Taxation 1

Full Text Cases for General

Principles of Taxation

Table of Contents:
GENERAL PRINCIPLES OF TAXATION........ 4
Gomez v Palomar | GR No. L-23645 | 29
October 1968 .............................................. 4
Philippine Airlines v Edu | GR No. L-41383 |
15 August 1988 ........................................ 22
CIR v Pineda | GR No. 22734 | 15 September
1967 ......................................................... 34
Francia v IAC | GR No. L-67649 | 28 June
1988 ......................................................... 39
Domingo v Garlitos | GR No. L-18994 | 29
June 1963 ................................................ 49
Philex Mining Corporation v CIR | GR No.
148187 | 16 April 2008 ........................... 53
Caltex Phils v COA | GR No. 92585 | 08 May
1992 ......................................................... 68
Vera v Fernandez | GR No. L-31364 | 30
March 1979 ............................................ 103
Lutz v Araneta | GR No. L-7859 | 22
December 1955 ...................................... 109
Pascual v Secretary of Public Works | GR No.
L-10405 | 29 December 1960 ................ 115
Pepsi-Cola Bottling Company v City of
Butuan | GR No. L-22814 | 28 August 1968
............................................................... 126
Pepsi-Cola Bottling Company v Tanauan |
GR No. L-31156 | 27 February 1976 ..... 133
ABAKADA Guro Party List v Ermita | GR No.
168056 | 01 September 2005 ................ 145
Bagatsing v Ramirez | GR No. L-41631 | 17
December 1976 ...................................... 218
Atlas Consolidated Mining Corporation v CIR
| GR Nos. 141104 & 148763 | 08 June 2007
............................................................... 228
National Development Company v CIR | GR
No. 53961 | 30 June 1987 ..................... 273
Manila International Airport Authority v City
of Pasay | GR No. 163072 | 02 April 2009
............................................................... 281
National Development Company v Cebu City
| GR No. 51593 | 05 November 1992 .... 346
Mactan Cebu International Airport Authority
v Marcos | GR No. 120082 | 11 September
1996 ....................................................... 359
Republic v City of Parañaque | GR No.
191109 | 18 July 2012 .......................... 382
Republic (DOTC) v City of Mandaluyong | GR
No. 184879 | 23 February 2011 ............ 404
GSIS v Group Management Corporation | GR
Nos. 167000 & 167001 | 08 June 2011 411
Reyes v Almanzor | GR No. L-49839 | 26
April 1991 .............................................. 452
Chamber of Real Estate Builder’s Association
(CREBA) v Romulo | GR No. 160756 | 09
March 2010 ............................................ 460
Manila Race Horse Trainer’s Association v De
La Fuente | GR No. L-2947 | 11 January
1951 ....................................................... 494
Casanovas v Hord | GR No. 3474 | 22 March
1907 ....................................................... 498
CEPALCO v CIR | GR No. L-60126 | 25
September 1985 ..................................... 509
American Bible Society v City of Manila | GR
No. L-9637 | 30 April 1957 .................... 512
ABRA Valley College v Aquino | GR No. L-
39086 | 15 June 1988 ........................... 531
Lung Center of the Philippines v Quezon City
and Posas | GR No. 144104 | 29 June 2004
............................................................... 541
St Luke’s Medical Center v CIR | CTA Case
No. 7822 & 7823 | 18 February 2014 ... 558
De La Salle v CIR | CTA Case EB No. 671 |
08 June 2011 ......................................... 558
ADMU v CIR | CTA Case No. 7246 & 7293 |
30 June 2011 ......................................... 558
Angeles Foundation v City of Angeles | GR
No. 189999 | 27 June 2012 ................... 558
Chevron v Bases Conversion Development
Authority | GR No. 173863 | 15 September
2010 ....................................................... 574
Tolentino v Secretary of Finance | GR No.
115455 | 30 October 1995..................... 583
Garcia v Executive Secretary | GR NO.
101273 | 03 July 1992 .......................... 622
Osmeña v Orbos | GR No. 99886 | 31 March
1993 ....................................................... 632
Republic Bank v CTA | GR No. 62554-55 |
02 September 1992 ................................ 644
CIR v Toda, Jr | GR No. 147188 | 14
September 2004 ..................................... 657
CIR v Pascor Realty Development Corp | GR
No. 128315 | 29 June 1999 ................... 670
CIR v Raul Gonzales | GR No. 177279 | 13
October 2010 .......................................... 680
Ungab v Cusi | GR No. L-41919-24 | 30 June
1980 ....................................................... 706
Yutivo & Sons Hardware, Co. v CTA | GR No.
L-13203 | 28 January 1961 .................. 713
People v Tan | GR No. 144707 | 13 July
2004 ....................................................... 738
CIR v Lednicky | GR Nos. L-18169, L-18262,
L-21434 | 31 July 1964 ......................... 769
CIR v Isabela Cultural Corporation | GR No.
172231 | 12 February 2007 .................. 778
Fernandez Hermanos, Inc. v CIR | GR Nos. L-
21551, L-21557, L-24972, L-24978 | 30
September 1969 ..................................... 786
Limpian Investment Corporation v CIR | GR
No. L-21570 | 26 July 1966 ................... 807
 General Principles of Taxation

Gomez v Palomar | GR No. L-23645 | 29

October 1968

G.R. No. L-23645 October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as
Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of
Public Works and Communications, and
DOMINGO GOPEZ, in his capacity as Acting
Postmaster of San Fernando, Pampanga,
respondent-appellants.

Lorenzo P. Navarro and Narvaro Belar S.

Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Frine C. Zaballero
and Solicitor Dominador L. Quiroz for
respondents-appellants.

CASTRO, J.:

This appeal puts in issue the constitutionality

of Republic Act 1635,1 as amended by Republic
Act 2631,2 which provides as follows:

To help raise funds for the Philippine

Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to
September thirty every year the printing and
issue of semi-postal stamps of different
denominations with face value showing the
regular postage charge plus the additional
amount of five centavos for the said purpose,
and during the said period, no mail matter shall
be accepted in the mails unless it bears such
semi-postal stamps: Provided, That no such
additional charge of five centavos shall be
imposed on newspapers. The additional
proceeds realized from the sale of the semi-
postal stamps shall constitute a special fund
and be deposited with the National Treasury to
be expended by the Philippine Tuberculosis
Society in carrying out its noble work to prevent
and eradicate tuberculosis.

The respondent Postmaster General, in

implementation of the law, thereafter issued
four (4) administrative orders numbered 3
(June 20, 1958), 7 (August 9, 1958), 9 (August
28, 1958), and 10 (July 15, 1960). All these
administrative orders were issued with the
approval of the respondent Secretary of Public
Works and Communications.

The pertinent portions of Adm. Order 3 read as

follows:

Such semi-postal stamps could not be made

available during the period from August 19 to
September 30, 1957, for lack of time. However,
two denominations of such stamps, one at "5 +
5" centavos and another at "10 + 5" centavos,
will soon be released for use by the public on
their mails to be posted during the same period
starting with the year 1958.

xxx xxx xxx

During the period from August 19 to September

30 each year starting in 1958, no mail matter of
whatever class, and whether domestic or foreign,
posted at any Philippine Post Office and
addressed for delivery in this country or abroad,
shall be accepted for mailing unless it bears at
least one such semi-postal stamp showing the
additional value of five centavos intended for the
Philippine Tuberculosis Society.

In the case of second-class mails and mails

prepaid by means of mail permits or
impressions of postage meters, each piece of
such mail shall bear at least one such semi-
postal stamp if posted during the period above
stated starting with the year 1958, in addition
to being charged the usual postage prescribed
by existing regulations. In the case of business
reply envelopes and cards mailed during said
period, such stamp should be collected from the
addressees at the time of delivery. Mails entitled
to franking privilege like those from the office of
the President, members of Congress, and other
offices to which such privilege has been granted,
shall each also bear one such semi-postal
stamp if posted during the said period.

Mails posted during the said period starting in

1958, which are found in street or post-office
mail boxes without the required semi-postal
stamp, shall be returned to the sender, if known,
with a notation calling for the affixing of such
stamp. If the sender is unknown, the mail
matter shall be treated as nonmailable and
forwarded to the Dead Letter Office for proper
disposition.

Adm. Order 7, amending the fifth paragraph of

Adm. Order 3, reads as follows:

In the case of the following categories of mail

matter and mails entitled to franking privilege
which are not exempted from the payment of
the five centavos intended for the Philippine
Tuberculosis Society, such extra charge may be
collected in cash, for which official receipt
(General Form No. 13, A) shall be issued,
instead of affixing the semi-postal stamp in the
manner hereinafter indicated:

1. Second-class mail. — Aside from the

postage at the second-class rate, the extra
charge of five centavos for the Philippine
Tuberculosis Society shall be collected on each
separately-addressed piece of second-class mail
matter, and the total sum thus collected shall
be entered in the same official receipt to be
issued for the postage at the second-class rate.
In making such entry, the total number of
pieces of second-class mail posted shall be
stated, thus: "Total charge for TB Fund on 100
pieces . .. P5.00." The extra charge shall be
entered separate from the postage in both of the
official receipt and the Record of Collections.
2. First-class and third-class mail permits.
— Mails to be posted without postage affixed
under permits issued by this Bureau shall each
be charged the usual postage, in addition to the
five-centavo extra charge intended for said
society. The total extra charge thus received
shall be entered in the same official receipt to
be issued for the postage collected, as in
subparagraph 1.

3. Metered mail. — For each piece of mail

matter impressed by postage meter under
metered mail permit issued by this Bureau, the
extra charge of five centavos for said society
shall be collected in cash and an official receipt
issued for the total sum thus received, in the
manner indicated in subparagraph 1.

4. Business reply cards and envelopes. —

Upon delivery of business reply cards and
envelopes to holders of business reply permits,
the five-centavo charge intended for said society
shall be collected in cash on each reply card or
envelope delivered, in addition to the required
postage which may also be paid in cash. An
official receipt shall be issued for the total
postage and total extra charge received, in the
manner shown in subparagraph 1.

5. Mails entitled to franking privilege. —

Government agencies, officials, and other
persons entitled to the franking privilege under
existing laws may pay in cash such extra charge
intended for said society, instead of affixing the
semi-postal stamps to their mails, provided that
such mails are presented at the post-office
window, where the five-centavo extra charge for
said society shall be collected on each piece of
such mail matter. In such case, an official
receipt shall be issued for the total sum thus
collected, in the manner stated in
subparagraph 1.

Mail under permits, metered mails and franked

mails not presented at the post-office window
shall be affixed with the necessary semi-postal
stamps. If found in mail boxes without such
stamps, they shall be treated in the same way
as herein provided for other mails.

Adm. Order 9, amending Adm. Order 3, as

amended, exempts "Government and its
Agencies and Instrumentalities Performing
Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts
"copies of periodical publications received for
mailing under any class of mail matter,
including newspapers and magazines admitted
as second-class mail."

The FACTS. On September l5, 1963 the

petitioner Benjamin P. Gomez mailed a letter at
the post office in San Fernando, Pampanga.
Because this letter, addressed to a certain
Agustin Aquino of 1014 Dagohoy Street,
Singalong, Manila did not bear the special anti-
TB stamp required by the statute, it was
returned to the petitioner.

In view of this development, the petitioner

brough suit for declaratory relief in the Court of
First Instance of Pampanga, to test the
constitutionality of the statute, as well as the
implementing administrative orders issued,
contending that it violates the equal protection
clause of the Constitution as well as the rule of
uniformity and equality of taxation. The lower
court declared the statute and the orders
unconstitutional; hence this appeal by the
respondent postal authorities.

For the reasons set out in this opinion, the

judgment appealed from must be reversed.

I.

Before reaching the merits, we deem it

necessary to dispose of the respondents'
contention that declaratory relief is unavailing
because this suit was filed after the petitioner
had committed a breach of the statute. While
conceding that the mailing by the petitioner of
a letter without the additional anti-TB stamp
was a violation of Republic Act 1635, as
amended, the trial court nevertheless refused to
dismiss the action on the ground that under
section 6 of Rule 64 of the Rules of Court, "If
before the final termination of the case a breach
or violation of ... a statute ... should take place,
the action may thereupon be converted into an
ordinary action."

The prime specification of an action for

declaratory relief is that it must be brought
"before breach or violation" of the statute has
been committed. Rule 64, section 1 so provides.
Section 6 of the same rule, which allows the
court to treat an action for declaratory relief as
an ordinary action, applies only if the breach or
violation occurs after the filing of the action but
before the termination thereof.3

Hence, if, as the trial court itself admitted, there

had been a breach of the statute before the
firing of this action, then indeed the remedy of
declaratory relief cannot be availed of, much
less can the suit be converted into an ordinary
action.

Nor is there merit in the petitioner's argument

that the mailing of the letter in question did not
constitute a breach of the statute because the
statute appears to be addressed only to postal
authorities. The statute, it is true, in terms
provides that "no mail matter shall be accepted
in the mails unless it bears such semi-postal
stamps." It does not follow, however, that only
postal authorities can be guilty of violating it by
accepting mails without the payment of the
anti-TB stamp. It is obvious that they can be
guilty of violating the statute only if there are
people who use the mails without paying for the
additional anti-TB stamp. Just as in bribery the
mere offer constitutes a breach of the law, so in
the matter of the anti-TB stamp the mere
attempt to use the mails without the stamp
constitutes a violation of the statute. It is not
required that the mail be accepted by postal
authorities. That requirement is relevant only
for the purpose of fixing the liability of postal
officials.
Nevertheless, we are of the view that the
petitioner's choice of remedy is correct because
this suit was filed not only with respect to the
letter which he mailed on September 15, 1963,
but also with regard to any other mail that he
might send in the future. Thus, in his complaint,
the petitioner prayed that due course be given
to "other mails without the semi-postal stamps
which he may deliver for mailing ... if any,
during the period covered by Republic Act 1635,
as amended, as well as other mails hereafter to
be sent by or to other mailers which bear the
required postage, without collection of
additional charge of five centavos prescribed by
the same Republic Act." As one whose mail was
returned, the petitioner is certainly interested in
a ruling on the validity of the statute requiring
the use of additional stamps.

II.

We now consider the constitutional objections

raised against the statute and the implementing
orders.

1. It is said that the statute is violative of the

equal protection clause of the Constitution.
More specifically the claim is made that it
constitutes mail users into a class for the
purpose of the tax while leaving untaxed the
rest of the population and that even among
postal patrons the statute discriminatorily
grants exemption to newspapers while
Administrative Order 9 of the respondent
Postmaster General grants a similar exemption
to offices performing governmental functions. .

The five centavo charge levied by Republic Act

1635, as amended, is in the nature of an excise
tax, laid upon the exercise of a privilege, namely,
the privilege of using the mails. As such the
objections levelled against it must be viewed in
the light of applicable principles of taxation.

To begin with, it is settled that the legislature

has the inherent power to select the subjects of
taxation and to grant exemptions.4 This power
has aptly been described as "of wide range and
flexibility."5 Indeed, it is said that in the field of
taxation, more than in other areas, the
legislature possesses the greatest freedom in
classification.6 The reason for this is that
traditionally, classification has been a device for
fitting tax programs to local needs and usages
in order to achieve an equitable distribution of
the tax burden.7

That legislative classifications must be

reasonable is of course undenied. But what the
petitioner asserts is that statutory classification
of mail users must bear some reasonable
relationship to the end sought to be attained,
and that absent such relationship the selection
of mail users is constitutionally impermissible.
This is altogether a different proposition. As
explained in Commonwealth v. Life Assurance
Co.:8

While the principle that there must be a

reasonable relationship between classification
made by the legislation and its purpose is
undoubtedly true in some contexts, it has no
application to a measure whose sole purpose is
to raise revenue ... So long as the classification
imposed is based upon some standard capable
of reasonable comprehension, be that standard
based upon ability to produce revenue or some
other legitimate distinction, equal protection of
the law has been afforded. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79
S. Ct. at 441; Brown Forman Co. v.
Commonwealth of Kentucky, 2d U.S. 56, 573,
80 S. Ct. 578, 580 (1910).

We are not wont to invalidate legislation on

equal protection grounds except by the clearest
demonstration that it sanctions invidious
discrimination, which is all that the
Constitution forbids. The remedy for unwise
legislation must be sought in the legislature.
Now, the classification of mail users is not
without any reason. It is based on ability to pay,
let alone the enjoyment of a privilege, and on
administrative convinience. In the allocation of
the tax burden, Congress must have concluded
that the contribution to the anti-TB fund can be
assured by those whose who can afford the use
of the mails.

The classification is likewise based on

considerations of administrative convenience.
For it is now a settled principle of law that
"consideration of practical administrative
convenience and cost in the administration of
tax laws afford adequate ground for imposing a
tax on a well recognized and defined class."9 In
the case of the anti-TB stamps, undoubtedly,
the single most important and influential
consideration that led the legislature to select
mail users as subjects of the tax is the relative
ease and convenienceof collecting the tax
through the post offices. The small amount of
five centavos does not justify the great expense
and inconvenience of collecting through the
regular means of collection. On the other hand,
by placing the duty of collection on postal
authorities the tax was made almost self-
enforcing, with as little cost and as little
inconvenience as possible.

And then of course it is not accurate to say that

the statute constituted mail users into a class.
Mail users were already a class by themselves
even before the enactment of the statue and all
that the legislature did was merely to select
their class. Legislation is essentially empiric
and Republic Act 1635, as amended, no more
than reflects a distinction that exists in fact. As
Mr. Justice Frankfurter said, "to recognize
differences that exist in fact is living law; to
disregard [them] and concentrate on some
abstract identities is lifeless logic."10

Granted the power to select the subject of

taxation, the State's power to grant exemption
must likewise be conceded as a necessary
corollary. Tax exemptions are too common in
the law; they have never been thought of as
raising issues under the equal protection clause.
It is thus erroneous for the trial court to hold
that because certain mail users are exempted
from the levy the law and administrative
officials have sanctioned an invidious
discrimination offensive to the Constitution.
The application of the lower courts theory would
require all mail users to be taxed, a conclusion
that is hardly tenable in the light of differences
in status of mail users. The Constitution does
not require this kind of equality.

As the United States Supreme Court has said,

the legislature may withhold the burden of the
tax in order to foster what it conceives to be a
beneficent enterprise.11 This is the case of
newspapers which, under the amendment
introduced by Republic Act 2631, are exempt
from the payment of the additional stamp.

As for the Government and its instrumentalities,

their exemption rests on the State's sovereign
immunity from taxation. The State cannot be
taxed without its consent and such consent,
being in derogation of its sovereignty, is to be
strictly construed.12 Administrative Order 9 of
the respondent Postmaster General, which lists
the various offices and instrumentalities of the
Government exempt from the payment of the
anti-TB stamp, is but a restatement of this well-
known principle of constitutional law.

The trial court likewise held the law invalid on

the ground that it singles out tuberculosis to
the exclusion of other diseases which, it is said,
are equally a menace to public health. But it is
never a requirement of equal protection that all
evils of the same genus be eradicated or none at
all.13 As this Court has had occasion to say, "if
the law presumably hits the evil where it is most
felt, it is not to be overthrown because there are
other instances to which it might have been
applied."14

2. The petitioner further argues that the tax

in question is invalid, first, because it is not
levied for a public purpose as no special benefits
accrue to mail users as taxpayers, and second,
because it violates the rule of uniformity in
taxation.

The eradication of a dreaded disease is a public

purpose, but if by public purpose the petitioner
means benefit to a taxpayer as a return for what
he pays, then it is sufficient answer to say that
the only benefit to which the taxpayer is
constitutionally entitled is that derived from his
enjoyment of the privileges of living in an
organized society, established and safeguarded
by the devotion of taxes to public purposes. Any
other view would preclude the levying of taxes
except as they are used to compensate for the
burden on those who pay them and would
involve the abandonment of the most
fundamental principle of government — that it
exists primarily to provide for the common
good.15

Nor is the rule of uniformity and equality of

taxation infringed by the imposition of a flat rate
rather than a graduated tax. A tax need not be
measured by the weight of the mail or the extent
of the service rendered. We have said that
considerations of administrative convenience
and cost afford an adequate ground for
classification. The same considerations may
induce the legislature to impose a flat tax which
in effect is a charge for the transaction,
operating equally on all persons within the class
regardless of the amount involved.16 As Mr.
Justice Holmes said in sustaining the validity of
a stamp act which imposed a flat rate of two
cents on every $100 face value of stock
transferred:

One of the stocks was worth $30.75 a share of

the face value of $100, the other $172. The
inequality of the tax, so far as actual values are
concerned, is manifest. But, here again equality
in this sense has to yield to practical
considerations and usage. There must be a
fixed and indisputable mode of ascertaining a
stamp tax. In another sense, moreover, there is
equality. When the taxes on two sales are equal,
the same number of shares is sold in each case;
that is to say, the same privilege is used to the
same extent. Valuation is not the only thing to
be considered. As was pointed out by the court
of appeals, the familiar stamp tax of 2 cents on
checks, irrespective of income or earning
capacity, and many others, illustrate the
necessity and practice of sometimes
substituting count for weight ...17

According to the trial court, the money raised

from the sales of the anti-TB stamps is spent for
the benefit of the Philippine Tuberculosis
Society, a private organization, without
appropriation by law. But as the Solicitor
General points out, the Society is not really the
beneficiary but only the agency through which
the State acts in carrying out what is essentially
a public function. The money is treated as a
special fund and as such need not be
appropriated by law.18

3. Finally, the claim is made that the statute

is so broadly drawn that to execute it the
respondents had to issue administrative orders
far beyond their powers. Indeed, this is one of
the grounds on which the lower court
invalidated Republic Act 1631, as amended,
namely, that it constitutes an undue delegation
of legislative power.

Administrative Order 3, as amended by

Administrative Orders 7 and 10, provides that
for certain classes of mail matters (such as mail
permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in
cash instead of the purchase of the anti-TB
stamp. It further states that mails deposited
during the period August 19 to September 30 of
each year in mail boxes without the stamp
should be returned to the sender, if known,
otherwise they should be treated as
nonmailable.

It is true that the law does not expressly

authorize the collection of five centavos except
through the sale of anti-TB stamps, but such
authority may be implied in so far as it may be
necessary to prevent a failure of the
undertaking. The authority given to the
Postmaster General to raise funds through the
mails must be liberally construed, consistent
with the principle that where the end is required
the appropriate means are given.19

The anti-TB stamp is a distinctive stamp which

shows on its face not only the amount of the
additional charge but also that of the regular
postage. In the case of business reply cards, for
instance, it is obvious that to require mailers to
affix the anti-TB stamp on their cards would be
to make them pay much more because the
cards likewise bear the amount of the regular
postage.

It is likewise true that the statute does not

provide for the disposition of mails which do not
bear the anti-TB stamp, but a declaration
therein that "no mail matter shall be accepted
in the mails unless it bears such semi-postal
stamp" is a declaration that such mail matter is
nonmailable within the meaning of section 1952
of the Administrative Code. Administrative
Order 7 of the Postmaster General is but a
restatement of the law for the guidance of postal
officials and employees. As for Administrative
Order 9, we have already said that in listing the
offices and entities of the Government exempt
from the payment of the stamp, the respondent
Postmaster General merely observed an
established principle, namely, that the
Government is exempt from taxation.

ACCORDINGLY, the judgment a quo is reversed,

and the complaint is dismissed, without
pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon,

Makalintal, Sanchez, Angeles and Capistrano,
JJ., concur.
Zaldivar, J., is on leave.

Separate Opinions
FERNANDO, J., concurring:

I join fully the rest of my colleagues in the

decision upholding Republic Act No. 1635 as
amended by Republic Act No. 2631 and the
majority opinion expounded with Justice
Castro's usual vigor and lucidity subject to one
qualification. With all due recognition of its
inherently persuasive character, it would seem
to me that the same result could be achieved if
reliance be had on police power rather than the
attribute of taxation, as the constitutional basis
for the challenged legislation.

1. For me, the state in question is an exercise

of the regulatory power connected with the
performance of the public service. I refer of
course to the government postal function, one
of respectable and ancient lineage. The United
States Constitution of 1787 vests in the federal
government acting through Congress the power
to establish post offices.1 The first act providing
for the organization of government departments
in the Philippines, approved Sept. 6, 1901,
provided for the Bureau of Post Offices in the
Department of Commerce and Police.2 Its
creation is thus a manifestation of one of the
many services in which the government may
engage for public convenience and public
interest. Such being the case, it seems that any
legislation that in effect would require increase
cost of postage is well within the discretionary
authority of the government.

It may not be acting in a proprietary capacity

but in fixing the fees that it collects for the use
of the mails, the broad discretion that it enjoys
is undeniable. In that sense, the principle
announced in Esteban v. Cabanatuan City,3 in
an opinion by our Chief Justice, while not
precisely controlling furnishes for me more than
ample support for the validity of the challenged
legislation. Thus: "Certain exactions, imposable
under an authority other than police power, are
not subject, however, to qualification as to the
amount chargeable, unless the Constitution or
the pertinent laws provide otherwise. For
instance, the rates of taxes, whether national or
municipal, need not be reasonable, in the
absence of such constitutional or statutory
limitation. Similarly, when a municipal
corporation fixes the fees for the use of its
properties, such as public markets, it does not
wield the police power, or even the power of
taxation. Neither does it assert governmental
authority. It exercises merely a proprietary
function. And, like any private owner, it is — in
the absence of the aforementioned limitation,
which does not exist in the Charter of
Cabanatuan City (Republic Act No. 526) — free
to charge such sums as it may deem best,
regardless of the reasonableness of the amount
fixed, for the prospective lessees are free to
enter into the corresponding contract of lease, if
they are agreeable to the terms thereof or,
otherwise, not enter into such contract."

2. It would appear likewise that an

expression of one's personal view both as to the
attitude and awareness that must be displayed
by inferior tribunals when the "delicate and
awesome" power of passing on the validity of a
statute would not be inappropriate. "The
Constitution is the supreme law, and statutes
are written and enforced in submission to its
commands."4 It is likewise common place in
constitutional law that a party adversely
affected could, again to quote from Cardozo,
"invoke, when constitutional immunities are
threatened, the judgment of the courts."5

Since the power of judicial review flows logically

from the judicial function of ascertaining the
facts and applying the law and since obviously
the Constitution is the highest law before which
statutes must bend, then inferior tribunals can,
in the discharge of their judicial functions,
nullify legislative acts. As a matter of fact, in
clear cases, such is not only their power but
their duty. In the language of the present Chief
Justice: "In fact, whenever the conflicting
claims of the parties to a litigation cannot
properly be settled without inquiring into the
validity of an act of Congress or of either House
thereof, the courts have, not only jurisdiction to
pass upon said issue but, also, the duty to do
so, which cannot be evaded without violating
the fundamental law and paving the way to its
eventual destruction."6

Nonetheless, the admonition of Cooley,

specially addressed to inferior tribunals, must
ever be kept in mind. Thus: "It must be evident
to any one that the power to declare a legislative
enactment void is one which the judge,
conscious of the fallibility of the human
judgment, will shrink from exercising in any
case where he can conscientiously and with due
regard to duty and official oath decline the
responsibility."7

There must be a caveat however to the above

Cooley pronouncement. Such should not be the
case, to paraphrase Freund, when the
challenged legislation imperils freedom of the
mind and of the person, for given such an
undesirable situation, "it is freedom that
commands a momentum of respect." Here then,
fidelity to the great ideal of liberty enshrined in
the Constitution may require the judiciary to
take an uncompromising and militant stand. As
phrased by us in a recent decision, "if the liberty
involved were freedom of the mind or the person,
the standard of its validity of governmental acts
is much more rigorous and exacting."8

So much for the appropriate judicial attitude.

Now on the question of awareness of the
controlling constitutional doctrines.

There is nothing I can add to the enlightening

discussion of the equal protection aspect as
found in the majority opinion. It may not be
amiss to recall to mind, however, the language
of Justice Laurel in the leading case of People v.
Vera,9 to the effect that the basic individual
right of equal protection "is a restraint on all the
three grand departments of our government and
on the subordinate instrumentalities and
subdivisions thereof, and on many
constitutional powers, like the police power,
taxation and eminent domain."10 Nonetheless,
no jurist was more careful in avoiding the dire
consequences to what the legislative body might
have deemed necessary to promote the ends of
public welfare if the equal protection guaranty
were made to constitute an insurmountable
obstacle.

A similar sense of realism was invariably

displayed by Justice Frankfurter, as is quite
evident from the various citations from his pen
found in the majority opinion. For him, it would
be a misreading of the equal protection clause
to ignore actual conditions and settled practices.
Not for him the at times academic and sterile
approach to constitutional problems of this sort.
Thus: "It would be a narrow conception of
jurisprudence to confine the notion of 'laws' to
what is found written on the statute books, and
to disregard the gloss which life has written
upon it. Settled state practice cannot supplant
constitutional guaranties, but it can establish
what is state law. The Equal Protection Clause
did not write an empty formalism into the
Constitution. Deeply embedded traditional
ways of carrying out state policy, such as those
of which petitioner complains, are often tougher
and truer law than the dead words of the written
text."11 This too, from the same distinguished
jurist: "The Constitution does not require things
which are different in fact or opinion to be
treated in law as though they were the same."12

Now, as to non-delegation. It is to be admitted

that the problem of non-delegation of legislative
power at times occasions difficulties. Its strict
view has been announced by Justice Laurel in
the aforecited case of People v. Vera in this
language. Thus: "In testing whether a statute
constitutes an undue delegation of legislative
power or not, it is usual to inquire whether the
statute was complete in all its terms and
provisions when it left the hands of the
legislature so that nothing was left to the
judgment of any other appointee or delegate of
the legislature. .... In United States v. Ang Tang
Ho ..., this court adhered to the foregoing rule;
it held an act of the legislature void in so far as
it undertook to authorize the Governor-General,
in his discretion, to issue a proclamation fixing
the price of rice and to make the sale of it in
violation of the proclamation a crime."13

Only recently, the present Chief Justice

reaffirmed the above view in Pelaez v. Auditor
General,14 specially where the delegation deals
not with an administrative function but one
essentially and eminently legislative in
character. What could properly be stigmatized
though to quote Justice Cardozo, is delegation
of authority that is "unconfined and vagrant,
one not canalized within banks which keep it
from overflowing."15

This is not the situation as it presents itself to

us. What was delegated was power not
legislative in character. Justice Laurel himself,
in a later case, People v. Rosenthal,16 admitted
that within certain limits, there being a need for
coping with the more intricate problems of
society, the principle of "subordinate
legislation" has been accepted, not only in the
United States and England, but in practically
all modern governments. This view was
reiterated by him in a 1940 decision,
Pangasinan Transportation Co., Inc. v. Public
Service Commission.17 Thus: "Accordingly,
with the growing complexity of modern life, the
multiplication of the subjects of governmental
regulation, and the increased difficulty of
administering the laws, there is a constantly
growing tendency toward the delegation of
greater powers by the legislature, and toward
the approval of the practice by the courts."

In the light of the above views of eminent jurists,

authoritative in character, of both the equal
protection clause and the non-delegation
principle, it is apparent how far the lower court
departed from the path of constitutional
orthodoxy in nullifying Republic Act No. 1635
as amended. Fortunately, the matter has been
set right with the reversal of its decision, the
opinion of the Court, manifesting its fealty to
constitutional law precepts, which have been
reiterated time and time again and for the
soundest of reasons.

Philippine Airlines v Edu | GR No. L-41383 |

15 August 1988

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land
Transportation Commissioner, and UBALDO
CARBONELL, in his capacity as National
Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for

plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration

fees? Are they taxes or regulatory fees?

This question has been brought before this

Court in the past. The parties are, in effect,
asking for a re-examination of the latest
decision on this issue.

This appeal was certified to us as one involving

a pure question of law by the Court of Appeals
in a case where the then Court of First Instance
of Rizal dismissed the portion-about complaint
for refund of registration fees paid under protest.

The disputed registration fees were imposed by

the appellee, Commissioner Romeo F. Elevate
pursuant to Section 8, Republic Act No. 4136,
otherwise known as the Land Transportation
and Traffic Code.

The Philippine Airlines (PAL) is a corporation

organized and existing under the laws of the
Philippines and engaged in the air
transportation business under a legislative
franchise, Act No. 42739, as amended by
Republic Act Nos. 25). and 269.1 Under its
franchise, PAL is exempt from the payment of
taxes. The pertinent provision of the franchise
provides as follows:

Section 13. In consideration of the

franchise and rights hereby granted, the
grantee shall pay to the National Government
during the life of this franchise a tax of two per
cent of the gross revenue or gross earning
derived by the grantee from its operations under
this franchise. Such tax shall be due and
payable quarterly and shall be in lieu of all taxes
of any kind, nature or description, levied,
established or collected by any municipal,
provincial or national automobiles, Provided,
that if, after the audit of the accounts of the
grantee by the Commissioner of Internal
Revenue, a deficiency tax is shown to be due,
the deficiency tax shall be payable within the
ten days from the receipt of the assessment. The
grantee shall pay the tax on its real property in
conformity with existing law.

On the strength of an opinion of the Secretary

of Justice (Op. No. 307, series of 1956) PAL has,
since 1956, not been paying motor vehicle
registration fees.

Sometime in 1971, however, appellee

Commissioner Romeo F. Elevate issued a
regulation requiring all tax exempt entities,
among them PAL to pay motor vehicle
registration fees.

Despite PAL's protestations, the appellee

refused to register the appellant's motor
vehicles unless the amounts imposed under
Republic Act 4136 were paid. The appellant
thus paid, under protest, the amount of
P19,529.75 as registration fees of its motor
vehicles.

After paying under protest, PAL through

counsel, wrote a letter dated May 19,1971, to
Commissioner Edu demanding a refund of the
amounts paid, invoking the ruling in Calalang
v. Lorenzo (97 Phil. 212 [1951]) where it was
held that motor vehicle registration fees are in
reality taxes from the payment of which PAL is
exempt by virtue of its legislative franchise.

Appellee Edu denied the request for refund

basing his action on the decision in Republic v.
Philippine Rabbit Bus Lines, Inc., (32 SCRA 211,
March 30, 1970) to the effect that motor vehicle
registration fees are regulatory exceptional. and
not revenue measures and, therefore, do not
come within the exemption granted to PAL?
under its franchise. Hence, PAL filed the
complaint against Land Transportation
Commissioner Romeo F. Edu and National
Treasurer Ubaldo Carbonell with the Court of
First Instance of Rizal, Branch 18 where it was
docketed as Civil Case No. Q-15862.

Appellee Romeo F. Elevate in his capacity as

LTC Commissioner, and LOI Carbonell in his
capacity as National Treasurer, filed a motion to
dismiss alleging that the complaint states no
cause of action. In support of the motion to
dismiss, defendants repatriation the ruling in
Republic v. Philippine Rabbit Bus Lines, Inc.,
(supra) that registration fees of motor vehicles
are not taxes, but regulatory fees imposed as an
incident of the exercise of the police power of the
state. They contended that while Act 4271
exempts PAL from the payment of any tax
except two per cent on its gross revenue or
earnings, it does not exempt the plaintiff from
paying regulatory fees, such as motor vehicle
registration fees. The resolution of the motion to
dismiss was deferred by the Court until after
trial on the merits.

