

has prescribed. By interposing such second ground in its motion to
dismiss, Ker & Co., Ltd. availed of an affirmative defense on the basis of
which it prayed the court to resolve controversy in its favor. For the court
to validly decide the said plea of defendant Ker & Co., Ltd., it necessarily
had to acquire jurisdiction upon the latter's person, who, being the
proponent of the affirmative defense, should be deemed to have
abandoned its special appearance and voluntarily submitted itself to the
jurisdiction of the court.3
Voluntary appearance cures defects of summons, if any.4 Such defect, if
any, was further cured when defendant filed its answer to the complaint.5
A defendant can not be permitted to speculate upon the judgment of the
court by objecting to the court's jurisdiction over its person if the
judgment is adverse to it, and acceding to jurisdiction over its person if and
when the judgment sustains its defenses.
Second Issue
Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of
the Commissioner of Internal Revenue to assess against it a deficiency
income tax for the year 1947 has prescribed because the assessment was
issued on July 25, 1953 after a lapse of five years, three months and
thirteen days from the date (April 12, 1948) it filed its income tax return.
On the other hand, the Republic of the Philippines insists that the
taxpayer's income tax return was fraudulent, therefore the Commissioner
of Internal Revenue may assess the tax within ten years from discovery of
the fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.
The stand of the Republic of the Philippines hinges on whether or not
taxpayer's income tax return for 1947 was fraudulent.
The court a quo, confining itself to determining whether or not the
assessment of the tax for 1947 was issued within the five-year period
provided for in Section 331 of the Tax Code, ruled that the right of the
Commissioner of Internal Revenue to assess the tax has prescribed. Said
the lower court:
The Court resolves the second issue in the negative, because Section 331 of
the Revenue Code explicitly provides, in mandatory terms, that "Internal
Revenue taxes shall be assessed within 5 years after the return was filed,
and no proceedings in court without assessment, for the collection of such
taxes, shall be begun after expiration of such period. The attempt by the
Commissioner of Internal Revenue to make an assessment on July 25,
1953, on the basis of a return filed on April 12, 1948, is an exercise of
TAXATION CASES |34
authority against the aforequoted explicit and mandatory limitations of
statutory law. Settled in our system is the rule that acts committed against
the provisions of mandatory or prohibitory laws shall be void (Art. 5, New
Civil Code). . . .
Said court resolved the issue without touching upon fraudulence of the
return. The reason is that the complaint alleged no fraud, nor did the
plaintiff present evidence to prove fraud.
In reply to the lower court's conclusion, the Republic of the Philippines
maintains in its brief that Ker & Co., Ltd. filed a false return and since the
fraud penalty of 50% surcharge was imposed in the deficiency income tax
assessment, which has become final and executory, the finding of the
Commissioner of Internal Revenue as to the existence of the fraud has also
become final and need not be proved. This contention suffers from a flaw
in that it fails to consider the well-settled principle that fraud is a question
of fact6 which must be alleged and proved.7 Fraud is a serious charge and,
to be sustained, it must be supported by clear and convincing proof.8
Accordingly, fraud should have been alleged and proved in the lower court.
On these premises We therefore sustain the ruling of the lower court upon
the point of prescription.
It would be worth mentioning that since the assessment for deficiency
income tax for 1947 has become final and executory, Ker & Co., Ltd. may
not anymore raise defenses which go into the merits of the assessment, i.e.,
prescription of the Commissioner's right to assess the tax. Such was our
ruling in previous cases.9 In this case however, Ker & Co., Ltd. raised the
defense of prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to raise such
defense, litigated on it and submitted the issue for resolution of the court.
By its actuation, the Republic of the Philippines should be considered to
have waived its right to object to the setting up of such defense.
Third Issue
Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines
filed the complaint for the collection of the deficiency income tax for the
years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one
month and eleven days from February 16, 1953, the date the tax was
assessed, the right to collect the same has prescribed pursuant to Section
332 (c) of the Tax Code. The Republic of the Philippines however contends
that the running of the prescriptive period was interrupted by the filing of
the taxpayer's petition for review in the Court of Tax Appeals on March 1,
1956.

If the period during which the case was pending in the Court of Tax
Appeals and in the Supreme Court were not counted in reckoning the
prescriptive period, less than five years would have elapsed, hence, the
right to collect the tax has not prescribed.
The taxpayer counters that the filing of the petition for review in the Court
of Tax Appeals could not have stopped the running of the prescriptive
period to collect because said court did not have jurisdiction over the case,
the appeal having been interposed beyond the 30-day period set forth in
Section 11 of Republic Act 1125. Precisely, it adds, the Tax Court dismissed
the appeal for lack of jurisdiction and said dismissal was affirmed by the
Supreme Court in L-12396 aforementioned.
Under Section 333 of the Tax Code, quoted hereunder:
SEC. 333. Suspension of running of statute.—The running of the statute of
limitations provided in Section 331 or three hundred thirty-two on the
making of assessments and the beginning, of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be
suspended for the period during which the Collector of Internal Revenue is
prohibited from making the assessment or beginning distraint or levy or a
proceeding in court, and for sixty days thereafter.
the running of the prescriptive period to collect the tax shall be suspended
for the period during which the Commissioner of Internal Revenue is
prohibited from beginning a distraint and levy or instituting a proceeding
in court, and for sixty days thereafter.
Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and
in the Supreme Court have the effect of legally preventing the
Commissioner of Internal Revenue from instituting an action in the Court
of First Instance for the collection of the tax? Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the
Court of Tax Appeals contesting the legality of the assessments in question,
until the termination of its appeal in the Supreme Court, the Commissioner
of Internal Revenue was prevented, as recognized in this Court's ruling in
Ledesma, et al. v. Court of Tax Appeals, 10 from filing an ordinary action in
the Court of First Instance to collect the tax. Besides, to do so would be to
violate the judicial policy of avoiding multiplicity of suits and the rule on lis
pendens. 11
TAXATION CASES |35
It would be interesting to note that when the Commissioner of Internal
Revenue issued the final deficiency assessments on January 5, 1954, he
had already lost, by prescription, the right to collect the tax (except that for
1950) by the summary method of warrant of distraint and levy. Ker & Co.,
Ltd. immediately thereafter requested suspension of the collection of the
tax without penalty incident to late payment pending the filing of a
memorandum in support of its views. As requested, no tax was collected.
On May 22, 1954 the projected memorandum was filed, but as of that date
the Commissioner's right to collect by warrant of distraint and levy the
deficiency tax for 1950 had already prescribed. So much so, that on March
1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax
Appeals, the Commissioner of Internal Revenue had but one remedy left to
collect the tax, that is, by judicial action. 12 However, as stated, an
independent ordinary action in the Court of First Instance was not
available to the Commissioner pursuant to Our ruling in Ledesma, et al. v.
Court of Tax Appeals, supra, in view of the pendency of the taxpayer's
petition for review in the Court of Tax Appeals. Precisely he urgently filed a
motion to dismiss the taxpayer's petition for review with a view to
terminating therein the proceedings in the shortest possible time in order
that he could file a collection case in the Court of First Instance before his
right to do so is cut off by the passage of time. As moved, the Tax Court
dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court. By
the time the Supreme Court affirmed the order of dismissal of the Court of
Tax Appeals in L-12396 on January 31, 1962 more than five years had
elapsed since the final assessments were made on January 5, 1954.
Thereafter, the Commissioner of Internal Revenue demanded extra-
judicially the payment of the deficiency tax in question and in reply the
taxpayer, by its letter dated March 28, 1962, advised the Commissioner of
Internal Revenue that the right to collect the tax has prescribed pursuant
to Section 332 (c) of the Tax Code.1awphîl.nèt
Thus, did the taxpayer produce the effect of temporarily staying the hands
of the Commissioner of Internal Revenue simply through a choice of
remedy. And, if We were to sustain the taxpayer's stand, We would be
encouraging taxpayers to delay the payment of taxes in the hope of
ultimately avoiding the same.
Under the circumstances, the Commissioner of Internal Revenue was in
effect prohibited from collecting the tax in question. This being so, the
provisions of Section 333 of the Tax Code will apply.
Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on
the deficiency income tax for 1948, 1949 and 1950 accrued and should
commence from the date of the assessments as shown in the assessment
notices, pursuant to Section 51(e) of the Tax Code, instead of from the date
the complaint was filed as determined in the decision appealed from.
Section 51 (e) of the Tax Code states:
SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or
sums due and unpaid after the dates prescribed in subsections (b), (c) and
(d) for the payment of the same, there shall be added the sum of five per
centum on the amount of tax unpaid and interest at the rate of one per
centum a month upon said tax from the time the same became due, except
from the estates of insane, deceased, or insolvent persons. (emphasis
supplied)
Exhibit "F" — the letter of assessment — shows that the deficiency income
tax for 1948 and 1949 became due on March 15, 1953 and that for 1950
accrued on February 15, 1954 in accordance with Section 51(d) of the Tax
Code. Since the tax in question remained unpaid, delinquency interest
accrued and became due starting from said due dates. The decision
appealed from should therefore be modified accordingly.
WHEREFORE, the decision appealed from is affirmed with the modification
that the delinquency interest at the rate of 1% per month shall be
computed from March 15, 1953 for the deficiency income tax for 1948 and
1949 and from February 15, 1954 for the deficiency income tax for 1950.
With costs against Ker & Co., Ltd. So ordered.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar,
Sanchez and Castro, JJ., concur.
9. Mamba vs. Lara
G.R. No. 165109 December 14, 2009
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N. FAUSTO,
Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN,
ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.
FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE T.
LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL
TAXATION CASES |36
COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO., and
LAND BANK OF THE PHILIPPINES, Respondents.
DECISION
DEL CASTILLO, J.:
The decision to entertain a taxpayer’s suit is discretionary upon the Court.
It can choose to strictly apply the rule or take a liberal stance depending on
the controversy involved. Advocates for a strict application of the rule
believe that leniency would open floodgates to numerous suits, which
could hamper the government from performing its job. Such possibility,
however, is not only remote but also negligible compared to what is at
stake - "the lifeblood of the State". For this reason, when the issue hinges
on the illegal disbursement of public funds, a liberal approach should be
preferred as it is more in keeping with truth and justice.
This Petition for Review on Certiorari with prayer for a Temporary
Restraining Order/Writ of Preliminary Injunction, under Rule 45 of the
Rules of Court, seeks to set aside the April 27, 2004 Order 1 of the Regional
Trial Court (RTC), Branch 5, Tuguegarao City, dismissing the Petition for
Annulment of Contracts and Injunction with prayer for the issuance of a
Temporary Restraining Order/Writ of Preliminary Injunction, 2 docketed
as Civil Case No. 6283. Likewise assailed in this Petition is the August 20,
2004 Resolution 3 of RTC, Branch 1, Tuguegarao City denying the Motion
for Reconsideration of the dismissal.
Factual Antecedents
On November 5, 2001, the Sangguniang Panlalawigan of Cagayan passed
Resolution No. 2001-272 4 authorizing Governor Edgar R. Lara (Gov. Lara)
to engage the services of and appoint Preferred Ventures Corporation as
financial advisor or consultant for the issuance and flotation of bonds to
fund the priority projects of the governor without cost and commitment.
On November 19, 2001, the Sangguniang Panlalawigan, through Resolution
No. 290-2001, 5 ratified the Memorandum of Agreement (MOA) 6 entered
into by Gov. Lara and Preferred Ventures Corporation. The MOA provided
that the provincial government of Cagayan shall pay Preferred Ventures
Corporation a one-time fee of 3% of the amount of bonds floated.
On February 15, 2002, the Sangguniang Panlalawigan approved Resolution
No. 2002-061-A 7 authorizing Gov. Lara to negotiate, sign and execute
contracts or agreements pertinent to the flotation of the bonds of the