On April 24, 1973, the trial court rendered a

decision dismissing the appellant's complaint
"moved by the later ruling laid down by the
Supreme Court in the case or Republic v.
Philippine Rabbit Bus Lines, Inc., (supra)."
From this judgment, PAL appealed to the Court
of Appeals which certified the case to us.
Calalang v. Lorenzo (supra) and Republic v.
Philippine Rabbit Bus Lines, Inc. (supra) cited
by PAL and Commissioner Romeo F. Edu
respectively, discuss the main points of
contention in the case at bar.

Resolving the issue in the Philippine Rabbit

case, this Court held:

"The registration fee which defendant-appellee

had to pay was imposed by Section 8 of the
Revised Motor Vehicle Law (Republic Act No.
587 [1950]). Its heading speaks of "registration
fees." The term is repeated four times in the
body thereof. Equally so, mention is made of the
"fee for registration." (Ibid., Subsection G) A
subsection starts with a categorical statement
"No fees shall be charged." (lbid., Subsection H)
The conclusion is difficult to resist therefore
that the Motor Vehicle Act requires the payment
not of a tax but of a registration fee under the
police power. Hence the incipient, of the section
relied upon by defendant-appellee under the
Back Pay Law, It is not held liable for a tax but
for a registration fee. It therefore cannot make
use of a backpay certificate to meet such an
obligation.

Any vestige of any doubt as to the correctness

of the above conclusion should be dissipated by
Republic Act No. 5448. ([1968]. Section 3
thereof as to the imposition of additional tax on
privately-owned passenger automobiles,
motorcycles and scooters was amended by
Republic Act No. 5470 which is (sic) approved
on May 30, 1969.) A special science fund was
thereby created and its title expressly sets forth
that a tax on privately-owned passenger
automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in
its Section 3 which clearly specifies the"
Philippine tax."(Cooley to be paid as
distinguished from the registration fee under
the Motor Vehicle Act. There cannot be any
clearer expression therefore of the legislative
will, even on the assumption that the earlier
legislation could by subdivision the point be
susceptible of the interpretation that a tax
rather than a fee was levied. What is thus most
apparent is that where the legislative body relies
on its authority to tax it expressly so states, and
where it is enacting a regulatory measure, it is
equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v.

Lorenzo (supra), where the Court, on the other
hand, held:

The charges prescribed by the Revised Motor

Vehicle Law for the registration of motor
vehicles are in section 8 of that law called "fees".
But the appellation is no impediment to their
being considered taxes if taxes they really are.
For not the name but the object of the charge
determines whether it is a tax or a fee. Geveia
speaking, taxes are for revenue, whereas fees
are exceptional. for purposes of regulation and
inspection and are for that reason limited in
amount to what is necessary to cover the cost
of the services rendered in that connection.
Hence, a charge fixed by statute for the service
to be person,-When by an officer, where the
charge has no relation to the value of the
services performed and where the amount
collected eventually finds its way into the
treasury of the branch of the government whose
officer or officers collected the chauffeur, is not
a fee but a tax."(Cooley on Taxation, Vol. 1, 4th
ed., p. 110.)

From the data submitted in the court below, it

appears that the expenditures of the Motor
Vehicle Office are but a small portion—about 5
per centum—of the total collections from motor
vehicle registration fees. And as proof that the
money collected is not intended for the
expenditures of that office, the law itself
provides that all such money shall accrue to the
funds for the construction and maintenance of
public roads, streets and bridges. It is thus
obvious that the fees are not collected for
regulatory purposes, that is to say, as an
incident to the enforcement of regulations
governing the operation of motor vehicles on
public highways, for their express object is to
provide revenue with which the Government is
to discharge one of its principal functions—the
construction and maintenance of public
highways for everybody's use. They are veritable
taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle

Law itself now regards those fees as taxes, for it
provides that "no other taxes or fees than those
prescribed in this Act shall be imposed," thus
implying that the charges therein imposed—
though called fees—are of the category of taxes.
The provision is contained in section 70, of
subsection (b), of the law, as amended by
section 17 of Republic Act 587, which reads:

Sec. 70(b) No other taxes or fees than those

prescribed in this Act shall be imposed for the
registration or operation or on the ownership of
any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal
corporation, the provisions of any city charter
to the contrary notwithstanding: Provided,
however, That any provincial board, city or
municipal council or board, or other competent
authority may exact and collect such
reasonable and equitable toll fees for the use of
such bridges and ferries, within their respective
jurisdiction, as may be authorized and
approved by the Secretary of Public Works and
Communications, and also for the use of such
public roads, as may be authorized by the
President of the Philippines upon the
recommendation of the Secretary of Public
Works and Communications, but in none of
these cases, shall any toll fee." be charged or
collected until and unless the approved
schedule of tolls shall have been posted levied,
in a conspicuous place at such toll station. (at
pp. 213-214)

Motor vehicle registration fees were matters

originally governed by the Revised Motor
Vehicle Law (Act 3992 [19511) as amended by
Commonwealth Act 123 and Republic Acts Nos.
587 and 1621.
Today, the matter is governed by Rep. Act 4136
[1968]), otherwise known as the Land
Transportation Code, (as amended by Rep. Acts
Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896,
110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which

amended Sec. 73 of Act 3992 and remained
unsegregated, by Rep. Act Nos. 587 and 1603)
states:

Section 73. Disposal of moneys collected.—

Twenty per centum of the money collected
under the provisions of this Act shall accrue to
the road and bridge funds of the different
provinces and chartered cities in proportion to
the centum shall during the next previous year
and the remaining eighty per centum shall be
deposited in the Philippine Treasury to create a
special fund for the construction and
maintenance of national and provincial roads
and bridges. as well as the streets and bridges
in the chartered cities to be alloted by the
Secretary of Public Works and Communications
for projects recommended by the Director of
Public Works in the different provinces and
chartered cities. ....

Presently, Sec. 61 of the Land Transportation

and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected—

Monies collected under the provisions of this
Act shall be deposited in a special trust account
in the National Treasury to constitute the
Highway Special Fund, which shall be
apportioned and expended in accordance with
the provisions of the" Philippine Highway Act of
1935. "Provided, however, That the amount
necessary to maintain and equip the Land
Transportation Commission but not to exceed
twenty per cent of the total collection during one
year, shall be set aside for the purpose. (As
amended by RA 64-67, approved August 6,
1971).
It appears clear from the above provisions that
the legislative intent and purpose behind the
law requiring owners of vehicles to pay for their
registration is mainly to raise funds for the
construction and maintenance of highways and
to a much lesser degree, pay for the operating
expenses of the administering agency. On the
other hand, the Philippine Rabbit case
mentions a presumption arising from the use of
the term "fees," which appears to have been
favored by the legislature to distinguish fees
from other taxes such as those mentioned in
Section 13 of Rep. Act 4136 which reads:

Sec. 13. Payment of taxes upon

registration.—No original registration of motor
vehicles subject to payment of taxes, customs s
duties or other charges shall be accepted unless
proof of payment of the taxes due thereon has
been presented to the Commission.

referring to taxes other than those imposed on

the registration, operation or ownership of a
motor vehicle (Sec. 59, b, Rep. Act 4136, as
amended).

Fees may be properly regarded as taxes even

though they also serve as an instrument of
regulation, As stated by a former presiding
judge of the Court of Tax Appeals and writer on
various aspects of taxpayers

It is possible for an exaction to be both tax arose.

regulation. License fees are changes. looked to
as a source of revenue as well as a means of
regulation (Sonzinky v. U.S., 300 U.S. 506) This
is true, for example, of automobile license fees.
Isabela such case, the fees may properly be
regarded as taxes even though they also serve
as an instrument of regulation. If the purpose is
primarily revenue, or if revenue is at least one
of the real and substantial purposes, then the
exaction is properly called a tax. (1955 CCH Fed.
tax Course, Par. 3101, citing Cooley on Taxation
(2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil.
213-214) Lutz v. Araneta 98 Phil. 198.) These
exactions are sometimes called regulatory taxes.
(See Secs. 4701, 4711, 4741, 4801, 4811, 4851,
and 4881, U.S. Internal Revenue Code of 1954,
which classify taxes on tobacco and alcohol as
regulatory taxes.) (Umali, Reviewer in Taxation,
1980, pp. 12-13, citing Cooley on Taxation, 2nd
Edition, 591-593).

Indeed, taxation may be made the implement of

the state's police power (Lutz v. Araneta, 98 Phil.
148).

If the purpose is primarily revenue, or if revenue

is, at least, one of the real and substantial
purposes, then the exaction is properly called a
tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become
inescapable in view of Section 70(b) of Rep. Act
587 quoted in the Calalang case. The same
provision appears as Section 591-593). in the
Land Transportation code. It is patent
therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition
on the registration, operation or ownership of a
motor vehicle as a "tax or fee." Though nowhere
in Rep. Act 4136 does the law specifically state
that the imposition is a tax, Section 591-593).
speaks of "taxes." or fees ... for the registration
or operation or on the ownership of any motor
vehicle, or for the exercise of the profession of
chauffeur ..." making the intent to impose a tax
more apparent. Thus, even Rep. Act 5448 cited
by the respondents, speak of an "additional"
tax," where the law could have referred to an
original tax and not one in addition to the tax
already imposed on the registration, operation,
or ownership of a motor vehicle under Rep. Act
41383. Simply put, if the exaction under Rep.
Act 4136 were merely a regulatory fee, the
imposition in Rep. Act 5448 need not be an
"additional" tax. Rep. Act 4136 also speaks of
other "fees," such as the special permit fees for
certain types of motor vehicles (Sec. 10) and
additional fees for change of registration (Sec.
11). These are not to be understood as taxes
because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned
by Sec. 591-593). of the Code as taxes like the
motor vehicle registration fee and chauffers'
license fee. Such fees are to go into the
expenditures of the Land Transportation
Commission as provided for in the last proviso
of see. 61, aforequoted.

It is quite apparent that vehicle registration fees

were originally simple exceptional. intended
only for rigidly purposes in the exercise of the
State's police powers. Over the years, however,
as vehicular traffic exploded in number and
motor vehicles became absolute necessities
without which modem life as we know it would
stand still, Congress found the registration of
vehicles a very convenient way of raising much
needed revenues. Without changing the earlier
deputy. of registration payments as "fees," their
nature has become that of "taxes."

In view of the foregoing, we rule that motor

vehicle registration fees as at present exacted
pursuant to the Land Transportation and
Traffic Code are actually taxes intended for
additional revenues. of government even if one
fifth or less of the amount collected is set aside
for the operating expenses of the agency
administering the program.

May the respondent administrative agency be

required to refund the amounts stated in the
complaint of PAL?

The answer is NO.

The claim for refund is made for payments given

in 1971. It is not clear from the records as to
what payments were made in succeeding years.
We have ruled that Section 24 of Rep. Act No.
5448 dated June 27, 1968, repealed all earlier
tax exemptions Of corporate taxpayers found in
legislative franchises similar to that invoked by
PAL in this case.

In Radio Communications of the Philippines,

Inc. v. Court of Tax Appeals, et al. (G.R. No.
615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No.
21); enacted in 1957, petitioner Radio
Communications of the Philippines, Inc., was
subject to both the franchise tax and income tax.
In 1964, however, petitioner's franchise was
amended by Republic Act No. 41-42). to the
effect that its franchise tax of one and one-half
percentum (1-1/2%) of all gross receipts was
provided as "in lieu of any and all taxes of any
kind, nature, or description levied, established,
or collected by any authority whatsoever,
municipal, provincial, or national from which
taxes the grantee is hereby expressly
exempted." The issue raised to this Court now
is the validity of the respondent court's decision
which ruled that the exemption under Republic
Act No. 41-42). was repealed by Section 24 of
Republic Act No. 5448 dated June 27, 1968
which reads:

"(d) The provisions of existing special or

general laws to the contrary notwithstanding,
all corporate taxpayers not specifically exempt
under Sections 24 (c) (1) of this Code shall pay
the rates provided in this section. All
corporations, agencies, or instrumentalities
owned or controlled by the government,
including the Government Service Insurance
System and the Social Security System but
excluding educational institutions, shall pay
such rate of tax upon their taxable net income
as are imposed by this section upon
associations or corporations engaged in a
similar business or industry. "

An examination of Section 24 of the Tax Code

as amended shows clearly that the law intended
all corporate taxpayers to pay income tax as
provided by the statute. There can be no doubt
as to the power of Congress to repeal the earlier
exemption it granted. Article XIV, Section 8 of
the 1935 Constitution and Article XIV, Section
5 of the Constitution as amended in 1973
expressly provide that no franchise shall be
granted to any individual, firm, or corporation
except under the condition that it shall be
subject to amendment, alteration, or repeal by
the legislature when the public interest so
requires. There is no question as to the public
interest involved. The country needs increased
revenues. The repealing clause is clear and
unambiguous. There is a listing of entities
entitled to tax exemption. The petitioner is not
covered by the provision. Considering the
foregoing, the Court Resolved to DENY the
petition for lack of merit. The decision of the
respondent court is affirmed.

Any registration fees collected between June 27,

1968 and April 9, 1979, were correctly imposed
because the tax exemption in the franchise of
PAL was repealed during the period. However,
an amended franchise was given to PAL in 1979.
Section 13 of Presidential Decree No. 1590, now
provides:

In consideration of the franchise and rights

hereby granted, the grantee shall pay to the
Philippine Government during the lifetime of
this franchise whichever of subsections (a) and
(b) hereunder will result in a lower taxes.)

(a) The basic corporate income tax based on

the grantee's annual net taxable income
computed in accordance with the provisions of
the Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the

gross revenues. derived by the grantees from all
specific. without distinction as to transport or
nontransport corporations; provided that with
respect to international airtransport service,
only the gross passengers, mail, and freight
revenues. from its outgoing flights shall be
subject to this law.

The tax paid by the grantee under either of the

above alternatives shall be in lieu of all other
taxes, duties, royalties, registration, license and
other fees and charges of any kind, nature or
description imposed, levied, established,
assessed, or collected by any municipal, city,
provincial, or national authority or government,
agency, now or in the future, including but not
limited to the following:

xxx xxx xxx

(5) All taxes, fees and other charges on the

registration, license, acquisition, and transfer of
airtransport equipment, motor vehicles, and all
other personal or real property of the gravitates
(Pres. Decree 1590, 75 OG No. 15, 3259, April
9, 1979).

PAL's current franchise is clear and specific. It

has removed the ambiguity found in the earlier
law. PAL is now exempt from the payment of any
tax, fee, or other charge on the registration and
licensing of motor vehicles. Such payments are
already included in the basic tax or franchise
tax provided in Subsections (a) and (b) of
Section 13, P.D. 1590, and may no longer be
exacted.

WHEREFORE, the petition is hereby partially

GRANTED. The prayed for refund of registration
fees paid in 1971 is DENIED. The Land
Transportation Franchising and Regulatory
Board (LTFRB) is enjoined functions-the
collecting any tax, fee, or other charge on the
registration and licensing of the petitioner's
motor vehicles from April 9, 1979 as provided in
Presidential Decree No. 1590.

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera, Cruz,

Paras, Feliciano, Gancayco, Padilla, Bidin,
Sarmiento, Cortes, Griño Aquino and Medialdea,
JJ., concur.

CIR v Pineda | GR No. 22734 | 15 September

1967

G.R. No. L-22734 September 15, 1967

COMMISSIONER OF INTERNAL REVENUE,

petitioner,
vs.
MANUEL B. PINEDA, as one of the heirs of
deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as
respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died,

survived by his wife, Felicisima Bagtas, and 15
children, the eldest of whom is Manuel B.
Pineda, a lawyer. Estate proceedings were had
in the Court of First Instance of Manila (Case
No. 71129) wherein the surviving widow was
appointed administratrix. The estate was
divided among and awarded to the heirs and the
proceedings terminated on June 8, 1948.
Manuel B. Pineda's share amounted to about
P2,500.00.

After the estate proceedings were closed, the

Bureau of Internal Revenue investigated the
income tax liability of the estate for the years
1945, 1946, 1947 and 1948 and it found that
the corresponding income tax returns were not
filed. Thereupon, the representative of the
Collector of Internal Revenue filed said returns
for the estate on the basis of information and
data obtained from the aforesaid estate
proceedings and issued an assessment for the
following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from November 30, 1953
to April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late payment 40.00
Total amount due
P2,707.44
===========
2. Additional residence tax for 1945
P14.50
===========
3. Real Estate dealer's tax for the fourth
quarter of 1946 and the whole year of 1947
P207.50
===========
Manuel B. Pineda, who received the assessment,
contested the same. Subsequently, he appealed
to the Court of Tax Appeals alleging that he was
appealing "only that proportionate part or
portion pertaining to him as one of the heirs."

After hearing the parties, the Court of Tax

Appeals rendered judgment reversing the
decision of the Commissioner on the ground
that his right to assess and collect the tax has
prescribed. The Commissioner appealed and
this Court affirmed the findings of the Tax Court
in respect to the assessment for income tax for
the year 1947 but held that the right to assess
and collect the taxes for 1945 and 1946 has not
prescribed. For 1945 and 1946 the returns were
filed on August 24, 1953; assessments for both
taxable years were made within five years
therefrom or on October 19, 1953; and the
action to collect the tax was filed within five
years from the latter date, on August 7, 1957.
For taxable year 1947, however, the return was
filed on March 1, 1948; the assessment was
made on October 19, 1953, more than five years
from the date the return was filed; hence, the
right to assess income tax for 1947 had
prescribed. Accordingly, We remanded the case
to the Tax Court for further appropriate
proceedings.1

In the Tax Court, the parties submitted the case

for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals

rendered judgment holding Manuel B. Pineda
liable for the payment corresponding to his
share of the following taxes:

Deficiency income tax

1945 P135.83
1946 436.95
Real estate dealer's fixed tax 4th quarter of 1946
and whole year of 1947 P187.50
The Commissioner of Internal Revenue has
appealed to Us and has proposed to hold
Manuel B. Pineda liable for the payment of all
the taxes found by the Tax Court to be due from
the estate in the total amount of P760.28
instead of only for the amount of taxes
corresponding to his share in the
estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on

the ground that as an heir he is liable for unpaid
income tax due the estate only up to the extent
of and in proportion to any share he received.
He relies on Government of the Philippine
Islands v. Pamintuan2 where We held that
"after the partition of an estate, heirs and
distributees are liable individually for the
payment of all lawful outstanding claims
against the estate in proportion to the amount
or value of the property they have respectively
received from the estate."

We hold that the Government can require

Manuel B. Pineda to pay the full amount of the
taxes assessed.

Pineda is liable for the assessment as an heir

and as a holder-transferee of property belonging
to the estate/taxpayer. As an heir he is
individually answerable for the part of the tax
proportionate to the share he received from the
inheritance.3 His liability, however, cannot
exceed the amount of his share.4

As a holder of property belonging to the estate,

Pineda is liable for he tax up to the amount of
the property in his possession. The reason is
that the Government has a lien on the
P2,500.00 received by him from the estate as
his share in the inheritance, for unpaid income
taxes4a for which said estate is liable, pursuant
to the last paragraph of Section 315 of the Tax
Code, which we quote hereunder:
If any person, corporation, partnership, joint-
account (cuenta en participacion), association,
or insurance company liable to pay the income
tax, neglects or refuses to pay the same after
demand, the amount shall be a lien in favor of
the Government of the Philippines from the time
when the assessment was made by the
Commissioner of Internal Revenue until paid
with interest, penalties, and costs that may
accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .

By virtue of such lien, the Government has the

right to subject the property in Pineda's
possession, i.e., the P2,500.00, to satisfy the
income tax assessment in the sum of P760.28.
After such payment, Pineda will have a right of
contribution from his co-heirs,5 to achieve an
adjustment of the proper share of each heir in
the distributable estate.

All told, the Government has two ways of

collecting the tax in question. One, by going
after all the heirs and collecting from each one
of them the amount of the tax proportionate to
the inheritance received. This remedy was
adopted in Government of the Philippine
Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs
for the collection of the tax. This action rests on
the concept that hereditary property consists
only of that part which remains after the
settlement of all lawful claims against the estate,
for the settlement of which the entire estate is
first liable.6 The reason why in case suit is filed
against all the heirs the tax due from the estate
is levied proportionately against them is to
achieve thereby two results: first, payment of
the tax; and second, adjustment of the shares
of each heir in the distributed estate as lessened
by the tax.

Another remedy, pursuant to the lien created by

Section 315 of the Tax Code upon all property
and rights to property belonging to the taxpayer
for unpaid income tax, is by subjecting said
property of the estate which is in the hands of
an heir or transferee to the payment of the tax
due, the estate. This second remedy is the very
avenue the Government took in this case to
collect the tax. The Bureau of Internal Revenue
should be given, in instances like the case at
bar, the necessary discretion to avail itself of the
most expeditious way to collect the tax as may
be envisioned in the particular provision of the
Tax Code above quoted, because taxes are the
lifeblood of government and their prompt and
certain availability is an imperious need.7 And
as afore-stated in this case the suit seeks to
achieve only one objective: payment of the tax.
The adjustment of the respective shares due to
the heirs from the inheritance, as lessened by
the tax, is left to await the suit for contribution
by the heir from whom the Government
recovered said tax.

WHEREFORE, the decision appealed from is

modified. Manuel B. Pineda is hereby ordered to
pay to the Commissioner of Internal Revenue
the sum of P760.28 as deficiency income tax for
1945 and 1946, and real estate dealer's fixed
tax for the fourth quarter of 1946 and for the
whole year 1947, without prejudice to his right
of contribution for his co-heirs. No costs. So
ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon,

Makalintal, Zaldivar, Sanchez, Castro, Angeles
and Fernando, JJ., concur.

Francia v IAC | GR No. L-67649 | 28 June

1988

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 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:

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 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 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 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.

Fernan (Chairman), Feliciano, Bidin and Cortes,

JJ., concur.

Domingo v Garlitos | GR No. L-18994 | 29

June 1963

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 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.

Padilla, Bautista Angelo, Concepcion, Barrera,

Paredes, Dizon, Regala and Makalintal, JJ.,
concur.
Bengzon, C.J., took no part.

Philex Mining Corporation v CIR | GR No.

148187 | 16 April 2008

PHILEX MINING G.R. No. 148187

CORPORATION,
Petitioner, Present:
Ynares-Santiago, J. (Chairperson),
- versus - Carpio Morales, *
Chico-Nazario,
Nachura, and,
Reyes, JJ.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
April 16, 2008
x -------------------------------------------------------
--------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review on certiorari of the

June 30, 2000 Decision[1] of the Court of
Appeals in CA-G.R. SP No. 49385, which
affirmed the Decision[2] of the Court of Tax
Appeals in C.T.A. Case No. 5200. Also assailed
is the April 3, 2001 Resolution[3] denying the
motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining

Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining
Company (Baguio Gold) for the former to
manage and operate the latters mining claim,
known as the Sto. Nino mine, located in Atok
and Tublay, Benguet Province. The parties
agreement was denominated as Power of
Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the

PRINCIPAL (Baguio Gold) shall make available
to the MANAGERS (Philex Mining) up to
ELEVEN MILLION PESOS (P11,000,000.00), in
such amounts as from time to time may be
required by the MANAGERS within the said 3-
year period, for use in the MANAGEMENT of the
STO. NINO MINE. The said ELEVEN MILLION
PESOS (P11,000,000.00) shall be deemed, for
internal audit purposes, as the owners account
in the Sto. Nino PROJECT. Any part of any
income of the PRINCIPAL from the STO. NINO
MINE, which is left with the Sto. Nino PROJECT,
shall be added to such owners account.

5. Whenever the MANAGERS shall deem it

necessary and convenient in connection with
the MANAGEMENT of the STO. NINO MINE,
they may transfer their own funds or property
to the Sto. Nino PROJECT, in accordance with
the following arrangements:

(a) The properties shall be appraised and,

together with the cash, shall be carried by the
Sto. Nino PROJECT as a special fund to be
known as the MANAGERS account.

(b) The total of the MANAGERS account shall

not exceed P11,000,000.00, except with prior
approval of the PRINCIPAL; provided, however,
that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the
Sto. Nino PROJECT, the amount not so paid in
cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be

withdrawn from the Sto. Nino PROJECT until
termination of this Agency.

(d) The MANAGERS account shall not accrue

interest. Since it is the desire of the PRINCIPAL
to extend to the MANAGERS the benefit of
subsequent appreciation of property, upon a
projected termination of this Agency, the ratio
which the MANAGERS account has to the
owners account will be determined, and the
corresponding proportion of the entire assets of
the STO. NINO MINE, excluding the claims,
shall be transferred to the MANAGERS, except
that such transferred assets shall not include
mine development, roads, buildings, and
similar property which will be valueless, or of
slight value, to the MANAGERS. The
MANAGERS can, on the other hand, require at
their option that property originally transferred
by them to the Sto. Nino PROJECT be re-
transferred to them. Until such assets are
transferred to the MANAGERS, this Agency
shall remain subsisting.

xxxx

12. The compensation of the MANAGER shall be

fifty per cent (50%) of the net profit of the Sto.
Nino PROJECT before income tax. It is
understood that the MANAGERS shall pay
income tax on their compensation, while the
PRINCIPAL shall pay income tax on the net
profit of the Sto. Nino PROJECT after deduction
therefrom of the MANAGERS compensation.

xxxx

16. The PRINCIPAL has current pecuniary

obligation in favor of the MANAGERS and, in
the future, may incur other obligations in favor
of the MANAGERS. This Power of Attorney has
been executed as security for the payment and
satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a
means to fulfill the same. Therefore, this Agency
shall be irrevocable while any obligation of the
PRINCIPAL in favor of the MANAGERS is
outstanding, inclusive of the MANAGERS
account. After all obligations of the PRINCIPAL
in favor of the MANAGERS have been paid and
satisfied in full, this Agency shall be revocable
by the PRINCIPAL upon 36-month notice to the
MANAGERS.

17. Notwithstanding any agreement or

understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS
may withdraw from this Agency by giving 6-
month notice to the PRINCIPAL. The
MANAGERS shall not in any manner be held
liable to the PRINCIPAL by reason alone of such
withdrawal. Paragraph 5(d) hereof shall be
operative in case of the MANAGERS withdrawal.

x x x x[5]

In the course of managing and operating the

project, Philex Mining made advances of cash
and property in accordance with paragraph 5 of
the agreement. However, the mine suffered
continuing losses over the years which resulted
to petitioners withdrawal as manager of the
mine on January 28, 1982 and in the eventual
cessation of mine operations on February 20,
1982.[6]
Thereafter, on September 27, 1982, the parties
executed a Compromise with Dation in
Payment[7] wherein Baguio Gold admitted an
indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in
three segments by first assigning Baguio Golds
tangible assets to petitioner, transferring to the
latter Baguio Golds equitable title in its
Philodrill assets and finally settling the
remaining liability through properties that
Baguio Gold may acquire in the future.

On December 31, 1982, the parties executed an

Amendment to Compromise with Dation in
Payment[8] where the parties determined that
Baguio Golds indebtedness to petitioner
actually amounted to P259,137,245.00, which
sum included liabilities of Baguio Gold to other
creditors that petitioner had assumed as
guarantor. These liabilities pertained to long-
term loans amounting to US$11,000,000.00
contracted by Baguio Gold from the Bank of
America NT & SA and Citibank N.A. This time,
Baguio Gold undertook to pay petitioner in two
segments by first assigning its tangible assets
for P127,838,051.00 and then transferring its
equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained
that Baguio Gold had a remaining outstanding
indebtedness to petitioner in the amount of
P114,996,768.00.

Subsequently, petitioner wrote off in its 1982

books of account the remaining outstanding
indebtedness of Baguio Gold by charging
P112,136,000.00 to allowances and reserves
that were set up in 1981 and P2,860,768.00 to
the 1982 operations.

In its 1982 annual income tax return, petitioner

deducted from its gross income the amount of
P112,136,000.00 as loss on settlement of
receivables from Baguio Gold against reserves
and allowances.[9] However, the Bureau of
Internal Revenue (BIR) disallowed the amount
as deduction for bad debt and assessed
petitioner a deficiency income tax of
P62,811,161.39.

Petitioner protested before the BIR arguing that

the deduction must be allowed since all
requisites for a bad debt deduction were
satisfied, to wit: (a) there was a valid and
existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the
taxable year when it was determined to be
worthless.

Petitioner emphasized that the debt arose out of

a valid management contract it entered into
with Baguio Gold. The bad debt deduction
represented advances made by petitioner which,
pursuant to the management contract, formed
part of Baguio Golds pecuniary obligations to
petitioner. It also included payments made by
petitioner as guarantor of Baguio Golds long-
term loans which legally entitled petitioner to be
subrogated to the rights of the original creditor.

Petitioner also asserted that due to Baguio

Golds irreversible losses, it became evident that
it would not be able to recover the advances and
payments it had made in behalf of Baguio Gold.
For a debt to be considered worthless, petitioner
claimed that it was neither required to institute
a judicial action for collection against the debtor
nor to sell or dispose of collateral assets in
satisfaction of the debt. It is enough that a
taxpayer exerted diligent efforts to enforce
collection and exhausted all reasonable means
to collect.

On October 28, 1994, the BIR denied petitioners

protest for lack of legal and factual basis. It held
that the alleged debt was not ascertained to be
worthless since Baguio Gold remained existing
and had not filed a petition for bankruptcy; and
that the deduction did not consist of a valid and
subsisting debt considering that, under the
management contract, petitioner was to be paid
fifty percent (50%) of the projects net profit.[10]
Petitioner appealed before the Court of Tax
Appeals (CTA) which rendered judgment, as
follows:

WHEREFORE, in view of the foregoing, the

instant Petition for Review is hereby DENIED for
lack of merit. The assessment in question, viz:
FAS-1-82-88-003067 for deficiency income tax
in the amount of P62,811,161.39 is hereby
AFFIRMED.

ACCORDINGLY, petitioner Philex Mining

Corporation is hereby ORDERED to PAY
respondent Commissioner of Internal Revenue
the amount of P62,811,161.39, plus, 20%
delinquency interest due computed from
February 10, 1995, which is the date after the
20-day grace period given by the respondent
within which petitioner has to pay the
deficiency amount x x x up to actual date of
payment.

SO ORDERED.[11]

The CTA rejected petitioners assertion that the

advances it made for the Sto. Nino mine were in
the nature of a loan. It instead characterized the
advances as petitioners investment in a
partnership with Baguio Gold for the
development and exploitation of the Sto. Nino
mine. The CTA held that the Power of Attorney
executed by petitioner and Baguio Gold was
actually a partnership agreement. Since the
advanced amount partook of the nature of an
investment, it could not be deducted as a bad
debt from petitioners gross income.

The CTA likewise held that the amount paid by

petitioner for the long-term loan obligations of
Baguio Gold could not be allowed as a bad debt
deduction. At the time the payments were made,
Baguio Gold was not in default since its loans
were not yet due and demandable. What
petitioner did was to pre-pay the loans as
evidenced by the notice sent by Bank of America
showing that it was merely demanding payment
of the installment and interests due. Moreover,
Citibank imposed and collected a pre-
termination penalty for the pre-payment.

The Court of Appeals affirmed the decision of

the CTA.[12] Hence, upon denial of its motion
for reconsideration,[13] petitioner took this
recourse under Rule 45 of the Rules of Court,
alleging that:

I.
The Court of Appeals erred in construing that
the advances made by Philex in the
management of the Sto. Nino Mine pursuant to
the Power of Attorney partook of the nature of
an investment rather than a loan.

II.
The Court of Appeals erred in ruling that the
50%-50% sharing in the net profits of the Sto.
Nino Mine indicates that Philex is a partner of
Baguio Gold in the development of the Sto. Nino
Mine notwithstanding the clear absence of any
intent on the part of Philex and Baguio Gold to
form a partnership.

III.
The Court of Appeals erred in relying only on
the Power of Attorney and in completely
disregarding the Compromise Agreement and
the Amended Compromise Agreement when it
construed the nature of the advances made by
Philex.

IV.
The Court of Appeals erred in refusing to delve
upon the issue of the propriety of the bad debts
write-off.[14]

Petitioner insists that in determining the nature

of its business relationship with Baguio Gold,
we should not only rely on the Power of Attorney,
but also on the subsequent Compromise with
Dation in Payment and Amended Compromise
with Dation in Payment that the parties
executed in 1982. These documents, allegedly
evinced the parties intent to treat the advances
and payments as a loan and establish a
creditor-debtor relationship between them.

The petition lacks merit.

The lower courts correctly held that the Power

of Attorney is the instrument that is material in
determining the true nature of the business
relationship between petitioner and Baguio
Gold. Before resort may be had to the two
compromise agreements, the parties
contractual intent must first be discovered from
the expressed language of the primary contract
under which the parties business relations were
founded. It should be noted that the
compromise agreements were mere collateral
documents executed by the parties pursuant to
the termination of their business relationship
created under the Power of Attorney. On the
other hand, it is the latter which established the
juridical relation of the parties and defined the
parameters of their dealings with one another.

The execution of the two compromise

agreements can hardly be considered as a
subsequent or contemporaneous act that is
reflective of the parties true intent. The
compromise agreements were executed eleven
years after the Power of Attorney and merely
laid out a plan or procedure by which petitioner
could recover the advances and payments it
made under the Power of Attorney. The parties
entered into the compromise agreements as a
consequence of the dissolution of their business
relationship. It did not define that relationship
or indicate its real character.

An examination of the Power of Attorney reveals

that a partnership or joint venture was indeed
intended by the parties. Under a contract of
partnership, two or more persons bind
themselves to contribute money, property, or
industry to a common fund, with the intention
of dividing the profits among themselves.[15]
While a corporation, like petitioner, cannot
generally enter into a contract of partnership
unless authorized by law or its charter, it has
been held that it may enter into a joint venture
which is akin to a particular partnership:

The legal concept of a joint venture is of

common law origin. It has no precise legal
definition, but it has been generally understood
to mean an organization formed for some
temporary purpose. x x x It is in fact hardly
distinguishable from the partnership, since
their elements are similar community of interest
in the business, sharing of profits and losses,
and a mutual right of control. x x x The main
distinction cited by most opinions in common
law jurisdictions is that the partnership
contemplates a general business with some
degree of continuity, while the joint venture is
formed for the execution of a single transaction,
and is thus of a temporary nature. x x x This
observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a
partnership may be particular or universal, and
a particular partnership may have for its object
a specific undertaking. x x x It would seem
therefore that under Philippine law, a joint
venture is a form of partnership and should be
governed by the law of partnerships. The
Supreme Court has however recognized a
distinction between these two business forms,
and has held that although a corporation
cannot enter into a partnership contract, it may
however engage in a joint venture with others. x
x x (Citations omitted) [16]

Perusal of the agreement denominated as the

Power of Attorney indicates that the parties had
intended to create a partnership and establish
a common fund for the purpose. They also had
a joint interest in the profits of the business as
shown by a 50-50 sharing in the income of the
mine.

Under the Power of Attorney, petitioner and

Baguio Gold undertook to contribute money,
property and industry to the common fund
known as the Sto. Nio mine.[17] In this regard,
we note that there is a substantive equivalence
in the respective contributions of the parties to
the development and operation of the mine.
Pursuant to paragraphs 4 and 5 of the
agreement, petitioner and Baguio Gold were to
contribute equally to the joint venture assets
under their respective accounts. Baguio Gold
would contribute P11M under its owners
account plus any of its income that is left in the
project, in addition to its actual mining claim.
Meanwhile, petitioners contribution would
consist of its expertise in the management and
operation of mines, as well as the managers
account which is comprised of P11M in funds
and property and petitioners compensation as
manager that cannot be paid in cash.

However, petitioner asserts that it could not

have entered into a partnership agreement with
Baguio Gold because it did not bind itself to
contribute money or property to the project;
that under paragraph 5 of the agreement, it was
only optional for petitioner to transfer funds or
property to the Sto. Nio project (w)henever the
MANAGERS shall deem it necessary and
convenient in connection with the
MANAGEMENT of the STO. NIO MINE.[18]

The wording of the parties agreement as to

petitioners contribution to the common fund
does not detract from the fact that petitioner
transferred its funds and property to the project
as specified in paragraph 5, thus rendering
effective the other stipulations of the contract,
particularly paragraph 5(c) which prohibits
petitioner from withdrawing the advances until
termination of the parties business relations. As
can be seen, petitioner became bound by its
contributions once the transfers were made.
The contributions acquired an obligatory nature
as soon as petitioner had chosen to exercise its
option under paragraph 5.

There is no merit to petitioners claim that the

prohibition in paragraph 5(c) against
withdrawal of advances should not be taken as
an indication that it had entered into a
partnership with Baguio Gold; that the
stipulation only showed that what the parties
entered into was actually a contract of agency
coupled with an interest which is not revocable
at will and not a partnership.

In an agency coupled with interest, it is the

agency that cannot be revoked or withdrawn by
the principal due to an interest of a third party
that depends upon it, or the mutual interest of
both principal and agent.[19] In this case, the
non-revocation or non-withdrawal under
paragraph 5(c) applies to the advances made by
petitioner who is supposedly the agent and not
the principal under the contract. Thus, it
cannot be inferred from the stipulation that the
parties relation under the agreement is one of
agency coupled with an interest and not a
partnership.

Neither can paragraph 16 of the agreement be

taken as an indication that the relationship of
the parties was one of agency and not a
partnership. Although the said provision states
that this Agency shall be irrevocable while any
obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the
MANAGERS account, it does not necessarily
follow that the parties entered into an agency
contract coupled with an interest that cannot be
withdrawn by Baguio Gold.

It should be stressed that the main object of the

Power of Attorney was not to confer a power in
favor of petitioner to contract with third persons
on behalf of Baguio Gold but to create a
business relationship between petitioner and
Baguio Gold, in which the former was to
manage and operate the latters mine through
the parties mutual contribution of material
resources and industry. The essence of an
agency, even one that is coupled with interest,
is the agents ability to represent his principal
and bring about business relations between the
latter and third persons.[20] Where
representation for and in behalf of the principal
is merely incidental or necessary for the proper
discharge of ones paramount undertaking
under a contract, the latter may not necessarily
be a contract of agency, but some other
agreement depending on the ultimate
undertaking of the parties.[21]

In this case, the totality of the circumstances

and the stipulations in the parties agreement
indubitably lead to the conclusion that a
partnership was formed between petitioner and
Baguio Gold.

First, it does not appear that Baguio Gold was

unconditionally obligated to return the
advances made by petitioner under the
agreement. Paragraph 5 (d) thereof provides
that upon termination of the parties business
relations, the ratio which the MANAGERS
account has to the owners account will be
determined, and the corresponding proportion
of the entire assets of the STO. NINO MINE,
excluding the claims shall be transferred to
petitioner.[22] As pointed out by the Court of
Tax Appeals, petitioner was merely entitled to a
proportionate return of the mines assets upon
dissolution of the parties business relations.
There was nothing in the agreement that would
require Baguio Gold to make payments of the
advances to petitioner as would be recognized
as an item of obligation or accounts payable for
Baguio Gold.

Thus, the tax court correctly concluded that the

agreement provided for a distribution of assets
of the Sto. Nio mine upon termination, a
provision that is more consistent with a
partnership than a creditor-debtor relationship.
It should be pointed out that in a contract of
loan, a person who receives a loan or money or
any fungible thing acquires ownership thereof
and is bound to pay the creditor an equal
amount of the same kind and quality.[23] In
this case, however, there was no stipulation for
Baguio Gold to actually repay petitioner the
cash and property that it had advanced, but
only the return of an amount pegged at a ratio
which the managers account had to the owners
account.
In this connection, we find no contractual basis
for the execution of the two compromise
agreements in which Baguio Gold recognized a
debt in favor of petitioner, which supposedly
arose from the termination of their business
relations over the Sto. Nino mine. The Power of
Attorney clearly provides that petitioner would
only be entitled to the return of a proportionate
share of the mine assets to be computed at a
ratio that the managers account had to the
owners account. Except to provide a basis for
claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself
liable to petitioner under the compromise
agreements, for any amount over and above the
proportion agreed upon in the Power of Attorney.

Next, the tax court correctly observed that it

was unlikely for a business corporation to lend
hundreds of millions of pesos to another
corporation with neither security, or collateral,
nor a specific deed evidencing the terms and
conditions of such loans. The parties also did
not provide a specific maturity date for the
advances to become due and demandable, and
the manner of payment was unclear. All these
point to the inevitable conclusion that the
advances were not loans but capital
contributions to a partnership.

The strongest indication that petitioner was a

partner in the Sto Nio mine is the fact that it
would receive 50% of the net profits as
compensation under paragraph 12 of the
agreement. The entirety of the parties
contractual stipulations simply leads to no
other conclusion than that petitioners
compensation is actually its share in the income
of the joint venture.

Article 1769 (4) of the Civil Code explicitly

provides that the receipt by a person of a share
in the profits of a business is prima facie
evidence that he is a partner in the business.
Petitioner asserts, however, that no such
inference can be drawn against it since its share
in the profits of the Sto Nio project was in the
nature of compensation or wages of an
employee, under the exception provided in
Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that

petitioner was not an employee of Baguio Gold
who will be paid wages pursuant to an
employer-employee relationship. To begin with,
petitioner was the manager of the project and
had put substantial sums into the venture in
order to ensure its viability and profitability. By
pegging its compensation to profits, petitioner
also stood not to be remunerated in case the
mine had no income. It is hard to believe that
petitioner would take the risk of not being paid
at all for its services, if it were truly just an
ordinary employee.

Consequently, we find that petitioners

compensation under paragraph 12 of the
agreement actually constitutes its share in the
net profits of the partnership. Indeed, petitioner
would not be entitled to an equal share in the
income of the mine if it were just an employee
of Baguio Gold.[25] It is not surprising that
petitioner was to receive a 50% share in the net
profits, considering that the Power of Attorney
also provided for an almost equal contribution
of the parties to the St. Nino mine. The
compensation agreed upon only serves to
reinforce the notion that the parties relations
were indeed of partners and not employer-
employee.

All told, the lower courts did not err in treating

petitioners advances as investments in a
partnership known as the Sto. Nino mine. The
advances were not debts of Baguio Gold to
petitioner inasmuch as the latter was under no
unconditional obligation to return the same to
the former under the Power of Attorney. As for
the amounts that petitioner paid as guarantor
to Baguio Golds creditors, we find no reason to
depart from the tax courts factual finding that
Baguio Golds debts were not yet due and
demandable at the time that petitioner paid the
same. Verily, petitioner pre-paid Baguio Golds
outstanding loans to its bank creditors and this
conclusion is supported by the evidence on
record.[26]

In sum, petitioner cannot claim the advances as

a bad debt deduction from its gross income.
Deductions for income tax purposes partake of
the nature of tax exemptions and are strictly
construed against the taxpayer, who must
prove by convincing evidence that he is entitled
to the deduction claimed.[27] In this case,
petitioner failed to substantiate its assertion
that the advances were subsisting debts of
Baguio Gold that could be deducted from its
gross income. Consequently, it could not claim
the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The

decision of the Court of Appeals in CA-G.R. SP
No. 49385 dated June 30, 2000, which affirmed
the decision of the Court of Tax Appeals in C.T.A.
Case No. 5200 is AFFIRMED. Petitioner Philex
Mining Corporation is ORDERED to PAY the
deficiency tax on its 1982 income in the amount
of P62,811,161.31, with 20% delinquency
interest computed from February 10, 1995,
which is the due date given for the payment of
the deficiency income tax, up to the actual date
of payment.

SO ORDERED.

Caltex Phils v COA | GR No. 92585 | 08 May

1992

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT,
HONORABLE COMMISSIONER BARTOLOME C.
FERNANDEZ and HONORABLE
COMMISSIONER ALBERTO P. CRUZ,
respondents.
DAVIDE, JR., J.:

This is a petition erroneously brought under

Rule 44 of the Rules of Court 1 questioning the
authority of the Commission on Audit (COA) in
disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization
Fund (OPSF) and seeking the reversal of said
Commission's decision denying its claims for
recovery of financing charges from the Fund
and reimbursement of underrecovery arising
from sales to the National Power Corporation,
Atlas Consolidated Mining and Development
Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from
exercising the right to offset its remittances
against its reimbursement vis-a-vis the OPSF
and disallowing its claims which are still
pending resolution before the Office of Energy
Affairs (OEA) and the Department of Finance
(DOF).

Pursuant to the 1987 Constitution, 2 any

decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on
certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The
certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of
Court. 4

Considering, however, that the allegations that

the COA acted with:
(a) total lack of jurisdiction in completely
ignoring and showing absolutely no respect for
the findings and rulings of the administrator of
the fund itself and in disallowing a claim which
is still pending resolution at the OEA level, and
(b) "grave abuse of discretion and completely
without jurisdiction" 5 in declaring that
petitioner cannot avail of the right to offset any
amount that it may be required under the law
to remit to the OPSF against any amount that it
may receive by way of reimbursement therefrom
are sufficient to bring this petition within Rule
65 of the Rules of Court, and, considering
further the importance of the issues raised, the
error in the designation of the remedy pursued
will, in this instance, be excused.

The issues raised revolve around the OPSF

created under Section 8 of Presidential Decree
(P.D.) No. 1956, as amended by Executive Order
(E.O.) No. 137. As amended, said Section 8
reads as follows:

Sec. 8 . There is hereby created a Trust

Account in the books of accounts of the Ministry
of Energy to be designated as Oil Price
Stabilization Fund (OPSF) for the purpose of
minimizing frequent price changes brought
about by exchange rate adjustments and/or
changes in world market prices of crude oil and
imported petroleum products. The Oil Price
Stabilization Fund may be sourced from any of
the following:

a) Any increase in the tax collection from ad

valorem tax or customs duty imposed on
petroleum products subject to tax under this
Decree arising from exchange rate adjustment,
as may be determined by the Minister of
Finance in consultation with the Board of
Energy;

b) Any increase in the tax collection as a

result of the lifting of tax exemptions of
government corporations, as may be
determined by the Minister of Finance in
consultation with the Board of Energy;

c) Any additional amount to be imposed on

petroleum products to augment the resources
of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring
payment by persons or companies engaged in
the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in

case the actual peso costs paid by oil companies
in the importation of crude oil and petroleum
products is less than the peso costs computed
using the reference foreign exchange rate as
fixed by the Board of Energy.

The Fund herein created shall be used for the

following:

1) To reimburse the oil companies for cost

increases in crude oil and imported petroleum
products resulting from exchange rate
adjustment and/or increase in world market
prices of crude oil;

2) To reimburse the oil companies for

possible cost under-recovery incurred as a
result of the reduction of domestic prices of
petroleum products. The magnitude of the
underrecovery, if any, shall be determined by
the Ministry of Finance. "Cost underrecovery"
shall include the following:

i. Reduction in oil company take as directed

by the Board of Energy without the
corresponding reduction in the landed cost of
oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as

a result of foregoing government mandated
price reductions;

iii. Other factors as may be determined by the

Ministry of Finance to result in cost
underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be

administered by the Ministry of Energy.

The material operative facts of this case, as

gathered from the pleadings of the parties, are
not disputed.

On 2 February 1989, the COA sent a letter to

Caltex Philippines, Inc. (CPI), hereinafter
referred to as Petitioner, directing the latter to
remit to the OPSF its collection, excluding that
unremitted for the years 1986 and 1988, of the
additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D.
No. 1956 which, as of 31 December 1987,
amounted to P335,037,649.00 and informing it
that, pending such remittance, all of its claims
for reimbursement from the OPSF shall be held
in abeyance. 6

On 9 March 1989, the COA sent another letter

to petitioner informing it that partial verification
with the OEA showed that the grand total of its
unremitted collections of the above tax is
P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and

surcharges thereon, within sixty (60) days from
receipt of the letter; advising it that the COA will
hold in abeyance the audit of all its claims for
reimbursement from the OPSF; and directing it
to desist from further offsetting the taxes
collected against outstanding claims in 1989
and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested

the COA for an early release of its
reimbursement certificates from the OPSF
covering claims with the Office of Energy Affairs
since June 1987 up to March 1989, invoking in
support thereof COA Circular No. 89-299 on the
lifting of pre-audit of government transactions
of national government agencies and
government-owned or controlled corporations.
8

In its Answer dated 8 May 1989, the COA

denied petitioner's request for the early release
of the reimbursement certificates from the
OPSF and repeated its earlier directive to
petitioner to forward payment of the latter's
unremitted collections to the OPSF to facilitate
COA's audit action on the reimbursement
claims. 9
By way of a reply, petitioner, in a letter dated 31
May 1989, submitted to the COA a proposal for
the payment of the collections and the recovery
of claims, since the outright payment of the sum
of P1.287 billion to the OEA as a prerequisite
for the processing of said claims against the
OPSF will cause a very serious impairment of its
cash position. 10 The proposal reads:

We, therefore, very respectfully propose the

following:

(1) Any procedural arrangement acceptable to

COA to facilitate monitoring of payments and
reimbursements will be administered by the
ERB/Finance Dept./OEA, as agencies
designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will

deliver to OEA, P1.287 billion as payment to
OPSF, similarly OEA will deliver to Caltex the
same amount in cash reimbursement from
OPSF.

(3) The COA audit will commence

immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be

conducted expeditiously to preclude further
accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman

taking no part, handed down Decision No. 921
accepting the above-stated proposal but
prohibiting petitioner from further offsetting
remittances and reimbursements for the
current and ensuing years. 11 Decision No. 921
reads:

This pertains to the within separate requests of

Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President
and Managing Director, Caltex (Philippines) Inc.,
for reconsideration of this Commission's
adverse action embodied in its letters dated
February 2, 1989 and March 9, 1989, the
former directing immediate remittance to the
Oil Price Stabilization Fund of collections made
by the firms pursuant to P.D. 1956, as amended
by E.O. No. 137, S. 1987, and the latter
reiterating the same directive but further
advising the firms to desist from offsetting
collections against their claims with the notice
that "this Commission will hold in abeyance the
audit of all . . . claims for reimbursement from
the OPSF."

It appears that under letters of authority issued

by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset
the amounts due to the Oil Price Stabilization
Fund against their outstanding claims from the
said Fund for the calendar years 1987 and 1988,
pending with the then Ministry of Energy, the
government entity charged with administering
the OPSF. This Commission, however,
expressing serious doubts as to the propriety of
the offsetting of all types of reimbursements
from the OPSF against all categories of
remittances, advised these oil companies that
such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly
manifest their intent to make arrangements for
the remittance to the Office of Energy Affairs of
the amount of collections equivalent to what
has been previously offset, provided that this
Commission authorizes the Office of Energy
Affairs to prepare the corresponding checks
representing reimbursement from the OPSF. It
is alleged that the implementation of such an
arrangement, whereby the remittance of
collections due to the OPSF and the
reimbursement of claims from the Fund shall be
made within a period of not more than one week
from each other, will benefit the Fund and not
unduly jeopardize the continuing daily cash
requirements of these firms.

Upon a circumspect evaluation of the

circumstances herein obtaining, this
Commission perceives no further objectionable
feature in the proposed arrangement, provided
that 15% of whatever amount is due from the
Fund is retained by the Office of Energy Affairs,
the same to be answerable for suspensions or
disallowances, errors or discrepancies which
may be noted in the course of audit and
surcharges for late remittances without
prejudice to similar future retentions to answer
for any deficiency in such surcharges, and
provided further that no offsetting of
remittances and reimbursements for the
current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18

August 1989, sent the following letter to
Executive Director Wenceslao R. De la Paz of the
Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision

No. 921 dated June 7, 1989, and based on our
initial verification of documents submitted to us
by your Office in support of Caltex (Philippines),
Inc. offsets (sic) for the year 1986 to May 31,
1989, as well as its outstanding claims against
the Oil Price Stabilization Fund (OPSF) as of
May 31, 1989, we are pleased to inform your
Office that Caltex (Philippines), Inc. shall be
required to remit to OPSF an amount of
P1,505,668,906, representing remittances to
the OPSF which were offset against its claims
reimbursements (net of unsubmitted claims). In
addition, the Commission hereby authorize (sic)
the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex,
representing claims initially allowed in audit,
the details of which are presented hereunder: . . .

As presented in the foregoing computation the

disallowances totalled P387,683,535, which
included P130,420,235 representing those
claims disallowed by OEA, details of which is
(sic) shown in Schedule 1 as summarized as
follows:

Disallowance of COA
Particulars Amount
Recovery of financing charges P162,728,475
/a
Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed

hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as

amended by E.O. 137 seems to indicate that
recovery of financing charges by oil companies
is not among the items for which the OPSF may
be utilized. Therefore, it is our view that
recovery of financing charges has no legal basis.
The mechanism for such claims is provided in
DOF Circular 1-87.

b. Product Sales –– Sales to International

Vessels/Airlines

BOE Resolution No. 87-01 dated February 7,

1987 as implemented by OEA Order No. 87-03-
095 indicating that (sic) February 7, 1987 as the
effectivity date that (sic) oil companies should
pay OPSF impost on export sales of petroleum
products. Effective February 7, 1987 sales to
international vessels/airlines should not be
included as part of its domestic sales. Changing
the effectivity date of the resolution from
February 7, 1987 to October 20, 1987 as
covered by subsequent ERB Resolution No. 88-
12 dated November 18, 1988 has allowed Caltex
to include in their domestic sales volumes to
international vessels/airlines and claim the
corresponding reimbursements from OPSF
during the period. It is our opinion that the
effectivity of the said resolution should be
February 7, 1987.

c. Inventory losses –– Settlement of Ad

Valorem

We reviewed the system of handling Borrow and

Loan (BLA) transactions including the related
BLA agreement, as they affect the claims for
reimbursements of ad valorem taxes. We
observed that oil companies immediately settle
ad valorem taxes for BLA transaction (sic). Loan
balances therefore are not tax paid inventories
of Caltex subject to reimbursements but those
of the borrower. Hence, we recommend
reduction of the claim for July, August, and
November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that

"I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and
other charges whether direct or indirect due
and payable by the copper mining companies in
distress to the national and local governments."
It is our opinion that LOI 1416 which
implements the exemption from payment of
OPSF imposts as effected by OEA has no legal
basis.

Furthermore, we wish to emphasize that

payment to Caltex (Phil.) Inc., of the amount as
herein authorized shall be subject to availability
of funds of OPSF as of May 31, 1989 and
applicable auditing rules and regulations. With
regard to the disallowances, it is further
informed that the aggrieved party has 30 days
within which to appeal the decision of the
Commission in accordance with law.

On 8 September 1989, petitioner filed an

Omnibus Request for the Reconsideration of the
decision based on the following grounds: 13
A) COA-DISALLOWED CLAIMS ARE
AUTHORIZED UNDER EXISTING RULES,
ORDERS, RESOLUTIONS, CIRCULARS
ISSUED BY THE DEPARTMENT OF FINANCE
AND THE ENERGY REGULATORY BOARD
PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN
THE COURSE OF EXERCISE OF EXECUTIVE
POWER BY DEPARTMENT OF FINANCE AND
ENERGY REGULATORY BOARD ARE LEGAL
AND SHOULD BE RESPECTED AND APPLIED
UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF

OFFSET ARRANGEMENT, AS AUTHORIZED BY
THE EXECUTIVE BRANCH OF GOVERNMENT,
REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the

COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman

Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down
Decision No. 1171 affirming the disallowance
for recovery of financing charges, inventory
losses, and sales to MARCOPPER and ATLAS,
while allowing the recovery of product sales or
those arising from export sales. 15 Decision No.
1171 reads as follows:

Anent the recovery of financing charges you

contend that Caltex Phil. Inc. has the .authority
to recover financing charges from the OPSF on
the basis of Department of Finance (DOF)
Circular 1-87, dated February 18, 1987, which
allowed oil companies to "recover cost of
financing working capital associated with crude
oil shipments," and provided a schedule of
reimbursement in terms of peso per barrel. It
appears that on November 6, 1989, the DOF
issued a memorandum to the President of the
Philippines explaining the nature of these
financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic

recovery, . . . oil companies (were authorized) to
refinance their imports of crude oil and
petroleum products from the normal trade
credit of 30 days up to 360 days from date of
loading . . . Conformably . . ., the oil companies
deferred their foreign exchange remittances for
purchases by refinancing their import bills from
the normal 30-day payment term up to the
desired 360 days. This refinancing of
importations carried additional costs (financing
charges) which then became, due to
government mandate, an inherent part of the
cost of the purchases of our country's oil
requirement.

We beg to disagree with such contention. The

justification that financing charges increased
oil costs and the schedule of reimbursement
rate in peso per barrel (Exhibit 1) used to
support alleged increase (sic) were not validated
in our independent inquiry. As manifested in
Exhibit 2, using the same formula which the
DOF used in arriving at the reimbursement rate
but using comparable percentages instead of
pesos, the ineluctable conclusion is that the oil
companies are actually gaining rather than
losing from the extension of credit because such
extension enables them to invest the collections
in marketable securities which have much
higher rates than those they incur due to the
extension. The Data we used were obtained
from CPI (CALTEX) Management and can easily
be verified from our records.

With respect to product sales or those arising

from sales to international vessels or
airlines, . . ., it is believed that export sales
(product sales) are entitled to claim refund from
the OPSF.

As regard your claim for underrecovery arising

from inventory losses, . . . It is the considered
view of this Commission that the OPSF is not
liable to refund such surtax on inventory losses
because these are paid to BIR and not OPSF, in
view of which CPI (CALTEX) should seek refund
from BIR. . . .

Finally, as regards the sales to Atlas and

Marcopper, it is represented that you are
entitled to claim recovery from the OPSF
pursuant to LOI 1416 issued on July 17, 1984,
since these copper mining companies did not
pay CPI (CALTEX) and OPSF imposts which
were added to the selling price.

Upon a circumspect evaluation, this

Commission believes and so holds that the CPI
(CALTEX) has no authority to claim
reimbursement for this uncollected OPSF
impost because LOI 1416 dated July 17, 1984,
which exempts distressed mining companies
from "all taxes, duties, import fees and other
charges" was issued when OPSF was not yet in
existence and could not have contemplated
OPSF imposts at the time of its formulation.
Moreover, it is evident that OPSF was not
created to aid distressed mining companies but
rather to help the domestic oil industry by
stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on

28 March 1990 the present petition wherein it
imputes to the COA the commission of the
following errors: 16

RESPONDENT COMMISSION ERRED IN

DISALLOWING RECOVERY OF FINANCING
CHARGES FROM THE OPSF.

II
RESPONDENT COMMISSION ERRED IN
DISALLOWING
CPI's 17 CLAIM FOR REIMBURSEMENT OF
UNDERRECOVERY ARISING FROM SALES TO
NPC.

III

RESPONDENT COMMISSION ERRED IN

DENYING CPI's CLAIMS FOR
REIMBURSEMENT ON SALES TO ATLAS AND
MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN

PREVENTING CPI FROM EXERCISING ITS
LEGAL RIGHT TO OFFSET ITS REMITTANCES
AGAINST ITS REIMBURSEMENT VIS-A-VIS
THE OPSF.

RESPONDENT COMMISSION ERRED IN

DISALLOWING CPI's CLAIMS WHICH ARE
STILL PENDING RESOLUTION BY (SIC) THE
OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court

required the respondents to comment on the
petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and

Commissioners Fernandez and Cruz, assisted
by the Office of the Solicitor General, filed their
Comment. 19

This Court resolved to give due course to this

petition on 30 May 1991 and required the
parties to file their respective Memoranda
within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the

Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be
considered as the Memorandum for
respondents. 21
Upon the other hand, petitioner filed its
Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first

assigned error contending, in support thereof,
that:

(1) In view of the expanded role of the OPSF

pursuant to Executive Order No. 137, which
added a second purpose, to wit:

2) To reimburse the oil companies for

possible cost underrecovery incurred as a result
of the reduction of domestic prices of petroleum
products. The magnitude of the underrecovery,
if any, shall be determined by the Ministry of
Finance. "Cost underrecovery" shall include the
following:

i. Reduction in oil company take as directed

by the Board of Energy without the
corresponding reduction in the landed cost of
oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as

a result of foregoing government mandated
price reductions;

iii. Other factors as may be determined by the

Ministry of Finance to result in cost
underrecovery.

the "other factors" mentioned therein that may

be determined by the Ministry (now Department)
of Finance may include financing charges for "in
essence, financing charges constitute
unrecovered cost of acquisition of crude oil
incurred by the oil companies," as explained in
the 6 November 1989 Memorandum to the
President of the Department of Finance; they
"directly translate to cost underrecovery in
cases where the money market placement rates
decline and at the same time the tax on interest
income increases. The relationship is such that
the presence of underrecovery or overrecovery
is directly dependent on the amount and extent
of financing charges."

(2) The claim for recovery of financing charges

has clear legal and factual basis; it was filed on
the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of

financing working capital associated with crude
oil shipments, the following guidelines on the
utilization of the Oil Price Stabilization Fund
pertaining to the payment of the foregoing (sic)
exchange risk premium and recovery of
financing charges will be implemented:

1. The OPSF foreign exchange premium shall

be reduced to a flat rate of one (1) percent for
the first (6) months and 1/32 of one percent per
month thereafter up to a maximum period of
one year, to be applied on crude oil' shipments
from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987
shall be charged on the basis of the fee
applicable to the remaining period of financing.

2. In addition, for shipments loaded after

January 1987, oil companies shall be allowed to
recover financing charges directly from the
OPSF per barrel of crude oil based on the
following schedule:

Financing Period Reimbursement Rate

Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every

sixty
days. 22
Pursuant to this circular, the Department of
Finance, in its letter of 18 February 1987,
advised the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry

dated December 4, 1986 and February 5, 1987
and subsequent discussions held by the Price
Review committee on February 6, 1987.

On the basis of the representations made, the

Department of Finance recognizes the necessity
to reduce the foreign exchange risk premium
accruing to the Oil Price Stabilization Fund
(OPSF). Such a reduction would allow the
industry to recover partly associated financing
charges on crude oil imports. Accordingly, the
OPSF foreign exchange risk fee shall be reduced
to a flat charge of 1% for the first six (6) months
plus 1/32% of 1% per month thereafter up to a
maximum period of one year, effective January
1, 1987. In addition, since the prevailing
company take would still leave unrecovered
financing charges, reimbursement may be
secured from the OPSF in accordance with the
provisions of the attached Department of
Finance circular. 23

Acting on this letter, the OEA issued on 4 May

1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign
exchange risk fee and the recovery of financing
charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover

financing charges directly from the OPSF for
both crude and product shipments loaded after
January 1, 1987 based on the following rates:
Financing Period Reimbursement Rate
(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review

every sixty days. 24

Then on 22 November 1988, the Department of

Finance issued Circular No. 4-88 imposing
further guidelines on the recoverability of
financing charges, to wit:

Following are the supplemental rules to

Department of Finance Circular No. 1-87 dated
February 18, 1987 which allowed the recovery
of financing charges directly from the Oil Price
Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on

a per shipment basis.

2. The claim shall be filed with the Office of

Energy Affairs together with the claim on peso
cost differential for a particular shipment and
duly certified supporting documents provided
for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of

reimbursement certificate (Annex A) to be
issued by the Office of Energy Affairs. The said
certificate may be used to offset against
amounts payable to the OPSF. The oil
companies may also redeem said certificates in
cash if not utilized, subject to availability of
funds. 25

The OEA disseminated this Circular to all oil

companies in its Memorandum Circular No. 88-
12-017. 26
The COA can neither ignore these issuances nor
formulate its own interpretation of the laws in
the light of the determination of executive
agencies. The determination by the Department
of Finance and the OEA that financing charges
are recoverable from the OPSF is entitled to
great weight and consideration. 27 The function
of the COA, particularly in the matter of
allowing or disallowing certain expenditures, is
limited to the promulgation of accounting and
auditing rules for, among others, the
disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable
expenditures, or uses of government funds and
properties. 28

(3) Denial of petitioner's claim for

reimbursement would be inequitable.
Additionally, COA's claim that petitioner is
gaining, instead of losing, from the extension of
credit, is belatedly raised and not supported by
expert analysis.

In impeaching the validity of petitioner's

assertions, the respondents argue that:

1. The Constitution gives the COA

discretionary power to disapprove irregular or
unnecessary government expenditures and as
the monetary claims of petitioner are not
allowed by law, the COA acted within its
jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not

allow reimbursement of financing charges from
the OPSF;

3. Under the principle of ejusdem generis,

the "other factors" mentioned in the second
purpose of the OPSF pursuant to E.O. No. 137
can only include "factors which are of the same
nature or analogous to those enumerated;"

4. In allowing reimbursement of financing

charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956
and E.O. No. 137; and
5. Department of Finance rules and
regulations implementing P.D. No. 1956 do not
likewise allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be

resolved in view of its primacy, We find the
theory of petitioner –– that such does not extend
to the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable
expenditures, or use of government funds and
properties, but only to the promulgation of
accounting and auditing rules for, among
others, such disallowance –– to be untenable in
the light of the provisions of the 1987
Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987

Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have

the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the
revenue and receipts of, and expenditures or
uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or
instrumentalities, including government-owned
and controlled corporations with original
charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices
that have been granted fiscal autonomy under
this Constitution; (b) autonomous state colleges
and universities; (c) other government-owned or
controlled corporations and their subsidiaries;
and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly,
from or through the government, which are
required by law or the granting institution to
submit to such audit as a condition of subsidy
or equity. However, where the internal control
system of the audited agencies is inadequate,
the Commission may adopt such measures,
including temporary or special pre-audit, as are
necessary and appropriate to correct the
deficiencies. It shall keep the general accounts,
of the Government and, for such period as may
be provided by law, preserve the vouchers and
other supporting papers pertaining thereto.

(2) The Commission shall have exclusive

authority, subject to the limitations in this
Article, to define the scope of its audit and
examination, establish the techniques and
methods required therefor, and promulgate
accounting and auditing rules and regulations,
including those for the prevention and
disallowance of irregular, unnecessary,
excessive, extravagant, or, unconscionable
expenditures, or uses of government funds and
properties.

These present powers, consistent with the

declared independence of the Commission, 30
are broader and more extensive than that
conferred by the 1973 Constitution. Under the
latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with

law and regulations, all accounts pertaining to
the revenues, and receipts of, and expenditures
or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or
instrumentalities including government-owned
or controlled corporations, keep the general
accounts of the Government and, for such
period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate
accounting and auditing rules and regulations
including those for the prevention of irregular,
unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31

Upon the other hand, under the 1935

Constitution, the power and authority of the
COA's precursor, the General Auditing Office,
were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereof
provided:
Sec. 2. The Auditor General shall examine,
audit, and settle all accounts pertaining to the
revenues and receipts from whatever source,
including trust funds derived from bond issues;
and audit, in accordance with law and
administrative regulations, all expenditures of
funds or property pertaining to or held in trust
by the Government or the provinces or
municipalities thereof. He shall keep the
general accounts of the Government and the
preserve the vouchers pertaining thereto. It
shall be the duty of the Auditor General to bring
to the attention of the proper administrative
officer expenditures of funds or property which,
in his opinion, are irregular, unnecessary,
excessive, or extravagant. He shall also perform
such other functions as may be prescribed by
law.

As clearly shown above, in respect to irregular,

unnecessary, excessive or extravagant
expenditures or uses of funds, the 1935
Constitution did not grant the Auditor General
the power to issue rules and regulations to
prevent the same. His was merely to bring that
matter to the attention of the proper
administrative officer.

The ruling on this particular point, quoted by

petitioner from the cases of Guevarra vs.
Gimenez 32 and Ramos vs. Aquino, 33 are no
longer controlling as the two (2) were decided in
the light of the 1935 Constitution.

There can be no doubt, however, that the audit

power of the Auditor General under the 1935
Constitution and the Commission on Audit
under the 1973 Constitution authorized them
to disallow illegal expenditures of funds or uses
of funds and property. Our present Constitution
retains that same power and authority, further
strengthened by the definition of the COA's
general jurisdiction in Section 26 of the
Government Auditing Code of the Philippines 34
and Administrative Code of 1987. 35 Pursuant
to its power to promulgate accounting and
auditing rules and regulations for the
prevention of irregular, unnecessary, excessive
or extravagant expenditures or uses of funds,
36 the COA promulgated on 29 March 1977
COA Circular No. 77-55. Since the COA is
responsible for the enforcement of the rules and
regulations, it goes without saying that failure
to comply with them is a ground for
disapproving the payment of the proposed
expenditure. As observed by one of the
Commissioners of the 1986 Constitutional
Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas

under Article XI, Section 2, of the 1935
Constitution the Auditor General could not
correct "irregular, unnecessary, excessive or
extravagant" expenditures of public funds but
could only "bring [the matter] to the attention of
the proper administrative officer," under the
1987 Constitution, as also under the 1973
Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and
regulations including those for the prevention
and disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable
expenditures or uses of government funds and
properties." Hence, since the Commission on
Audit must ultimately be responsible for the
enforcement of these rules and regulations, the
failure to comply with these regulations can be
a ground for disapproving the payment of a
proposed expenditure.

Indeed, when the framers of the last two (2)

Constitutions conferred upon the COA a more
active role and invested it with broader and
more extensive powers, they did not intend
merely to make the COA a toothless tiger, but
rather envisioned a dynamic, effective, efficient
and independent watchdog of the Government.

The issue of the financing charges boils down to

the validity of Department of Finance Circular
No. 1-87, Department of Finance Circular No.
4-88 and the implementing circulars of the OEA,
issued pursuant to Section 8, P.D. No. 1956, as
amended by E.O. No. 137, authorizing it to
determine "other factors" which may result in
cost underrecovery and a consequent
reimbursement from the OPSF.

The Solicitor General maintains that, following

the doctrine of ejusdem generis, financing
charges are not included in "cost
underrecovery" and, therefore, cannot be
considered as one of the "other factors." Section
8 of P.D. No. 1956, as amended by E.O. No. 137,
does not explicitly define what "cost
underrecovery" is. It merely states what it
includes. Thus:

. . . "Cost underrecovery" shall include the

following:

i. Reduction in oil company takes as

directed by the Board of Energy without the
corresponding reduction in the landed cost of
oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as

a result of foregoing government mandated
price reductions;

iii. Other factors as may be determined by the

Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those

which are of the same class or nature as the two
specifically enumerated in subparagraphs (i)
and (ii). A common characteristic of both is that
they are in the nature of government mandated
price reductions. Hence, any other factor which
seeks to be a part of the enumeration, or which
could qualify as a cost underrecovery, must be
of the same class or nature as those specifically
enumerated.