provincial government in an amount not to exceed P500 million for the
construction and improvement of priority projects to be approved by the
Sangguniang Panlalawigan.
On May 20, 2002, the majority of the members of the Sangguniang
Panlalawigan of Cagayan approved Ordinance No. 19-2002, 8 authorizing
the bond flotation of the provincial government in an amount not to
exceed P500 million to fund the construction and development of the new
Cagayan Town Center. The Resolution likewise granted authority to Gov.
Lara to negotiate, sign and execute contracts and agreements necessary
and related to the bond flotation subject to the approval and ratification by
the Sangguniang Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan approved Resolution
No. 350-2003 9 ratifying the Cagayan Provincial Bond Agreements entered
into by the provincial government, represented by Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking Corporation (RCBC)
– Trust and Investment Division and Malayan Insurance Company, Inc.
(MICO).
b. Deed of Assignment by way of security with the RCBC and the Land Bank
of the Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC – Trust and
Investment Division.
d. Guarantee Agreement with the RCBC – Trust and Investment Division
and MICO.
e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved Resolution No.
351-2003, 10 ratifying the Agreement for the Planning, Design,
Construction, and Site Development of the New Cagayan Town Center 11
entered into by the provincial government, represented by Gov. Lara and
Asset Builders Corporation, represented by its President, Mr. Rogelio P.
Centeno.
On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders
Corporation, giving to the latter the planning, design, construction and site
development of the town center project for a fee of P213,795,732.39. 12
Proceedings before the Regional Trial Court
TAXATION CASES |37
On December 12, 2003, petitioners Manuel N. Mamba, Raymund P.
Guzman and Leonides N. Fausto filed a Petition for Annulment of Contracts
and Injunction with prayer for a Temporary Restraining Order/Writ of
Preliminary Injunction 13 against Edgar R. Lara, Jenerwin C. Bacuyag,
Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman A. Agatep, Estrella P.
Fernandez, Vilmer V. Viloria, Baylon A. Calagui, Cecilia Maeve T. Layos,
Preferred Ventures Corporation, Asset Builders Corporation, RCBC, MICO
and LBP.1avvphi1
At the time of the filing of the petition, Manuel N. Mamba was the
Representative of the 3rd Congressional District of the province of
Cagayan 14 while Raymund P. Guzman and Leonides N. Fausto were
members of the Sangguniang Panlalawigan of Cagayan. 15
Edgar R. Lara was sued in his capacity as governor of Cagayan, 16 while
Jenerwin C. Bacuyag, Wilson O. Puyawan, Aldegundo Q. Cayosa, Jr., Norman
A. Agatep, Estrella P. Fernandez, Vilmer V. Viloria, Baylon A. Calagui and
Cecilia Maeve T. Layos were sued as members of the Sangguniang
Panlalawigan of Cagayan. 17 Respondents Preferred Ventures Corporation,
Asset Builders Corporation, RCBC, MICO and LBP were all impleaded as
indispensable or necessary parties.
Respondent Preferred Ventures Corporation is the financial advisor of the
province of Cagayan regarding the bond flotation undertaken by the
province. 18 Respondent Asset Builders Corporation was awarded the
right to plan, design, construct and develop the proposed town center. 19
Respondent RCBC, through its Trust and Investment Division, is the
trustee of the seven-year bond flotation undertaken by the province for the
construction of the town center, 20 while respondent MICO is the
guarantor. 21 Lastly, respondent LBP is the official depositary bank of the
province. 22
In response to the petition, public respondents filed an Answer with
Motion to Dismiss, 23 raising the following defenses: a) petitioners are not
the proper parties or they lack locus standi in court; b) the action is barred
by the rule on state immunity from suit and c) the issues raised are not
justiciable questions but purely political.
For its part, respondent Preferred Ventures Corporation filed a Motion to
Dismiss 24 on the following grounds: a) petitioners have no cause of action
for injunction; b) failure to join an indispensable party; c) lack of
personality to sue and d) lack of locus standi. Respondent MICO likewise
filed a Motion to Dismiss 25 raising the grounds of lack of cause of action

and legal standing. Respondent RCBC similarly argued in its Motion to
Dismiss 26 that: a) petitioners are not the real parties-in-interest or have
no legal standing to institute the petition; b) petitioners have no cause of
action as the flotation of the bonds are within the right and power of both
respondent RCBC and the province of Cagayan and c) the viability of the
construction of a town center is not a justiciable question but a political
question.
Respondent Asset Builders Corporation, on the other hand, filed an
Answer 27 interposing special and affirmative defenses of lack of legal
standing and cause of action. Respondent LBP also filed an Answer 28
alleging in the main that petitioners have no cause of action against it as it
is not an indispensable party or a necessary party to the case.
Two days after the filing of respondents’ respective memoranda on the
issues raised during the hearing of the special and/or affirmative defenses,
petitioners filed a Motion to Admit Amended Petition 29 attaching thereto
the amended petition. 30 Public respondents opposed the motion for the
following reasons: 1) the motion was belatedly filed; 2) the Amended
Petition is not sufficient in form and in substance; 3) the motion is patently
dilatory and 4) the Amended Petition was filed to cure the defect in the
original petition. 31
Petitioners also filed a Consolidated Opposition to the Motion to Dismiss
32 followed by supplemental pleadings 33 in support of their prayer for a
writ of preliminary injunction.
On April 27, 2004, the RTC issued the assailed Order denying the Motion to
Admit Amended Petition and dismissing the petition for lack of cause of
action. It ruled that:
The language of Secs. 2 & 3 of Rule 10 of the 1997 Rules of Civil Procedure
dealing on the filing of an amended pleading is quite clear. As such, the
Court rules that the motion was belatedly filed. The granting of leave to file
amended pleadings is a matter peculiarly within the sound discretion of
the trial court. But the rule allowing amendments to pleadings is subject to
the general but inflexible limitation that the cause of action or defense
shall not be substantially changed or the theory of the case altered to the
prejudice of the other party (Avecilla vs. Yatcvo, 103 Phil. 666).
On the assumption that the controversy presents justiciable issues which
this Court may take cognizance of, petitioners in the present case who
presumably presented legitimate interests in the controversy are not
parties to the questioned contract. Contracts produce effect as between the
TAXATION CASES |38
parties who execute them. Only a party to the contract can maintain an
action to enforce the obligations arising under said contract (Young vs. CA,
169 SCRA 213). Since a contract is binding only upon the parties thereto, a
third person cannot ask for its rescission if it is in fraud of his rights. One
who is not a party to a contract has no rights under such contract and even
if the contrary may be voidable, its nullity can be asserted only by one who
is a party thereto; a third person would have absolutely no personality to
ask for the annulment (Wolfson vs. Estate of Martinez, 20 Phil. 340; Ibañez
vs. Hongkong & Shanghai Bank, 22 Phil. 572; Ayson vs. CA, G.R. Nos. L-
6501 & 6599, May 21, 1955).
It was, however, held that a person who is not a party obliged principally
or subsidiarily in a contract may exercise an action for nullity of the
contract if he is prejudiced in his rights with respect to one of the
contracting parties and can show the detriment which would positively
result to him from the contract in which he had no intervention (Bañez vs.
CA, 59 SCRA 15; Anyong Hsan vs. CA, 59 SCRA 110, 112-113; Leodovica vs.
CA, 65 SCRA 154-155). In the case at bar, petitioners failed to show that
they were prejudiced in their rights [or that a] detriment x x x would
positively result to them. Hence, they lack locus standi in court.
xxxx
To the mind of the Court, procedural matters in the present controversy
may be dispensed with, stressing that the instant case is a political
question, a question which the court cannot, in any manner, take judicial
cognizance. Courts will not interfere with purely political questions
because of the principle of separation of powers (Tañada vs. Cuenco, 103
Phil. 1051). Political questions are those questions which, under the
Constitution, are to be decided by the people in their sovereign capacity or
in regard to which full discretionary authority has been delegated to the
legislative or [to the] executive branch of the government (Nuclear Free
Phils. Coalition vs. NPC, 141 SCRA 307 (1986); Torres vs. Gonzales, 152
SCRA 272; Citizen’s Alliance for Consumer Protection vs. Energy
Regulatory Board, G.R. No. 78888-90, June 23, 1988).
The citation made by the provincial government[, to] which this Court is
inclined to agree, is that the matter falls under the discretion of another
department, hence the decision reached is in the category of a political
question and consequently may not be the subject of judicial jurisdiction
(Cruz in Political Law, 1998 Ed., page 81) is correct.

It is [a] well-recognized principle that purely administrative and
discretionary functions may not be interfered with by the courts (Adm.
Law Test & Cases, 2001 Ed., De Leon, De Leon, Jr.).
The case therefore calls for the doctrine of ripeness for judicial review.
This determines the point at which courts may review administrative
action. The basic principle of ripeness is that the judicial machinery should
be conserved for problems which are real and present or imminent and
should not be squandered on problems which are future, imaginary or
remote. This case is not ripe for judicial determination since there is no
imminently x x x substantial injury to the petitioners.
In other words, the putting up of the New Cagayan Town Center by the
province over the land fully owned by it and the concomitant contracts
entered into by the same is within the bounds of its corporate power, an
undertaking which falls within the ambit of its discretion and therefore a
purely political issue which is beyond the province of the court x x x.
[Consequently, the court cannot,] in any manner, take judicial cognizance
over it. The act of the provincial government was in pursuance of the
mandate of the Local Government Code of 1991.
xxxx
Indeed, adjudication of the procedural issues presented for resolution by
the present action would be a futile exercise in exegesis.
What defeats the plea of the petitioners for the issuance of a writ of
preliminary injunction is the fact that their averments are merely
speculative and founded on conjectures. An injunction is not intended to
protect contingent or future rights nor is it a remedy to enforce an abstract
right (Cerebo vs. Dictado, 160 SCRA 759; Ulang vs. CA, 225 SCRA 637). An
injunction, whether preliminary or final, will not issue to protect a right
not in in esse and which may never arise, or to restrain an act which does
not give rise to a cause of action. The complainant’s right on title,
moreover, must be clear and unquestioned [since] equity, as a rule, will not
take cognizance of suits to establish title and will not lend its preventive
aid by injunction where the complainant’s title or right is doubtful or
disputed. The possibility of irreparable damage, without proof of violation
of an actual existing right, is no ground for injunction being a mere
damnum, absque injuria (Talisay-Silay Milling Company, Inc. vs. CFI of
Negros Occidental, et. al. 42 SCRA 577, 582).
xxxx
TAXATION CASES |39
For lack of cause of action, the case should be dismissed.
The facts and allegations [necessarily] suggest also that this court may
dismiss the case for want of jurisdiction.
The rule has to be so because it can motu propio dismiss it as its only
jurisdiction is to dismiss it if it has no jurisdiction. This is in line with the
ruling in Andaya vs. Abadia, 46 SCAD 1036, G.R. No. 104033, Dec. 27, 1993
where the court may dismiss a complaint even without a motion to dismiss
or answer.
Upon the foregoing considerations, the case is hereby dismissed without
costs.
SO ORDERED. 34
Petitioners filed a Motion for Reconsideration 35 to which respondents
filed their respective Oppositions. 36 Petitioners then filed a Motion to
Inhibit, which the court granted. Accordingly, the case was re-raffled to
Branch 1 of the RTC of Tuguegarao City. 37
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a
Resolution denying petitioners’ plea for reconsideration. The court found
the motion to be a mere scrap of paper as the notice of hearing was
addressed only to the Clerk of Court in violation of Section 5, Rule 15 of the
Rules of Court. As to the merits, the court sustained the findings of Branch
5 that petitioners lack legal standing to sue and that the issue involved is
political.
Issues
Hence, the present recourse where petitioners argue that:
A. The lower court decided a question of substance in a way not in accord
with law and with the applicable decision of the Supreme Court, and
B. The lower court has so far departed from the accepted and usual course
of judicial proceedings as to call for an exercise of the power of supervision
in that:
I. It denied locus standi to petitioners;
II. [It] determined that the matter of contract entered into by the
provincial government is in the nature of a political question;