Petitioner, however, suggests that E.O. No. 137

intended to grant the Department of Finance
broad and unrestricted authority to determine
or define "other factors."
Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here

general words follow an enumeration of persons
or things, by words of a particular and specific
meaning, such general words are not to be
construed in their widest extent, but are held to
be as applying only to persons or things of the
same kind or class as those specifically
mentioned. 38 A reading of subparagraphs (i)
and (ii) easily discloses that they do not have a
common characteristic. The first relates to price
reduction as directed by the Board of Energy
while the second refers to reduction in internal
ad valorem taxes. Therefore, subparagraph (iii)
cannot be limited by the enumeration in these
subparagraphs. What should be considered for
purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of
paragraph (2) of the Section which explicitly
allows cost underrecovery only if such were
incurred as a result of the reduction of domestic
prices of petroleum products.

Although petitioner's financing losses, if indeed

incurred, may constitute cost underrecovery in
the sense that such were incurred as a result of
the inability to fully offset financing expenses
from yields in money market placements, they
do not, however, fall under the foregoing
provision of P.D. No. 1956, as amended,
because the same did not result from the
reduction of the domestic price of petroleum
products. Until paragraph (2), Section 8 of the
decree, as amended, is further amended by
Congress, this Court can do nothing. The duty
of this Court is not to legislate, but to apply or
interpret the law. Be that as it may, this Court
wishes to emphasize that as the facts in this
case have shown, it was at the behest of the
Government that petitioner refinanced its oil
import payments from the normal 30-day trade
credit to a maximum of 360 days. Petitioner
could be correct in its assertion that owing to
the extended period for payment, the financial
institution which refinanced said payments
charged a higher interest, thereby resulting in
higher financing expenses for the petitioner. It
would appear then that equity considerations
dictate that petitioner should somehow be
allowed to recover its financing losses, if any,
which may have been sustained because it
accommodated the request of the Government.
Although under Section 29 of the National
Internal Revenue Code such losses may be
deducted from gross income, the effect of that
loss would be merely to reduce its taxable
income, but not to actually wipe out such losses.
The Government then may consider some
positive measures to help petitioner and others
similarly situated to obtain substantial relief.
An amendment, as aforestated, may then be in
order.

Upon the other hand, to accept petitioner's

theory of "unrestricted authority" on the part of
the Department of Finance to determine or
define "other factors" is to uphold an undue
delegation of legislative power, it clearly
appearing that the subject provision does not
provide any standard for the exercise of the
authority. It is a fundamental rule that
delegation of legislative power may be sustained
only upon the ground that some standard for its
exercise is provided and that the legislature, in
making the delegation, has prescribed the
manner of the exercise of the delegated
authority. 39

Finally, whether petitioner gained or lost by

reason of the extensive credit is rendered
irrelevant by reason of the foregoing
disquisitions. It may nevertheless be stated that
petitioner failed to disprove COA's claim that it
had in fact gained in the process. Otherwise
stated, petitioner failed to sufficiently show that
it incurred a loss. Such being the case, how can
petitioner claim for reimbursement? It cannot
have its cake and eat it too.

II. Anent the claims arising from sales to the

National Power Corporation, We find for the
petitioner. The respondents themselves admit
in their Comment that underrecovery arising
from sales to NPC are reimbursable because
NPC was granted full exemption from the
payment of taxes; to prove this, respondents
trace the laws providing for such exemption. 40
The last law cited is the Fiscal Incentives
Regulatory Board's Resolution No. 17-87 of 24
June 1987 which provides, in part, "that the tax
and duty exemption privileges of the National
Power Corporation, including those pertaining
to its domestic purchases of petroleum and
petroleum products . . . are restored effective
March 10, 1987." In a Memorandum issued on
5 October 1987 by the Office of the President,
NPC's tax exemption was confirmed and
approved.

Furthermore, as pointed out by respondents,

the intention to exempt sales of petroleum
products to the NPC is evident in the recently
passed Republic Act No. 6952 establishing the
Petroleum Price Standby Fund to support the
OPSF. 41 The pertinent part of Section 2,
Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be

subject to the following conditions:

(1) That the Fund shall be used to reimburse

the oil companies for (a) cost increases of
imported crude oil and finished petroleum
products resulting from foreign exchange rate
adjustments and/or increases in world market
prices of crude oil; (b) cost underrecovery
incurred as a result of fuel oil sales to the
National Power Corporation (NPC); and (c) other
cost underrecoveries incurred as may be finally
decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising

from sales of petroleum products to the
National Power Corporation.

III. With respect to its claim for

reimbursement on sales to ATLAS and
MARCOPPER, petitioner relies on Letter of
Instruction (LOI) 1416, dated 17 July 1984,
which ordered the suspension of payments of
all taxes, duties, fees and other charges,
whether direct or indirect, due and payable by
the copper mining companies in distress to the
national government. Pursuant to this LOI,
then Minister of Energy, Hon. Geronimo Velasco,
issued Memorandum Circular No. 84-11-22
advising the oil companies that Atlas
Consolidated Mining Corporation and
Marcopper Mining Corporation are among those
declared to be in distress.

In denying the claims arising from sales to

ATLAS and MARCOPPER, the COA, in its 18
August 1989 letter to Executive Director
Wenceslao R. de la Paz, states that "it is our
opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as
effected by OEA has no legal basis;" 42 in its
Decision No. 1171, it ruled that "the CPI
(CALTEX) (Caltex) has no authority to claim
reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was
issued when OPSF was not yet in existence and
could not have contemplated OPSF imposts at
the time of its formulation." 43 It is further
stated that: "Moreover, it is evident that OPSF
was not created to aid distressed mining
companies but rather to help the domestic oil
industry by stabilizing oil prices."

In sustaining COA's stand, respondents

vigorously maintain that LOI 1416 could not
have intended to exempt said distressed mining
companies from the payment of OPSF dues for
the following reasons:

a. LOI 1416 granting the alleged exemption

was issued on July 17, 1984. P.D. 1956 creating
the OPSF was promulgated on October 10, 1984,
while E.O. 137, amending P.D. 1956, was
issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist

distressed copper mining companies in line
with the government's effort to prevent the
collapse of the copper industry. P.D No. 1956,
as amended, was issued for the purpose of
minimizing frequent price changes brought
about by exchange rate adjustments and/or
changes in world market prices of crude oil and
imported petroleum product's; and

c. LOI 1416 caused the "suspension of all

taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by
the copper mining companies in distress to the
Notional and Local Governments . . ." On the
other hand, OPSF dues are not payable by (sic)
distressed copper companies but by oil
companies. It is to be noted that the copper
mining companies do not pay OPSF dues.
Rather, such imposts are built in or already
incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416

suspends the payment of taxes by distressed
mining companies, it does not accord petitioner
the same privilege with respect to its obligation
to pay OPSF dues.

We concur with the disquisitions of the

respondents. Aside from such reasons, however,
it is apparent that LOI 1416 was never
published in the Official Gazette 45 as required
by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following

the completion of their publication in the
Official Gazette, unless it is otherwise
provided. . . .

In applying said provision, this Court ruled in

the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders

respondents to publish in the Official Gazette
all unpublished presidential issuances which
are of general application, and unless so
published they shall have no binding force and
effect.
Resolving the motion for reconsideration of said
decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including

those of local application and private laws, shall
be published as a condition for their effectivity,
which shall begin fifteen days after publication
unless a different effectivity date is fixed by the
legislature.

Covered by this rule are presidential decrees

and executive orders promulgated by the
President in the exercise of legislative powers
whenever the same are validly delegated by the
legislature or, at present, directly conferred by
the Constitution. Administrative rules and
regulations must also be published if their
purpose is to enforce or implement existing laws
pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws

as above defined shall immediately upon their
approval, or as soon thereafter as possible, be
published in full in the Official Gazette, to
become effective only after fifteen days from
their publication, or on another date specified
by the legislature, in accordance with Article 2
of the Civil Code.

LOI 1416 has, therefore, no binding force or

effect as it was never published in the Official
Gazette after its issuance or at any time after
the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later

amended by Executive Order No. 200, issued on
18 June 1987. As amended, the said provision
now reads:

Laws shall take effect after fifteen days following

the completion of their publication either in the
Official Gazette or in a newspaper of general
circulation in the Philippines, unless it is
otherwise provided.
We are not aware of the publication of LOI 1416
in any newspaper of general circulation
pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI

1416 has force and effect, petitioner's claim
must still fail. Tax exemptions as a general rule
are construed strictly against the grantee and
liberally in favor of the taxing authority. 48 The
burden of proof rests upon the party claiming
exemption to prove that it is in fact covered by
the exemption so claimed. The party claiming
exemption must therefore be expressly
mentioned in the exempting law or at least be
within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that

it is entitled, as a consequence of its sales to
ATLAS and MARCOPPER, to claim
reimbursement from the OPSF under LOI 1416.
Though LOI 1416 may suspend the payment of
taxes by copper mining companies, it does not
give petitioner the same privilege with respect to
the payment of OPSF dues.

IV. As to COA's disallowance of the amount of

P130,420,235.00, petitioner maintains that the
Department of Finance has still to issue a final
and definitive ruling thereon; accordingly, it
was premature for COA to disallow it. By doing
so, the latter acted beyond its jurisdiction. 49
Respondents, on the other hand, contend that
said amount was already disallowed by the OEA
for failure to substantiate it. 50 In fact, when
OEA submitted the claims of petitioner for pre-
audit, the abovementioned amount was already
excluded.

An examination of the records of this case

shows that petitioner failed to prove or
substantiate its contention that the amount of
P130,420,235.00 is still pending before the OEA
and the DOF. Additionally, We find no reason to
doubt the submission of respondents that said
amount has already been passed upon by the
OEA. Hence, the ruling of respondent COA
disapproving said claim must be upheld.

V. The last issue to be resolved in this case is

whether or not the amounts due to the OPSF
from petitioner may be offset against
petitioner's outstanding claims from said fund.
Petitioner contends that it should be allowed to
offset its claims from the OPSF against its
contributions to the fund as this has been
allowed in the past, particularly in the years
1987 and 1988. 51

Furthermore, petitioner cites, as bases for

offsetting, the provisions of the New Civil Code
on compensation and Section 21, Book V, Title
I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction
of Indebtedness to Government." 52 Petitioner
also mentions communications from the Board
of Energy and the Department of Finance that
supposedly authorize compensation.

Respondents, on the other hand, citing Francia

vs. IAC and Fernandez, 53 contend that there
can be no offsetting of taxes against the claims
that a taxpayer may have against the
government, as taxes do not arise from
contracts or depend upon the will of the
taxpayer, but are imposed by law. Respondents
also allege that petitioner's reliance on Section
21, Book V, Title I-B of the Revised
Administrative Code, is misplaced because
"while this provision empowers the COA to
withhold payment of a government
indebtedness to a person who is also indebted
to the government and apply the government
indebtedness to the satisfaction of the
obligation of the person to the government, like
authority or right to make compensation is not
given to the private person." 54 The reason for
this, as stated in Commissioner of Internal
Revenue vs. Algue, Inc., 55 is that money due
the government, either in the form of taxes or
other dues, is its lifeblood and should be
collected without hindrance. Thus, instead of
giving petitioner a reason for compensation or
set-off, the Revised Administrative Code makes
it the respondents' duty to collect petitioner's
indebtedness to the OPSF.

Refuting respondents' contention, petitioner

claims that the amounts due from it do not arise
as a result of taxation because "P.D. 1956,
amended, did not create a source of taxation; it
instead established a special fund . . .," 56 and
that the OPSF contributions do not go to the
general fund of the state and are not used for
public purpose, i.e., not for the support of the
government, the administration of law, or the
payment of public expenses. This alleged lack of
a public purpose behind OPSF exactions
distinguishes such from a tax. Hence, the ruling
in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating

the Petroleum Price Standby Fund to support
the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be

subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price

Standby Fund shall be used to pay any oil
company which has an outstanding obligation
to the Government without said obligation being
offset first, subject to the requirements of
compensation or offset under the Civil Code.

We find no merit in petitioner's contention that

the OPSF contributions are not for a public
purpose because they go to a special fund of the
government. Taxation is no longer envisioned as
a measure merely to raise revenue to support
the existence of the government; taxes may be
levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of
a threatened industry which is affected with
public interest as to be within the police power
of the state. 57 There can be no doubt that the
oil industry is greatly imbued with public
interest as it vitally affects the general welfare.
Any unregulated increase in oil prices could
hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It
would have a chain reaction in terms of, among
others, demands for wage increases and
upward spiralling of the cost of basic
commodities. The stabilization then of oil prices
is of prime concern which the state, via its
police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No.

137, explicitly provides that the source of OPSF
is taxation. No amount of semantical juggleries
could dim this fact.

It is settled that a taxpayer may not offset taxes

due from the claims that he may have against
the government. 58 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. 59

We may even further state that technically, in

respect to the taxes for the OPSF, the oil
companies merely act as agents for the
Government in the latter's collection since the
taxes are, in reality, passed unto the end-users
–– the consuming public. In that capacity, the
petitioner, as one of such companies, has the
primary obligation to account for and remit the
taxes collected to the administrator of the OPSF.
This duty stems from the fiduciary relationship
between the two; petitioner certainly cannot be
considered merely as a debtor. In respect,
therefore, to its collection for the OPSF vis-a-vis
its claims for reimbursement, no compensation
is likewise legally feasible. Firstly, the
Government and the petitioner cannot be said
to be mutually debtors and creditors of each
other. Secondly, there is no proof that
petitioner's claim is already due and liquidated.
Under Article 1279 of the Civil Code, in order
that compensation may be proper, it is
necessary that:
(1) each one of the obligors be bound
principally, and that he be at the same time a
principal creditor of the other;

(2) both debts consist in a sum of :money, or

if the things due are consumable, they be of the
same kind, and also of the same quality if the
latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention

or controversy, commenced by third persons
and communicated in due time to the debtor.

That compensation had been the practice in the

past can set no valid precedent. Such a practice
has no legal basis. Lastly, R.A. No. 6952 does
not authorize oil companies to offset their
claims against their OPSF contributions.
Instead, it prohibits the government from
paying any amount from the Petroleum Price
Standby Fund to oil companies which have
outstanding obligations with the government,
without said obligation being offset first subject
to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing,

judgment is hereby rendered AFFIRMING the
challenged decision of the Commission on Audit,
except that portion thereof disallowing
petitioner's claim for reimbursement of
underrecovery arising from sales to the National
Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C.J., Melencio-Herrera, Gutierrez, Jr.,

Paras, Feliciano, Padilla, Bidin, Griño-Aquino,
Medialdea, Regalado, Romero and Nocon, JJ.,
concur.
Vera v Fernandez | GR No. L-31364 | 30
March 1979

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal

Revenue, and JAIME ARANETA, as Regional
Director, Revenue Region No. 14, Bureau of
Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court
of First Instance of Negros Occidental, Branch
V, and FRANCIS A. TONGOY, Administrator of
the Estate of the late LUIS D. TONGOY
respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First

Instance of Negros Occidental, Branch V in
Special Proceedings No. 7794, entitled:
"Intestate Estate of Luis D. Tongoy," the first
dated July 29, 1969 dismissing the Motion for
Allowance of Claim and for an Order of Payment
of Taxes by the Government of the Republic of
the Philippines against the Estate of the late
Luis D. Tongoy, for deficiency income taxes for
the years 1963 and 1964 of the decedent in the
total amount of P3,254.80, inclusive 5%
surcharge, 1% monthly interest and
compromise penalties, and the second, dated
October 7, 1969, denying the Motion for
reconsideration of the Order of dismissal.

The Motion for allowance of claim and for

payment of taxes dated May 28, 1969 was filed
on June 3, 1969 in the abovementioned special
proceedings, (par. 3, Annex A, Petition, pp.
1920, Rollo). The claim represents the
indebtedness to the Government of the late Luis
D. Tongoy for deficiency income taxes in the
total sum of P3,254.80 as above stated, covered
by Assessment Notices Nos. 11-50-29-1-11061-
21-63 and 11-50-291-1 10875-64, to which
motion was attached Proof of Claim (Annex B,
Petition, pp. 21-22, Rollo). The Administrator
opposed the motion solely on the ground that
the claim was barred under Section 5, Rule 86
of the Rules of Court (par. 4, Opposition to
Motion for Allowance of Claim, pp. 23-24, Rollo).
Finding the opposition well-founded, the
respondent Judge, Jose F. Fernandez,
dismissed the motion for allowance of claim
filed by herein petitioner, Regional Director of
the Bureau of Internal Revenue, in an order
dated July 29, 1969 (Annex D, Petition, p. 26,
Rollo). On September 18, 1969, a motion for
reconsideration was filed, of the order of July 29,
1969, but was denied in an Order dated October
7, 1969.

Hence, this appeal on certiorari, petitioner

assigning the following errors:

1. The lower court erred in holding that the

claim for taxes by the government against the
estate of Luis D. Tongoy was filed beyond the
period provided in Section 2, Rule 86 of the
Rules of Court.

2. The lower court erred in holding that the

claim for taxes of the government was already
barred under Section 5, Rule 86 of the Rules of
Court.

which raise the sole issue of whether or not the

statute of non-claims Section 5, Rule 86 of the
New Rule of Court, bars claim of the
government for unpaid taxes, still within the
period of limitation prescribed in Section 331
and 332 of the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the

respondent Administrator in hid Oppositions to
the Motion for Allowance of Claim, etc. of the
petitioners reads as follows:

All claims for money against the decedent,

arising from contracts, express or implied,
whether the same be due, not due, or
contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent,
and judgment for money against the decedent,
must be filed within the time limited in they
notice; otherwise they are barred forever, except
that they may be set forth as counter claims in
any action that the executor or administrator
may bring against the claimants. Where the
executor or administrator commence an action,
or prosecutes an action already commenced by
the deceased in his lifetime, the debtor may set
forth may answer the claims he has against the
decedents, instead of presenting them
independently to the court has herein provided,
and mutual claims may be set off against each
other in such action; and in final judgment is
rendered in favored of the decedent, the amount
to determined shall be considered the true
balance against the estate, as though the claim
has been presented directly before the court in
the administration proceedings. Claims not yet
due, or contingent may be approved at their
present value.

A perusal of the aforequoted provisions shows

that it makes no mention of claims for monetary
obligation of the decedent created by law, such
as taxes which is entirely of different character
from the claims expressly enumerated therein,
such as: "all claims for money against the
decedent arising from contract, express or
implied, whether the same be due, not due or
contingent, all claim for funeral expenses and
expenses for the last sickness of the decedent
and judgment for money against the decedent."
Under the familiar rule of statutory
construction of expressio unius est exclusio
alterius, the mention of one thing implies the
exclusion of another thing not mentioned. Thus,
if a statute enumerates the things upon which
it is to operate, everything else must necessarily,
and by implication be excluded from its
operation and effect (Crawford, Statutory
Construction, pp. 334-335).

In the case of Commissioner of Internal

Revenue vs. Ilagan Electric & Ice Plant, et al.,
G.R. No. L-23081, December 30, 1969, it was
held that the assessment, collection and
recovery of taxes, as well as the matter of
prescription thereof are governed by the
provisions of the National Internal revenue
Code, particularly Sections 331 and 332 thereof,
and not by other provisions of law. (See also Lim
Tio, Dy Heng and Dee Jue vs. Court of Tax
Appeals & Collector of Internal Revenue, G.R.
No. L-10681, March 29, 1958). Even without
being specifically mentioned, the provisions of
Section 2 of Rule 86 of the Rules of Court may
reasonably be presumed to have been also in
the mind of the Court as not affecting the
aforecited Section of the National Internal
Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil.

803, it was even more pointedly held that "taxes
assessed against the estate of a deceased
person ... need not be submitted to the
committee on claims in the ordinary course of
administration. In the exercise of its control
over the administrator, the court may direct the
payment of such taxes upon motion showing
that the taxes have been assessed against the
estate." The abolition of the Committee on
Claims does not alter the basic ruling laid down
giving exception to the claim for taxes from
being filed as the other claims mentioned in the
Rule should be filed before the Court. Claims for
taxes may be collected even after the
distribution of the decedent's estate among his
heirs who shall be liable therefor in proportion
of their share in the inheritance. (Government
of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of

claims for taxes against a decedent's estate in
the form of exception from the application of the
statute of non-claims, is not hard to find. Taxes
are the lifeblood of the Government and their
prompt and certain availability are imperious
need. (Commissioner of Internal Revenue vs.
Pineda, G. R. No. L-22734, September 15, 1967,
21 SCRA 105). Upon taxation depends the
Government ability to serve the people for
whose benefit taxes are collected. To safeguard
such interest, neglect or omission of
government officials entrusted with the
collection of taxes should not be allowed to
bring harm or detriment to the people, in the
same manner as private persons may be made
to suffer individually on account of his own
negligence, the presumption being that they
take good care of their personal affairs. This
should not hold true to government officials
with respect to matters not of their own
personal concern. This is the philosophy behind
the government's exception, as a general rule,
from the operation of the principle of estoppel.
(Republic vs. Caballero, L-27437, September 30,
1977, 79 SCRA 177; Manila Lodge No. 761,
Benevolent and Protective Order of the Elks Inc.
vs. Court of Appeals, L-41001, September 30,
1976, 73 SCRA 162; Sy vs. Central Bank of the
Philippines, L-41480, April 30,1976, 70 SCRA
571; Balmaceda vs. Corominas & Co., Inc., 66
SCRA 553; Auyong Hian vs. Court of Tax
Appeals, 59 SCRA 110; Republic vs. Philippine
Rabbit Bus Lines, Inc., 66 SCRA 553; Republic
vs. Philippine Long Distance Telephone
Company, L-18841, January 27, 1969, 26
SCRA 620; Zamora vs. Court of Tax Appeals, L-
23272, November 26, 1970, 36 SCRA 77; E.
Rodriguez, Inc. vs. Collector of Internal Revenue,
L- 23041, July 31, 1969, 28 SCRA 119.) As
already shown, taxes may be collected even
after the distribution of the estate of the
decedent among his heirs (Government of the
Philippines vs. Pamintuan, supra; Pineda vs.
CFI of Tayabas, supra Clara Diluangco Palanca
vs. Commissioner of Internal Revenue, G. R. No.
L-16661, January 31, 1962).

Furthermore, as held in Commissioner of

Internal Revenue vs. Pineda, supra, citing the
last paragraph of Section 315 of the Tax Code
payment of income tax shall be a lien in favor of
the Government of the Philippines from the time
the assessment was made by the Commissioner
of Internal Revenue until paid with interests,
penalties, etc. By virtue of such lien, this court
held that the property of the estate already in
the hands of an heir or transferee may be
subject to the payment of the tax due the estate.
A fortiori before the inheritance has passed to
the heirs, the unpaid taxes due the decedent
may be collected, even without its having been
presented under Section 2 of Rule 86 of the
Rules of Court. It may truly be said that until
the property of the estate of the decedent has
vested in the heirs, the decedent, represented
by his estate, continues as if he were still alive,
subject to the payment of such taxes as would
be collectible from the estate even after his
death. Thus in the case above cited, the income
taxes sought to be collected were due from the
estate, for the three years 1946, 1947 and 1948
following his death in May, 1945.

Even assuming arguendo that claims for taxes

have to be filed within the time prescribed in
Section 2, Rule 86 of the Rules of Court, the
claim in question may be filed even after the
expiration of the time originally fixed therein, as
may be gleaned from the italicized portion of the
Rule herein cited which reads:

Section 2. Time within which claims shall be

filed. - In the notice provided in the preceding
section, the court shall state the time for the
filing of claims against the estate, which shall
not be more than twelve (12) nor less than six
(6) months after the date of the first publication
of the notice. However, at any time before an
order of distribution is entered, on application
of a creditor who has failed to file his claim
within the time previously limited the court may,
for cause shown and on such terms as are
equitable, allow such claim to be flied within a
time not exceeding one (1) month. (Emphasis
supplied)

In the instant case, petitioners filed an

application (Motion for Allowance of Claim and
for an Order of Payment of Taxes) which, though
filed after the expiration of the time previously
limited but before an order of the distribution is
entered, should have been granted by the
respondent court, in the absence of any valid
ground, as none was shown, justifying denial of
the motion, specially considering that it was for
allowance Of claim for taxes due from the estate,
which in effect represents a claim of the people
at large, the only reason given for the denial that
the claim was filed out of the previously limited
period, sustaining thereby private respondents'
contention, erroneously as has been
demonstrated.

WHEREFORE, the order appealed from is

reverse. Since the Tax Commissioner's
assessment in the total amount of P3,254.80
with 5 % surcharge and 1 % monthly interest
as provided in the Tax Code is a final one and
the respondent estate's sole defense of
prescription has been herein overruled, the
Motion for Allowance of Claim is herein granted
and respondent estate is ordered to pay and
discharge the same, subject only to the
limitation of the interest collectible thereon as
provided by the Tax Code. No pronouncement
as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Fernandez,

Guerrero, and Melencio-Herrera, JJ., concur.

Lutz v Araneta | GR No. L-7859 | 22

December 1955

G.R. No. L-7859 December 22, 1955

WALTER LUTZ, as Judicial Administrator of the

Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of
Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

Office of the Solicitor General Ambrosio Padilla,
First Assistant Solicitor General Guillermo E.
Torres and Solicitor Felicisimo R. Rosete for
appellee.
REYES, J.B L., J.:

This case was initiated in the Court of First

Instance of Negros Occidental to test the legality
of the taxes imposed by Commonwealth Act No.
567, otherwise known as the Sugar Adjustment
Act.

Promulgated in 1940, the law in question opens

(section 1) with a declaration of emergency, due
to the threat to our industry by the imminent
imposition of export taxes upon sugar as
provided in the Tydings-McDuffe Act, and the
"eventual loss of its preferential position in the
United States market"; wherefore, the national
policy was expressed "to obtain a readjustment
of the benefits derived from the sugar industry
by the component elements thereof" and "to
stabilize the sugar industry so as to prepare it
for the eventuality of the loss of its preferential
position in the United States market and the
imposition of the export taxes."

In section 2, Commonwealth Act 567 provides

for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on
each picul of sugar manufactured; while section
3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and
ceded to others for a consideration, on lease or
otherwise —

a tax equivalent to the difference between the

money value of the rental or consideration
collected and the amount representing 12 per
centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall

accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar
Adjustment and Stabilization Fund,' and shall
be paid out only for any or all of the following
purposes or to attain any or all of the following
objectives, as may be provided by law.
First, to place the sugar industry in a position
to maintain itself, despite the gradual loss of the
preferntial position of the Philippine sugar in
the United States market, and ultimately to
insure its continued existence notwithstanding
the loss of that market and the consequent
necessity of meeting competition in the free
markets of the world;

Second, to readjust the benefits derived from

the sugar industry by all of the component
elements thereof — the mill, the landowner, the
planter of the sugar cane, and the laborers in
the factory and in the field — so that all might
continue profitably to engage
therein;lawphi1.net

Third, to limit the production of sugar to areas

more economically suited to the production
thereof; and

Fourth, to afford labor employed in the industry

a living wage and to improve their living and
working conditions: Provided, That the
President of the Philippines may, until the
adjourment of the next regular session of the
National Assembly, make the necessary
disbursements from the fund herein created (1)
for the establishment and operation of sugar
experiment station or stations and the
undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with
the view of reducing manufacturing costs, (b) to
produce and propagate higher yielding varieties
of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower
the costs of raising sugar cane, (d) to improve
the buying quality of denatured alcohol from
molasses for motor fuel, (e) to determine the
possibility of utilizing the other by-products of
the industry, (f) to determine what crop or crops
are suitable for rotation and for the utilization
of excess cane lands, and (g) on other problems
the solution of which would help rehabilitate
and stabilize the industry, and (2) for the
improvement of living and working conditions in
sugar mills and sugar plantations, authorizing
him to organize the necessary agency or
agencies to take charge of the expenditure and
allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise,
authorizing the disbursement from the fund
herein created of the necessary amount or
amounts needed for salaries, wages, travelling
expenses, equipment, and other sundry
expenses of said agency or agencies.

Plaintiff, Walter Lutz, in his capacity as Judicial

Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the
Collector of Internal Revenue the sum of
P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-
1949 and 1949-1950; alleging that such tax is
unconstitutional and void, being levied for the
aid and support of the sugar industry
exclusively, which in plaintiff's opinion is not a
public purpose for which a tax may be
constitutioally levied. The action having been
dismissed by the Court of First Instance, the
plaintifs appealed the case directly to this Court
(Judiciary Act, section 17).

The basic defect in the plaintiff's position is his

assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise
of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in
full), will show that the tax is levied with a
regulatory purpose, to provide means for the
rehabilitation and stabilization of the
threatened sugar industry. In other words, the
act is primarily an exercise of the police power.

This Court can take judicial notice of the fact

that sugar production is one of the great
industries of our nation, sugar occupying a
leading position among its export products; that
it gives employment to thousands of laborers in
fields and factories; that it is a great source of
the state's wealth, is one of the important
sources of foreign exchange needed by our
government, and is thus pivotal in the plans of
a regime committed to a policy of currency
stability. Its promotion, protection and
advancement, therefore redounds greatly to the
general welfare. Hence it was competent for the
legislature to find that the general welfare
demanded that the sugar industry should be
stabilized in turn; and in the wide field of its
police power, the lawmaking body could provide
that the distribution of benefits therefrom be
readjusted among its components to enable it to
resist the added strain of the increase in taxes
that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel.
Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc.
vs. Mayo, 103 Fla. 552, 139 So. 121).

As stated in Johnson vs. State ex rel. Marey,

with reference to the citrus industry in Florida
—

The protection of a large industry constituting

one of the great sources of the state's wealth
and therefore directly or indirectly affecting the
welfare of so great a portion of the population of
the State is affected to such an extent by public
interests as to be within the police power of the
sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the

protection and promotion of the sugar industry
is a matter of public concern, it follows that the
Legislature may determine within reasonable
bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject
only to the test of reasonableness; and it is not
contended that the means provided in section 6
of the law (above quoted) bear no relation to the
objective pursued or are oppressive in character.
If objective and methods are alike
constitutionally valid, no reason is seen why the
state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be
made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U.
S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U.
S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4
Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the
sugar producers themselves can hardly be a
ground of complaint; indeed, it appears rational
that the tax be obtained precisely from those
who are to be benefited from the expenditure of
the funds derived from it. At any rate, it is
inherent in the power to tax that a state be free
to select the subjects of taxation, and it has
been repeatedly held that "inequalities which
result from a singling out of one particular class
for taxation, or exemption infringe no
constitutional limitation" (Carmichael vs.
Southern Coal & Coke Co., 301 U. S. 495, 81 L.
Ed. 1245, citing numerous authorities, at p.
1251).

From the point of view we have taken it appears

of no moment that the funds raised under the
Sugar Stabilization Act, now in question,
should be exclusively spent in aid of the sugar
industry, since it is that very enterprise that is
being protected. It may be that other industries
are also in need of similar protection; that the
legislature is not required by the Constitution
to adhere to a policy of "all or none." As ruled in
Minnesota ex rel. Pearson vs. Probate Court,
309 U. S. 270, 84 L. Ed. 744, "if the law
presumably hits the evil where it is most felt, it
is not to be overthrown because there are other
instances to which it might have been applied;"
and that "the legislative authority, exerted
within its proper field, need not embrace all the
evils within its reach" (N. L. R. B. vs. Jones &
Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).

Even from the standpoint that the Act is a pure

tax measure, it cannot be said that the devotion
of tax money to experimental stations to seek
increase of efficiency in sugar production,
utilization of by-products and solution of allied
problems, as well as to the improvements of
living and working conditions in sugar mills or
plantations, without any part of such money
being channeled directly to private persons,
constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of
Education, 91 L. Ed. 472, 168 ALR 1392, 1400).

The decision appealed from is affirmed, with

costs against appellant. So ordered.

Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo,

Bautista Angelo, Labrador, and Concepcion, JJ.,
concur.

Pascual v Secretary of Public Works | GR No.

L-10405 | 29 December 1960

G.R. No. L-10405 December 29, 1960

WENCESLAO PASCUAL, in his official capacity

as Provincial Governor of Rizal, petitioner-
appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND
COMMUNICATIONS, ET AL., respondents-
appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos

for appellant.
Office of the Asst. Solicitor General Jose G.
Bautista and Solicitor A. A. Torres for appellee.

CONCEPCION, J.:

Appeal, by petitioner Wenceslao Pascual, from

a decision of the Court of First Instance of Rizal,
dismissing the above entitled case and
dissolving the writ of preliminary injunction
therein issued, without costs.

On August 31, 1954, petitioner Wenceslao

Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with
injunction, upon the ground that Republic Act
No. 920, entitled "An Act Appropriating Funds
for Public Works", approved on June 20, 1953,
contained, in section 1-C (a) thereof, an item
(43[h]) of P85,000.00 "for the construction,
reconstruction, repair, extension and
improvement" of Pasig feeder road terminals
(Gen. Roxas — Gen. Araneta — Gen. Lucban —
Gen. Capinpin — Gen. Segundo — Gen.
Delgado — Gen. Malvar — Gen. Lim)"; that, at
the time of the passage and approval of said Act,
the aforementioned feeder roads were "nothing
but projected and planned subdivision roads,
not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal"
(according to the tracings attached to the
petition as Annexes A and B, near Shaw
Boulevard, not far away from the intersection
between the latter and Highway 54), which
projected feeder roads "do not connect any
government property or any important premises
to the main highway"; that the aforementioned
Antonio Subdivision (as well as the lands on
which said feeder roads were to be construed)
were private properties of respondent Jose C.
Zulueta, who, at the time of the passage and
approval of said Act, was a member of the
Senate of the Philippines; that on May, 1953,
respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to
donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13,
1953, the offer was accepted by the council,
subject to the condition "that the donor would
submit a plan of the said roads and agree to
change the names of two of them"; that no deed
of donation in favor of the municipality of Pasig
was, however, executed; that on July 10, 1953,
respondent Zulueta wrote another letter to said
council, calling attention to the approval of
Republic Act. No. 920, and the sum of
P85,000.00 appropriated therein for the
construction of the projected feeder roads in
question; that the municipal council of Pasig
endorsed said letter of respondent Zulueta to
the District Engineer of Rizal, who, up to the
present "has not made any endorsement
thereon" that inasmuch as the projected feeder
roads in question were private property at the
time of the passage and approval of Republic
Act No. 920, the appropriation of P85,000.00
therein made, for the construction,
reconstruction, repair, extension and
improvement of said projected feeder roads, was
illegal and, therefore, void ab initio"; that said
appropriation of P85,000.00 was made by
Congress because its members were made to
believe that the projected feeder roads in
question were "public roads and not private
streets of a private subdivision"'; that, "in order
to give a semblance of legality, when there is
absolutely none, to the aforementioned
appropriation", respondents Zulueta executed
on December 12, 1953, while he was a member
of the Senate of the Philippines, an alleged deed
of donation — copy of which is annexed to the
petition — of the four (4) parcels of land
constituting said projected feeder roads, in
favor of the Government of the Republic of the
Philippines; that said alleged deed of donation
was, on the same date, accepted by the then
Executive Secretary; that being subject to an
onerous condition, said donation partook of the
nature of a contract; that, such, said donation
violated the provision of our fundamental law
prohibiting members of Congress from being
directly or indirectly financially interested in
any contract with the Government, and, hence,
is unconstitutional, as well as null and void ab
initio, for the construction of the projected
feeder roads in question with public funds
would greatly enhance or increase the value of
the aforementioned subdivision of respondent
Zulueta, "aside from relieving him from the
burden of constructing his subdivision streets
or roads at his own expense"; that the
construction of said projected feeder roads was
then being undertaken by the Bureau of Public
Highways; and that, unless restrained by the
court, the respondents would continue to
execute, comply with, follow and implement the
aforementioned illegal provision of law, "to the
irreparable damage, detriment and prejudice
not only to the petitioner but to the Filipino
nation."