III. [It] denied the admission of Amended Petition; and
IV. [It] found a defect of substance in the petitioners’ Motion for
Reconsideration. 38
Our Ruling
The petition is partially meritorious.
Petitioners have legal standing to sue as taxpayers
A taxpayer is allowed to sue where there is a claim that public funds are
illegally disbursed, or that the public money is being deflected to any
improper purpose, or that there is wastage of public funds through the
enforcement of an invalid or unconstitutional law. 39 A person suing as a
taxpayer, however, must show that the act complained of directly involves
the illegal disbursement of public funds derived from taxation. 40 He must
also prove that he has sufficient interest in preventing the illegal
expenditure of money raised by taxation and that he will sustain a direct
injury because of the enforcement of the questioned statute or contract. 41
In other words, for a taxpayer’s suit to prosper, two requisites must be
met: (1) public funds derived from taxation are disbursed by a political
subdivision or instrumentality and in doing so, a law is violated or some
irregularity is committed and (2) the petitioner is directly affected by the
alleged act. 42
In light of the foregoing, it is apparent that contrary to the view of the RTC,
a taxpayer need not be a party to the contract to challenge its validity. 43
As long as taxes are involved, people have a right to question contracts
entered into by the government.
In this case, although the construction of the town center would be
primarily sourced from the proceeds of the bonds, which respondents
insist are not taxpayer’s money, a government support in the amount of
P187 million would still be spent for paying the interest of the bonds. 44 In
fact, a Deed of Assignment 45 was executed by the governor in favor of
respondent RCBC over the Internal Revenue Allotment (IRA) and other
revenues of the provincial government as payment and/or security for the
obligations of the provincial government under the Trust Indenture
Agreement dated September 17, 2003. Records also show that on March 4,
2004, the governor requested the Sangguniang Panlalawigan to
TAXATION CASES |40
appropriate an amount of P25 million for the interest of the bond. 46
Clearly, the first requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the
stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance",
"paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show
direct injury. 48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the court did not
hesitate to give standing to taxpayers. 49
We find no reason to deviate from the jurisprudential trend.
To begin with, the amount involved in this case is substantial. Under the
various agreements entered into by the governor, which were ratified by
the Sangguniang Panlalawigan, the provincial government of Cagayan
would incur the following costs: 50
Compensation to Preferred Ventures - P 6,150,000.00
(3% of P205M) 51 Resolution No. 290-2001
Management and Underwriting Fees - 3,075,000.00
(1.5% of P205M) 52
Documentary Tax - 1,537,500.00
(0.75% of P205M) 53
Guarantee Fee 54 - 7,350,000.00
Construction and Design of town center 55 - 213,795,732.39
Total Cost - P231,908,232.39
What is more, the provincial government would be shelling out a total
amount of P187 million for the period of seven years by way of subsidy for
the interest of the bonds. Without a doubt, the resolution of the present
petition is of paramount importance to the people of Cagayan who at the
end of the day would bear the brunt of these agreements.
Another point to consider is that local government units now possess more
powers, authority and resources at their disposal, 56 which in the hands of
unscrupulous officials may be abused and misused to the detriment of the
public. To protect the interest of the people and to prevent taxes from
being squandered or wasted under the guise of government projects, a
liberal approach must therefore be adopted in determining locus standi in
public suits.

In view of the foregoing, we are convinced that petitioners have sufficient
standing to file the present suit. Accordingly, they should be given the
opportunity to present their case before the RTC.
Having resolved the core issue, we shall now proceed to the remaining
issues.
The controversy involved is justiciable
A political question is a question of policy, which is to be decided by the
people in their sovereign capacity or by the legislative or the executive
branch of the government to which full discretionary authority has been
delegated. 57
In filing the instant case before the RTC, petitioners seek to restrain public
respondents from implementing the bond flotation and to declare null and
void all contracts related to the bond flotation and construction of the
town center. In the petition before the RTC, they alleged grave abuse of
discretion and clear violations of law by public respondents. They put in
issue the overpriced construction of the town center; the grossly
disadvantageous bond flotation; the irrevocable assignment of the
provincial government’s annual regular income, including the IRA, to
respondent RCBC to cover and secure the payment of the bonds floated;
and the lack of consultation and discussion with the community regarding
the proposed project, as well as a proper and legitimate bidding for the
construction of the town center.
Obviously, the issues raised in the petition do not refer to the wisdom but
to the legality of the acts complained of. Thus, we find the instant
controversy within the ambit of judicial review. Besides, even if the issues
were political in nature, it would still come within our powers of review
under the expanded jurisdiction conferred upon us by Section 1, Article
VIII of the Constitution, which includes the authority to determine whether
grave abuse of discretion amounting to excess or lack of jurisdiction has
been committed by any branch or instrumentality of the government. 58
The Motion to Admit Amended Petition was properly denied
However, as to the denial of petitioners’ Motion to Admit Amended
Petition, we find no reason to reverse the same. The inclusion of the
province of Cagayan as a petitioner would not only change the theory of
the case but would also result in an absurd situation. The provincial
government, if included as a petitioner, would in effect be suing itself
TAXATION CASES |41
considering that public respondents are being sued in their official
capacity.
In any case, there is no need to amend the petition because petitioners, as
we have said, have legal standing to sue as taxpayers.
Section 5, Rule 15 of the Rules of Court was substantially complied with
This brings us to the fourth and final issue.
A perusal of the Motion for Reconsideration filed by petitioners would
show that the notice of hearing was addressed only to the Clerk of Court in
violation of Section 5, Rule 15 of the Rules of Court, which requires the
notice of hearing to be addressed to all parties concerned. This defect,
however, did not make the motion a mere scrap of paper. The rule is not a
ritual to be followed blindly. 59 The purpose of a notice of hearing is
simply to afford the adverse parties a chance to be heard before a motion
is resolved by the court. 60 In this case, respondents were furnished copies
of the motion, and consequently, notified of the scheduled hearing. Counsel
for public respondents in fact moved for the postponement of the hearing,
which the court granted. 61 Moreover, respondents were afforded
procedural due process as they were given sufficient time to file their
respective comments or oppositions to the motion. From the foregoing, it
is clear that the rule requiring notice to all parties was substantially
complied with. 62 In effect, the defect in the Motion for Reconsideration
was cured.
We cannot overemphasize that procedural rules are mere tools to aid the
courts in the speedy, just and inexpensive resolution of cases. 63
Procedural defects or lapses, if negligible, should be excused in the higher
interest of justice as technicalities should not override the merits of the
case. Dismissal of cases due to technicalities should also be avoided to
afford the parties the opportunity to present their case. Courts must be
reminded that the swift unclogging of the dockets although a laudable
objective must not be done at the expense of substantial justice. 64
WHEREFORE, the instant Petition is PARTIALLY GRANTED. The April 27,
2004 Order of Branch 5 and the August 20, 2004 Resolution of Branch 1 of
the Regional Trial Court of Tuguegarao City are hereby REVERSED and SET
ASIDE insofar as the dismissal of the petition is concerned. Accordingly,
the case is hereby REMANDED to the court a quo for further proceedings.
SO ORDERED.

G.R. No. 191667 April 17, 2013
LAND BANK OF THE PHILIPPINES, Petitioner,
vs.
EDUARDO M. CACAYURAN, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this Petition for Review on Certiorari1 is the March 26, 2010 Decision2 of
the Court of Appeals (CA) in CA-G.R. CV. No. 89732 which affirmed with modification
the April 10, 2007 Decision3 of the Regional Trial Court (RTC) of Agoo, La Union,
Branch 31, declaring inter alia the nullity of the loan agreements entered into by
petitioner Land Bank of the Philippines (Land Bank) and the Municipality of Agoo,
La Union (Municipality).
The Facts
From 2005 to 2006, the Municipality’s Sangguniang Bayan (SB) passed certain
resolutions to implement a multi-phased plan (Redevelopment Plan) to redevelop
the Agoo Public Plaza (Agoo Plaza) where the Imelda Garden and Jose Rizal
Monument were situated.
To finance phase 1 of the said plan, the SB initially passed Resolution No. 68-
20054 on April 19, 2005, authorizing then Mayor Eufranio Eriguel (Mayor Eriguel)
to obtain a loan from Land Bank and incidental thereto, mortgage a 2,323.75 square
meter lot situated at the southeastern portion of the Agoo Plaza (Plaza Lot) as
collateral. To serve as additional security, it further authorized the assignment of a
portion of its internal revenue allotment (IRA) and the monthly income from the
proposed project in favor of Land Bank.5 The foregoing terms were confirmed,
approved and ratified on October 4, 2005 through Resolution No. 139-
2005.6 Consequently, on November 21, 2005, Land Bank extended a ₱4,000,000.00
loan in favor of the Municipality (First Loan),7 the proceeds of which were used to
construct ten (10) kiosks at the northern and southern portions of the Imelda
Garden. After completion, these kiosks were rented out.8
On March 7, 2006, the SB passed Resolution No. 58-2006,9 approving the
construction of a commercial center on the Plaza Lot as part of phase II of the
Redevelopment Plan. To finance the project, Mayor Eriguel was again authorized to
obtain a loan from Land Bank, posting as well the same securities as that of the First
TAXATION CASES |42
Loan. All previous representations and warranties of Mayor Eriguel related to the
negotiation and obtention of the new loan10were ratified on September 5, 2006
through Resolution No. 128-2006.11 In consequence, Land Bank granted a second
loan in favor of the Municipality on October 20, 2006 in the principal amount of
₱28,000,000.00 (Second Loan).12
Unlike phase 1 of the Redevelopment Plan, the construction of the commercial
center at the Agoo Plaza was vehemently objected to by some residents of the
Municipality. Led by respondent Eduardo Cacayuran (Cacayuran), these residents
claimed that the conversion of the Agoo Plaza into a commercial center, as funded
by the proceeds from the First and Second Loans (Subject Loans), were "highly
irregular, violative of the law, and detrimental to public interests, and will result to
wanton desecration of the said historical and public park."13 The foregoing was
embodied in a Manifesto,14 launched through a signature campaign conducted by
the residents and Cacayuran.
In addition, Cacayuran wrote a letter15 dated December 8, 2006 addressed to Mayor
Eriguel, Vice Mayor Antonio Eslao (Vice Mayor Eslao), and the members of the SB
namely, Violeta Laroya-Balbin, Jaime Boado, Jr., Rogelio De Vera, James Dy,
Crisogono Colubong, Ricardo Fronda, Josephus Komiya, Erwina Eriguel, Felizardo
Villanueva, and Gerard Mamuyac (Implicated Officers), expressing the growing
public clamor against the conversion of the Agoo Plaza into a commercial center. He
then requested the foregoing officers to furnish him certified copies of various
documents related to the aforementioned conversion including, among others, the
resolutions approving the Redevelopment Plan as well as the loan agreements for
the sake of public information and transparency.
Unable to get any response, Cacayuran, invoking his right as a taxpayer, filed a
Complaint16 against the Implicated Officers and Land Bank, assailing, among others,
the validity of the Subject Loans on the ground that the Plaza Lot used as collateral
thereof is property of public dominion and therefore, beyond the commerce of
man.17
Upon denial of the Motion to Dismiss dated December 27, 2006,18 the Implicated
Officers and Land Bank filed their respective Answers.
For its part, Land Bank claimed that it is not privy to the Implicated Officers’ acts of
destroying the Agoo Plaza. It further asserted that Cacayuran did not have a cause of
action against it since he was not privy to any of the Subject Loans.19