Petitioner prayed, therefore, that the contested

item of Republic Act No. 920 be declared null
and void; that the alleged deed of donation of
the feeder roads in question be "declared
unconstitutional and, therefor, illegal"; that a
writ of injunction be issued enjoining the
Secretary of Public Works and Communications,
the Director of the Bureau of Public Works and
Highways and Jose C. Zulueta from ordering or
allowing the continuance of the above-
mentioned feeder roads project, and from
making and securing any new and further
releases on the aforementioned item of Republic
Act No. 920, and the disbursing officers of the
Department of Public Works and Highways from
making any further payments out of said funds
provided for in Republic Act No. 920; and that
pending final hearing on the merits, a writ of
preliminary injunction be issued enjoining the
aforementioned parties respondent from
making and securing any new and further
releases on the aforesaid item of Republic Act
No. 920 and from making any further payments
out of said illegally appropriated funds.

Respondents moved to dismiss the petition

upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not
state a cause of action". In support to this
motion, respondent Zulueta alleged that the
Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province of Rizal,
pursuant to section 1683 of the Revised
Administrative Code; that said respondent is "
not aware of any law which makes illegal the
appropriation of public funds for the
improvements of . . . private property"; and that,
the constitutional provision invoked by
petitioner is inapplicable to the donation in
question, the same being a pure act of liberality,
not a contract. The other respondents, in turn,
maintained that petitioner could not assail the
appropriation in question because "there is no
actual bona fide case . . . in which the validity
of Republic Act No. 920 is necessarily involved"
and petitioner "has not shown that he has a
personal and substantial interest" in said Act
"and that its enforcement has caused or will
cause him a direct injury."
Acting upon said motions to dismiss, the lower
court rendered the aforementioned decision,
dated October 29, 1953, holding that, since
public interest is involved in this case, the
Provincial Governor of Rizal and the provincial
fiscal thereof who represents him therein, "have
the requisite personalities" to question the
constitutionality of the disputed item of
Republic Act No. 920; that "the legislature is
without power appropriate public revenues for
anything but a public purpose", that the
instructions and improvement of the feeder
roads in question, if such roads where private
property, would not be a public purpose; that,
being subject to the following condition:

The within donation is hereby made upon the

condition that the Government of the Republic
of the Philippines will use the parcels of land
hereby donated for street purposes only and for
no other purposes whatsoever; it being
expressly understood that should the
Government of the Republic of the Philippines
violate the condition hereby imposed upon it,
the title to the land hereby donated shall, upon
such violation, ipso facto revert to the DONOR,
JOSE C. ZULUETA. (Emphasis supplied.)

which is onerous, the donation in question is a

contract; that said donation or contract is
"absolutely forbidden by the Constitution" and
consequently "illegal", for Article 1409 of the
Civil Code of the Philippines, declares in
existence and void from the very beginning
contracts "whose cause, objector purpose is
contrary to law, morals . . . or public policy";
that the legality of said donation may not be
contested, however, by petitioner herein,
because his "interest are not directly affected"
thereby; and that, accordingly, the
appropriation in question "should be upheld"
and the case dismissed.

At the outset, it should be noted that we are

concerned with a decision granting the
aforementioned motions to dismiss, which as
much, are deemed to have admitted
hypothetically the allegations of fact made in
the petition of appellant herein. According to
said petition, respondent Zulueta is the owner
of several parcels of residential land situated in
Pasig, Rizal, and known as the Antonio
Subdivision, certain portions of which had been
reserved for the projected feeder roads
aforementioned, which, admittedly, were
private property of said respondent when
Republic Act No. 920, appropriating P85,000.00
for the "construction, reconstruction, repair,
extension and improvement" of said roads, was
passed by Congress, as well as when it was
approved by the President on June 20, 1953.
The petition further alleges that the
construction of said roads, to be undertaken
with the aforementioned appropriation of
P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of
constructing his subdivision streets or roads at
his own expenses, 1and would "greatly enhance
or increase the value of the subdivision" of said
respondent. The lower court held that under
these circumstances, the appropriation in
question was "clearly for a private, not a public
purpose."

Respondents do not deny the accuracy of this

conclusion, which is self-evident. 2However,
respondent Zulueta contended, in his motion to
dismiss that:

A law passed by Congress and approved by the

President can never be illegal because Congress
is the source of all laws . . . Aside from the fact
that movant is not aware of any law which
makes illegal the appropriation of public funds
for the improvement of what we, in the
meantime, may assume as private property . . .
(Record on Appeal, p. 33.)

The first proposition must be rejected most

emphatically, it being inconsistent with the
nature of the Government established under
the Constitution of the Republic of the
Philippines and the system of checks and
balances underlying our political structure.
Moreover, it is refuted by the decisions of this
Court invalidating legislative enactments
deemed violative of the Constitution or organic
laws. 3

As regards the legal feasibility of appropriating

public funds for a public purpose, the principle
according to Ruling Case Law, is this:

It is a general rule that the legislature is without

power to appropriate public revenue for
anything but a public purpose. . . . It is the
essential character of the direct object of the
expenditure which must determine its validity
as justifying a tax, and not the magnitude of the
interest to be affected nor the degree to which
the general advantage of the community, and
thus the public welfare, may be ultimately
benefited by their promotion. Incidental to the
public or to the state, which results from the
promotion of private interest and the prosperity
of private enterprises or business, does not
justify their aid by the use public money. (25
R.L.C. pp. 398-400; Emphasis supplied.)

The rule is set forth in Corpus Juris Secundum

in the following language:

In accordance with the rule that the taxing

power must be exercised for public purposes
only, discussed supra sec. 14, money raised by
taxation can be expended only for public
purposes and not for the advantage of private
individuals. (85 C.J.S. pp. 645-646; emphasis
supplied.)

Explaining the reason underlying said rule,

Corpus Juris Secundum states:

Generally, under the express or implied

provisions of the constitution, public funds may
be used only for public purpose. The right of the
legislature to appropriate funds is correlative
with its right to tax, and, under constitutional
provisions against taxation except for public
purposes and prohibiting the collection of a tax
for one purpose and the devotion thereof to
another purpose, no appropriation of state
funds can be made for other than for a public
purpose.

xxx xxx xxx

The test of the constitutionality of a statute

requiring the use of public funds is whether the
statute is designed to promote the public
interest, as opposed to the furtherance of the
advantage of individuals, although each
advantage to individuals might incidentally
serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)

Needless to say, this Court is fully in accord

with the foregoing views which, apart from
being patently sound, are a necessary corollary
to our democratic system of government, which,
as such, exists primarily for the promotion of
the general welfare. Besides, reflecting as they
do, the established jurisprudence in the United
States, after whose constitutional system ours
has been patterned, said views and
jurisprudence are, likewise, part and parcel of
our own constitutional law.lawphil.net

This notwithstanding, the lower court felt

constrained to uphold the appropriation in
question, upon the ground that petitioner may
not contest the legality of the donation above
referred to because the same does not affect him
directly. This conclusion is, presumably, based
upon the following premises, namely: (1) that, if
valid, said donation cured the constitutional
infirmity of the aforementioned appropriation;
(2) that the latter may not be annulled without
a previous declaration of unconstitutionality of
the said donation; and (3) that the rule set forth
in Article 1421 of the Civil Code is absolute, and
admits of no exception. We do not agree with
these premises.

The validity of a statute depends upon the

powers of Congress at the time of its passage or
approval, not upon events occurring, or acts
performed, subsequently thereto, unless the
latter consists of an amendment of the organic
law, removing, with retrospective operation, the
constitutional limitation infringed by said
statute. Referring to the P85,000.00
appropriation for the projected feeder roads in
question, the legality thereof depended upon
whether said roads were public or private
property when the bill, which, latter on, became
Republic Act 920, was passed by Congress, or,
when said bill was approved by the President
and the disbursement of said sum became
effective, or on June 20, 1953 (see section 13 of
said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed
belonged then to respondent Zulueta, the result
is that said appropriation sought a private
purpose, and hence, was null and void. 4 The
donation to the Government, over five (5)
months after the approval and effectivity of said
Act, made, according to the petition, for the
purpose of giving a "semblance of legality", or
legalizing, the appropriation in question, did not
cure its aforementioned basic defect.
Consequently, a judicial nullification of said
donation need not precede the declaration of
unconstitutionality of said appropriation.

Again, Article 1421 of our Civil Code, like many

other statutory enactments, is subject to
exceptions. For instance, the creditors of a party
to an illegal contract may, under the conditions
set forth in Article 1177 of said Code, exercise
the rights and actions of the latter, except only
those which are inherent in his person,
including therefore, his right to the annulment
of said contract, even though such creditors are
not affected by the same, except indirectly, in
the manner indicated in said legal provision.

Again, it is well-stated that the validity of a

statute may be contested only by one who will
sustain a direct injury in consequence of its
enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws
providing for the disbursement of public funds,
5upon the theory that "the expenditure of
public funds by an officer of the State for the
purpose of administering an unconstitutional
act constitutes a misapplication of such funds,"
which may be enjoined at the request of a
taxpayer. 6Although there are some decisions to
the contrary, 7the prevailing view in the United
States is stated in the American Jurisprudence
as follows:

In the determination of the degree of interest

essential to give the requisite standing to attack
the constitutionality of a statute, the general
rule is that not only persons individually
affected, but also taxpayers, have sufficient
interest in preventing the illegal expenditure of
moneys raised by taxation and may therefore
question the constitutionality of statutes
requiring expenditure of public moneys. (11 Am.
Jur. 761; emphasis supplied.)

However, this view was not favored by the

Supreme Court of the U.S. in Frothingham vs.
Mellon (262 U.S. 447), insofar as federal laws
are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its
Federal Government is different from that of a
taxpayer of a municipal corporation to its
government. Indeed, under the composite
system of government existing in the U.S., the
states of the Union are integral part of the
Federation from an international viewpoint, but,
each state enjoys internally a substantial
measure of sovereignty, subject to the
limitations imposed by the Federal Constitution.
In fact, the same was made by representatives
of each state of the Union, not of the people of
the U.S., except insofar as the former
represented the people of the respective States,
and the people of each State has, independently
of that of the others, ratified said Constitution.
In other words, the Federal Constitution and
the Federal statutes have become binding upon
the people of the U.S. in consequence of an act
of, and, in this sense, through the respective
states of the Union of which they are citizens.
The peculiar nature of the relation between said
people and the Federal Government of the U.S.
is reflected in the election of its President, who
is chosen directly, not by the people of the U.S.,
but by electors chosen by each State, in such
manner as the legislature thereof may direct
(Article II, section 2, of the Federal
Constitution).lawphi1.net

The relation between the people of the

Philippines and its taxpayers, on the other hand,
and the Republic of the Philippines, on the other,
is not identical to that obtaining between the
people and taxpayers of the U.S. and its Federal
Government. It is closer, from a domestic
viewpoint, to that existing between the people
and taxpayers of each state and the government
thereof, except that the authority of the
Republic of the Philippines over the people of
the Philippines is more fully direct than that of
the states of the Union, insofar as the simple
and unitary type of our national government is
not subject to limitations analogous to those
imposed by the Federal Constitution upon the
states of the Union, and those imposed upon
the Federal Government in the interest of the
Union. For this reason, the rule recognizing the
right of taxpayers to assail the constitutionality
of a legislation appropriating local or state
public funds — which has been upheld by the
Federal Supreme Court (Crampton vs. Zabriskie,
101 U.S. 601) — has greater application in the
Philippines than that adopted with respect to
acts of Congress of the United States
appropriating federal funds.

Indeed, in the Province of Tayabas vs. Perez (56

Phil., 257), involving the expropriation of a land
by the Province of Tayabas, two (2) taxpayers
thereof were allowed to intervene for the
purpose of contesting the price being paid to the
owner thereof, as unduly exorbitant. It is true
that in Custodio vs. President of the Senate (42
Off. Gaz., 1243), a taxpayer and employee of the
Government was not permitted to question the
constitutionality of an appropriation for
backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and
Barredo vs. Commission on Elections (84 Phil.,
368; 45 Off. Gaz., 4411), we entertained the
action of taxpayers impugning the validity of
certain appropriations of public funds, and
invalidated the same. Moreover, the reason that
impelled this Court to take such position in said
two (2) cases — the importance of the issues
therein raised — is present in the case at bar.
Again, like the petitioners in the Rodriguez and
Barredo cases, petitioner herein is not merely a
taxpayer. The Province of Rizal, which he
represents officially as its Provincial Governor,
is our most populated political subdivision,
8and, the taxpayers therein bear a substantial
portion of the burden of taxation, in the
Philippines.

Hence, it is our considered opinion that the

circumstances surrounding this case
sufficiently justify petitioners action in
contesting the appropriation and donation in
question; that this action should not have been
dismissed by the lower court; and that the writ
of preliminary injunction should have been
maintained.

Wherefore, the decision appealed from is hereby

reversed, and the records are remanded to the
lower court for further proceedings not
inconsistent with this decision, with the costs of
this instance against respondent Jose C.
Zulueta. It is so ordered.

Paras, C.J., Bengzon, Padilla, Bautista Angelo,

Labrador, Reyes, J.B.L., Barrera, Gutierrez
David, Paredes, and Dizon, JJ., concur.

Pepsi-Cola Bottling Company v City of

Butuan | GR No. L-22814 | 28 August 1968

G.R. No. L-22814 August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE

PHILIPPINES, INC., plaintiff-appellant,
vs.
CITY OF BUTUAN, MEMBERS OF THE
MUNICIPAL BOARD,
THE CITY MAYOR and THE CITY TREASURER,
all of the CITY OF BUTUAN, defendants-
appellees.

Sabido, Sabido and Associates for plaintiff-

appellant.
The City Attorney of Butuan City for
defendants-appellees.

CONCEPCION, C.J.:

Direct appeal to this Court, from a decision of

the Court of First Instance of Agusan,
dismissing plaintiff's complaint, with costs.

Plaintiff, Pepsi-Cola Bottling Company of the

Philippines, is a domestic corporation with
offices and principal place of business in
Quezon City. The defendants are the City of
Butuan, its City Mayor, the members of its
municipal board and its City Treasurer. Plaintiff
— seeks to recover the sums paid by it to the
City of Butuan — hereinafter referred to as the
City and collected by the latter, pursuant to its
Municipal Ordinance No. 110, as amended by
Municipal Ordinance No. 122, both series of
1960, which plaintiff assails as null and void,
and to prevent the enforcement thereof. Both
parties submitted the case for decision in the
lower court upon a stipulation to the effect:

1. That plaintiff's warehouse in the City of

Butuan serves as a storage for its products the
"Pepsi-Cola" soft drinks for sale to customers in
the City of Butuan and all the municipalities in
the Province of Agusan. These "Pepsi-Cola Cola"
soft drinks are bottled in Cebu City and shipped
to the Butuan City warehouse of plaintiff for
distribution and sale in the City of Butuan and
all municipalities of Agusan. .

2. That on August 16, 1960, the City of Butuan

enacted Ordinance No. 110 which was
subsequently amended by Ordinance No. 122
and effective November 28, 1960. A copy of
Ordinance No. 110, Series of 1960 and
Ordinance No. 122 are incorporated herein as
Exhibits "A" and "B", respectively.

3. That Ordinance No. 110 as amended,

imposes a tax on any person, association, etc.,
of P0.10 per case of 24 bottles of Pepsi-Cola and
the plaintiff paid under protest the amount of
P4,926.63 from August 16 to December 31,
1960 and the amount of P9,250.40 from
January 1 to July 30, 1961.

4. That the plaintiff filed the foregoing complaint

for the recovery of the total amount of
P14,177.03 paid under protest and those that if
may later on pay until the termination of this
case on the ground that Ordinance No. 110 as
amended of the City of Butuan is illegal, that
the tax imposed is excessive and that it is
unconstitutional.

5. That pursuant to Ordinance No. 110 as

amended, the City Treasurer of Butuan City,
has prepared a form to be accomplished by the
plaintiff for the computation of the tax. A copy
of the form is enclosed herewith as Exhibit "C".

6. That the Profit and Loss Statement of the

plaintiff for the period from January 1, 1961 to
July 30, 1961 of its warehouse in Butuan City
is incorporated herein as Exhibits "D" to "D-1"
to "D-5". In this Profit and Loss Statement, the
defendants claim that the plaintiff is not
entitled to a depreciation of P3,052.63 but only
P1,202.55 in which case the profit of plaintiff
will be increased from P1,254.44 to P3,104.52.
The plaintiff differs only on the claim of
depreciation which the company claims to be
P3,052.62. This is in accordance with the
findings of the representative of the
undersigned City Attorney who verified the
records of the plaintiff.

7. That beginning November 21, 1960, the price

of Pepsi-Cola per case of 24 bottles was
increased to P1.92 which price is uniform
throughout the Philippines. Said increase was
made due to the increase in the production cost
of its manufacture.

8. That the parties reserve the right to submit

arguments on the constitutionality and
illegality of Ordinance No. 110, as amended of
the City of Butuan in their respective
memoranda.

xxx xxx x x x1äwphï1.ñët

Section 1 of said Ordinance No. 110, as

amended, states what products are "liquors",
within the purview thereof. Section 2 provides
for the payment by "any agent and/or
consignee" of any dealer "engaged in selling
liquors, imported or local, in the City," of taxes
at specified rates. Section 3 prescribes a tax of
P0.10 per case of 24 bottles of the soft drinks
and carbonated beverages therein named, and
"all other soft drinks or carbonated drinks."
Section 3-A, defines the meaning of the term
"consignee or agent" for purposes of the
ordinance. Section 4 provides that said taxes
"shall be paid at the end of every calendar
month." Pursuant to Section 5, the taxes "shall
be based and computed from the cargo manifest
or bill of lading or any other record showing the
number of cases of soft drinks, liquors or all
other soft drinks or carbonated drinks received
within the month." Sections 6, 7 and 8 specify
the surcharge to be added for failure to pay the
taxes within the period prescribed and the
penalties imposable for "deliberate and willful
refusal to pay the tax mentioned in Sections 2
and 3" or for failure "to furnish the office of the
City Treasurer a copy of the bill of lading or
cargo manifest or record of soft drinks, liquors
or carbonated drinks for sale in the City."
Section 9 makes the ordinance applicable to
soft drinks, liquors or carbonated drinks
"received outside" but "sold within" the City.
Section 10 of the ordinance provides that the
revenue derived therefrom "shall be alloted as
follows: 40% for Roads and Bridges Fund; 40%
for the General Fund and 20% for the School
Fund."
Plaintiff maintains that the disputed ordinance
is null and void because: (1) it partakes of the
nature of an import tax; (2) it amounts to double
taxation; (3) it is excessive, oppressive and
confiscatory; (4) it is highly unjust and
discriminatory; and (5) section 2 of Republic Act
No. 2264, upon the authority of which it was
enacted, is an unconstitutional delegation of
legislative powers.

The second and last objections are manifestly

devoid of merit. Indeed — independently of
whether or not the tax in question, when
considered in relation to the sales tax
prescribed by Acts of Congress, amounts to
double taxation, on which we need not and do
not express any opinion - double taxation, in
general, is not forbidden by our fundamental
law. We have not adopted, as part thereof, the
injunction against double taxation found in the
Constitution of the United States and of some
States of the Union.1 Then, again, the general
principle against delegation of legislative powers,
in consequence of the theory of separation of
powers2 is subject to one well-established
exception, namely: legislative powers may be
delegated to local governments — to which said
theory does not apply3 — in respect of matters
of local concern.

The third objection is, likewise, untenable. The

tax of "P0.10 per case of 24 bottles," of soft
drinks or carbonated drinks — in the
production and sale of which plaintiff is
engaged — or less than P0.0042 per bottle, is
manifestly too small to be excessive, oppressive,
or confiscatory.

The first and the fourth objections merit,

however, serious consideration. In this
connection, it is noteworthy that the tax
prescribed in section 3 of Ordinance No. 110, as
originally approved, was imposed upon dealers
"engaged in selling" soft drinks or carbonated
drinks. Thus, it would seem that the intent was
then to levy a tax upon the sale of said
merchandise. As amended by Ordinance No.
122, the tax is, however, imposed only upon
"any agent and/or consignee of any person,
association, partnership, company or
corporation engaged in selling ... soft drinks or
carbonated drinks." And, pursuant to section 3-
A, which was inserted by said Ordinance No.
122:

... — Definition of the Term Consignee or Agent.

— For purposes of this Ordinance, a consignee
of agent shall mean any person, association,
partnership, company or corporation who acts
in the place of another by authority from him or
one entrusted with the business of another or
to whom is consigned or shipped no less than
1,000 cases of hard liquors or soft drinks every
month for resale, either retail or wholesale.

As a consequence, merchants engaged in the

sale of soft drink or carbonated drinks, are not
subject to the tax, unless they are agents
and/or consignees of another dealer, who, in
the very nature of things, must be one engaged
in business outside the City. Besides, the tax
would not be applicable to such agent and/or
consignee, if less than 1,000 cases of soft drinks
are consigned or shipped to him every month.
When we consider, also, that the tax "shall be
based and computed from the cargo manifest or
bill of lading ... showing the number of cases" —
not sold — but "received" by the taxpayer, the
intention to limit the application of the
ordinance to soft drinks and carbonated drinks
brought into the City from outside thereof
becomes apparent. Viewed from this angle, the
tax partakes of the nature of an import duty,
which is beyond defendant's authority to
impose by express provision of law.4

Even however, if the burden in question were

regarded as a tax on the sale of said beverages,
it would still be invalid, as discriminatory, and
hence, violative of the uniformity required by
the Constitution and the law therefor, since
only sales by "agents or consignees" of outside
dealers would be subject to the tax. Sales by
local dealers, not acting for or on behalf of other
merchants, regardless of the volume of their
sales, and even if the same exceeded those
made by said agents or consignees of producers
or merchants established outside the City of
Butuan, would be exempt from the disputed tax.

It is true that the uniformity essential to the

valid exercise of the power of taxation does not
require identity or equality under all
circumstances, or negate the authority to
classify the objects of taxation.5 The
classification made in the exercise of this
authority, to be valid, must, however, be
reasonable6 and this requirement is not
deemed satisfied unless: (1) it is based upon
substantial distinctions which make real
differences; (2) these are germane to the
purpose of the legislation or ordinance; (3) the
classification applies, not only to present
conditions, but, also, to future conditions
substantially identical to those of the present;
and (4) the classification applies equally all
those who belong to the same class.7

These conditions are not fully met by the

ordinance in question.8 Indeed, if its purpose
were merely to levy a burden upon the sale of
soft drinks or carbonated beverages, there is no
reason why sales thereof by sealers other than
agents or consignees of producers or merchants
established outside the City of Butuan should
be exempt from the tax.

WHEREFORE, the decision appealed from is

hereby reversed, and another one shall be
entered annulling Ordinance No. 110, as
amended by Ordinance No. 122, and sentencing
the City of Butuan to refund to plaintiff herein
the amounts collected from and paid under
protest by the latter, with interest thereon at the
legal rate from the date of the promulgation of
this decision, in addition to the costs, and
defendants herein are, accordingly, restrained
and prohibited permanently from enforcing said
Ordinance, as amended. It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar,
Sanchez, Castro, Angeles and Fernando, JJ.,
concur. 1äwphï1.

Pepsi-Cola Bottling Company v Tanauan |

GR No. L-31156 | 27 February 1976

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE

PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE
MUNICIPAL MAYOR, ET AL., defendant
appellees.

Sabido, Sabido & Associates for appellant.

Provincial Fiscal Zoila M. Redona & Assistant

Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T.
Limcaoco & Solicitor Enrique M. Reyes for
appellees.

MARTIN, J.:

This is an appeal from the decision of the Court

of First Instance of Leyte in its Civil Case No.
3294, which was certified to Us by the Court of
Appeals on October 6, 1969, as involving only
pure questions of law, challenging the power of
taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as
amended, June 19, 1959).

On February 14, 1963, the plaintiff-appellant,

Pepsi-Cola Bottling Company of the Philippines,
Inc., commenced a complaint with preliminary
injunction before the Court of First Instance of
Leyte for that court to declare Section 2 of
Republic Act No. 2264. 1 otherwise known as
the Local Autonomy Act, unconstitutional as an
undue delegation of taxing authority as well as
to declare Ordinances Nos. 23 and 27, series of
1962, of the municipality of Tanauan, Leyte,
null and void.

On July 23, 1963, the parties entered into a

Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23
and 27 embrace or cover the same subject
matter and the production tax rates imposed
therein are practically the same, and second,
that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter
addressed to the Manager of the Pepsi-Cola
Bottling Plant in said municipality, sought to
enforce compliance by the latter of the
provisions of said Ordinance No. 27, series of
1962.

Municipal Ordinance No. 23, of Tanauan, Leyte,

which was approved on September 25, 1962,
levies and collects "from soft drinks producers
and manufacturers a tai of one-sixteenth (1/16)
of a centavo for every bottle of soft drink
corked." 2 For the purpose of computing the
taxes due, the person, firm, company or
corporation producing soft drinks shall submit
to the Municipal Treasurer a monthly report, of
the total number of bottles produced and
corked during the month. 3

On the other hand, Municipal Ordinance No. 27,

which was approved on October 28, 1962, levies
and collects "on soft drinks produced or
manufactured within the territorial jurisdiction
of this municipality a tax of ONE CENTAVO
(P0.01) on each gallon (128 fluid ounces, U.S.)
of volume capacity." 4 For the purpose of
computing the taxes due, the person, fun
company, partnership, corporation or plant
producing soft drinks shall submit to the
Municipal Treasurer a monthly report of the
total number of gallons produced or
manufactured during the month. 5

The tax imposed in both Ordinances Nos. 23

and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance
of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality
of [Section 2, Republic Act No. 2264] declaring
Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the
taxes due under the oft the said Ordinances;
and to pay the costs."

From this judgment, the plaintiff Pepsi-Cola

Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us
pursuant to Section 31 of the Judiciary Act of
1948, as amended.

There are three capital questions raised in this

appeal:

1. — Is Section 2, Republic Act No. 2264 an

undue delegation of power, confiscatory and
oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute

double taxation and impose percentage or
specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and

unfair?

1. The power of taxation is an essential and

inherent attribute of sovereignty, belonging as a
matter of right to every independent
government, without being expressly conferred
by the people. 6 It is a power that is purely
legislative and which the central legislative body
cannot delegate either to the executive or
judicial department of the government without
infringing upon the theory of separation of
powers. The exception, however, lies in the case
of municipal corporations, to which, said theory
does not apply. Legislative powers may be
delegated to local governments in respect of
matters of local concern. 7 This is sanctioned by
immemorial practice. 8 By necessary
implication, the legislative power to create
political corporations for purposes of local self-
government carries with it the power to confer
on such local governmental agencies the power
to tax. 9 Under the New Constitution, local
governments are granted the autonomous
authority to create their own sources of revenue
and to levy taxes. Section 5, Article XI provides:
"Each local government unit shall have the
power to create its sources of revenue and to
levy taxes, subject to such limitations as may
be provided by law." Withal, it cannot be said
that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the
legislative power to enact and vest in local
governments the power of local taxation.

The plenary nature of the taxing power thus

delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the
said law as confiscatory and oppressive. In
delegating the authority, the State is not limited
6 the exact measure of that which is exercised
by itself. When it is said that the taxing power
may be delegated to municipalities and the like,
it is meant that there may be delegated such
measure of power to impose and collect taxes as
the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects
which for reasons of public policy the State has
not deemed wise to tax for more general
purposes. 10 This is not to say though that the
constitutional injunction against deprivation of
property without due process of law may be
passed over under the guise of the taxing power,
except when the taking of the property is in the
lawful exercise of the taxing power, as when (1)
the tax is for a public purpose; (2) the rule on
uniformity of taxation is observed; (3) either the
person or property taxed is within the
jurisdiction of the government levying the tax;
and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity for
hearing are provided. 11 Due process is usually
violated where the tax imposed is for a private
as distinguished from a public purpose; a tax is
imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or
oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the
due process clause, as applied to a particular
taxpayer, although the purpose of the tax will
result in an injury rather than a benefit to such
taxpayer. Due process does not require that the
property subject to the tax or the amount of tax
to be raised should be determined by judicial
inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it
shall be apportioned are generally not
necessary to due process of law. 12

There is no validity to the assertion that the

delegated authority can be declared
unconstitutional on the theory of double
taxation. It must be observed that the
delegating authority specifies the limitations
and enumerates the taxes over which local
taxation may not be exercised. 13 The reason is
that the State has exclusively reserved the same
for its own prerogative. Moreover, double
taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as
part thereof the injunction against double
taxation found in the Constitution of the United
States and some states of the Union. 14 Double
taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the
same governmental entity 15 or by the same
jurisdiction for the same purpose, 16 but not in
a case where one tax is imposed by the State
and the other by the city or municipality. 17

2. The plaintiff-appellant submits that

Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover
the same subject matter and impose practically
the same tax rate. The thesis proceeds from its
assumption that both ordinances are valid and
legally enforceable. This is not so. As earlier
quoted, Ordinance No. 23, which was approved
on September 25, 1962, levies or collects from
soft drinks producers or manufacturers a tax of
one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of
the bottle used. When it was discovered that the
producer or manufacturer could increase the
volume contents of the bottle and still pay the
same tax rate, the Municipality of Tanauan
enacted Ordinance No. 27, approved on October
28, 1962, imposing a tax of one centavo (P0.01)
on each gallon (128 fluid ounces, U.S.) of
volume capacity. The difference between the two
ordinances clearly lies in the tax rate of the soft
drinks produced: in Ordinance No. 23, it was
1/16 of a centavo for every bottle corked; in
Ordinance No. 27, it is one centavo (P0.01) on
each gallon (128 fluid ounces, U.S.) of volume
capacity. The intention of the Municipal Council
of Tanauan in enacting Ordinance No. 27 is
thus clear: it was intended as a plain substitute
for the prior Ordinance No. 23, and operates as
a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted
that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even
the stipulation of facts confirms the fact that the
Acting Municipal Treasurer of Tanauan, Leyte
sought t6 compel compliance by the plaintiff-
appellant of the provisions of said Ordinance No.
27, series of 1962. The aforementioned
admission shows that only Ordinance No. 27,
series of 1962 is being enforced by defendants-
appellees. Even the Provincial Fiscal, counsel
for defendants-appellees admits in his brief
"that Section 7 of Ordinance No. 27, series of
1962 clearly repeals Ordinance No. 23 as the
provisions of the latter are inconsistent with the
provisions of the former."

That brings Us to the question of whether the

remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the
taxing authority conferred on local governments
under Section 2, Republic Act No. 2264, is
broad enough as to extend to almost "everything,
accepting those which are mentioned therein."
As long as the text levied under the authority of
a city or municipal ordinance is not within the
exceptions and limitations in the law, the same
comes within the ambit of the general rule,
pursuant to the rules of exclucion attehus and
exceptio firmat regulum in cabisus non excepti
19 The limitation applies, particularly, to the
prohibition against municipalities and
municipal districts to impose "any percentage
tax or other taxes in any form based thereon nor
impose taxes on articles subject to specific tax
except gasoline, under the provisions of the
National Internal Revenue Code." For purposes
of this particular limitation, a municipal
ordinance which prescribes a set ratio between
the amount of the tax and the volume of sale of
the taxpayer imposes a sales tax and is null and
void for being outside the power of the
municipality to enact. 20 But, the imposition of
"a tax of one centavo (P0.01) on each gallon (128
fluid ounces, U.S.) of volume capacity" on all
soft drinks produced or manufactured under
Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in
any form based thereon. The tax is levied on the
produce (whether sold or not) and not on the
sales. The volume capacity of the taxpayer's
production of soft drinks is considered solely for
purposes of determining the tax rate on the
products, but there is not set ratio between the
volume of sales and the amount of the tax. 21

Nor can the tax levied be treated as a specific

tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker
fuel oil, diesel fuel oil, cinematographic films,
playing cards, saccharine, opium and other
habit-forming drugs. 22 Soft drink is not one of
those specified.

3. The tax of one (P0.01) on each gallon (128

fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an
equivalent of 1-½ centavos per case, 23 cannot
be considered unjust and unfair. 24 an increase
in the tax alone would not support the claim
that the tax is oppressive, unjust and
confiscatory. Municipal corporations are
allowed much discretion in determining the
reates of imposable taxes. 25 This is in line with
the constutional policy of according the widest
possible autonomy to local governments in
matters of local taxation, an aspect that is given
expression in the Local Tax Code (PD No. 231,
July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go
slow in writing off an ordinance as
unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as
Ordinance No. 27 if the purpose of the law to
further strengthen local autonomy were to be
realized. 28

Finally, the municipal license tax of P1,000.00

per corking machine with five but not more than
ten crowners or P2,000.00 with ten but not
more than twenty crowners imposed on
manufacturers, producers, importers and
dealers of soft drinks and/or mineral waters
under Ordinance No. 54, series of 1964, as
amended by Ordinance No. 41, series of 1968,
of defendant Municipality, 29 appears not to
affect the resolution of the validity of Ordinance
No. 27. Municipalities are empowered to impose,
not only municipal license taxes upon persons
engaged in any business or occupation but also
to levy for public purposes, just and uniform
taxes. The ordinance in question (Ordinance No.
27) comes within the second power of a
municipality.

ACCORDINGLY, the constitutionality of Section

2 of Republic Act No. 2264, otherwise known as
the Local Autonomy Act, as amended, is hereby
upheld and Municipal Ordinance No. 27 of the
Municipality of Tanauan, Leyte, series of 1962,
re-pealing Municipal Ordinance No. 23, same
series, is hereby declared of valid and legal
effect. Costs against petitioner-appellant.

SO ORDERED.

Castro, C.J., Teehankee, Barredo, Makasiar,

Antonio, Esguerra, Muñoz Palma, Aquino and
Concepcion, Jr., JJ., concur.
Separate Opinions

FERNANDO, J., concurring:

The opinion of the Court penned by Justice

Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows
adherence to tried and tested concepts of the
law of municipal taxation, I am only in
agreement. If I limit myself to concurrence in
the result, it is primarily because with the
article on Local Autonomy found in the present
Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different
basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless
it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the
nuances and implications that could arise from
the approach taken by my brethren. Likewise as
to the constitutional aspect of the thorny
question of double taxation, I would limit myself
to what has been set forth in City of Baguio v.
De Leon. 1

1. The present Constitution is quite explicit

as to the power of taxation vested in local and
municipal corporations. It is therein specifically
provided: "Each local government unit shall
have the power to create its own sources of
revenue and to levy taxes subject to such
limitations as may be provided by law. 2 That
was not the case under the 1935 Charter. The
only limitation then on the authority, plenary in
character of the national government, was that
while the President of the Philippines was
vested with the power of control over all
executive departments, bureaus, or offices, he
could only . It exercise general supervision over
all local governments as may be provided by
law ... 3 As far as legislative power over local
government was concerned, no restriction
whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the
extent of the taxing power was solely for the
legislative body to decide. It is true that in 1939,
there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in
1959 such competence was further expanded in
the Local Autonomy Act. 5 Nevertheless, as late
as December of 1964, five years after its
enactment of the Local Autonomy Act, this
Court, through Justice Dizon, in Golden Ribbon
Lumber Co. v. City of Butuan, 6 reaffirmed the
traditional concept in these words: "The rule is
well-settled that municipal corporations, unlike
sovereign states, after clothed with no power of
taxation; that its charter or a statute must
clearly show an intent to confer that power or
the municipal corporation cannot assume and
exercise it, and that any such power granted
must be construed strictly, any doubt or
ambiguity arising from the terms of the grant to
be resolved against the municipality." 7

Taxation, according to Justice Parades in the

earlier case of Tan v. Municipality of Pagbilao, 8
"is an attribute of sovereignty which municipal
corporations do not enjoy." 9 That case left no
doubt either as to weakness of a claim "based
merely by inferences, implications and
deductions, [as they have no place in the
interpretation of the power to tax of a municipal
corporation." 10 As the conclusion reached by
the Court finds support in such grant of the
municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an
alleged double taxation, I would prefer to rely on
the doctrine announced by this Court in City of
Baguio v. De Leon. 11 Thus: "As to why double
taxation is not violative of due process, Justice
Holmes made clear in this language: 'The
objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the
due process clause) no more forbids double
taxation than it does doubling the amount of a
tax, short of (confiscation or proceedings
unconstitutional on other grouse With that
decision rendered at a time when American
sovereignty in the Philippines was recognized, it
possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey
of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem
though that in the United States, as with us, its
ghost, as noted by an eminent critic, still stalks
the juridical stage. 'In a 1947 decision, however,
we quoted with approval this excerpt from a
leading American decision: 'Where, as here,
Congress has clearly expressed its intention,
the statute must be sustained even though
double taxation results. 12

So I would view the issues in this suit and

accordingly concur in the result.

Separate Opinions
FERNANDO, J., concurring:

The opinion of the Court penned by Justice

Martin is impressed with a scholarly and
comprehensive character. Insofar as it shows
adherence to tried and tested concepts of the
law of municipal taxation, I am only in
agreement. If I limit myself to concurrence in
the result, it is primarily because with the
article on Local Autonomy found in the present
Constitution, I feel a sense of reluctance in
restating doctrines that arose from a different
basic premise as to the scope of such power in
accordance with the 1935 Charter. Nonetheless
it is well-nigh unavoidable that I do so as I am
unable to share fully what for me are the
nuances and implications that could arise from
the approach taken by my brethren. Likewise as
to the constitutional aspect of the thorny
question of double taxation, I would limit myself
to what has been set forth in City of Baguio v.
De Leon. 1

1. The present Constitution is quite explicit

as to the power of taxation vested in local and
municipal corporations. It is therein specifically
provided: "Each local government unit shall
have the power to create its own sources of
revenue and to levy taxes subject to such
limitations as may be provided by law. 2 That
was not the case under the 1935 Charter. The
only limitation then on the authority, plenary in
character of the national government, was that
while the President of the Philippines was
vested with the power of control over all
executive departments, bureaus, or offices, he
could only . It exercise general supervision over
all local governments as may be provided by
law ... 3 As far as legislative power over local
government was concerned, no restriction
whatsoever was placed on the Congress of the
Philippines. It would appear therefore that the
extent of the taxing power was solely for the
legislative body to decide. It is true that in 1939,
there was a statute that enlarged the scope of
the municipal taxing power. 4 Thereafter, in
1959 such competence was further expanded in
the Local Autonomy Act. 5 Nevertheless, as late
as December of 1964, five years after its
enactment of the Local Autonomy Act, this
Court, through Justice Dizon, in Golden Ribbon
Lumber Co. v. City of Butuan, 6 reaffirmed the
traditional concept in these words: "The rule is
well-settled that municipal corporations, unlike
sovereign states, after clothed with no power of
taxation; that its charter or a statute must
clearly show an intent to confer that power or
the municipal corporation cannot assume and
exercise it, and that any such power granted
must be construed strictly, any doubt or
ambiguity arising from the terms of the grant to
be resolved against the municipality." 7

Taxation, according to Justice Parades in the

earlier case of Tan v. Municipality of Pagbilao, 8
"is an attribute of sovereignty which municipal
corporations do not enjoy." 9 That case left no
doubt either as to weakness of a claim "based
merely by inferences, implications and
deductions, [as they have no place in the
interpretation of the power to tax of a municipal
corporation." 10 As the conclusion reached by
the Court finds support in such grant of the
municipal taxing power, I concur in the result.
2. As to any possible infirmity based on an
alleged double taxation, I would prefer to rely on
the doctrine announced by this Court in City of
Baguio v. De Leon. 11 Thus: "As to why double
taxation is not violative of due process, Justice
Holmes made clear in this language: 'The
objection to the taxation as double may be laid
down on one side. ... The 14th Amendment [the
due process clause) no more forbids double
taxation than it does doubling the amount of a
tax, short of (confiscation or proceedings
unconstitutional on other grouse With that
decision rendered at a time when American
sovereignty in the Philippines was recognized, it
possesses more than just a persuasive effect. To
some, it delivered the coup justice to the bogey
of double taxation as a constitutional bar to the
exercise of the taxing power. It would seem
though that in the United States, as with us, its
ghost, as noted by an eminent critic, still stalks
the juridical stage. 'In a 1947 decision, however,
we quoted with approval this excerpt from a
leading American decision: 'Where, as here,
Congress has clearly expressed its intention,
the statute must be sustained even though
double taxation results. 12

So I would view the issues in this suit and

accordingly concur in the result.

ABAKADA Guro Party List v Ermita | GR No.

168056 | 01 September 2005

ABAKADA GURO PARTY LIST (Formerly

AASJAS) OFFICERS SAMSON S. ALCANTARA
and ED VINCENT S. ALBANO,

G.R. No. 168056

Petitioners,

Present:

DAVIDE, JR., C.J.,

PUNO,

PANGANIBAN,

QUISUMBING,

YNARES-SANTIAGO,

SANDOVAL-GUTIERREZ,
- versus -

CARPIO,

AUSTRIA-MARTINEZ,

CORONA,

CARPIO-MORALES,

CALLEJO, SR.,

AZCUNA,

TINGA,

CHICO-NAZARIO, and

GARCIA, JJ.
THE HONORABLE EXECUTIVE SECRETARY
EDUARDO ERMITA; HONORABLE
SECRETARY OF THE DEPARTMENT OF
FINANCE CESAR PURISIMA; and HONORABLE
COMMISSIONER OF INTERNAL REVENUE
GUILLERMO PARAYNO, JR.,

Respondents.

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

AQUILINO Q. PIMENTEL, JR., LUISA P.

EJERCITO-ESTRADA, JINGGOY E. ESTRADA,
PANFILO M. LACSON, ALFREDO S. LIM,
JAMBY A.S. MADRIGAL, AND SERGIO R.
OSMEA III,

G.R. No. 168207

Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R.

ERMITA, CESAR V. PURISIMA, SECRETARY OF
FINANCE, GUILLERMO L. PARAYNO, JR.,
COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE,

Respondents.
x-------------------------x

ASSOCIATION OF PILIPINAS SHELL DEALERS,

INC. represented by its President, ROSARIO
ANTONIO; PETRON DEALERS ASSOCIATION
represented by its President, RUTH E. BARBIBI;
ASSOCIATION OF CALTEX DEALERS OF THE
PHILIPPINES represented by its President,
MERCEDITAS A. GARCIA; ROSARIO ANTONIO
doing business under the name and style of
ANB NORTH SHELL SERVICE STATION;
LOURDES MARTINEZ doing business under
the name and style of SHELL GATE N.
DOMINGO; BETHZAIDA TAN doing business
under the name and style of ADVANCE SHELL
STATION; REYNALDO P. MONTOYA doing
business under the name and style of NEW
LAMUAN SHELL SERVICE STATION; EFREN
SOTTO doing business under the name and
style of RED FIELD SHELL SERVICE STATION;
DONICA CORPORATION represented by its
President, DESI TOMACRUZ; RUTH E.
MARBIBI doing business under the name and
style of R&R PETRON STATION; PETER M.
UNGSON doing business under the name and
style of CLASSIC STAR GASOLINE SERVICE
STATION; MARIAN SHEILA A. LEE doing
business under the name and style of NTE
GASOLINE & SERVICE STATION; JULIAN
CESAR P. POSADAS doing business under the
name and style of STARCARGA ENTERPRISES;
ADORACION MAEBO doing business under the
name and style of CMA MOTORISTS CENTER;
SUSAN M. ENTRATA doing business under the
name and style of LEONAS GASOLINE STATION
and SERVICE CENTER; CARMELITA
BALDONADO doing business under the name
and style of FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing business under
the name and style of LORPED SERVICE
CENTER; RHEAMAR A. RAMOS doing business
under the name and style of RJRAM PTT GAS
STATION; MA. ISABEL VIOLAGO doing
business under the name and style of
VIOLAGO-PTT SERVICE CENTER; MOTORISTS
HEART CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; PHILIPPINE STANDARD OIL
CORPORATION represented by its Vice-
President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing
business under the name and style of ROMMAN
GASOLINE STATION; ANTHONY ALBERT CRUZ
III doing business under the name and style of
TRUE SERVICE STATION,

G.R. No. 168461

Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as

Secretary of the Department of Finance and
GUILLERMO L. PARAYNO, JR., in his capacity
as Commissioner of Internal Revenue,

Respondents.

x-------------------------x
FRANCIS JOSEPH G. ESCUDERO, VINCENT
CRISOLOGO, EMMANUEL JOEL J.
VILLANUEVA, RODOLFO G. PLAZA, DARLENE
ANTONINO-CUSTODIO, OSCAR G. MALAPITAN,
BENJAMIN C. AGARAO, JR. JUAN EDGARDO
M. ANGARA, JUSTIN MARC SB. CHIPECO,
FLORENCIO G. NOEL, MUJIV S. HATAMAN,
RENATO B. MAGTUBO, JOSEPH A. SANTIAGO,
TEOFISTO DL. GUINGONA III, RUY ELIAS C.
LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,

G.R. No. 168463

Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as

Secretary of Finance, GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of Internal
Revenue, and EDUARDO R. ERMITA, in his
capacity as Executive Secretary,

Respondents.

x-------------------------x
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.

G.R. No. 168730

Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his capacity as

the Executive Secretary; HON. MARGARITO
TEVES, in his capacity as Secretary of Finance;
HON. JOSE MARIO BUNAG, in his capacity as
the OIC Commissioner of the Bureau of Internal
Revenue; and HON. ALEXANDER AREVALO, in
his capacity as the OIC Commissioner of the
Bureau of Customs,

Promulgated:
Respondents.

September 1, 2005

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

DECISION
AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their

object the interest of all, should be borne by
everyone, and the more man enjoys the
advantages of society, the more he ought to hold
himself honored in contributing to those
expenses.

-Anne Robert Jacques Turgot (1727-1781)

French statesman and economist

Mounting budget deficit, revenue generation,

inadequate fiscal allocation for education,
increased emoluments for health workers, and
wider coverage for full value-added tax benefits
these are the reasons why Republic Act No.
9337 (R.A. No. 9337)[1] was enacted. Reasons,
the wisdom of which, the Court even with its
extensive constitutional power of review, cannot
probe. The petitioners in these cases, however,
question not only the wisdom of the law, but
also perceived constitutional infirmities in its
passage.

Every law enjoys in its favor the presumption of

constitutionality. Their arguments
notwithstanding, petitioners failed to justify
their call for the invalidity of the law. Hence, R.A.
No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three

legislative bills namely, House Bill Nos. 3555
and 3705, and Senate Bill No. 1950.

House Bill No. 3555[2] was introduced on first

reading on January 7, 2005. The House
Committee on Ways and Means approved the
bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson
introduced on August 8, 2004. The President
certified the bill on January 7, 2005 for
immediate enactment. On January 27, 2005,
the House of Representatives approved the bill
on second and third reading.

House Bill No. 3705[3] on the other hand,

substituted House Bill No. 3105 introduced by
Rep. Salacnib F. Baterina, and House Bill No.
3381 introduced by Rep. Jacinto V. Paras. Its
mother bill is House Bill No. 3555. The House
Committee on Ways and Means approved the
bill on February 2, 2005. The President also
certified it as urgent on February 8, 2005. The
House of Representatives approved the bill on
second and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and

Means approved Senate Bill No. 1950[4] on
March 7, 2005, in substitution of Senate Bill
Nos. 1337, 1838 and 1873, taking into
consideration House Bill Nos. 3555 and 3705.
Senator Ralph G. Recto sponsored Senate Bill
No. 1337, while Senate Bill Nos. 1838 and 1873
were both sponsored by Sens. Franklin M.
Drilon, Juan M. Flavier and Francis N.
Pangilinan. The President certified the bill on
March 11, 2005, and was approved by the
Senate on second and third reading on April 13,
2005.

On the same date, April 13, 2005, the Senate

agreed to the request of the House of
Representatives for a committee conference on
the disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the

Disagreeing Provisions of House Bill No. 3555,
House Bill No. 3705, and Senate Bill No. 1950,
after having met and discussed in full free and
conference, recommended the approval of its
report, which the Senate did on May 10, 2005,
and with the House of Representatives agreeing
thereto the next day, May 11, 2005.

On May 23, 2005, the enrolled copy of the

consolidated House and Senate version was
transmitted to the President, who signed the
same into law on May 24, 2005. Thus, came R.A.
No. 9337.

July 1, 2005 is the effectivity date of R.A. No.

9337.[5] When said date came, the Court issued
a temporary restraining order, effective
immediately and continuing until further orders,
enjoining respondents from enforcing and
implementing the law.

Oral arguments were held on July 14, 2005.

Significantly, during the hearing, the Court
speaking through Mr. Justice Artemio V.
Panganiban, voiced the rationale for its
issuance of the temporary restraining order on
July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the
details of your presentation, let me just tell you
a little background. You know when the law
took effect on July 1, 2005, the Court issued a
TRO at about 5 oclock in the afternoon. But
before that, there was a lot of complaints aired
on television and on radio. Some people in a gas
station were complaining that the gas prices
went up by 10%. Some people were complaining
that their electric bill will go up by 10%. Other
times people riding in domestic air carrier were
complaining that the prices that theyll have to
pay would have to go up by 10%. While all that
was being aired, per your presentation and per
our own understanding of the law, thats not
true. Its not true that the e-vat law necessarily
increased prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your

Honor, there is an Executive Order that granted
the Petroleum companies some subsidy . . .
interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was
meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of

the mitigating measures would be the
elimination of the Excise Tax and the import
duties. That is why, it is not correct to say that
the VAT as to petroleum dealers increased
prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no

justification for increasing the retail price by 10%
to cover the E-Vat tax. If you consider the excise
tax and the import duties, the Net Tax would
probably be in the neighborhood of 7%? We are
not going into exact figures I am just trying to
deliver a point that different industries,
different products, different services are hit
differently. So its not correct to say that all
prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic

Airline companies, Mr. Counsel, are at present
imposed a Sales Tax of 3%. When this E-Vat law
took effect the Sales Tax was also removed as a
mitigating measure. So, therefore, there is no
justification to increase the fares by 10% at best
7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that

the people were complaining on that first day,
were being increased arbitrarily by 10%. And
thats one reason among many others this Court
had to issue TRO because of the confusion in
the implementation. Thats why we added as an
issue in this case, even if its tangentially taken
up by the pleadings of the parties, the confusion
in the implementation of the E-vat. Our people
were subjected to the mercy of that confusion of
an across the board increase of 10%, which you
yourself now admit and I think even the
Government will admit is incorrect. In some
cases, it should be 3% only, in some cases it
should be 6% depending on these mitigating
measures and the location and situation of each
product, of each service, of each company, isnt
it?

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : Alright. So thats one reason

why we had to issue a TRO pending the
clarification of all these and we wish the
government will take time to clarify all these by
means of a more detailed implementing rules,
in case the law is upheld by this Court. . . .[6]

The Court also directed the parties to file their

respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners

ABAKADA GURO Party List, et al., filed a
petition for prohibition on May 27, 2005. They
question the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337, amending Sections 106,
107 and 108, respectively, of the National
Internal Revenue Code (NIRC). Section 4
imposes a 10% VAT on sale of goods and
properties, Section 5 imposes a 10% VAT on
importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of
properties. These questioned provisions contain
a uniform proviso authorizing the President,
upon recommendation of the Secretary of
Finance, to raise the VAT rate to 12%, effective
January 1, 2006, after any of the following
conditions have been satisfied, to wit:

. . . That the President, upon the

recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%), after
any of the following conditions has been
satisfied:

(i) Value-added tax collection as a percentage of

Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%);
or

(ii) National government deficit as a percentage

of GDP of the previous year exceeds one and
one-half percent (1 %).

Petitioners argue that the law is

unconstitutional, as it constitutes
abandonment by Congress of its exclusive
authority to fix the rate of taxes under Article VI,
Section 28(2) of the 1987 Philippine
Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr.,

et al., filed a petition for certiorari likewise
assailing the constitutionality of Sections 4, 5
and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by
authority of the President to increase the VAT
rate to 12%, on the ground that it amounts to
an undue delegation of legislative power,
petitioners also contend that the increase in the
VAT rate to 12% contingent on any of the two
conditions being satisfied violates the due
process clause embodied in Article III, Section 1
of the Constitution, as it imposes an unfair and
additional tax burden on the people, in that: (1)
the 12% increase is ambiguous because it does
not state if the rate would be returned to the
original 10% if the conditions are no longer
satisfied; (2) the rate is unfair and unreasonable,
as the people are unsure of the applicable VAT
rate from year to year; and (3) the increase in
the VAT rate, which is supposed to be an
incentive to the President to raise the VAT
collection to at least 2 4/5 of the GDP of the
previous year, should only be based on fiscal
adequacy.

Petitioners further claim that the inclusion of a

stand-by authority granted to the President by
the Bicameral Conference Committee is a
violation of the no-amendment rule upon last
reading of a bill laid down in Article VI, Section
26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed

on June 29, 2005, by the Association of
Pilipinas Shell Dealers, Inc., et al., assailing the
following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of the
NIRC, requiring that the input tax on
depreciable goods shall be amortized over a 60-
month period, if the acquisition, excluding the
VAT components, exceeds One Million Pesos (P1,
000,000.00);

2) Section 8, amending Section 110 (B) of the

NIRC, imposing a 70% limit on the amount of
input tax to be credited against the output tax;
and

3) Section 12, amending Section 114 (c) of the

NIRC, authorizing the Government or any of its
political subdivisions, instrumentalities or
agencies, including GOCCs, to deduct a 5%
final withholding tax on gross payments of
goods and services, which are subject to 10%
VAT under Sections 106 (sale of goods and
properties) and 108 (sale of services and use or
lease of properties) of the NIRC.

Petitioners contend that these provisions are

unconstitutional for being arbitrary, oppressive,
excessive, and confiscatory.

Petitioners argument is premised on the

constitutional right of non-deprivation of life,
liberty or property without due process of law
under Article III, Section 1 of the Constitution.
According to petitioners, the contested sections
impose limitations on the amount of input tax
that may be claimed. Petitioners also argue that
the input tax partakes the nature of a property
that may not be confiscated, appropriated, or
limited without due process of law. Petitioners
further contend that like any other property or
property right, the input tax credit may be
transferred or disposed of, and that by limiting
the same, the government gets to tax a profit or
value-added even if there is no profit or value-
added.

Petitioners also believe that these provisions

violate the constitutional guarantee of equal
protection of the law under Article III, Section 1
of the Constitution, as the limitation on the
creditable input tax if: (1) the entity has a high
ratio of input tax; or (2) invests in capital
equipment; or (3) has several transactions with
the government, is not based on real and
substantial differences to meet a valid
classification.

Lastly, petitioners contend that the 70% limit is

anything but progressive, violative of Article VI,
Section 28(1) of the Constitution, and that it is
the smaller businesses with higher input tax to
output tax ratio that will suffer the
consequences thereof for it wipes out whatever
meager margins the petitioners make.

G.R. No. 168463

Several members of the House of

Representatives led by Rep. Francis Joseph G.
Escudero filed this petition for certiorari on
June 30, 2005. They question the
constitutionality of R.A. No. 9337 on the
following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337

constitute an undue delegation of legislative
power, in violation of Article VI, Section 28(2) of
the Constitution;
2) The Bicameral Conference Committee acted
without jurisdiction in deleting the no pass on
provisions present in Senate Bill No. 1950 and
House Bill No. 3705; and

3) Insertion by the Bicameral Conference

Committee of Sections 27, 28, 34, 116, 117, 119,
121, 125,[7] 148, 151, 236, 237 and 288, which
were present in Senate Bill No. 1950, violates
Article VI, Section 24(1) of the Constitution,
which provides that all appropriation, revenue
or tariff bills shall originate exclusively in the
House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T.

Garcia filed a petition for certiorari and
prohibition on July 20, 2005, alleging
unconstitutionality of the law on the ground
that the limitation on the creditable input tax in
effect allows VAT-registered establishments to
retain a portion of the taxes they collect, thus
violating the principle that tax collection and
revenue should be solely allocated for public
purposes and expenditures. Petitioner Garcia
further claims that allowing these
establishments to pass on the tax to the
consumers is inequitable, in violation of Article
VI, Section 28(1) of the Constitution.

RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a

Comment in behalf of respondents.
Preliminarily, respondents contend that R.A. No.
9337 enjoys the presumption of
constitutionality and petitioners failed to cast
doubt on its validity.

Relying on the case of Tolentino vs. Secretary of

Finance, 235 SCRA
630 (1994), respondents argue that the
procedural issues raised by petitioners, i.e.,
legality of the bicameral proceedings, exclusive
origination of revenue measures and the power
of the Senate concomitant thereto, have already
been settled. With regard to the issue of undue
delegation of legislative power to the President,
respondents contend that the law is complete
and leaves no discretion to the President but to
increase the rate to 12% once any of the two
conditions provided therein arise.

Respondents also refute petitioners argument

that the increase to 12%, as well as the 70%
limitation on the creditable input tax, the 60-
month amortization on the purchase or
importation of capital goods exceeding
P1,000,000.00, and the 5% final withholding
tax by government agencies, is arbitrary,
oppressive, and confiscatory, and that it
violates the constitutional principle on
progressive taxation, among others.

Finally, respondents manifest that R.A. No.

9337 is the anchor of the governments fiscal
reform agenda. A reform in the value-added
system of taxation is the core revenue measure
that will tilt the balance towards a sustainable
macroeconomic environment necessary for
economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following

provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337,

amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337,
amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC, violate
the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate

the general principles and concepts of value-
added tax (VAT), as the confusion and inevitably,
litigation, breeds from a fallacious notion of its
nature.

The VAT is a tax on spending or consumption.

It is levied on the sale, barter, exchange or lease
of goods or properties and services.[8] Being an
indirect tax on expenditure, the seller of goods
or services may pass on the amount of tax paid
to the buyer,[9] with the seller acting merely as
a tax collector.[10] The burden of VAT is
intended to fall on the immediate buyers and
ultimately, the end-consumers.

In contrast, a direct tax is a tax for which a

taxpayer is directly liable on the transaction or
business it engages in, without transferring the
burden to someone else.[11] Examples are
individual and corporate income taxes, transfer
taxes, and residence taxes.[12]

In the Philippines, the value-added system of

sales taxation has long been in existence, albeit
in a different mode. Prior to 1978, the system
was a single-stage tax computed under the cost
deduction method and was payable only by the
original sellers. The single-stage system was
subsequently modified, and a mixture of the
cost deduction method and tax credit method
was used to determine the value-added tax
payable.[13] Under the tax credit method, an
entity can credit against or subtract from the
VAT charged on its sales or outputs the VAT
paid on its purchases, inputs and imports.[14]

It was only in 1987, when President Corazon C.

Aquino issued Executive Order No. 273, that
the VAT system was rationalized by imposing a
multi-stage tax rate of 0% or 10% on all sales
using the tax credit method.[15]

E.O. No. 273 was followed by R.A. No. 7716 or

the Expanded VAT Law,[16] R.A. No. 8241 or
the Improved VAT Law,[17] R.A. No. 8424 or the
Tax Reform Act of 1997,[18] and finally, the
presently beleaguered R.A. No. 9337, also
referred to by respondents as the VAT Reform
Act.

The Court will now discuss the issues in logical

sequence.

PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following
provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al.,

allege that the Bicameral Conference
Committee exceeded its authority by:

1) Inserting the stand-by authority in favor of

the President in Sections 4, 5, and 6 of R.A. No.
9337;

2) Deleting entirely the no pass-on provisions

found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit

on the amount of input tax to be credited
against the output tax; and
4) Including the amendments introduced only
by Senate Bill No. 1950 regarding other kinds of
taxes in addition to the value-added tax.

Petitioners now beseech the Court to define the

powers of the Bicameral Conference Committee.

It should be borne in mind that the power of

internal regulation and discipline are intrinsic
in any legislative body for, as unerringly
elucidated by Justice Story, [i]f the power did
not exist, it would be utterly impracticable to
transact the business of the nation, either at all,
or at least with decency, deliberation, and
order.[19] Thus, Article VI, Section 16 (3) of the
Constitution provides that each House may
determine the rules of its proceedings. Pursuant
to this inherent constitutional power to
promulgate and implement its own rules of
procedure, the respective rules of each house of
Congress provided for the creation of a
Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules

of House of Representatives provides as follows:

Sec. 88. Conference Committee. In the event

that the House does not agree with the Senate
on the amendment to any bill or joint resolution,
the differences may be settled by the conference
committees of both chambers.

In resolving the differences with the Senate, the

House panel shall, as much as possible, adhere
to and support the House Bill. If the differences
with the Senate are so substantial that they
materially impair the House Bill, the panel shall
report such fact to the House for the latters
appropriate action.

Sec. 89. Conference Committee Reports. . . .

Each report shall contain a detailed, sufficiently
explicit statement of the changes in or
amendments to the subject measure.

...
The Chairman of the House panel may be
interpellated on the Conference Committee
Report prior to the voting thereon. The House
shall vote on the Conference Committee Report
in the same manner and procedure as it votes
on a bill on third and final reading.

Rule XII, Section 35 of the Rules of the Senate

states:

Sec. 35. In the event that the Senate does not

agree with the House of Representatives on the
provision of any bill or joint resolution, the
differences shall be settled by a conference
committee of both Houses which shall meet
within ten (10) days after their composition. The
President shall designate the members of the
Senate Panel in the conference committee with
the approval of the Senate.

Each Conference Committee Report shall

contain a detailed and sufficiently explicit
statement of the changes in, or amendments to
the subject measure, and shall be signed by a
majority of the members of each House panel,
voting separately.

A comparative presentation of the conflicting

House and Senate provisions and a reconciled
version thereof with the explanatory statement
of the conference committee shall be attached
to the report.

...

The creation of such conference committee was

apparently in response to a problem, not
addressed by any constitutional provision,
where the two houses of Congress find
themselves in disagreement over changes or
amendments introduced by the other house in
a legislative bill. Given that one of the most
basic powers of the legislative branch is to
formulate and implement its own rules of
proceedings and to discipline its members, may
the Court then delve into the details of how
Congress complies with its internal rules or how
it conducts its business of passing legislation?
Note that in the present petitions, the issue is
not whether provisions of the rules of both
houses creating the bicameral conference
committee are unconstitutional, but whether
the bicameral conference committee has strictly
complied with the rules of both houses, thereby
remaining within the jurisdiction conferred
upon it by Congress.

In the recent case of Farias vs. The Executive

Secretary,[20] the Court En Banc, unanimously
reiterated and emphasized its adherence to the
enrolled bill doctrine, thus, declining therein
petitioners plea for the Court to go behind the
enrolled copy of the bill. Assailed in said case
was Congresss creation of two sets of bicameral
conference committees, the lack of records of
said committees proceedings, the alleged
violation of said committees of the rules of both
houses, and the disappearance or deletion of
one of the provisions in the compromise bill
submitted by the bicameral conference
committee. It was argued that such
irregularities in the passage of the law nullified
R.A. No. 9006, or the Fair Election Act.

Striking down such argument, the Court held

thus:

Under the enrolled bill doctrine, the signing of a

bill by the Speaker of the House and the Senate
President and the certification of the Secretaries
of both Houses of Congress that it was passed
are conclusive of its due enactment. A review of
cases reveals the Courts consistent adherence
to the rule. The Court finds no reason to deviate
from the salutary rule in this case where the
irregularities alleged by the petitioners mostly
involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is not the
proper forum for the enforcement of these
internal rules of Congress, whether House or
Senate. Parliamentary rules are merely
procedural and with their observance the courts
have no concern. Whatever doubts there may be
as to the formal validity of Rep. Act No. 9006
must be resolved in its favor. The Court
reiterates its ruling in Arroyo vs. De Venecia,
viz.:

But the cases, both here and abroad, in varying

forms of expression, all deny to the courts the
power to inquire into allegations that, in
enacting a law, a House of Congress failed to
comply with its own rules, in the absence of
showing that there was a violation of a
constitutional provision or the rights of private
individuals. In Osmea v. Pendatun, it was held:
At any rate, courts have declared that the rules
adopted by deliberative bodies are subject to
revocation, modification or waiver at the
pleasure of the body adopting them. And it has
been said that Parliamentary rules are merely
procedural, and with their observance, the
courts have no concern. They may be waived or
disregarded by the legislative body.
Consequently, mere failure to conform to
parliamentary usage will not invalidate the
action (taken by a deliberative body) when the
requisite number of members have agreed to a
particular measure.[21] (Emphasis supplied)

The foregoing declaration is exactly in point

with the present cases, where petitioners allege
irregularities committed by the conference
committee in introducing changes or deleting
provisions in the House and Senate bills. Akin
to the Farias case,[22] the present petitions also
raise an issue regarding the actions taken by
the conference committee on matters regarding
Congress compliance with its own internal rules.
As stated earlier, one of the most basic and
inherent power of the legislature is the power to
formulate rules for its proceedings and the
discipline of its members. Congress is the best
judge of how it should conduct its own business
expeditiously and in the most orderly manner.
It is also the sole
concern of Congress to instill discipline among
the members of its conference committee if it
believes that said members violated any of its
rules of proceedings. Even the expanded
jurisdiction of this Court cannot apply to
questions regarding only the internal operation
of Congress, thus, the Court is wont to deny a
review of the internal proceedings of a co-equal
branch of government.

Moreover, as far back as 1994 or more than ten

years ago, in the case of Tolentino vs. Secretary
of Finance,[23] the Court already made the
pronouncement that [i]f a change is desired in
the practice [of the Bicameral Conference
Committee] it must be sought in Congress since
this question is not covered by any
constitutional provision but is only an internal
rule of each house. [24] To date, Congress has
not seen it fit to make such changes adverted to
by the Court. It seems, therefore, that Congress
finds the practices of the bicameral conference
committee to be very useful for purposes of
prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no

blatant irregularities tainted the proceedings of
the bicameral conference committees, the Court
deems it necessary to dwell on the issue. The
Court observes that there was a necessity for a
conference committee because a comparison of
the provisions of House Bill Nos. 3555 and 3705
on one hand, and Senate Bill No. 1950 on the
other, reveals that there were indeed
disagreements. As pointed out in the petitions,
said disagreements were as follows:

House Bill No. 3555

House Bill No.3705

Senate Bill No. 1950

With regard to Stand-By Authority in favor of
President

Provides for 12% VAT on every sale of goods or

properties (amending Sec. 106 of NIRC); 12%
VAT on importation of goods (amending Sec.
107 of NIRC); and 12% VAT on sale of services
and use or lease of properties (amending Sec.
108 of NIRC)

Provides for 12% VAT in general on sales of

goods or properties and reduced rates for sale
of certain locally manufactured goods and
petroleum products and raw materials to be
used in the manufacture thereof (amending Sec.
106 of NIRC); 12% VAT on importation of goods
and reduced rates for certain imported products
including petroleum products (amending Sec.
107 of NIRC); and 12% VAT on sale of services
and use or lease of properties and a reduced
rate for certain services including power
generation (amending Sec. 108 of NIRC)

Provides for a single rate of 10% VAT on sale of

goods or properties (amending Sec. 106 of NIRC),
10% VAT on sale of services including sale of
electricity by generation companies,
transmission and distribution companies, and
use or lease of properties (amending Sec. 108 of
NIRC)

With regard to the no pass-on provision

No similar provision

Provides that the VAT imposed on power

generation and on the sale of petroleum
products shall be absorbed by generation
companies or sellers, respectively, and shall not
be passed on to consumers

Provides that the VAT imposed on sales of

electricity by generation companies and
services of transmission companies and
distribution companies, as well as those of
franchise grantees of electric utilities shall not
apply to residential
end-users. VAT shall be absorbed by generation,
transmission, and distribution companies.
With regard to 70% limit on input tax credit

Provides that the input tax credit for capital

goods on which a VAT has been paid shall be
equally distributed over 5 years or the
depreciable life of such capital goods; the input
tax credit for goods and services other than
capital goods shall not exceed 5% of the total
amount of such goods and services; and for
persons engaged in retail trading of goods, the
allowable input tax credit shall not exceed 11%
of the total amount of goods purchased.

No similar provision

Provides that the input tax credit for capital

goods on which a VAT has been paid shall be
equally distributed over 5 years or the
depreciable life of such capital goods; the input
tax credit for goods and services other than
capital goods shall not exceed 90% of the output
VAT.

With regard to amendments to be made to NIRC

provisions regarding income and excise taxes

No similar provision

No similar provision
Provided for amendments to several NIRC
provisions regarding corporate income,
percentage, franchise and excise taxes

The disagreements between the provisions in

the House bills and the Senate bill were with
regard to (1) what rate of VAT is to be imposed;
(2) whether only the VAT imposed on electricity
generation, transmission and distribution
companies should not be passed on to
consumers, as proposed in the Senate bill, or
both the VAT imposed on electricity generation,
transmission and distribution companies and
the VAT imposed on sale of petroleum products
should not be passed on to consumers, as
proposed in the House bill; (3) in what manner
input tax credits should be limited; (4) and
whether the NIRC provisions on corporate
income taxes, percentage, franchise and excise
taxes should be amended.

There being differences and/or disagreements

on the foregoing provisions of the House and
Senate bills, the Bicameral Conference
Committee was mandated by the rules of both
houses of Congress to act on the same by
settling said differences and/or disagreements.
The Bicameral Conference Committee acted on
the disagreeing provisions by making the
following changes:

1. With regard to the disagreement on the rate

of VAT to be imposed, it would appear from the
Conference Committee Report that the
Bicameral Conference Committee tried to bridge
the gap in the difference between the 10% VAT
rate proposed by the Senate, and the various
rates with 12% as the highest VAT rate
proposed by the House, by striking a
compromise whereby the present 10% VAT rate
would be retained until certain conditions arise,
i.e., the value-added tax collection as a
percentage of gross domestic product (GDP) of
the previous year exceeds 2 4/5%, or National
Government deficit as a percentage of GDP of
the previous year exceeds 1%, when the
President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT
to 12% effective January 1, 2006.

2. With regard to the disagreement on whether

only the VAT imposed on electricity generation,
transmission and distribution companies
should not be passed on to consumers or
whether both the VAT imposed on electricity
generation, transmission and distribution
companies and the VAT imposed on sale of
petroleum products may be passed on to
consumers, the Bicameral Conference
Committee chose to settle such disagreement by
altogether deleting from its Report any no pass-
on provision.