During the pendency of the proceedings, the construction of the commercial center
was completed and the said structure later became known as the Agoo’s People
Center (APC).
On May 8, 2007, the SB passed Municipal Ordinance No. 02-2007,20 declaring the
area where the APC stood as patrimonial property of the Municipality.
The Ruling of the RTC
In its Decision dated April 10, 2007,21 the RTC ruled in favor of Cacayuran, declaring
the nullity of the Subject Loans.22 It found that the resolutions approving the said
loans were passed in a highly irregular manner and thus, ultra vires; as such, the
Municipality is not bound by the same.23 Moreover, it found that the Plaza Lot is
proscribed from collateralization given its nature as property for public use.24
Aggrieved, Land Bank filed its Notice of Appeal on April 23, 2007.25 On the other
hand, the Implicated Officers’ appeal was deemed abandoned and dismissed for
their failure to file an appellants’ brief despite due notice.26 In this regard, only Land
Bank’s appeal was given due course by the CA.
Ruling of the CA
In its Decision dated March 26, 2010,27 the CA affirmed with modification the RTC’s
ruling, excluding Vice Mayor Eslao from any personal liability arising from the
Subject Loans.28
It held, among others, that: (1) Cacayuran had locus standi to file his complaint,
considering that (a) he was born, raised and a bona fide resident of the Municipality;
and (b) the issue at hand involved public interest of transcendental
importance;29 (2) Resolution Nos. 68-2005, 139-2005, 58-2006, 128-2006 and all
other related resolutions (Subject Resolutions) were invalidly passed due to the SB’s
non-compliance with certain sections of Republic Act No. 7160, otherwise known as
the "Local Government Code of 1991" (LGC); (3) the Plaza Lot, which served as
collateral for the Subject Loans, is property of public dominion and thus, cannot be
appropriated either by the State or by private persons;30 and (4) the Subject Loans
are ultra vires because they were transacted without proper authority and their
collateralization constituted improper disbursement of public funds.
Dissatisfied, Land Bank filed the instant petition.
Issues Before the Court
TAXATION CASES |43
The following issues have been raised for the Court’s resolution: (1) whether
Cacayuran has standing to sue; (2) whether the Subject Resolutions were validly
passed; and (3) whether the Subject Loans are ultra vires.
The Court’s Ruling
The petition lacks merit.
A. Cacayuran’s standing to sue
Land Bank claims that Cacayuran did not have any standing to contest the
construction of the APC as it was funded through the proceeds coming from the
Subject Loans and not from public funds. Besides, Cacayuran was not even a party to
any of the Subject Loans and is thus, precluded from questioning the same.
The argument is untenable.
It is hornbook principle that a taxpayer is allowed to sue where there is a claim that
public funds are illegally disbursed, or that public money is being deflected to any
improper purpose, or that there is wastage of public funds through the enforcement
of an invalid or unconstitutional law. A person suing as a taxpayer, however, must
show that the act complained of directly involves the illegal disbursement of public
funds derived from taxation. In other words, for a taxpayer’s suit to prosper, two
requisites must be met namely, (1) public funds derived from taxation are disbursed
by a political subdivision or instrumentality and in doing so, a law is violated or
some irregularity is committed; and (2) the petitioner is directly affected by the
alleged act.31
Records reveal that the foregoing requisites are present in the instant case.
First, although the construction of the APC would be primarily sourced from the
proceeds of the Subject Loans, which Land Bank insists are not taxpayer’s money,
there is no denying that public funds derived from taxation are bound to be
expended as the Municipality assigned a portion of its IRA as a security for the
foregoing loans. Needless to state, the Municipality’s IRA, which serves as the local
government unit’s just share in the national taxes,32 is in the nature of public funds
derived from taxation. The Court believes, however, that although these funds may
be posted as a security, its collateralization should only be deemed effective during
the incumbency of the public officers who approved the same, else those who
succeed them be effectively deprived of its use.

In any event, it is observed that the proceeds from the Subject Loans had already
been converted into public funds by the Municipality’s receipt thereof. Funds
coming from private sources become impressed with the characteristics of public
funds when they are under official custody.33
Accordingly, the first requisite has been clearly met.
Second, as a resident-taxpayer of the Municipality, Cacayuran is directly affected by
the conversion of the Agoo Plaza which was funded by the proceeds of the Subject
Loans. It is well-settled that public plazas are properties for public use34 and
therefore, belongs to the public dominion.35 As such, it can be used by anybody and
no one can exercise over it the rights of a private owner.36 In this light, Cacayuran
had a direct interest in ensuring that the Agoo Plaza would not be exploited for
commercial purposes through the APC’s construction. Moreover, Cacayuran need
not be privy to the Subject Loans in order to proffer his objections thereto. In
Mamba v. Lara, it has been held that a taxpayer need not be a party to the contract to
challenge its validity; as long as taxes are involved, people have a right to question
contracts entered into by the government.37
Therefore, as the above-stated requisites obtain in this case, Cacayuran has standing
to file the instant suit.
B. Validity of the Subject Resolutions
Land Bank avers that the Subject Resolutions provided ample authority for Mayor
Eriguel to contract the Subject Loans. It posits that Section 444(b)(1)(vi) of the LGC
merely requires that the municipal mayor be authorized by the SB concerned and
that such authorization need not be embodied in an ordinance.38
A careful perusal of Section 444(b)(1)(vi) of the LGC shows that while the
authorization of the municipal mayor need not be in the form of an ordinance, the
obligation which the said local executive is authorized to enter into must be made
pursuant to a law or ordinance, viz:
Sec. 444. The Chief Executive: Powers, Duties, Functions and Compensation. -
xxxx
(b) For efficient, effective and economical governance the purpose of which is the
general welfare of the municipality and its inhabitants pursuant to Section 16 of this
Code, the municipal mayor shall:
TAXATION CASES |44
xxxx
(vi) Upon authorization by the sangguniang bayan, represent the municipality in all
its business transactions and sign on its behalf all bonds, contracts, and obligations,
and such other documents made pursuant to law or ordinance; (Emphasis and
underscoring supplied)
In the present case, while Mayor Eriguel’s authorization to contract the Subject
Loans was not contained – as it need not be contained – in the form of an ordinance,
the said loans and even the Redevelopment Plan itself were not approved pursuant
to any law or ordinance but through mere resolutions. The distinction between
ordinances and resolutions is well-perceived. While ordinances are laws and
possess a general and permanent character, resolutions are merely declarations of
the sentiment or opinion of a lawmaking body on a specific matter and are
temporary in nature.39 As opposed to ordinances, "no rights can be conferred by and
be inferred from a resolution."40 In this accord, it cannot be denied that the SB
violated Section 444(b)(1)(vi) of the LGC altogether.
Noticeably, the passage of the Subject Resolutions was also tainted with other
irregularities, such as (1) the SB’s failure to submit the Subject Resolutions to the
Sangguniang Panlalawigan of La Union for its review contrary to Section 56 of the
LGC;41 and (2) the lack of publication and posting in contravention of Section 59 of
the LGC.42
In fine, Land Bank cannot rely on the Subject Resolutions as basis to validate the
Subject Loans.
C. Ultra vires nature of the Subject
Loans
Neither can Land Bank claim that the Subject Loans do not constitute ultra vires acts
of the officers who approved the same.
Generally, an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore
beyond the powers conferred upon it by law.43 There are two (2) types of ultra vires
acts. As held in Middletown Policemen's Benevolent Association v. Township of
Middletown:44

There is a distinction between an act utterly beyond the jurisdiction of a municipal
corporation and the irregular exercise of a basic power under the legislative grant in
matters not in themselves jurisdictional. The former are ultra vires in the primary
sense and void; the latter, ultra vires only in a secondary sense which does not
preclude ratification or the application of the doctrine of estoppel in the interest of
equity and essential justice. (Emphasis and underscoring supplied)
In other words, an act which is outside of the municipality’s jurisdiction is
considered as a void ultra vires act, while an act attended only by an irregularity but
remains within the municipality’s power is considered as an ultra vires act subject
to ratification and/or validation. To the former belongs municipal contracts which
(a) are entered into beyond the express, implied or inherent powers of the local
government unit; and (b) do not comply with the substantive requirements of law
e.g., when expenditure of public funds is to be made, there must be an actual
appropriation and certificate of availability of funds; while to the latter belongs
those which (a) are entered into by the improper department, board, officer of
agent; and (b)do not comply with the formal requirements of a written contract e.g.,
the Statute of Frauds.45
Applying these principles to the case at bar, it is clear that the Subject Loans belong
to the first class of ultra vires acts deemed as void.
Records disclose that the said loans were executed by the Municipality for the
purpose of funding the conversion of the Agoo Plaza into a commercial center
pursuant to the Redevelopment Plan. However, the conversion of the said plaza is
beyond the Municipality’s jurisdiction considering the property’s nature as one for
public use and thereby, forming part of the public dominion. Accordingly, it cannot
be the object of appropriation either by the State or by private persons. 46 Nor can it
be the subject of lease or any other contractual undertaking.47 In Villanueva v.
Castañeda, Jr.,48 citing Espiritu v. Municipal Council of Pozorrubio,49 the Court
pronounced that:
x x x Town plazas are properties of public dominion, to be devoted to public use and
to be made available to the public in general. They are outside the commerce of man
and cannot be disposed of or even leased by the municipality to private
parties.1âwphi1
In this relation, Article 1409(1) of the Civil Code provides that a contract whose
purpose is contrary to law, morals, good customs, public order or public policy is
considered void50 and as such, creates no rights or obligations or any juridical
relations.51 Consequently, given the unlawful purpose behind the Subject Loans
which is to fund the commercialization of the Agoo Plaza pursuant to the
TAXATION CASES |45
Redevelopment Plan, they are considered as ultra vires in the primary sense thus,
rendering them void and in effect, non-binding on the Municipality.
At this juncture, it is equally observed that the land on which the Agoo Plaza is
situated cannot be converted into patrimonial property – as the SB tried to when it
passed Municipal Ordinance No. 02-200752 – absent any express grant by the
national government.53 As public land used for public use, the foregoing lot
rightfully belongs to and is subject to the administration and control of the Republic
of the Philippines.54 Hence, without the said grant, the Municipality has no right to
claim it as patrimonial property.
Nevertheless, while the Subject Loans cannot bind the Municipality for being ultra
vires, the officers who authorized the passage of the Subject Resolutions are
personally liable. Case law states that public officials can be held personally
accountable for acts claimed to have been performed in connection with official
duties where they have acted ultra vires,55 as in this case.
WHEREFORE, the petition is DENIED. Accordingly, the March 26, 2010 Decision of
the Court of Appeals in CA-G.R. CV. No. 89732 is hereby AFFIRMED.
SO ORDERED.
CIR vs. Estate f Toda
G.R. No. 147188 September 14, 2004
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators
Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme
adopted by a corporation constitutes tax evasion that would justify an assessment of
deficiency income tax.
The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the
Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the respondent
Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles
 TAXATION CASES |46

Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by
ordered the cancellation and setting aside of the assessment issued by special co-administrators Lorna Kapunan and Mario Luza Bautista,
Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. received a Notice of Assessment12 dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year
The case at bar stemmed from a Notice of Assessment sent to CIC by the 1989 in the amount of P79,099,999.22, computed as follows:
Commissioner of Internal Revenue for deficiency income tax arising from Income Tax – 1989
an alleged simulated sale of a 16-storey commercial building known as Net Income per return P75,987,725.00
Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati
City. Add: Additional gain on sale of real property taxable under ordinary
corporate income but were substituted with individual capital
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner gains(P200M – 100M)
of 99.991% of its issued and outstanding capital stock, to sell the Cibeles 100,000,000.00
Building and the two parcels of land on which the building stands for an Total Net Taxable Income per investigation P175,987,725.00
amount of not less than P90 million.4 Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
On 30 August 1989, Toda purportedly sold the property for P100 million 1. Per return P26,595,704.00
to Rafael A. Altonaga, who, in turn, sold the same property on the same day 2. Thru Capital Gains Tax made
to Royal Match Inc. (RMI) for P200 million. These two transactions were by R.A. Altonaga 10,000,000.00 36,595,704.00 Balance of tax due
evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public.5 P 24,999,999.75
Add: 50% Surcharge
For the sale of the property to RMI, Altonaga paid capital gains tax in the 12,499,999.88
amount of P10 million.6 25% Surcharge
6,249,999.94
On 16 April 1990, CIC filed its corporate annual income tax return7 for the Total
year 1989, declaring, among other things, its gain from the sale of real P 43,749,999.57
property in the amount of P75,728.021. After crediting withholding taxes Add: Interest 20% from
of P254,497.00, it paid P26,341,2078 for its net taxable income of 4/16/90-4/30/94 (.808) 35,349,999.65
P75,987,725. TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
==============
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T.
Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 The Estate thereafter filed a letter of protest.13
Three and a half years later, or on 16 January 1994, Toda died.
In the letter dated 19 October 1995,14 the Commissioner dismissed the
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an protest, stating that a fraudulent scheme was deliberately perpetuated by
assessment notice10 and demand letter to the CIC for deficiency income the CIC wholly owned and controlled by Toda by covering up the
tax for the year 1989 in the amount of P79,099,999.22. additional gain of P100 million, which resulted in the change in the income
structure of the proceeds of the sale of the two parcels of land and the
The new CIC asked for a reconsideration, asserting that the assessment building thereon to an individual capital gains, thus evading the higher
should be directed against the old CIC, and not against the new CIC, which corporate income tax rate of 35%.
is owned by an entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the CIC free from all On 15 February 1996, the Estate filed a petition for review15 with the CTA
tax liabilities for the fiscal years 1987-1989.11 alleging that the Commissioner erred in holding the Estate liable for
income tax deficiency; that the inference of fraud of the sale of the

properties is unreasonable and unsupported; and that the right of the
Commissioner to assess CIC had already prescribed.
In his Answer16 and Amended Answer,17 the Commissioner argued that
the two transactions actually constituted a single sale of the property by
CIC to RMI, and that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The additional gain of P100
million (the difference between the second simulated sale for P200 million
and the first simulated sale for P100 million) realized by CIC was taxed at
the rate of only 5% purportedly as capital gains tax of Altonaga, instead of
at the rate of 35% as corporate income tax of CIC. The income tax return
filed by CIC for 1989 with intent to evade payment of the tax was thus false
or fraudulent. Since such falsity or fraud was discovered by the BIR only on
8 March 1991, the assessment issued on 9 January 1995 was well within
the prescriptive period prescribed by Section 223 (a) of the National
Internal Revenue Code of 1986, which provides that tax may be assessed
within ten years from the discovery of the falsity or fraud. With the sale
being tainted with fraud, the separate corporate personality of CIC should
be disregarded. Toda, being the registered owner of the 99.991% shares of
stock of CIC and the beneficial owner of the remaining 0.009% shares
registered in the name of the individual directors of CIC, should be held
liable for the deficiency income tax, especially because the gains realized
from the sale were withdrawn by him as cash advances or paid to him as
cash dividends. Since he is already dead, his estate shall answer for his
liability.
In its decision18 of 3 January 2000, the CTA held that the Commissioner
failed to prove that CIC committed fraud to deprive the government of the
taxes due it. It ruled that even assuming that a pre-conceived scheme was
adopted by CIC, the same constituted mere tax avoidance, and not tax
evasion. There being no proof of fraudulent transaction, the applicable
period for the BIR to assess CIC is that prescribed in Section 203 of the
NIRC of 1986, which is three years after the last day prescribed by law for
the filing of the return. Thus, the government’s right to assess CIC
prescribed on 15 April 1993. The assessment issued on 9 January 1995
was, therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in itself
sufficient ground for piercing the separate corporate personality of CIC.
Hence, the CTA declared that the Estate is not liable for deficiency income
tax of P79,099,999.22 and, accordingly, cancelled and set aside the
assessment issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,19 the Commissioner insisted that the
sale of the property owned by CIC was the result of the connivance
TAXATION CASES |47
between Toda and Altonaga. She further alleged that the latter was a
representative, dummy, and a close business associate of the former,
having held his office in a property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied20 the motion for
reconsideration, prompting the Commissioner to file a petition for
review21 with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals
affirmed the decision of the CTA, reasoning that the CTA, being more
advantageously situated and having the necessary expertise in matters of
taxation, is "better situated to determine the correctness, propriety, and
legality of the income tax assessments assailed by the Toda Estate."22
Unsatisfied with the decision of the Court of Appeals, the Commissioner
filed the present petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT
COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE
OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE
SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX
FOR THE YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and
insists that the sale by CIC of the Cibeles property was in connivance with
its dummy Rafael Altonaga, who was financially incapable of purchasing it.
She further points out that the documents themselves prove the fact of
fraud in that (1) the two sales were done simultaneously on the same date,
30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI
was notarized ahead of the alleged sale between CIC and Altonaga, with
the former registered in the Notarial Register of Jocelyn H. Arreza
Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc.
No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as
early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30
June 1989 as investment in Cibeles Building. The substantial portion of
P40 million was withdrawn by Toda through the declaration of cash
dividends to all its stockholders.

For its part, respondent Estate asserts that the Commissioner failed to
present the income tax return of Altonaga to prove that the latter is
financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following
questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989
prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC
for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by
taxpayers in escaping from taxation. Tax avoidance is the tax saving device
within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand,
is a scheme used outside of those lawful means and when availed of, it
usually subjects the taxpayer to further or additional civil or criminal
liabilities.23
Tax evasion connotes the integration of three factors: (1) the end to be
achieved, i.e., the payment of less than that known by the taxpayer to be
legally due, or the non-payment of tax when it is shown that a tax is due;
(2) an accompanying state of mind which is described as being "evil," in
"bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of
action or failure of action which is unlawful.24
All these factors are present in the instant case. It is significant to note that
as early as 4 May 1989, prior to the purported sale of the Cibeles property
by CIC to Altonaga on 30 August 1989, CIC received P40 million from
RMI,25 and not from Altonaga. That P40 million was debited by RMI and
reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31
July 1989, another P40 million was debited and reflected in RMI’s trial
balance as "other inv. – Cibeles Bldg." This would show that the real buyer
of the properties was RMI, and not the intermediary Altonaga.lavvphi1.net
TAXATION CASES |48
The investigation conducted by the BIR disclosed that Altonaga was a close
business associate and one of the many trusted corporate executives of
Toda. This information was revealed by Mr. Boy Prieto, the assistant
accountant of CIC and an old timer in the company.27 But Mr. Prieto did
not testify on this matter, hence, that information remains to be hearsay
and is thus inadmissible in evidence. It was not verified either, since the
letter-request for investigation of Altonaga was unserved,28 Altonaga
having left for the United States of America in January 1990. Nevertheless,
that Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme
of CIC. That admission is borne by the records. In its Memorandum,
respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of the
proceeds of sale. Admitted one hundred percent. But isn’t this precisely the
definition of tax planning? Change the structure of the funds and pay a
lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free
transfers of property for stock, changing the structure of the property and
the tax to be paid. As long as it is done legally, changing the structure of a
transaction to achieve a lower tax is not against the law. It is absolutely
allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax.
Surely petitioner [sic] cannot be faulted for wanting to reduce the tax from
35% to 5%.29 [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to Altonaga, and then from
Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach
of legal or equitable duty, trust or confidence justly reposed, resulting in
the damage to another, or by which an undue and unconscionable
advantage is taken of another."30
Here, it is obvious that the objective of the sale to Altonaga was to reduce
the amount of tax to be paid especially that the transfer from him to RMI
would then subject the income to only 5% individual capital gains tax, and
not the 35% corporate income tax. Altonaga’s sole purpose of acquiring
and transferring title of the subject properties on the same day was to
create a tax shelter. Altonaga never controlled the property and did not
enjoy the normal benefits and burdens of ownership. The sale to him was

merely a tax ploy, a sham, and without business purpose and economic
substance. Doubtless, the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing the consequent income
tax liability.lavvphi1.net
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which
was prompted more on the mitigation of tax liabilities than for legitimate
business purposes constitutes one of tax evasion.31
Generally, a sale or exchange of assets will have an income tax incidence
only when it is consummated.32 The incidence of taxation depends upon
the substance of a transaction. The tax consequences arising from gains
from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be
viewed as a whole, and each step from the commencement of negotiations
to the consummation of the sale is relevant. A sale by one person cannot be
transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the
transaction to be disguised by mere formalisms, which exist solely to alter
tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.33
To allow a taxpayer to deny tax liability on the ground that the sale was
made through another and distinct entity when it is proved that the latter
was merely a conduit is to sanction a circumvention of our tax laws. Hence,
the sale to Altonaga should be disregarded for income tax purposes.34 The
two sale transactions should be treated as a single direct sale by CIC to
RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the
NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997),
which stated as follows:
Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.-
A tax is hereby imposed upon the taxable net income received during each
taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, and partnerships, no matter how created
or organized but not including general professional partnerships, in
accordance with the following:
Twenty-five percent upon the amount by which the taxable net income
does not exceed one hundred thousand pesos; and
TAXATION CASES |49
Thirty-five percent upon the amount by which the taxable net income
exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income
in 1989. The 5% individual capital gains tax provided for in Section 34 (h)
of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax
Reform Act of 1997) is inapplicable. Hence, the assessment for the
deficiency income tax issued by the BIR must be upheld.
Has the period of assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform
Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection
of taxes.-(a) In the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a proceeding in
court after the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for collection thereof… .
Put differently, in cases of (1) fraudulent returns; (2) false returns with
intent to evade tax; and (3) failure to file a return, the period within which
to assess tax is ten years from discovery of the fraud, falsification or
omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his
counsel, asked the Opinion of the BIR on the tax consequence of the two
sale transactions.36 Thus, the BIR was amply informed of the transactions
even prior to the execution of the necessary documents to effect the
transfer. Subsequently, the two sales were openly made with the execution
of public documents and the declaration of taxes for 1989. However, these
circumstances do not negate the existence of fraud. As earlier discussed
those two transactions were tainted with fraud. And even assuming
arguendo that there was no fraud, we find that the income tax return filed
by CIC for the year 1989 was false. It did not reflect the true or actual
amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case
of false returns is ten years from the discovery of the falsity. The false
return was filed on 15 April 1990, and the falsity thereof was claimed to

have been discovered only on 8 March 1991.37 The assessment for the
1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly,
the issuance of the correct assessment for deficiency income tax was well
within the prescriptive period.
Is respondent Estate liable for the 1989 deficiency income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the
persons owning or composing it. Thus, the owners or stockholders of a
corporation may not generally be made to answer for the liabilities of a
corporation and vice versa. There are, however, certain instances in which
personal liability may arise. It has been held in a number of cases that
personal liability of a corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad
faith or gross negligence in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having
knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the
corporation; or
4. He is made, by specific provision of law, to personally answer for his
corporate action.38
It is worth noting that when the late Toda sold his shares of stock to Le
Hun T. Choa, he knowingly and voluntarily held himself personally liable
for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and
1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically
provides:
g. Except for transactions occurring in the ordinary course of business,
Cibeles has no liabilities or obligations, contingent or otherwise, for taxes,
sums of money or insurance claims other than those reported in its
audited financial statement as of December 31, 1989, attached hereto as
"Annex B" and made a part hereof. The business of Cibeles has at all times
been conducted in full compliance with all applicable laws, rules and
regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles
Before the Court are consolidated petitions for review on certiorari:1
TAXATION CASES |50
free from any and all income tax liabilities of Cibeles for the fiscal years
1987, 1988 and 1989.39 [Underscoring Supplied].
When the late Toda undertook and agreed "to hold the BUYER and Cibeles
free from any all income tax liabilities of Cibeles for the fiscal years 1987,
1988, and 1989," he thereby voluntarily held himself personally liable
therefor. Respondent estate cannot, therefore, deny liability for CIC’s
deficiency income tax for the year 1989 by invoking the separate corporate
personality of CIC, since its obligation arose from Toda’s contractual
undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED.
The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No.
57799 is REVERSED and SET ASIDE, and another one is hereby rendered
ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as
deficiency income tax of Cibeles Insurance Corporation for the year 1989,
plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
G.R. No. 196596, November 09, 2016
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
UNIVERSITY, INC., Respondent.
G.R. No. 198841
DE LA SALLE UNIVERSITY INC., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE,Respondent.
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. DE LA SALLE
UNIVERSITY, INC., Respondent.
DECISION
BRION, J.:

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 Tax Appeals (CTA) in En Banc Case No.
622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the
June 8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case
No. 671;3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011
decision and October 4, 2011 resolution in CTA En Banc Case No. 671.4
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 BancCase
No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841
and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also
challenge CTA Case No. 7303.chanroblesvirtuallawlibrary
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
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
period Fiscal Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST)
on loans and lease contracts. The BIR demanded the payment of P17,303,001.12,
inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DLSU filed on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its
petition on Article XIV, Section 4 (3) of the Constitution, which reads:
chanRoblesvirtualLawlibrary
(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.
TAXATION CASES |51
On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
The dispositive portion of the decision reads:
chanRoblesvirtualLawlibrary
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of P1,1681,774.00 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 P18,421,363.53...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.
SO ORDERED.9ChanRoblesVirtualawlibrary
Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 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 reconsideration.11
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
coverage under the Constitution.12
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 exclusively for educational purposes.13The Commissioner did not promptly object
to the formal offer of supplemental evidence despite notice.14
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:
chanRoblesvirtualLawlibrary
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 P5,506,456.71...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
September 30, 2004 until fully paid.15ChanRoblesVirtualawlibrary
Consequently, the Commissioner supplemented its petition with the CTA En
Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16
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 cancelled Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of DLSU's rental income was not proved to
have been used actually, directly and exclusively for educational
purposes.18chanroblesvirtuallawlibrary
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 findings of the CTA Division.19
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
exclusively for educational purposes; hence, exempt from tax.20 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 Physical Education - Sports Complex.21
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
VAT.22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU proved its remittance of the DST
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's DST
payments had been remitted to the BIR, evidenced by the stamp on the documents
TAXATION CASES |52
made by a DST imprinting machine, which is allowed under Section 200 (D) of the
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
(RR) No. 15-2001.25cralawred
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 evidence.26
The Commissioner moved but failed to obtain a reconsideration of the CTA En
Banc's December 10, 2010 decision.27 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 tax liabilities to P2,554,825.47 inclusive of surcharge.28
On the validity of the Letter of Authority
The issue of the LOA's validity was raised during trial;29 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 prohibited.30 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 other periods or years shall be specifically indicated in the LOA. 31
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
year 2003 is valid.32
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,
and defenses.33
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, directly and exclusively used for educational purposes.34
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.chanroblesvirtuallawlibrary
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
or disposed of.35 DLSU's operations of canteens and bookstores within its campus
even though exclusively serving the university community do not negate income tax
liability.36
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 subject to tax imposed by this Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 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 such purposes.39
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 property.40 Thus, DLSU's income from the leases of its real properties is not
exempt from taxation even if the income would be used for educational purposes. 41
Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 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-
2000.43
TAXATION CASES |53
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
unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
supplemental documentary evidence was unnecessary since its rental income was
taxable regardless of its disposition.45
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
assessment issued based on such defective LOA must also be void.46
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 and
2003.47 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:
chanRoblesvirtualLawlibrary
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.ChanRoblesVirtualawlibrary
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 be entirely voided.48
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
weighed in the same manner.49 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,
also a non-stock, non-profit educational institution.50
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.
196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51chanroblesvirtuallawlibrary
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the petition. 52

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 duties.53
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
the 1997 Tax Code cannot amend the 1987 Constitution;54 (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 categorically enshrined.55
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
effect.56 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 exclusively for educational purposes."57
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
purposes.58 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
educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted "to incentivize private educational
TAXATION CASES |54
institutions to share with the State the responsibility of educating the youth."60
Third, DLSU highlights that both the CTA En Banc and Division found that the bank
that handled DLSU's loan and mortgage transactions had remitted to the BIR the
DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owmg to the exemption
granted under the Constitution.62
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 object, she became bound by the results of the submission of such
supplemental evidence.63
The CIR's Comment on G.R. No. 198841
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
proceedings.64 That it was asked on cross�examination during the trial does not
make it an issue that the CTA could resolve.65 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
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.67
In addition, DLSU prays that the Court award attorney's fees in its favor because it
was constrained to unnecessarily retain the services of counsel in this separate
petition.68chanroblesvirtuallawlibrary
Issues
Although the parties raised a number of issues, the Court shall decide only the
pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties
and taxes;chanrobleslaw
II. Whether the entire assessment should be voided because of the defective
LOA;chanrobleslaw
III. Whether the CTA correctly admitted DLSU's supplemental pieces of
evidence; and

IV. Whether the CTA's appreciation of the sufficiency ofDLSU's evidence may
be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence;
and
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
conclusion.
The parties failed to convince the Court that the CTA overlooked or failed
to consider relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used
actually, directly and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line
imprinting machine.
I. The revenues and assets of non-stock, non-profit educational institutions
proved to have been used actually, directly, and exclusively for educational
purposes are exempt from duties and taxes.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which
reads:
chanRoblesvirtualLawlibrary
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law. Proprietary educational
institutions, including those cooperatively owned, may likewise be entitled
to such exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment [underscoring and
emphasis supplied]
Before fully discussing the merits of the case, we observe that:
TAXATION CASES |55
First, the constitutional provision refers to two kinds of educational institutions: (1)
non-stock, non-profit educational institutions and (2) proprietary educational
institutions.69
Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the
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.
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.
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
30 (H) of the Tax Code. The relevant text reads:
chanRoblesvirtualLawlibrary
The following organizations shall not be taxed under this Title [Tax on Income] in
respect to income received by them as such:
xxxx
(H) A non-stock and non-profit educational institution
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. [underscoring and emphasis
supplied]ChanRoblesVirtualawlibrary
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 taxable even if these revenues and income are used for educational

purposes.
Did the 1997 Tax Code qualifY the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first impression,71 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
corporation," was subject to income tax under the Tax Code and the Constitution.72
The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is
not tax-exempt per se; "what is exempted is not the institution itself...those
exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes."74
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
unequivocally subjects to tax the rent income of the YMCA from its property.75
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 school system.76
The Court then significantly laid down the requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the
classification non-stock, non-profit educational institution; and (2) the income it
TAXATION CASES |56
seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.77
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without force and effect
with 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, directly and exclusively for educational
purposes.
2. The tax-exemption constitutionally-granted to non-stock, non� profit
educational institutions, is not subject to limitations imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and exclusive
use of their assets, revenues and income78for educational purposes.
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 the records of the 1986 Constitutional Commission79 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 institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4
(3) does not require that the revenues and income must have also been sourced
from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of
revenues. Thus, so long as the revenues and income are used actually, directly and
exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties.81

We find it helpful to discuss at this point the taxation of revenues versus the taxation
of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 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
tax,83 VAT,84 and local business tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in
the stocks of a corporation, inventory of goods, or any property from which the
person or 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 tax (RPT).87 Also, the landed cost of imported goods is a component of the
tax base in VAT on importation88 and tariff duties.89
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
exempted from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational purposes, it shall
be exempted from RPT.
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.
To illustrate, if a university leases a portion of its school building to a bookstore or
cafeteria, the leased portion is not actually, directly and exclusively used for
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff.
The leased portion of the building may be subject to real property tax, as held
in Abra Valley College, Inc. v. Aquino.90 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 necessary for the accomplishment of the main
purposes.
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
Constitution.91 There is no exemption because the asset is not used actually, directly
and exclusively for educational purposes. The commercial use of the property is also
not incidental to and reasonably necessary for the accomplishment of the main
purpose of a university, which is to educate its students.
TAXATION CASES |57
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
shall be exempt from taxes and duties. The tax exemption no longer hinges on the
use of the asset from which the revenues were earned, but on the actual, direct and
exclusive use of the revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational
institution not used actually, directly and exclusively for educational purposes are
not exempt from duties and taxes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and exclusively for educational
purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately. But so
long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions, unlike the exemption that may be availed of by
proprietary educational institutions, is not subject to limitations imposed by
law.
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 use of their revenues and assets for educational purposes. In
clear contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.
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 counterparts.
While a non-stock, non-profit educational institution is classified as a tax-exempt
entity 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).
To be specific, Section 30 provides that exempt organizations like non-stock, non-
profit educational institutions shall not be taxed on income received by them as
such.
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...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...[the regular corporate income tax of 30%] shall be
imposed on the entire taxable income...92
By the Tax Code's clear terms, a proprietary educational institution is entitled only
to the reduced rate of 10% corporate income tax. The reduced rate is applicable
only if: (1) the proprietary educational institution is non� profit and (2) its gross
income from unrelated trade, business or activity does not exceed 50% of its total
gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do
not apply to non-stock, non-profit educational institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force and
effect for being contrary to the Constitution insofar as it subjects to tax the income
and revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purpose. We make this declaration in the exercise of
and consistent with our duty93 to uphold the primacy of the Constitution.94
Finally, we stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.
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.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
DLSU objects to the CTA En Banc's conclusion that the LOA is valid for taxable year
2003 and insists that the entire LOA should be voided for being contrary to RMO No.
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.
A LOA is the authority given to the appropriate revenue officer to examine the books
of account and other accounting records of the taxpayer in order to determine the
taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the
correct amount oftax,96 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 persons. The LOA commences the audit process97 and informs the taxpayer that it
is under audit for possible deficiency tax assessment.
TAXATION CASES |58
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
for taxable year 2003?
We answer in the negative.
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which
reads:
chanRoblesvirtualLawlibrary
3. A Letter of Authority [LOA] should cover a taxable period not exceeding
one taxable year. The practice of issuing [LOAs] covering audit of
unverified prior years is hereby prohibited. If the audit of a taxpayer shall
include more than one taxable period, the other periods or years shall be
specifically indicated in the [LOA].98
What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains
unverified prior years is void. It merely prescribes that if the audit includes more
than 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.
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 by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases
of fraud audit.99
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
includes unverified prior years. This does not mean, however, that the entire LOA is
void.
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
audited for taxable year 2003. Corollarily, the assessments for taxable years 2001
and 2002 are void for having been unspecified on separate LOAs as required under
RMO No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA's
validity at the CTA Division, and thus, should not have been entertained on appeal, is
not accurate.