3. With regard to the disagreement on whether

input tax credits should be limited or not, the
Bicameral Conference Committee decided to
adopt the position of the House by putting a
limitation on the amount of input tax that may
be credited against the output tax, although it
crafted its own language as to the amount of the
limitation on input tax credits and the manner
of computing the same by providing thus:

(A) Creditable Input Tax. . . .

...

Provided, The input tax on goods purchased or

imported in a calendar month for use in trade
or business for which deduction for
depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds
one million Pesos (P1,000,000.00): PROVIDED,
however, that if the estimated useful life of the
capital good is less than five (5) years, as used
for depreciation purposes, then the input VAT
shall be spread over such shorter period: . . .
(B) Excess Output or Input Tax. If at the end of
any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the VAT-
registered person. If the input tax exceeds the
output tax, the excess shall be carried over to
the succeeding quarter or quarters: PROVIDED
that the input tax inclusive of input VAT carried
over from the previous quarter that may be
credited in every quarter shall not exceed
seventy percent (70%) of the output VAT:
PROVIDED, HOWEVER, THAT any input tax
attributable to zero-rated sales by a VAT-
registered person may at his option be refunded
or credited against other internal revenue
taxes, . . .

4. With regard to the amendments to other

provisions of the NIRC on corporate income tax,
franchise, percentage and excise taxes, the
conference committee decided to include such
amendments and basically adopted the
provisions found in Senate Bill No. 1950, with
some changes as to the rate of the tax to be
imposed.

Under the provisions of both the Rules of the

House of Representatives and Senate Rules, the
Bicameral Conference Committee is mandated
to settle the differences between the disagreeing
provisions in the House bill and the Senate bill.
The term settle is synonymous to reconcile and
harmonize.[25] To reconcile or harmonize
disagreeing provisions, the Bicameral
Conference Committee may then (a) adopt the
specific provisions of either the House bill or
Senate bill, (b) decide that neither provisions in
the House bill or the provisions in the Senate
bill would
be carried into the final form of the bill, and/or
(c) try to arrive at a compromise between the
disagreeing provisions.
In the present case, the changes introduced by
the Bicameral Conference Committee on
disagreeing provisions were meant only to
reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent
that is wholly foreign to the subject embraced
by the original provisions.

The so-called stand-by authority in favor of the

President, whereby the rate of 10% VAT wanted
by the Senate is retained until such time that
certain conditions arise when the 12% VAT
wanted by the House shall be imposed, appears
to be a compromise to try to bridge the
difference in the rate of VAT proposed by the two
houses of Congress. Nevertheless, such
compromise is still totally within the subject of
what rate of VAT should be imposed on
taxpayers.

The no pass-on provision was deleted altogether.

In the transcripts of the proceedings of the
Bicameral Conference Committee held on May
10, 2005, Sen. Ralph Recto, Chairman of the
Senate Panel, explained the reason for deleting
the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law

or the VAT bill simple. And we were thinking
that no sector should be a beneficiary of
legislative grace, neither should any sector be
discriminated on. The VAT is an indirect tax. It
is a pass on-tax. And lets keep it plain and
simple. Lets not confuse the bill and put a no
pass-on provision. Two-thirds of the world have
a VAT system and in this two-thirds of the globe,
I have yet to see a VAT with a no pass-though
provision. So, the thinking of the Senate is
basically simple, lets keep the VAT simple.[26]
(Emphasis supplied)

Rep. Teodoro Locsin further made the

manifestation that the no pass-on provision
never really enjoyed the support of either
House.[27]
With regard to the amount of input tax to be
credited against output tax, the Bicameral
Conference Committee came to a compromise
on the percentage rate of the limitation or cap
on such input tax credit, but again, the change
introduced by the Bicameral Conference
Committee was totally within the intent of both
houses to put a cap on input tax that may be
credited against the output tax. From the
inception of the subject revenue bill in the
House of Representatives, one of the major
objectives was to plug a glaring loophole in the
tax policy and administration by creating vital
restrictions on the claiming of input VAT tax
credits . . . and [b]y introducing limitations on
the claiming of tax credit, we are capping a
major leakage that has placed our collection
efforts at an apparent disadvantage.[28]

As to the amendments to NIRC provisions on

taxes other than the value-added tax proposed
in Senate Bill No. 1950, since said provisions
were among those referred to it, the conference
committee had to act on the same and it
basically adopted the version of the Senate.

Thus, all the changes or modifications made by

the Bicameral Conference Committee were
germane to subjects of the provisions referred
to it for reconciliation. Such being the case, the
Court does not see any grave abuse of discretion
amounting to lack or excess of jurisdiction
committed by the Bicameral Conference
Committee. In the earlier cases of Philippine
Judges Association vs. Prado[29] and Tolentino
vs. Secretary of Finance,[30] the Court
recognized the long-standing legislative practice
of giving said conference committee ample
latitude for compromising differences between
the Senate and the House. Thus, in the
Tolentino case, it was held that:

. . . it is within the power of a conference

committee to include in its report an entirely
new provision that is not found either in the
House bill or in the Senate bill. If the committee
can propose an amendment consisting of one or
two provisions, there is no reason why it cannot
propose several provisions, collectively
considered as an amendment in the nature of a
substitute, so long as such amendment is
germane to the subject of the bills before the
committee. After all, its report was not final but
needed the approval of both houses of Congress
to become valid as an act of the legislative
department. The charge that in this case the
Conference Committee acted as a third
legislative chamber is thus without any
basis.[31] (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI,

Section 26(2) of the Constitution on the No-
Amendment Rule

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a

law unless it has passed three readings on
separate days, and printed copies thereof in its
final form have been distributed to its Members
three days before its passage, except when the
President certifies to the necessity of its
immediate enactment to meet a public calamity
or emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the
vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the
Journal.

Petitioners argument that the practice where a

bicameral conference committee is allowed to
add or delete provisions in the House bill and
the Senate bill after these had passed three
readings is in effect a circumvention of the no
amendment rule (Sec. 26 (2), Art. VI of the 1987
Constitution), fails to convince the Court to
deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the

Committees Report in these cases must have
undergone three readings in each of the two
houses. If that be the case, there would be no
end to negotiation since each house may seek
modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as

referring only to bills introduced for the first
time in either house of Congress, not to the
conference committee report.[32] (Emphasis
supplied)

The Court reiterates here that the no-

amendment rule refers only to the procedure to
be followed by each house of Congress with
regard to bills initiated in each of said respective
houses, before said bill is transmitted to the
other house for its concurrence or amendment.
Verily, to construe said provision in a way as to
proscribe any further changes to a bill after one
house has voted on it would lead to absurdity
as this would mean that the other house of
Congress would be deprived of its constitutional
power to amend or introduce changes to said
bill. Thus, Art. VI, Sec. 26 (2) of the Constitution
cannot be taken to mean that the introduction
by the Bicameral Conference Committee of
amendments and modifications to disagreeing
provisions in bills that have been acted upon by
both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI,

Section 24 of the Constitution on Exclusive
Origination of Revenue Bills

Coming to the issue of the validity of the

amendments made regarding the NIRC
provisions on corporate income taxes and
percentage, excise taxes. Petitioners refer to the
following provisions, to wit:

Section 27

Rates of Income Tax on Domestic Corporation

28(A)(1)

Tax on Resident Foreign Corporation

28(B)(1)

Inter-corporate Dividends

34(B)(1)

Inter-corporate Dividends

116

Tax on Persons Exempt from VAT

117

Percentage Tax on domestic carriers and

keepers of Garage

119

Tax on franchises

121

Tax on banks and Non-Bank Financial

Intermediaries

148

Excise Tax on manufactured oils and other

fuels

151

Excise Tax on mineral products

236

Registration requirements

237

Issuance of receipts or sales or commercial

invoices
288

Disposition of Incremental Revenue

Petitioners claim that the amendments to these

provisions of the NIRC did not at all originate
from the House. They aver that House Bill No.
3555 proposed amendments only regarding
Sections 106, 107, 108, 110 and 114 of the
NIRC, while House Bill No. 3705 proposed
amendments only to Sections 106, 107,108,
109, 110 and 111 of the NIRC; thus, the other
sections of the NIRC which the Senate amended
but which amendments were not found in the
House bills are not intended to be amended by
the House of Representatives. Hence, they
argue that since the proposed amendments did
not originate from the House, such
amendments are a violation of Article VI,
Section 24 of the Constitution.

The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills,

bills authorizing increase of the public debt,
bills of local application, and private bills shall
originate exclusively in the House of
Representatives but the Senate may propose or
concur with amendments.

In the present cases, petitioners admit that it

was indeed House Bill Nos. 3555 and 3705 that
initiated the move for amending provisions of
the NIRC dealing mainly with the value-added
tax. Upon transmittal of said House bills to the
Senate, the Senate came out with Senate Bill No.
1950 proposing amendments not only to NIRC
provisions on the value-added tax but also
amendments to NIRC provisions on other kinds
of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value-
added tax, which is the only kind of tax being
amended in the House bills, still within the
purview of the constitutional provision
authorizing the Senate to propose or concur
with amendments to a revenue bill that
originated from the House?

The foregoing question had been squarely

answered in the Tolentino case, wherein the
Court held, thus:

. . . To begin with, it is not the law but the

revenue bill which is required by the
Constitution to originate exclusively in the
House of Representatives. It is important to
emphasize this, because a bill originating in the
House may undergo such extensive changes in
the Senate that the result may be a rewriting of
the whole. . . . At this point, what is important
to note is that, as a result of the Senate action,
a distinct bill may be produced. To insist that a
revenue statute and not only the bill which
initiated the legislative process culminating in
the enactment of the law must substantially be
the same as the House bill would be to deny the
Senates power not only to concur with
amendments but also to propose amendments.
It would be to violate the coequality of legislative
power of the two houses of Congress and in fact
make the House superior to the Senate.

Given, then, the power of the Senate to propose

amendments, the Senate can propose its own
version even with respect to bills which are
required by the Constitution to originate in the
House.
...

Indeed, what the Constitution simply means is

that the initiative for filing revenue, tariff or tax
bills, bills authorizing an increase of the public
debt, private bills and bills of local application
must come from the House of Representatives
on the theory that, elected as they are from the
districts, the members of the House can be
expected to be more sensitive to the local needs
and problems. On the other hand, the senators,
who are elected at large, are expected to
approach the same problems from the national
perspective. Both views are thereby made to
bear on the enactment of such laws.[33]
(Emphasis supplied)

Since there is no question that the revenue bill

exclusively originated in the House of
Representatives, the Senate was acting within
its
constitutional power to introduce amendments
to the House bill when it included provisions in
Senate Bill No. 1950 amending corporate
income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the
Constitution does not contain any prohibition
or limitation on the extent of the amendments
that may be introduced by the Senate to the
House revenue bill.

Furthermore, the amendments introduced by

the Senate to the NIRC provisions that had not
been touched in the House bills are still in
furtherance of the intent of the House in
initiating the subject revenue bills. The
Explanatory Note of House Bill No. 1468, the
very first House bill introduced on the floor,
which was later substituted by House Bill No.
3555, stated:

One of the challenges faced by the present

administration is the urgent and daunting task
of solving the countrys serious financial
problems. To do this, government expenditures
must be strictly monitored and controlled and
revenues must be significantly increased. This
may be easier said than done, but our fiscal
authorities are still optimistic the government
will be operating on a balanced budget by the
year 2009. In fact, several measures that will
result to significant expenditure savings have
been identified by the administration. It is
supported with a credible package of revenue
measures that include measures to improve tax
administration and control the leakages in
revenues from income taxes and the value-
added tax (VAT). (Emphasis supplied)

Rep. Eric D. Singson, in his sponsorship speech

for House Bill No. 3555, declared that:

In the budget message of our President in the

year 2005, she reiterated that we all
acknowledged that on top of our agenda must
be the restoration of the health of our fiscal
system.

In order to considerably lower the consolidated

public sector deficit and eventually achieve a
balanced budget by the year 2009, we need to
seize windows of opportunities which might
seem poignant in the beginning, but in the long
run prove effective and beneficial to the overall
status of our economy. One such opportunity is
a review of existing tax rates, evaluating the
relevance given our present conditions.[34]
(Emphasis supplied)

Notably therefore, the main purpose of the bills

emanating from the House of Representatives is
to bring in sizeable revenues for the government
to supplement our countrys serious financial
problems, and improve tax administration and
control of the leakages in revenues from income
taxes and value-added taxes. As these house
bills were transmitted to the Senate, the latter,
approaching the measures from the point of
national perspective, can introduce
amendments within the purposes of those bills.
It can provide for ways that would soften the
impact of the VAT measure on the consumer,
i.e., by distributing the burden across all
sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship
speech of Sen. Ralph Recto on why the
provisions on income tax on corporation were
included is worth quoting:

All in all, the proposal of the Senate Committee

on Ways and Means will raise P64.3 billion in
additional revenues annually even while by
mitigating prices of power, services and
petroleum products.

However, not all of this will be wrung out of VAT.

In fact, only P48.7 billion amount is from the
VAT on twelve goods and services. The rest of
the tab P10.5 billion- will be picked by
corporations.

What we therefore prescribe is a burden sharing

between corporate Philippines and the
consumer. Why should the latter bear all the
pain? Why should the fiscal salvation be only on
the burden of the consumer?

The corporate worlds equity is in form of the

increase in the corporate income tax from 32 to
35 percent, but up to 2008 only. This will raise
P10.5 billion a year. After that, the rate will slide
back, not to its old rate of 32 percent, but two
notches lower, to 30 percent.

Clearly, we are telling those with the capacity to

pay, corporations, to bear with this emergency
provision that will be in effect for 1,200 days,
while we put our fiscal house in order. This
fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction

awaits them. We intend to keep the length of
their sacrifice brief. We would like to assure
them that not because there is a light at the end
of the tunnel, this government will keep on
making the tunnel long.

The responsibility will not rest solely on the

weary shoulders of the small man. Big business
will be there to share the burden.[35]

As the Court has said, the Senate can propose

amendments and in fact, the amendments
made on provisions in the tax on income of
corporations are germane to the purpose of the
house bills which is to raise revenues for the
government.
Likewise, the Court finds the sections referring
to other percentage and excise taxes germane to
the reforms to the VAT system, as these sections
would cushion the effects of VAT on consumers.
Considering that certain goods and services
which were subject to percentage tax and excise
tax would no longer be VAT-exempt, the
consumer would be burdened more as they
would be paying the VAT in addition to these
taxes. Thus, there is a need to amend these
sections to soften the impact of VAT. Again, in
his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we

will reduce to zero the present excise tax on
bunker fuel, to lessen the effect of a VAT on this
product.

For electric utilities like Meralco, we will wipe

out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy

the VAT on oil products, so as not to destroy the
VAT chain, we will however bring down the
excise tax on socially sensitive products such as
diesel, bunker, fuel and kerosene.

...

What do all these exercises point to? These are

not contortions of giving to the left hand what
was taken from the right. Rather, these sprang
from our concern of softening the impact of VAT,
so that the people can cushion the blow of
higher prices they will have to pay as a result of
VAT.[36]

The other sections amended by the Senate

pertained to matters of tax administration
which are necessary for the implementation of
the changes in the VAT system.

To reiterate, the sections introduced by the

Senate are germane to the subject matter and
purposes of the house bills, which is to
supplement our countrys fiscal deficit, among
others. Thus, the Senate acted within its power
to propose those amendments.

SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108 of the
NIRC, violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al.,

Pimentel, Jr., et al., and Escudero, et al.
contend in common that Sections 4, 5 and 6 of
R.A. No. 9337, amending Sections 106, 107 and
108, respectively, of the NIRC giving the
President the stand-by authority to raise the
VAT rate from 10% to 12% when a certain
condition is met, constitutes undue delegation
of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended,

is hereby further amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or

Properties.

(A) Rate and Base of Tax. There shall be levied,

assessed and collected on every sale, barter or
exchange of goods or properties, a value-added
tax equivalent to ten percent (10%) of the gross
selling price or gross value in money of the
goods or properties sold, bartered or exchanged,
such tax to be paid by the seller or transferor:
provided, that the President, upon the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%), after
any of the following conditions has been
satisfied.

(i) value-added tax collection as a

percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth
percent (2 4/5%) or

(ii) national government deficit as a percentage

of GDP of the previous year exceeds one and
one-half percent (1 %).

SEC. 5. Section 107 of the same Code, as

amended, is hereby further amended to read as
follows:

SEC. 107. Value-Added Tax on Importation of

Goods.
(A) In General. There shall be levied, assessed
and collected on every importation of goods a
value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if any,
and other charges, such tax to be paid by the
importer prior to the release of such goods from
customs custody: Provided, That where the
customs duties are determined on the basis of
the quantity or volume of the goods, the value-
added tax shall be based on the landed cost
plus excise taxes, if any: provided, further, that
the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve
percent (12%) after any of the following
conditions has been satisfied.

(i) value-added tax collection as a percentage of

Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or
(ii) national government deficit as a percentage
of GDP of the previous year exceeds one and
one-half percent (1 %).
SEC. 6. Section 108 of the same Code, as
amended, is hereby further amended to read as
follows:

SEC. 108. Value-added Tax on Sale of Services

and Use or Lease of Properties

(A) Rate and Base of Tax. There shall be levied,

assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services:
provided, that the President, upon the
recommendation of the Secretary of Finance,
shall, effective January 1, 2006, raise the rate
of value-added tax to twelve percent (12%), after
any of the following conditions has been
satisfied.

(i) value-added tax collection as a percentage of

Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%)
or
(ii) national government deficit as a percentage
of GDP of the previous year exceeds one and
one-half percent (1 %). (Emphasis supplied)

Petitioners allege that the grant of the stand-by

authority to the President to increase the VAT
rate is a virtual abdication by Congress of its
exclusive power to tax because such delegation
is not within the purview of Section 28 (2),
Article VI of the Constitution, which provides:

The Congress may, by law, authorize the

President to fix within specified limits, and may
impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or
imposts within the framework of the national
development program of the government.

They argue that the VAT is a tax levied on the

sale, barter or exchange of goods and properties
as well as on the sale or exchange of services,
which cannot be included within the purview of
tariffs under the exempted delegation as the
latter refers to customs duties, tolls or tribute
payable upon merchandise to the government
and usually imposed on goods or merchandise
imported or exported.

Petitioners ABAKADA GURO Party List, et al.,

further contend that delegating to the President
the legislative power to tax is contrary to
republicanism. They insist that accountability,
responsibility and transparency should dictate
the actions of Congress and they should not
pass to the President the decision to impose
taxes. They also argue that the law also
effectively nullified the Presidents power of
control, which includes the authority to set
aside and nullify the acts of her subordinates
like the Secretary of Finance, by mandating the
fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the

President has ample powers to cause, influence
or create the conditions provided by the law to
bring about either or both the conditions
precedent.

On the other hand, petitioners Escudero, et al.

find bizarre and revolting the situation that the
imposition of the 12% rate would be subject to
the whim of the Secretary of Finance, an
unelected bureaucrat, contrary to the principle
of no taxation without representation. They
submit that the Secretary of Finance is not
mandated to give a favorable recommendation
and he may not even give his recommendation.
Moreover, they allege that no guiding standards
are provided in the law on what basis and as to
how he will make his recommendation. They
claim, nonetheless, that any recommendation
of the Secretary of Finance can easily be
brushed aside by the President since the former
is a mere alter ego of the latter, such that,
ultimately, it is the President who decides
whether to impose the increased tax rate or not.
A brief discourse on the principle of non-
delegation of powers is instructive.

The principle of separation of powers ordains

that each of the three great branches of
government has exclusive cognizance of and is
supreme in matters falling within its own
constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers
is the principle of non-delegation of powers, as
expressed in the Latin maxim: potestas delegata
non delegari potest which means what has been
delegated, cannot be delegated.[38] This
doctrine is based on the ethical principle that
such as delegated power constitutes not only a
right but a duty to be performed by the delegate
through the instrumentality of his own
judgment and not through the intervening mind
of another.[39]

With respect to the Legislature, Section 1 of

Article VI of the Constitution provides that the
Legislative power shall be vested in the
Congress of the Philippines which shall consist
of a Senate and a House of Representatives. The
powers which Congress is prohibited from
delegating are those which are strictly, or
inherently and exclusively, legislative. Purely
legislative power, which can never be delegated,
has been described as the authority to make a
complete law complete as to the time when it
shall take effect and as to whom it shall be
applicable and to determine the expediency of
its enactment.[40] Thus, the rule is that in order
that a court may be justified in holding a statute
unconstitutional as a delegation of legislative
power, it must appear that the power involved
is purely legislative in nature that is, one
appertaining exclusively to the legislative
department. It is the nature of the power, and
not the liability of its use or the manner of its
exercise, which determines the validity of its
delegation.

Nonetheless, the general rule barring delegation

of legislative powers is subject to the following
recognized limitations or exceptions:
(1) Delegation of tariff powers to the President
under Section 28 (2) of Article VI of the
Constitution;

(2) Delegation of emergency powers to the

President under Section 23 (2) of Article VI of
the Constitution;

(3) Delegation to the people at large;

(4) Delegation to local governments; and

(5) Delegation to administrative bodies.

In every case of permissible delegation, there

must be a showing that the delegation itself is
valid. It is valid only if the law (a) is complete in
itself, setting forth therein the policy to be
executed, carried out, or implemented by the
delegate;[41] and (b) fixes a standard the limits
of which are sufficiently determinate and
determinable to which the delegate must
conform in the performance of his functions.[42]
A sufficient standard is one which defines
legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to
apply it. It indicates the circumstances under
which the legislative command is to be
effected.[43] Both tests are intended to prevent
a total transference of legislative authority to
the delegate, who is not allowed to step into the
shoes of the legislature and exercise a power
essentially legislative.[44]

In People vs. Vera,[45] the Court, through

eminent Justice Jose P. Laurel, expounded on
the concept and extent of delegation of power in
this wise:

In testing whether a statute constitutes an

undue delegation of legislative power or not, it
is usual to inquire whether the statute was
complete in all its terms and provisions when it
left the hands of the legislature so that nothing
was left to the judgment of any other appointee
or delegate of the legislature.

...

The true distinction, says Judge Ranney, is

between the delegation of power to make the law,
which necessarily involves a discretion as to
what it shall be, and conferring an authority or
discretion as to its execution, to be exercised
under and in pursuance of the law. The first
cannot be done; to the latter no valid objection
can be made.

...

It is contended, however, that a legislative act

may be made to the effect as law after it leaves
the hands of the legislature. It is true that laws
may be made effective on certain contingencies,
as by proclamation of the executive or the
adoption by the people of a particular
community. In Wayman vs. Southard, the
Supreme Court of the United States ruled that
the legislature may delegate a power not
legislative which it may itself rightfully exercise.
The power to ascertain facts is such a power
which may be delegated. There is nothing
essentially legislative in ascertaining the
existence of facts or conditions as the basis of
the taking into effect of a law. That is a mental
process common to all branches of the
government. Notwithstanding the apparent
tendency, however, to relax the rule prohibiting
delegation of legislative authority on account of
the complexity arising from social and economic
forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his
work on Constitutional Limitations finds
restatement in Prof. Willoughby's treatise on the
Constitution of the United States in the
following language speaking of declaration of
legislative power to administrative agencies:
The principle which permits the legislature to
provide that the administrative agent may
determine when the circumstances are such as
require the application of a law is defended
upon the ground that at the time this authority
is granted, the rule of public policy, which is the
essence of the legislative act, is determined by
the legislature. In other words, the legislature,
as it is its duty to do, determines that, under
given circumstances, certain executive or
administrative action is to be taken, and that,
under other circumstances, different or no
action at all is to be taken. What is thus left to
the administrative official is not the legislative
determination of what public policy demands,
but simply the ascertainment of what the facts
of the case require to be done according to the
terms of the law by which he is governed. The
efficiency of an Act as a declaration of legislative
will must, of course, come from Congress, but
the ascertainment of the contingency upon
which the Act shall take effect may be left to
such agencies as it may designate. The
legislature, then, may provide that a law shall
take effect upon the happening of future
specified contingencies leaving to some other
person or body the power to determine when the
specified contingency has arisen. (Emphasis
supplied).[46]

In Edu vs. Ericta,[47] the Court reiterated:

What cannot be delegated is the authority

under the Constitution to make laws and to
alter and repeal them; the test is the
completeness of the statute in all its terms and
provisions when it leaves the hands of the
legislature. To determine whether or not there
is an undue delegation of legislative power, the
inquiry must be directed to the scope and
definiteness of the measure enacted. The
legislative does not abdicate its functions when
it describes what job must be done, who is to do
it, and what is the scope of his authority. For a
complex economy, that may be the only way in
which the legislative process can go forward. A
distinction has rightfully been made between
delegation of power to make the laws which
necessarily involves a discretion as to what it
shall be, which constitutionally may not be
done, and delegation of authority or discretion
as to its execution to be exercised under and in
pursuance of the law, to which no valid
objection can be made. The Constitution is thus
not to be regarded as denying the legislature the
necessary resources of flexibility and
practicability. (Emphasis supplied).[48]

Clearly, the legislature may delegate to

executive officers or bodies the power to
determine certain facts or conditions, or the
happening of contingencies, on which the
operation of a statute is, by its terms, made to
depend, but the legislature must prescribe
sufficient standards, policies or limitations on
their authority.[49] While the power to tax
cannot be delegated to executive agencies,
details as to the enforcement and
administration of an exercise of such power
may be left to them, including the power to
determine the existence of facts on which its
operation depends.[50]

The rationale for this is that the preliminary

ascertainment of facts as basis for the
enactment of legislation is not of itself a
legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating
information and making recommendations is
the kind of subsidiary activity which the
legislature may perform through its members,
or which it may delegate to others to perform.
Intelligent legislation on the complicated
problems of modern society is impossible in the
absence of accurate information on the part of
the legislators, and any reasonable method of
securing such information is proper.[51] The
Constitution as a continuously operative
charter of government does not require that
Congress find for itself
every fact upon which it desires to base
legislative action or that it make for itself
detailed determinations which it has declared to
be prerequisite to application of legislative
policy to particular facts and circumstances
impossible for Congress itself properly to
investigate.[52]

In the present case, the challenged section of

R.A. No. 9337 is the common proviso in
Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation

of the Secretary of Finance, shall, effective
January 1, 2006, raise the rate of value-added
tax to twelve percent (12%), after any of the
following conditions has been satisfied:

(i) Value-added tax collection as a percentage of

Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%);
or

(ii) National government deficit as a percentage

of GDP of the previous year exceeds one and
one-half percent (1 %).

The case before the Court is not a delegation of

legislative power. It is simply a delegation of
ascertainment of facts upon which enforcement
and administration of the increase rate under
the law is contingent. The legislature has made
the operation of the 12% rate effective January
1, 2006, contingent upon a specified fact or
condition. It leaves the entire operation or non-
operation of the 12% rate upon factual matters
outside of the control of the executive.

No discretion would be exercised by the

President. Highlighting the absence of
discretion is the fact that the word shall is used
in the common proviso. The use of the word
shall connotes a mandatory order. Its use in a
statute denotes an imperative obligation and is
inconsistent with the idea of discretion.[53]
Where the law is clear and unambiguous, it
must be taken to mean exactly what it says, and
courts have no choice but to see to it that the
mandate is obeyed.[54]
Thus, it is the ministerial duty of the President
to immediately impose the 12% rate upon the
existence of any of the conditions specified by
Congress. This is a duty which cannot be
evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of
discretion by the President does not come into
play. It is a clear directive to impose the 12%
VAT rate when the specified conditions are
present. The time of taking into effect of the 12%
VAT rate is based on the happening of a certain
specified contingency, or upon the
ascertainment of certain facts or conditions by
a person or body other than the legislature itself.

The Court finds no merit to the contention of

petitioners ABAKADA GURO Party List, et al.
that the law effectively nullified the Presidents
power of control over the Secretary of Finance
by mandating the fixing of the tax rate by the
President upon the recommendation of the
Secretary of Finance. The Court cannot also
subscribe to the position of petitioners
Pimentel, et al. that the word shall should be
interpreted to mean may in view of the phrase
upon the recommendation of the Secretary of
Finance. Neither does the Court find persuasive
the submission of petitioners Escudero, et al.
that any recommendation by the Secretary of
Finance can easily be brushed aside by the
President since the former is a mere alter ego of
the latter.

When one speaks of the Secretary of Finance as

the alter ego of the President, it simply means
that as head of the Department of Finance he is
the assistant and agent of the Chief Executive.
The multifarious executive and administrative
functions of the Chief Executive are performed
by and through the executive departments, and
the acts of the secretaries of such departments,
such as the Department of Finance, performed
and promulgated in the regular course of
business, are, unless disapproved or reprobated
by the Chief Executive, presumptively the acts
of the Chief Executive. The Secretary of Finance,
as such, occupies a political position and holds
office in an advisory capacity, and, in the
language of Thomas Jefferson, "should be of the
President's bosom confidence" and, in the
language of Attorney-General Cushing, is
subject to the direction of the President."[55]

In the present case, in making his

recommendation to the President on the
existence of either of the two conditions, the
Secretary of Finance is not acting as the alter
ego of the President or even her subordinate. In
such instance, he is not subject to the power of
control and direction of the President. He is
acting as the agent of the legislative department,
to determine and declare the event upon which
its expressed will is to take effect.[56] The
Secretary of Finance becomes the means or tool
by which legislative policy is determined and
implemented, considering that he possesses all
the facilities to gather data and information and
has a much broader perspective to properly
evaluate them. His function is to gather and
collate statistical data and other pertinent
information and verify if any of the two
conditions laid out by Congress is present. His
personality in such instance is in reality but a
projection of that of Congress. Thus, being the
agent of Congress and not of the President, the
President cannot alter or modify or nullify, or
set aside the findings of the Secretary of
Finance and to substitute the judgment of the
former for that of the latter.

Congress simply granted the Secretary of

Finance the authority to ascertain the existence
of a fact, namely, whether by December 31,
2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of
the previous year exceeds two and four-fifth
percent (24/5%) or the national government
deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1%). If
either of these two instances has occurred, the
Secretary of Finance, by legislative mandate,
must submit such information to the President.
Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no
undue delegation of legislative power but only of
the discretion as to the execution of a law. This
is constitutionally permissible.[57] Congress
does not abdicate its functions or unduly
delegate power when it describes what job must
be done, who must do it, and what is the scope
of his authority; in our complex economy that is
frequently the only way in which the legislative
process can go forward.[58]

As to the argument of petitioners ABAKADA

GURO Party List, et al. that delegating to the
President the legislative power to tax is contrary
to the principle of republicanism, the same
deserves scant consideration. Congress did not
delegate the power to tax but the mere
implementation of the law. The intent and will
to increase the VAT rate to 12% came from
Congress and the task of the President is to
simply execute the legislative policy. That
Congress chose to do so in such a manner is not
within the province of the Court to inquire into,
its task being to interpret the law.[59]

The insinuation by petitioners Pimentel, et al.

that the President has ample powers to cause,
influence or create the conditions to bring about
either or both the conditions precedent does not
deserve any merit as this argument is highly
speculative. The Court does not rule on
allegations which are manifestly conjectural, as
these may not exist at all. The Court deals with
facts, not fancies; on realities, not appearances.
When the Court acts on appearances instead of
realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose

an Unfair and Unnecessary Additional Tax
Burden

Petitioners Pimentel, et al. argue that the 12%

increase in the VAT rate imposes an unfair and
additional tax burden on the people. Petitioners
also argue that the 12% increase, dependent on
any of the 2 conditions set forth in the contested
provisions, is ambiguous because it does not
state if the VAT rate would be returned to the
original 10% if the rates are no longer satisfied.
Petitioners also argue that such rate is unfair
and unreasonable, as the people are unsure of
the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and

6 of R.A. No. 9337, if any of the two conditions
set forth therein are satisfied, the President
shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not
provide for a return to the 10% rate nor does it
empower the President to so revert if, after the
rate is increased to 12%, the VAT collection goes
below the 24/5 of the GDP of the previous year
or that the national government deficit as a
percentage of GDP of the previous year does not
exceed 1%.

Therefore, no statutory construction or

interpretation is needed. Neither can
conditions or limitations be introduced where
none is provided for. Rewriting the law is a
forbidden ground that only Congress may tread
upon.[60]

Thus, in the absence of any provision providing

for a return to the 10% rate, which in this case
the Court finds none, petitioners argument is,
at best, purely speculative. There is no basis for
petitioners fear of a fluctuating VAT rate
because the law itself does not provide that the
rate should go back to 10% if the conditions
provided in Sections 4, 5 and 6 are no longer
present. The rule is that where the provision of
the law is clear and unambiguous, so that there
is no occasion for the court's seeking the
legislative intent, the law must be taken as it is,
devoid of judicial addition or subtraction.[61]

Petitioners also contend that the increase in the

VAT rate, which was allegedly an incentive to
the President to raise the VAT collection to at
least 2 4/5 of the GDP of the previous year,
should be based on fiscal adequacy.
Petitioners obviously overlooked that increase
in VAT collection is not the only condition.
There is another condition, i.e., the national
government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent
(1 %).

Respondents explained the philosophy behind

these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12%

have economic or fiscal meaning. If VAT/GDP is
less than 2.8%, it means that government has
weak or no capability of implementing the VAT
or that VAT is not effective in the function of the
tax collection. Therefore, there is no value to
increase it to 12% because such action will also
be ineffectual.

2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when

deficit/GDP is 1.5% or less means the fiscal
condition of government has reached a
relatively sound position or is towards the
direction of a balanced budget position.
Therefore, there is no need to increase the VAT
rate since the fiscal house is in a relatively
healthy position. Otherwise stated, if the ratio
is more than 1.5%, there is indeed a need to
increase the VAT rate.[62]

That the first condition amounts to an incentive

to the President to increase the VAT collection
does not render it unconstitutional so long as
there is a public purpose for which the law was
passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the
need for a raise in revenue.

The principle of fiscal adequacy as a

characteristic of a sound tax system was
originally stated by Adam Smith in his Canons
of Taxation (1776), as:
IV. Every tax ought to be so contrived as both to
take out and to keep out of the pockets of the
people as little as possible over and above what
it brings into the public treasury of the state.[63]

It simply means that sources of revenues must

be adequate to meet government expenditures
and their variations.[64]

The dire need for revenue cannot be ignored.

Our country is in a quagmire of financial woe.
During the Bicameral Conference Committee
hearing, then Finance Secretary Purisima
bluntly depicted the countrys gloomy state of
economic affairs, thus:

First, let me explain the position that the

Philippines finds itself in right now. We are in a
position where 90 percent of our revenue is
used for debt service. So, for every peso of
revenue that we currently raise, 90 goes to debt
service. Thats interest plus amortization of our
debt. So clearly, this is not a sustainable
situation. Thats the first fact.

The second fact is that our debt to GDP level is

way out of line compared to other peer countries
that borrow money from that international
financial markets. Our debt to GDP is
approximately equal to our GDP. Again, that
shows you that this is not a sustainable
situation.

The third thing that Id like to point out is the

environment that we are presently operating in
is not as benign as what it used to be the past
five years.

What do I mean by that?

In the past five years, weve been lucky because

we were operating in a period of basically global
growth and low interest rates. The past few
months, we have seen an inching up, in fact, a
rapid increase in the interest rates in the
leading economies of the world. And, therefore,
our ability to borrow at reasonable prices is
going to be challenged. In fact, ultimately, the
question is our ability to access the financial
markets.