On the contrary, the CTA En Banc found that the issue of the LOA's validity came up
during the trial.100 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
LOA.101 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 despite notice.102
III. The CTA correctly admitted the supplemental evidence formally offered by
DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental
pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its motion for
reconsideration with the CTA Division.103 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 reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence on distinct
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object
to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly
by the technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the
court cannot, on its own, disregard such evidence.104
The Court has held that if a party desires the court to reject the evidence offered, it
must so state in the form of a timely objection and it cannot raise the objection to
the evidence for the first time on appeal.105
Because of a party's failure to timely object, the evidence offered becomes part of
the evidence in the case. As a consequence, all the parties are considered bound by
any outcome arising from the offer of evidence properly presented.106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal
offer of evidence despite notice.107 The Commissioner objected to the admission of
the 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,
admission and evaluation of the supplemental evidence were all fait accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing
TAXATION CASES |59
on the materiality or sufficiency of the supplemental evidence admitted, she was
bound by the outcome of the CTA Division's assessment of the evidence.108
Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
Division's admission of the formal offer of supplemental evidence, without prompt
objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to the
taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund claimant
attached to its motion for reconsideration with the CTA its Final Adjustment Return.
The Commissioner, as in the present case, did not oppose the taxpayer's motion for
reconsideration and the admission of the Final Adjustment Return.110 We thus
admitted and gave weight to the Final Adjustment Return although it was only
submitted upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the
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 evidence111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for
reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the
strict application of the technical rules of evidence in the present tax
assessmentcase. If anything, the liberal application of the rules assumes greater force
and significance in the case of a taxpayer who claims a constitutionally granted tax
exemption. While the taxpayers in the cited cases claimed refund of excess tax
payments based on the Tax Code,115 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 more reason that we should allow a taxpayer to
prove its exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not
only because the Commissioner failed to promptly object, but more so because the
strict application of the technical tules of evidence may defeat the intent of the
Constitution.

IV. The CTA's appreciation of evidence is generally binding on the Court unless
compelling reasons justify otherwise.
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
has been an abuse or improvident exercise of authority.116 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 rendered a decision which is valid in every respect.117
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,
statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed P93.86 Million,119
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
were allegedly deposited to a fund (CF-CPA Account),120 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
TAXATION CASES |60
CTA "cannot ascertain whether rental income from the [other] concessionaires was
indeed used for educational purposes."121
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; and (g) performing such other functions as the CTA
may direct.122
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 subjected to income tax and VAT.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
taxable years 2001 and 2002 due to the defective LOA.124
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 P10,610,379.00 in
taxable year 2003.125 DLSU earned this income from leasing a portion of its

premises to: 1) MTO-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp.,
5) Capri International, and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was expended, viz.:
1) P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
Complex; and 2) P6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the
P6,602,655.00 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 P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the P10,610,379.00 rental income, P4,841,066.65 was unsubstantiated, and thus,
subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130The CTA held as follows:
chanRoblesvirtualLawlibrary
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 P-
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 P6,259,078.3 (Exhibit "LL-25-C"),
and the total disbursements per subsidiary ledger amounts to P23,463,543.02
(Exhibit "LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is
26.68% (P6,259,078.30/P23,463,543.02). 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 P6,602,655.00 ts P1,761,588.35.131 (emphasis
supplied)ChanRoblesVirtualawlibrary
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 (P4,007,724.00) from the rental income (P10,610,379.00) earned
TAXATION CASES |61
from the abovementioned concessionaries. The difference (P6,602,655.00)
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 (P1,761,308.37) from the P6,602,655.00 to arrive at
the supposed unsubstantiated portion of the rental income
(P4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements
(P1,761,308.37)133 was derived by multiplying the rental income claimed
to have been added to the CF-CPA Account (P6,602,655.00) by 26.68% or
the ratio of substantiated disbursements to total
disbursements (P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated
disbursements from the CF-CPA Account as found by the Independent CPA
(P6,259,078.30) by the total disbursements (P23,463,543.02) 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 of its rental income (which amounted to a total of P10.61 million) 135 were
used for educational purposes. This amount was divided into two parts: (a) the
P4.01 million, which was used to pay the loan obtained for the construction of the
Sports Complex; and (b) the P6.60 million,136 which was transferred to the CF-CPA
account.
For year 2003, the total disbursement from the CF-CPA account amounted to P23.46
million.137 These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
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
P23.46 million had been for educational purposes and should thus be tax-exempt;
DLSU only claimed P10.61 million for tax�exemption and should thus be required
to prove that this amount had been used as claimed.
Of this amount, P4.01 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 P6.60 million which was transferred to the CF-CPA which in turn made
 TAXATION CASES |62

disbursements of P23.46 million for various general purposes, among them the
P6.60 million transferred by DLSU. � CTA Decision138 Revised

Significantly, the Independent CPA confirmed that the CF-CPA made disbursements Rental income 10,610,379.00 10,610,379.00
for educational purposes in year 2003 in the amount P6.26 million. Based on these
given figures, the CTA concluded that the expenses for educational purposes that Less: Rent income used in construction
4,007,724.00 4,007,724.00
had been coursed through the CF-CPA should be prorated so that only the portion of the Sports Complex
that P6.26 million bears to the total CF�-CPA disbursements should be credited to
DLSU for tax exemption. � � �

This approach, in our view, is flawed given the constitutional requirement that Rental income deposited to the CF-CPA
6,602,655.00 6,602.655.00
revenues actually and directly used for educational purposes should be tax-exempt. Account
As already mentioned above, DLSU is not claiming that the whole P23.46 million CF-
CPA disbursement had been used for educational purposes; it only claims that P6.60 � � �
million transferred to CF-CPA had been used for educational purposes. This was
what DLSU needed to prove to have actually and directly used for educational Less: Substantiated portion of CF-CPA
purposes. 1,761,588.35 6,259,078.30
disbursements

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
(P10,610,379.00) was used for educational purposes. Hence, while the total
disbursements from the CF-CPA Account amounted to P23,463,543.02, DLSU only
had to substantiate its P10.6 million rental income, part of which was the
P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259
million was substantiated to have been used for educational purposes.
� � �
Tax base for deficiency income tax
4,841,066.65 343,576.70
and VAT
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
income taxes and VAT under certain BIR and Department of Finance
issuances139that 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 these commercial establishments to avail of the
exemption.140
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
its decision on two different cases with two different issues."141

To summarize, we thus revise the tax base for deficiency income tax and VAT for DLSU disagrees with the CTA and argues that the entire assessment must be
taxable year 2003 as follows: cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
chanRoblesvirtualLawlibrary We reject DLSU's argument for being non sequitur. Its reliance on the concept of

uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence,
the sufficiency and materiality of the evidence supporting their respective claims
for tax exemption would necessarily differ because their attendant issues and 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
purposes also varied because the amount substantiated varied.142 Thus, the amount
of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency of P17,303,001.12 for
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a
total deficiency tax of P8,864,042.35 for the same period. Notably, DLSU was
assessed deficiency DST, while Ateneo was not.143
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
exclusively for educational purposes.144
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
that there was no bad faith on its part.145 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 proven by its recital in
some other authentic documents on record,146 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.
TAXATION CASES |63
Second, DLSU misunderstands the concept of uniformity oftaxation. Equality and
uniformity of taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate.147 A tax is uniform when it operates with
the same force and effect in every place where the subject of it is found.148 The
concept requires that all subjects of taxation similarly situated should be treated
alike and placed in equal footing.149
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
for by the person making, signing, issuing, accepting, or transferring the same.150The
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.
These agreements are subject to DST.151 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 P13,265.48.152
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 MODIFICATIONthat
the base for the deficiency income tax and VAT for taxable year 2003
is P343,576.70.
SO ORDERED.
LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.
DECISION
TAXATION CASES |64
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court,
as amended, of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R.
SP No. 57014 which affirmed the decision of the Central Board of Assessment
Appeals holding that the lot owned by the petitioner and its hospital building
constructed thereon are subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-profit
entity established on January 16, 1981 by virtue of Presidential Decree No.
1823.[2] It is the registered owner of a parcel of land, particularly described as Lot
No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical
Road, Central District, Quezon City. The lot has an area of 121,463 square meters
and is covered by Transfer Certificate of Title (TCT) No. 261320 of the Registry of
Deeds of Quezon City. Erected in the middle of the aforesaid lot is a hospital known
as the Lung Center of the Philippines. A big space at the ground floor is being leased
to private parties, for canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients whom they
charge for their professional services. Almost one-half of the entire area on the left
side of the building along Quezon Avenue is vacant and idle, while a big portion on
the right side, at the corner of Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical
services to out-patients, both paying and non-paying. Aside from its income from
paying patients, the petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were
assessed for real property taxes in the amount of P4,554,860 by the City Assessor of
Quezon City.[3]Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-
01231 (15-2518-A) were issued for the land and the hospital building,
respectively.[4] On August 25, 1993, the petitioner filed a Claim for
Exemption[5] from real property taxes with the City Assessor, predicated on its claim
that it is a charitable institution. The petitioners request was denied, and a petition
was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City
(QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of
its hospital beds are exclusively used for charity patients and that the major thrust
of its hospital operation is to serve charity patients. The petitioner contends that it

is a charitable institution and, as such, is exempt from real property taxes. The QC-
LBAA rendered judgment dismissing the petition and holding the petitioner liable
for real property taxes.[6]
The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board
of Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the
petitioner was not a charitable institution and that its real properties were not
actually, directly and exclusively used for charitable purposes; hence, it was not
entitled to real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.[8]
Undaunted, the petitioner filed its petition in this Court contending that:
A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT
ENTITLED TO REALTY TAX EXEMPTIONS ON THE GROUND THAT
ITS LAND, BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND EXCLUSIVELY
DEVOTED FOR CHARITABLE PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX
EXEMPT UNDER ITS CHARTER, PD 1823, SAID EXEMPTION MAY
NEVERTHELESS BE EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context of
Section 28(3), Article VI of the 1987 Constitution. It asserts that its character as a
charitable institution is not altered by the fact that it admits paying patients and
renders medical services to them, leases portions of the land to private parties, and
rents out portions of the hospital to private medical practitioners from which it
derives income to be used for operational expenses. The petitioner points out that
for the years 1995 to 1999, 100% of its out-patients were charity patients and of the
hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity
patients. It asserts that the fact that it receives subsidies from the government
attests to its character as a charitable institution. It contends that the exclusivity
required in the Constitution does not necessarily mean solely. Hence, even if a
portion of its real estate is leased out to private individuals from whom it derives
income, it does not lose its character as a charitable institution, and its exemption
from the payment of real estate taxes on its real property. The petitioner cited our
ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends
that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes, it
is not precluded from seeking tax exemption under the 1987 Constitution.
In their comment on the petition, the respondents aver that the petitioner is
not a charitable entity. The petitioners real property is not exempt from the
payment of real estate taxes under P.D. No. 1823 and even under the 1987
Constitution because it failed to prove that it is a charitable institution and that the
TAXATION CASES |65
said property is actually, directly and exclusively used for charitable purposes. The
respondents noted that in a newspaper report, it appears that graft charges were
filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids
and Garden Center, for entering into a lease contract over 7,663.13 square meters of
the property in 1990 for only P20,000 a month, when the monthly rental should
be P357,000 a month as determined by the Commission on Audit; and that instead
of complying with the directive of the COA for the cancellation of the contract for
being grossly prejudicial to the government, the petitioner renewed the same on
March 13, 1995 for a monthly rental of only P24,000. They assert that the petitioner
uses the subsidies granted by the government for charity patients and uses the rest
of its income from the property for the benefit of paying patients, among other
purposes. They aver that the petitioner failed to adduce substantial evidence that
100% of its out-patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not speak well of its record
of service. That before a patient is admitted for treatment in the Center, first
impression is that it is pay-patient and required to pay a certain amount as
deposit. That even if a patient is living below the poverty line, he is charged with
high hospital bills. And, without these bills being first settled, the poor patient
cannot be allowed to leave the hospital or be discharged without first paying the
hospital bills or issue a promissory note guaranteed and indorsed by an influential
agency or person known only to the Center; that even the remains of deceased poor
patients suffered the same fate.Moreover, before a patient is admitted for treatment
as free or charity patient, one must undergo a series of interviews and must submit
all the requirements needed by the Center, usually accompanied by endorsement by
an influential agency or person known only to the Center. These facts were heard
and admitted by the Petitioner LCP during the hearings before the Honorable QC-
BAA and Honorable CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called charitable?[10]
The Issues
The issues for resolution are the following: (a) whether the petitioner is a
charitable institution within the context of Presidential Decree No. 1823 and the
1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
whether the real properties of the petitioner are exempt from real property taxes.

The Courts Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution within
the context of the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its corporate purposes, its
constitution and by-laws, the methods of administration, the nature of the actual
work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.[11]
In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons,
either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or otherwise lessening the
burden of government.[12] It may be applied to almost anything that tend to promote
the well-doing and well-being of social man. It embraces the improvement and
promotion of the happiness of man.[13] The word charitable is not restricted to relief
of the poor or sick.[14] The test of a charity and a charitable organization are in law
the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for
gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered by the Office of
the President of the Philippines with the Ministry of Health and the Ministry of
Human Settlements. It was organized for the welfare and benefit of the Filipino
people principally to help combat the high incidence of lung and pulmonary
diseases in the Philippines. The raison detre for the creation of the petitioner is
stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority concern, having
been the leading cause of illness and death in the Philippines, comprising more than
45% of the total annual deaths from all causes, thus, exacting a tremendous toll on
human resources, which ailments are likely to increase and degenerate into serious
lung diseases on account of unabated pollution, industrialization and unchecked
cigarette smoking in the country;
Whereas, the more common lung diseases are, to a great extent, preventable, and
curable with early and adequate medical care, immunization and through prompt
and intensive prevention and health education programs;
TAXATION CASES |66
Whereas, there is an urgent need to consolidate and reinforce existing programs,
strategies and efforts at preventing, treating and rehabilitating people affected by
lung diseases, and to undertake research and training on the cure and prevention of
lung diseases, through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult and problematical
cases;
Whereas, to achieve this purpose, the Government intends to provide material and
financial support towards the establishment and maintenance of a Lung Center for
the welfare and benefit of the Filipino people.[15]
The purposes for which the petitioner was created are spelled out in its
Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is formed are as follows:
1. To construct, establish, equip, maintain, administer and conduct an integrated
medical institution which shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the concern of the government
to assist and provide material and financial support in the establishment and
maintenance of a lung center primarily to benefit the people of the Philippines and
in pursuance of the policy of the State to secure the well-being of the people by
providing them specialized health and medical services and by minimizing the
incidence of lung diseases in the country and elsewhere.
2. To promote the noble undertaking of scientific research related to the prevention
of lung or pulmonary ailments and the care of lung patients, including the holding of
a series of relevant congresses, conventions, seminars and conferences;
3. To stimulate and, whenever possible, underwrite scientific researches on the
biological, demographic, social, economic, eugenic and physiological aspects of lung
or pulmonary diseases and their control; and to collect and publish the findings of
such research for public consumption;
4. To facilitate the dissemination of ideas and public acceptance of information on
lung consciousness or awareness, and the development of fact-finding, information
and reporting facilities for and in aid of the general purposes or objects aforesaid,
especially in human lung requirements, general health and physical fitness, and
other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers
and medical and technical personnel in the practical and scientific implementation
of services to lung patients;
6. To assist universities and research institutions in their studies about lung
diseases, to encourage advanced training in matters of the lung and related fields
and to support educational programs of value to general health;
7. To encourage the formation of other organizations on the national, provincial
and/or city and local levels; and to coordinate their various efforts and activities for
the purpose of achieving a more effective programmatic approach on the common
problems relative to the objectives enumerated herein;
8. To seek and obtain assistance in any form from both international and local
foundations and organizations; and to administer grants and funds that may be
given to the organization;
9. To extend, whenever possible and expedient, medical services to the public and,
in general, to promote and protect the health of the masses of our people, which has
long been recognized as an economic asset and a social blessing;
10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and
maladies of the people in any and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because of race, creed, color or
political belief of the persons helped; and to enable them to obtain treatment when
such disorders occur;
11. To participate, as circumstances may warrant, in any activity designed and
carried on to promote the general health of the community;
12. To acquire and/or borrow funds and to own all funds or equipment, educational
materials and supplies by purchase, donation, or otherwise and to dispose of and
distribute the same in such manner, and, on such basis as the Center shall, from time
to time, deem proper and best, under the particular circumstances, to serve its
general and non-profit purposes and objectives;
13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose
of properties, whether real or personal, for purposes herein mentioned; and
TAXATION CASES |67
14. To do everything necessary, proper, advisable or convenient for the
accomplishment of any of the powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.[16]
Hence, the medical services of the petitioner are to be rendered to the public
in general in any and all walks of life including those who are poor and the needy
without discrimination.After all, any person, the rich as well as the poor, may fall
sick or be injured or wounded and become a subject of charity.[17]
As a general principle, a charitable institution does not lose its character as
such and its exemption from taxes simply because it derives income from paying
patients, whether out-patient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.[18] In Congregational
Sunday School, etc. v. Board of Review,[19] the State Supreme Court of Illinois held,
thus:
[A]n institution does not lose its charitable character, and consequent exemption
from taxation, by reason of the fact that those recipients of its benefits who are able
to pay are required to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable purposes, and those
benefits are refused to none on account of inability to pay therefor. The fundamental
ground upon which all exemptions in favor of charitable institutions are based is the
benefit conferred upon the public by them, and a consequent relief, to some extent,
of the burden upon the state to care for and advance the interests of its citizens.[20]
As aptly stated by the State Supreme Court of South Dakota in Lutheran
Hospital Association of South Dakota v. Baker:[21]
[T]he fact that paying patients are taken, the profits derived from attendance upon
these patients being exclusively devoted to the maintenance of the charity, seems
rather to enhance the usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all amongst the
suffering classes, that the deserving poor can with difficulty be persuaded to enter
an asylum of any kind confined to the reception of objects of charity; and that their
honest pride is much less wounded by being placed in an institution in which paying
patients are also received. The fact of receiving money from some of the patients
does not, we think, at all impair the character of the charity, so long as the money
thus received is devoted altogether to the charitable object which the institution is
intended to further.[22]

The money received by the petitioner becomes a part of the trust fund and
must be devoted to public trust purposes and cannot be diverted to private profit or
benefit.[23]
Under P.D. No. 1823, the petitioner is entitled to receive donations. The
petitioner does not lose its character as a charitable institution simply because the
gift or donation is in the form of subsidies granted by the government. As held by
the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:[24]
Second, the government subsidy payments are provided to the project. Thus, those
payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is the
presence or absence of material reciprocity. It is entirely irrelevant to this analysis
that the government, rather than a private benefactor, chose to make up the deficit
resulting from the exchange between St. Marks Tower and the tenants by making a
contribution to the landlord, just as it would have been irrelevant in Intermountain
Health Care if the patients income supplements had come from private individuals
rather than the government.
Therefore, the fact that subsidization of part of the cost of furnishing such housing is
by the government rather than private charitable contributions does not dictate the
denial of a charitable exemption if the facts otherwise support such an exemption,
as they do here.[25]
In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and 1992 for its
patients and for the operation of the hospital. It even incurred a net loss in 1991 and
1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold, anent
the second issue, that those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are not actually, directly
and exclusively used for charitable purposes.
The settled rule in this jurisdiction is that laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence, a claim for exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken.[26] As held in Salvation Army v. Hoehn:[27]
An intention on the part of the legislature to grant an exemption from the taxing
power of the state will never be implied from language which will admit of any
TAXATION CASES |68
other reasonable construction. Such an intention must be expressed in clear and
unmistakable terms, or must appear by necessary implication from the language
used, for it is a well settled principle that, when a special privilege or exemption is
claimed under a statute, charter or act of incorporation, it is to be construed strictly
against the property owner and in favor of the public. This principle applies with
peculiar force to a claim of exemption from taxation . [28]
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner,
specifically provides that the petitioner shall enjoy the tax exemptions and
privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock
corporation organized primarily to help combat the high incidence of lung and
pulmonary diseases in the Philippines, all donations, contributions, endowments
and equipment and supplies to be imported by authorized entities or persons and
by the Board of Trustees of the Lung Center of the Philippines, Inc., for the actual use
and benefit of the Lung Center, shall be exempt from income and gift taxes, the same
further deductible in full for the purpose of determining the maximum deductible
amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The Lung Center of the Philippines shall be exempt from the payment of taxes,
charges and fees imposed by the Government or any political subdivision or
instrumentality thereof with respect to equipment purchases made by, or for
the Lung Center.[29]
It is plain as day that under the decree, the petitioner does not enjoy any
property tax exemption privileges for its real properties as well as the building
constructed thereon. If the intentions were otherwise, the same should have been
among the enumeration of tax exempt privileges under Section 2:
It is a settled rule of statutory construction that the express mention of one person,
thing, or consequence implies the exclusion of all others. The rule is expressed in the
familiar maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated in a number of
ways. One variation of the rule is principle that what is expressed puts an end to
that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its
terms, is expressly limited to certain matters, it may not, by interpretation or
construction, be extended to other matters.
...

The rule of expressio unius est exclusio alterius and its variations are canons of
restrictive interpretation. They are based on the rules of logic and the natural
workings of the human mind. They are predicated upon ones own voluntary act and
not upon that of others. They proceed from the premise that the legislature would
not have made specified enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those expressly mentioned.[30]
The exemption must not be so enlarged by construction since the reasonable
presumption is that the State has granted in express terms all it intended to grant at
all, and that unless the privilege is limited to the very terms of the statute the favor
would be intended beyond what was meant.[31]
Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually,directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.[32]
The tax exemption under this constitutional provision covers property taxes
only.[33] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: . . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and
improvements actually, directly and exclusively used for religious, charitable or
educational purposes.[34]
Consequently, the constitutional provision is implemented by Section 234(b)
of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991)
as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes.[35]
We note that under the 1935 Constitution, ... all lands, buildings, and
improvements used exclusively for charitable purposes shall be exempt from
taxation.[36] However, under the 1973 and the present Constitutions, for lands,
buildings, and improvements of the charitable institution to be considered exempt,
TAXATION CASES |69
the same should not only be exclusively used for charitable purposes; it is required
that such property be used actually and directly for such purposes.[37]
In light of the foregoing substantial changes in the Constitution, the petitioner
cannot rely on our ruling in Herrera v. Quezon City Board of Assessment
Appeals which was promulgated on September 30, 1961 before the 1973 and 1987
Constitutions took effect.[38] As this Court held in Province of Abra v. Hernando:[39]
Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable, or educational purposes shall be exempt from taxation. The
present Constitution added charitable institutions, mosques, and non-profit
cemeteries and required that for the exemption of lands, buildings, and
improvements, they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words
actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious or
charitable purposes to be exempt from taxation.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be
entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. Exclusive is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and exclusively is defined,
in a manner to exclude; as enjoying a privilege exclusively.[40] If real property is used
for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.[41] The words dominant use or principal use
cannot be substituted for the words used exclusively without doing violence to the
Constitutions and the law.[42] Solely is synonymous with exclusively.[43]
What is meant by actual, direct and exclusive use of the property for charitable
purposes is the direct and immediate and actual application of the property itself to
the purposes for which the charitable institution is organized. It is not the use of the
income from the real property that is determinative of whether the property is used
for tax-exempt purposes.[44]
The petitioner failed to discharge its burden to prove that the entirety of its
real property is actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the dispensation
of medical services to them, whether paying or non-paying, other portions thereof
are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise
 TAXATION CASES |70

under the business name Elliptical Orchids and Garden Center. Indeed, the
petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991
and P1,679,999.28 for 1992 from the said lessees.
Accordingly, we hold that the portions of the land leased to private entities as
well as those parts of the hospital leased to private individuals are not exempt from
such taxes.[45] On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY
GRANTED. The respondent Quezon City Assessor is hereby DIRECTED to determine,
after due hearing, the precise portions of the land and the area thereof which are
leased to private persons, and to compute the real property taxes due thereon as
provided for by law.
SO ORDERED.