When the President made her speech in July

last year, the environment was not as bad as it
is now, at least based on the forecast of most
financial institutions. So, we were assuming
that raising 80 billion would put us in a position
where we can then convince them to improve
our ability to borrow at lower rates. But
conditions have changed on us because the
interest rates have gone up. In fact, just within
this room, we tried to access the market for a
billion dollars because for this year alone, the
Philippines will have to borrow 4 billion dollars.
Of that amount, we have borrowed 1.5 billion.
We issued last January a 25-year bond at 9.7
percent cost. We were trying to access last week
and the market was not as favorable and up to
now we have not accessed and we might pull
back because the conditions are not very good.

So given this situation, we at the Department of

Finance believe that we really need to front-end
our deficit reduction. Because it is deficit that is
causing the increase of the debt and we are in
what we call a debt spiral. The more debt you
have, the more deficit you have because interest
and debt service eats and eats more of your
revenue. We need to get out of this debt spiral.
And the only way, I think, we can get out of this
debt spiral is really have a front-end adjustment
in our revenue base.[65]

The image portrayed is chilling. Congress

passed the law hoping for rescue from an
inevitable catastrophe. Whether the law is
indeed sufficient to answer the states economic
dilemma is not for the Court to judge. In the
Farias case, the Court refused to consider the
various arguments raised therein that dwelt on
the wisdom of Section 14 of R.A. No. 9006 (The
Fair Election Act), pronouncing that:
. . . policy matters are not the concern of the
Court. Government policy is within the
exclusive dominion of the political branches of
the government. It is not for this Court to look
into the wisdom or propriety of legislative
determination. Indeed, whether an enactment
is wise or unwise, whether it is based on sound
economic theory, whether it is the best means
to achieve the desired results, whether, in short,
the legislative discretion within its prescribed
limits should be exercised in a particular
manner are matters for the judgment of the
legislature, and the serious conflict of opinions
does not suffice to bring them within the range
of judicial cognizance.[66]

In the same vein, the Court in this case will not

dawdle on the purpose of Congress or the
executive policy, given that it is not for the
judiciary to "pass upon questions of wisdom,
justice or expediency of legislation.[67]

II.
Whether Section 8 of R.A. No. 9337, amending
Sections 110(A)(2) and 110(B) of the NIRC; and
Section 12 of R.A. No. 9337, amending Section
114(C) of the NIRC, violate the following
provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell

Dealers, Inc., et al. argue that Section 8 of R.A.
No. 9337, amending Sections 110 (A)(2), 110 (B),
and Section 12 of R.A. No. 9337, amending
Section 114 (C) of the NIRC are arbitrary,
oppressive, excessive and confiscatory. Their
argument is premised on the constitutional
right against deprivation of life, liberty of
property without due process of law, as
embodied in Article III, Section 1 of the
Constitution.

Petitioners also contend that these provisions

violate the constitutional guarantee of equal
protection of the law.
The doctrine is that where the due process and
equal protection clauses are invoked,
considering that they are not fixed rules but
rather broad standards, there is a need for proof
of such persuasive character as would lead to
such a conclusion. Absent such a showing, the
presumption of validity must prevail.[68]

Section 8 of R.A. No. 9337, amending Section

110(B) of the NIRC imposes a limitation on the
amount of input tax that may be credited
against the output tax. It states, in part:
[P]rovided, that the input tax inclusive of the
input VAT carried over from the previous
quarter that may be credited in every quarter
shall not exceed seventy percent (70%) of the
output VAT:

Input Tax is defined under Section 110(A) of the

NIRC, as amended, as the value-added tax due
from or paid by a VAT-registered person on the
importation of goods or local purchase of good
and services, including lease or use of property,
in the course of trade or business, from a VAT-
registered person, and Output Tax is the value-
added tax due on the sale or lease of taxable
goods or properties or services by any person
registered or required to register under the law.

Petitioners claim that the contested sections

impose limitations on the amount of input tax
that may be claimed. In effect, a portion of the
input tax that has already been paid cannot
now be credited against the output tax.

Petitioners argument is not absolute. It

assumes that the input tax exceeds 70% of the
output tax, and therefore, the input tax in
excess of 70% remains uncredited. However, to
the extent that the input tax is less than 70% of
the output tax, then 100% of such input tax is
still creditable.

More importantly, the excess input tax, if any,

is retained in a businesss books of accounts
and remains creditable in the succeeding
quarter/s. This is explicitly allowed by Section
110(B), which provides that if the input tax
exceeds the output tax, the excess shall be
carried over to the succeeding quarter or
quarters. In addition, Section 112(B) allows a
VAT-registered person to apply for the issuance
of a tax credit certificate or refund for any
unused input taxes, to the extent that such
input taxes have not been applied against the
output taxes. Such unused input tax may be
used in payment of his other internal revenue
taxes.

The non-application of the unutilized input tax

in a given quarter is not ad infinitum, as
petitioners exaggeratedly contend. Their
analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net
effect that there will be unapplied/unutilized
inputs VAT for a given quarter. It does not
proceed further to the fact that such
unapplied/unutilized input tax may be credited
in the subsequent periods as allowed by the
carry-over provision of Section 110(B) or that it
may later on be refunded through a tax credit
certificate under Section 112(B).

Therefore, petitioners argument must be

rejected.

On the other hand, it appears that petitioner

Garcia failed to comprehend the operation of
the 70% limitation on the input tax. According
to petitioner, the limitation on the creditable
input tax in effect allows VAT-registered
establishments to retain a portion of the taxes
they collect, which violates the principle that
tax collection and revenue should be for public
purposes and expenditures
As earlier stated, the input tax is the tax paid
by a person, passed on to him by the seller,
when he buys goods. Output tax meanwhile is
the tax due to the person when he sells goods.
In computing the VAT payable, three possible
scenarios may arise:

First, if at the end of a taxable quarter the

output taxes charged by the seller are equal to
the input taxes that he paid and passed on by
the suppliers, then no payment is required;

Second, when the output taxes exceed the input

taxes, the person shall be liable for the excess,
which has to be paid to the Bureau of Internal
Revenue (BIR);[69] and

Third, if the input taxes exceed the output taxes,

the excess shall be carried over to the
succeeding quarter or quarters. Should the
input taxes result from zero-rated or effectively
zero-rated transactions, any excess over the
output taxes shall instead be refunded to the
taxpayer or credited against other internal
revenue taxes, at the taxpayers option.[70]

Section 8 of R.A. No. 9337 however, imposed a

70% limitation on the input tax. Thus, a person
can credit his input tax only up to the extent of
70% of the output tax. In laymans term, the
value-added taxes that a person/taxpayer paid
and passed on to him by a seller can only be
credited up to 70% of the value-added taxes
that is due to him on a taxable transaction.
There is no retention of any tax collection
because the person/taxpayer has already
previously paid the input tax to a seller, and the
seller will subsequently remit such input tax to
the BIR. The party directly liable for the
payment of the tax is the seller.[71] What only
needs to be done is for the person/taxpayer to
apply or credit these input taxes, as evidenced
by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell

Dealers, Inc., et al. also argue that the input tax
partakes the nature of a property that may not
be confiscated, appropriated, or limited without
due process of law.

The input tax is not a property or a property

right within the constitutional purview of the
due process clause. A VAT-registered persons
entitlement to the creditable input tax is a mere
statutory privilege.

The distinction between statutory privileges and

vested rights must be borne in mind for persons
have no vested rights in statutory privileges.
The state may change or take away rights,
which were created by the law of the state,
although it may not take away property, which
was vested by virtue of such rights.[72]

Under the previous system of single-stage

taxation, taxes paid at every level of distribution
are not recoverable from the taxes payable,
although it becomes part of the cost, which is
deductible from the gross revenue. When Pres.
Aquino issued E.O. No. 273 imposing a 10%
multi-stage tax on all sales, it was then that the
crediting of the input tax paid on purchase or
importation of goods and services by VAT-
registered persons against the output tax was
introduced.[73] This was adopted by the
Expanded VAT Law (R.A. No. 7716),[74] and The
Tax Reform Act of 1997 (R.A. No. 8424).[75] The
right to credit input tax as against the output
tax is clearly a privilege created by law, a
privilege that also the law can remove, or in this
case, limit.

Petitioners also contest as arbitrary, oppressive,

excessive and confiscatory, Section 8 of R.A. No.
9337, amending Section 110(A) of the NIRC,
which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods

purchased or imported in a calendar month for
use in trade or business for which deduction for
depreciation is allowed under this Code, shall
be spread evenly over the month of acquisition
and the fifty-nine (59) succeeding months if the
aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds
One million pesos (P1,000,000.00): Provided,
however, That if the estimated useful life of the
capital goods is less than five (5) years, as used
for depreciation purposes, then the input VAT
shall be spread over such a shorter period:
Provided, finally, That in the case of purchase
of services, lease or use of properties, the input
tax shall be creditable to the purchaser, lessee
or license upon payment of the compensation,
rental, royalty or fee.

The foregoing section imposes a 60-month

period within which to amortize the creditable
input tax on purchase or importation of capital
goods with acquisition cost of P1 Million pesos,
exclusive of the VAT component. Such spread
out only poses a delay in the crediting of the
input tax. Petitioners argument is without basis
because the taxpayer is not permanently
deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted

that the spread-out of the creditable input tax
in this case amounts to a 4-year interest-free
loan to the government.[76] In the same breath,
Congress also justified its move by saying that
the provision was designed to raise an annual
revenue of 22.6 billion.[77] The legislature also
dispelled the fear that the provision will fend off
foreign investments, saying that foreign
investors have other tax incentives provided by
law, and citing the case of China, where despite
a 17.5% non-creditable VAT, foreign
investments were not deterred.[78] Again, for
whatever is the purpose of the 60-month
amortization, this involves executive economic
policy and legislative wisdom in which the Court
cannot intervene.

With regard to the 5% creditable withholding

tax imposed on payments made by the
government for taxable transactions, Section 12
of R.A. No. 9337, which amended Section 114
of the NIRC, reads:

SEC. 114. Return and Payment of Value-added

Tax.

(C) Withholding of Value-added Tax. The

Government or any of its political subdivisions,
instrumentalities or agencies, including
government-owned or controlled corporations
(GOCCs) shall, before making payment on
account of each purchase of goods and services
which are subject to the value-added tax
imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at
the rate of five percent (5%) of the gross
payment thereof: Provided, That the payment
for lease or use of properties or property rights
to nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of
payment. For purposes of this Section, the
payor or person in control of the payment shall
be considered as the withholding agent.

The value-added tax withheld under this

Section shall be remitted within ten (10) days
following the end of the month the withholding
was made.

Section 114(C) merely provides a method of

collection, or as stated by respondents, a more
simplified VAT withholding system. The
government in this case is constituted as a
withholding agent with respect to their
payments for goods and services.

Prior to its amendment, Section 114(C) provided

for different rates of value-added taxes to be
withheld -- 3% on gross payments for
purchases of goods; 6% on gross payments for
services supplied by contractors other than by
public works contractors; 8.5% on gross
payments for services supplied by public work
contractors; or 10% on payment for the lease or
use of properties or property rights to
nonresident owners. Under the present Section
114(C), these different rates, except for the 10%
on lease or property rights payment to
nonresidents, were deleted, and a uniform rate
of 5% is applied.

The Court observes, however, that the law the

used the word final. In tax usage, final, as
opposed to creditable, means full. Thus, it is
provided in Section 114(C): final value-added
tax at the rate of five percent (5%).

In Revenue Regulations No. 02-98,

implementing R.A. No. 8424 (The Tax Reform
Act of 1997), the concept of final withholding tax
on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. Under the final

withholding tax system the amount of income
tax withheld by the withholding agent is
constituted as full and final payment of the
income tax due from the payee on the said
income. The liability for payment of the tax rests
primarily on the payor as a withholding agent.
Thus, in case of his failure to withhold the tax
or in case of underwithholding, the deficiency
tax shall be collected from the
payor/withholding agent.

(B) Creditable Withholding Tax. Under the

creditable withholding tax system, taxes
withheld on certain income payments are
intended to equal or at least approximate the
tax due of the payee on said income. Taxes
withheld on income payments covered by the
expanded withholding tax (referred to in Sec.
2.57.2 of these regulations) and compensation
income (referred to in Sec. 2.78 also of these
regulations) are creditable in nature.

As applied to value-added tax, this means that

taxable transactions with the government are
subject to a 5% rate, which constitutes as full
payment of the tax payable on the transaction.
This represents the net VAT payable of the seller.
The other 5% effectively accounts for the
standard input VAT (deemed input VAT), in lieu
of the actual input VAT directly or attributable
to the taxable transaction.[79]

The Court need not explore the rationale behind

the provision. It is clear that Congress intended
to treat differently taxable transactions with the
government.[80] This is supported by the fact
that under the old provision, the 5% tax
withheld by the government remains creditable
against the tax liability of the seller or
contractor, to wit:

SEC. 114. Return and Payment of Value-added

Tax.

(C) Withholding of Creditable Value-added Tax.

The Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of goods
from sellers and services rendered by
contractors which are subject to the value-
added tax imposed in Sections 106 and 108 of
this Code, deduct and withhold the value-added
tax due at the rate of three percent (3%) of the
gross payment for the purchase of goods and six
percent (6%) on gross receipts for services
rendered by contractors on every sale or
installment payment which shall be creditable
against the value-added tax liability of the seller
or contractor: Provided, however, That in the
case of government public works contractors,
the withholding rate shall be eight and one-half
percent (8.5%): Provided, further, That the
payment for lease or use of properties or
property rights to nonresident owners shall be
subject to ten percent (10%) withholding tax at
the time of payment. For this purpose, the payor
or person in control of the payment shall be
considered as the withholding agent.

The valued-added tax withheld under this

Section shall be remitted within ten (10) days
following the end of the month the withholding
was made. (Emphasis supplied)

As amended, the use of the word final and the

deletion of the word creditable exhibits
Congresss intention to treat transactions with
the government differently. Since it has not
been shown that the class subject to the 5%
final withholding tax has been unreasonably
narrowed, there is no reason to invalidate the
provision. Petitioners, as petroleum dealers, are
not the only ones subjected to the 5% final
withholding tax. It applies to all those who deal
with the government.

Moreover, the actual input tax is not totally lost

or uncreditable, as petitioners believe. Revenue
Regulations No. 14-2005 or the Consolidated
Value-Added Tax Regulations 2005 issued by
the BIR, provides that should the actual input
tax exceed 5% of gross payments, the excess
may form part of the cost. Equally, should the
actual input tax be less than 5%, the difference
is treated as income.[81]

Petitioners also argue that by imposing a

limitation on the creditable input tax, the
government gets to tax a profit or value-added
even if there is no profit or value-added.

Petitioners stance is purely hypothetical,

argumentative, and again, one-sided. The Court
will not engage in a legal joust where premises
are what ifs, arguments, theoretical and facts,
uncertain. Any disquisition by the Court on this
point will only be, as Shakespeare describes life
in Macbeth,[82] full of sound and fury,
signifying nothing.

Whats more, petitioners contention assumes

the proposition that there is no profit or value-
added. It need not take an astute businessman
to know that it is a matter of exception that a
business will sell goods or services without
profit or value-added. It cannot be overstressed
that a business is created precisely for profit.
The equal protection clause under the
Constitution means that no person or class of
persons shall be deprived of the same protection
of laws which is enjoyed by other persons or
other classes in the same place and in like
circumstances.[83]

The power of the State to make reasonable and

natural classifications for the purposes of
taxation has long been established. Whether it
relates to the subject of taxation, the kind of
property, the rates to be levied, or the amounts
to be raised, the methods of assessment,
valuation and collection, the States power is
entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power
absent a clear showing of unreasonableness,
discrimination, or arbitrariness.[84]

Petitioners point out that the limitation on the

creditable input tax if the entity has a high ratio
of input tax, or invests in capital equipment, or
has several transactions with the government,
is not based on real and substantial differences
to meet a valid classification.

The argument is pedantic, if not outright

baseless. The law does not make any
classification in the subject of taxation, the kind
of property, the rates to be levied or the
amounts to be raised, the methods of
assessment, valuation and collection.
Petitioners alleged distinctions are based on
variables that bear different consequences.
While the implementation of the law may yield
varying end results depending on ones profit
margin and value-added, the Court cannot go
beyond what the legislature has laid down and
interfere with the affairs of business.
The equal protection clause does not require the
universal application of the laws on all persons
or things without distinction. This might in fact
sometimes result in unequal protection. What
the clause requires is equality among equals as
determined according to a valid classification.
By classification is meant the grouping of
persons or things similar to each other in
certain particulars and different from all others
in these same particulars.[85]

Petitioners brought to the Courts attention the

introduction of Senate Bill No. 2038 by Sens.
S.R. Osmea III and Ma. Ana Consuelo A.S.
Madrigal on June 6, 2005, and House Bill No.
4493 by Rep. Eric D. Singson. The proposed
legislation seeks to amend the 70% limitation
by increasing the same to 90%. This, according
to petitioners, supports their stance that the 70%
limitation is arbitrary and confiscatory. On this
score, suffice it to say that these are still
proposed legislations. Until Congress amends
the law, and absent any unequivocal basis for
its unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution

reads:

The rule of taxation shall be uniform and

equitable. The Congress shall evolve a
progressive system of taxation.

Uniformity in taxation means that all taxable

articles or kinds of property of the same class
shall be taxed at the same rate. Different
articles may be taxed at different amounts
provided that the rate is uniform on the same
class everywhere with all people at all times.[86]

In this case, the tax law is uniform as it provides

a standard rate of 0% or 10% (or 12%) on all
goods and services. Sections 4, 5 and 6 of R.A.
No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of
10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and
use or lease of properties. These same sections
also provide for a 0% rate on certain sales and
transaction.
Neither does the law make any distinction as to
the type of industry or trade that will bear the
70% limitation on the creditable input tax, 5-
year amortization of input tax paid on purchase
of capital goods or the 5% final withholding tax
by the government. It must be stressed that the
rule of uniform taxation does not deprive
Congress of the power to classify subjects of
taxation, and only demands uniformity within
the particular class.[87]

R.A. No. 9337 is also equitable. The law is

equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of
goods or services with gross annual sales or
receipts not exceeding P1,500,000.00.[88] Also,
basic marine and agricultural food products in
their original state are still not subject to the
tax,[89] thus ensuring that prices at the
grassroots level will remain accessible. As was
stated in Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

The disputed sales tax is also equitable. It is

imposed only on sales of goods or services by
persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt
from the tax are sales of farm and marine
products, so that the costs of basic food and
other necessities, spared as they are from the
incidence of the VAT, are expected to be
relatively lower and within the reach of the
general public.

It is admitted that R.A. No. 9337 puts a

premium on businesses with low profit margins,
and unduly favors those with high profit
margins. Congress was not oblivious to this.
Thus, to equalize the weighty burden the law
entails, the law, under Section 116, imposed a
3% percentage tax on VAT-exempt persons
under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not
exceeding P1.5 Million. This acts as a equalizer
because in effect, bigger businesses that qualify
for VAT coverage and VAT-exempt taxpayers
stand on equal-footing.

Moreover, Congress provided mitigating

measures to cushion the impact of the
imposition of the tax on those previously
exempt. Excise taxes on petroleum products[91]
and natural gas[92] were reduced. Percentage
tax on domestic carriers was removed.[93]
Power producers are now exempt from paying
franchise tax.[94]

Aside from these, Congress also increased the

income tax rates of corporations, in order to
distribute the burden of taxation. Domestic,
foreign, and non-resident corporations are now
subject to a 35% income tax rate, from a
previous 32%.[95] Intercorporate dividends of
non-resident foreign corporations are still
subject to 15% final withholding tax but the tax
credit allowed on the corporations domicile was
increased to 20%.[96] The Philippine
Amusement and Gaming Corporation (PAGCOR)
is not exempt from income taxes anymore.[97]
Even the sale by an artist of his works or
services performed for the production of such
works was not spared.

All these were designed to ease, as well as

spread out, the burden of taxation, which would
otherwise rest largely on the consumers. It
cannot therefore be gainsaid that R.A. No. 9337
is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation

on the creditable input tax is anything but
regressive. It is the smaller business with higher
input tax-output tax ratio that will suffer the
consequences.

Progressive taxation is built on the principle of

the taxpayers ability to pay. This principle was
also lifted from Adam Smiths Canons of
Taxation, and it states:

I. The subjects of every state ought to contribute

towards the support of the government, as
nearly as possible, in proportion to their
respective abilities; that is, in proportion to the
revenue which they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up
depending on the resources of the person
affected.[98]

The VAT is an antithesis of progressive taxation.

By its very nature, it is regressive. The principle
of progressive taxation has no relation with the
VAT system inasmuch as the VAT paid by the
consumer or business for every goods bought or
services enjoyed is the same regardless of
income. In
other words, the VAT paid eats the same portion
of an income, whether big or small. The
disparity lies in the income earned by a person
or profit margin marked by a business, such
that the higher the income or profit margin, the
smaller the portion of the income or profit that
is eaten by VAT. A converso, the lower the
income or profit margin, the bigger the part that
the VAT eats away. At the end of the day, it is
really the lower income group or businesses
with low-profit margins that is always hardest
hit.

Nevertheless, the Constitution does not really

prohibit the imposition of indirect taxes, like the
VAT. What it simply provides is that Congress
shall "evolve a progressive system of taxation."
The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the

imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that
Congress shall evolve a progressive system of
taxation. The constitutional provision has been
interpreted to mean simply that direct taxes
are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized. (E.
FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. 1977)) Indeed,
the mandate to Congress is not to prescribe, but
to evolve, a progressive tax system. Otherwise,
sales taxes, which perhaps are the oldest form
of indirect taxes, would have been prohibited
with the proclamation of Art. VIII, 17 (1) of the
1973 Constitution from which the present Art.
VI, 28 (1) was taken. Sales taxes are also
regressive.

Resort to indirect taxes should be minimized

but not avoided entirely because it is difficult, if
not impossible, to avoid them by imposing such
taxes according to the taxpayers' ability to pay.
In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing
for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A.
No. 7716, 4 amending 103 of the NIRC)[99]

CONCLUSION

It has been said that taxes are the lifeblood of

the government. In this case, it is just an enema,
a first-aid measure to resuscitate an economy
in distress. The Court is neither blind nor is it
turning a deaf ear on the plight of the masses.
But it does not have the panacea for the malady
that the law seeks to remedy. As in other cases,
the Court cannot strike down a law as
unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that

for every wrong there is a remedy, and that the
judiciary should stand ready to afford relief.
There are undoubtedly many wrongs the
judicature may not correct, for instance, those
involving political questions. . . .

Let us likewise disabuse our minds from the

notion that the judiciary is the repository of
remedies for all political or social ills; We should
not forget that the Constitution has judiciously
allocated the powers of government to three
distinct and separate compartments; and that
judicial interpretation has tended to the
preservation of the independence of the three,
and a zealous regard of the prerogatives of each,
knowing full well that one is not the guardian of
the others and that, for official wrong-doing,
each may be brought to account, either by
impeachment, trial or by the ballot box.[100]

The words of the Court in Vera vs. Avelino[101]

holds true then, as it still holds true now. All
things considered, there is no raison d'tre for
the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being

unconstitutional, the petitions in G.R. Nos.
168056, 168207, 168461, 168463, and 168730,
are hereby DISMISSED.

There being no constitutional impediment to the

full enforcement and implementation of R.A. No.
9337, the temporary restraining order issued by
the Court on July 1, 2005 is LIFTED upon
finality of herein decision.

SO ORDERED.

Bagatsing v Ramirez | GR No. L-41631 | 17

December 1976

G.R. No. L-41631 December 17, 1976

HON. RAMON D. BAGATSING, as Mayor of the

City of Manila; ROMAN G. GARGANTIEL, as
Secretary to the Mayor; THE MARKET
ADMINISTRATOR; and THE MUNICIPAL
BOARD OF MANILA, petitioners,
vs.
HON. PEDRO A. RAMIREZ, in his capacity as
Presiding Judge of the Court of First Instance of
Manila, Branch XXX and the FEDERATION OF
MANILA MARKET VENDORS, INC.,
respondents.

Santiago F. Alidio and Restituto R. Villanueva

for petitioners.
Antonio H. Abad, Jr. for private respondent.

Federico A. Blay for petitioner for intervention.

MARTIN, J.:

The chief question to be decided in this case is

what law shall govern the publication of a tax
ordinance enacted by the Municipal Board of
Manila, the Revised City Charter (R.A. 409, as
amended), which requires publication of the
ordinance before its enactment and after its
approval, or the Local Tax Code (P.D. No. 231),
which only demands publication after approval.

On June 12, 1974, the Municipal Board of

Manila enacted Ordinance No. 7522, "AN
ORDINANCE REGULATING THE OPERATION
OF PUBLIC MARKETS AND PRESCRIBING
FEES FOR THE RENTALS OF STALLS AND
PROVIDING PENALTIES FOR VIOLATION
THEREOF AND FOR OTHER PURPOSES." The
petitioner City Mayor, Ramon D. Bagatsing,
approved the ordinance on June 15, 1974.

On February 17, 1975, respondent Federation

of Manila Market Vendors, Inc. commenced
Civil Case 96787 before the Court of First
Instance of Manila presided over by respondent
Judge, seeking the declaration of nullity of
Ordinance No. 7522 for the reason that (a) the
publication requirement under the Revised
Charter of the City of Manila has not been
complied with; (b) the Market Committee was
not given any participation in the enactment of
the ordinance, as envisioned by Republic Act
6039; (c) Section 3 (e) of the Anti-Graft and
Corrupt Practices Act has been violated; and (d)
the ordinance would violate Presidential Decree
No. 7 of September 30, 1972 prescribing the
collection of fees and charges on livestock and
animal products.
Resolving the accompanying prayer for the
issuance of a writ of preliminary injunction,
respondent Judge issued an order on March 11,
1975, denying the plea for failure of the
respondent Federation of Manila Market
Vendors, Inc. to exhaust the administrative
remedies outlined in the Local Tax Code.

After due hearing on the merits, respondent

Judge rendered its decision on August 29, 1975,
declaring the nullity of Ordinance No. 7522 of
the City of Manila on the primary ground of
non-compliance with the requirement of
publication under the Revised City Charter.
Respondent Judge ruled:

There is, therefore, no question that the

ordinance in question was not published at all
in two daily newspapers of general circulation
in the City of Manila before its enactment.
Neither was it published in the same manner
after approval, although it was posted in the
legislative hall and in all city public markets
and city public libraries. There being no
compliance with the mandatory requirement of
publication before and after approval, the
ordinance in question is invalid and, therefore,
null and void.

Petitioners moved for reconsideration of the

adverse decision, stressing that (a) only a post-
publication is required by the Local Tax Code;
and (b) private respondent failed to exhaust all
administrative remedies before instituting an
action in court.

On September 26, 1975, respondent Judge

denied the motion.

Forthwith, petitioners brought the matter to Us

through the present petition for review on
certiorari.

We find the petition impressed with merits.

1. The nexus of the present controversy is the

apparent conflict between the Revised Charter
of the City of Manila and the Local Tax Code on
the manner of publishing a tax ordinance
enacted by the Municipal Board of Manila. For,
while Section 17 of the Revised Charter provides:

Each proposed ordinance shall be published in

two daily newspapers of general circulation in
the city, and shall not be discussed or enacted
by the Board until after the third day following
such publication. * * * Each approved ordinance
* * * shall be published in two daily newspapers
of general circulation in the city, within ten days
after its approval; and shall take effect and be
in force on and after the twentieth day following
its publication, if no date is fixed in the
ordinance.

Section 43 of the Local Tax Code directs:

Within ten days after their approval, certified

true copies of all provincial, city, municipal and
barrio ordinances levying or imposing taxes,
fees or other charges shall be published for
three consecutive days in a newspaper or
publication widely circulated within the
jurisdiction of the local government, or posted
in the local legislative hall or premises and in
two other conspicuous places within the
territorial jurisdiction of the local government.
In either case, copies of all provincial, city,
municipal and barrio ordinances shall be
furnished the treasurers of the respective
component and mother units of a local
government for dissemination.

In other words, while the Revised Charter of the

City of Manila requires publication before the
enactment of the ordinance and after the
approval thereof in two daily newspapers of
general circulation in the city, the Local Tax
Code only prescribes for publication after the
approval of "ordinances levying or imposing
taxes, fees or other charges" either in a
newspaper or publication widely circulated
within the jurisdiction of the local government
or by posting the ordinance in the local
legislative hall or premises and in two other
conspicuous places within the territorial
jurisdiction of the local government. Petitioners'
compliance with the Local Tax Code rather than
with the Revised Charter of the City spawned
this litigation.

There is no question that the Revised Charter of

the City of Manila is a special act since it relates
only to the City of Manila, whereas the Local Tax
Code is a general law because it applies
universally to all local governments. Blackstone
defines general law as a universal rule affecting
the entire community and special law as one
relating to particular persons or things of a
class. 1 And the rule commonly said is that a
prior special law is not ordinarily repealed by a
subsequent general law. The fact that one is
special and the other general creates a
presumption that the special is to be considered
as remaining an exception of the general, one as
a general law of the land, the other as the law of
a particular case. 2 However, the rule readily
yields to a situation where the special statute
refers to a subject in general, which the general
statute treats in particular. The exactly is the
circumstance obtaining in the case at bar.
Section 17 of the Revised Charter of the City of
Manila speaks of "ordinance" in general, i.e.,
irrespective of the nature and scope thereof,
whereas, Section 43 of the Local Tax Code
relates to "ordinances levying or imposing taxes,
fees or other charges" in particular. In regard,
therefore, to ordinances in general, the Revised
Charter of the City of Manila is doubtless
dominant, but, that dominant force loses its
continuity when it approaches the realm of
"ordinances levying or imposing taxes, fees or
other charges" in particular. There, the Local
Tax Code controls. Here, as always, a general
provision must give way to a particular
provision. 3 Special provision governs. 4 This is
especially true where the law containing the
particular provision was enacted later than the
one containing the general provision. The City
Charter of Manila was promulgated on June 18,
1949 as against the Local Tax Code which was
decreed on June 1, 1973. The law-making
power cannot be said to have intended the
establishment of conflicting and hostile systems
upon the same subject, or to leave in force
provisions of a prior law by which the new will
of the legislating power may be thwarted and
overthrown. Such a result would render
legislation a useless and Idle ceremony, and
subject the law to the reproach of uncertainty
and unintelligibility. 5

The case of City of Manila v. Teotico 6 is

opposite. In that case, Teotico sued the City of
Manila for damages arising from the injuries he
suffered when he fell inside an uncovered and
unlighted catchbasin or manhole on P. Burgos
Avenue. The City of Manila denied liability on
the basis of the City Charter (R.A. 409)
exempting the City of Manila from any liability
for damages or injury to persons or property
arising from the failure of the city officers to
enforce the provisions of the charter or any
other law or ordinance, or from negligence of the
City Mayor, Municipal Board, or other officers
while enforcing or attempting to enforce the
provisions of the charter or of any other law or
ordinance. Upon the other hand, Article 2189 of
the Civil Code makes cities liable for damages
for the death of, or injury suffered by any
persons by reason of the defective condition of
roads, streets, bridges, public buildings, and
other public works under their control or
supervision. On review, the Court held the Civil
Code controlling. It is true that, insofar as its
territorial application is concerned, the Revised
City Charter is a special law and the subject
matter of the two laws, the Revised City Charter
establishes a general rule of liability arising
from negligence in general, regardless of the
object thereof, whereas the Civil Code
constitutes a particular prescription for liability
due to defective streets in particular. In the
same manner, the Revised Charter of the City
prescribes a rule for the publication of
"ordinance" in general, while the Local Tax Code
establishes a rule for the publication of
"ordinance levying or imposing taxes fees or
other charges in particular.
In fact, there is no rule which prohibits the
repeal even by implication of a special or
specific act by a general or broad one. 7 A
charter provision may be impliedly modified or
superseded by a later statute, and where a
statute is controlling, it must be read into the
charter notwithstanding any particular charter
provision. 8 A subsequent general law similarly
applicable to all cities prevails over any
conflicting charter provision, for the reason that
a charter must not be inconsistent with the
general laws and public policy of the state. 9 A
chartered city is not an independent sovereignty.
The state remains supreme in all matters not
purely local. Otherwise stated, a charter must
yield to the constitution and general laws of the
state, it is to have read into it that general law
which governs the municipal corporation and
which the corporation cannot set aside but to
which it must yield. When a city adopts a
charter, it in effect adopts as part of its charter
general law of such character. 10

2. The principle of exhaustion of

administrative remedies is strongly asserted by
petitioners as having been violated by private
respondent in bringing a direct suit in court.
This is because Section 47 of the Local Tax Code
provides that any question or issue raised
against the legality of any tax ordinance, or
portion thereof, shall be referred for opinion to
the city fiscal in the case of tax ordinance of a
city. The opinion of the city fiscal is appealable
to the Secretary of Justice, whose decision shall
be final and executory unless contested before
a competent court within thirty (30) days. But,
the petition below plainly shows that the
controversy between the parties is deeply rooted
in a pure question of law: whether it is the
Revised Charter of the City of Manila or the
Local Tax Code that should govern the
publication of the tax ordinance. In other words,
the dispute is sharply focused on the
applicability of the Revised City Charter or the
Local Tax Code on the point at issue, and not
on the legality of the imposition of the tax.
Exhaustion of administrative remedies before
resort to judicial bodies is not an absolute rule.
It admits of exceptions. Where the question
litigated upon is purely a legal one, the rule does
not apply. 11 The principle may also be
disregarded when it does not provide a plain,
speedy and adequate remedy. It may and
should be relaxed when its application may
cause great and irreparable damage. 12

3. It is maintained by private respondent that

the subject ordinance is not a "tax ordinance,"
because the imposition of rentals, permit fees,
tolls and other fees is not strictly a taxing power
but a revenue-raising function, so that the
procedure for publication under the Local Tax
Code finds no application. The pretense bears
its own marks of fallacy. Precisely, the raising of
revenues is the principal object of taxation.
Under Section 5, Article XI of the New
Constitution, "Each local government unit shall
have the power to create its own sources of
revenue and to levy taxes, subject to such
provisions as may be provided by law." 13 And
one of those sources of revenue is what the
Local Tax Code points to in particular: "Local
governments may collect fees or rentals for the
occupancy or use of public markets and
premises * * *." 14 They can provide for and
regulate market stands, stalls and privileges,
and, also, the sale, lease or occupancy thereof.
They can license, or permit the use of, lease, sell
or otherwise dispose of stands, stalls or
marketing privileges. 15

It is a feeble attempt to argue that the ordinance

violates Presidential Decree No. 7, dated
September 30, 1972, insofar as it affects
livestock and animal products, because the said
decree prescribes the collection of other fees
and charges thereon "with the exception of
ante-mortem and post-mortem inspection fees,
as well as the delivery, stockyard and slaughter
fees as may be authorized by the Secretary of
Agriculture and Natural Resources." 16 Clearly,
even the exception clause of the decree itself
permits the collection of the proper fees for
livestock. And the Local Tax Code (P.D. 231,
July 1, 1973) authorizes in its Section 31: "Local
governments may collect fees for the slaughter
of animals and the use of corrals * * * "

4. The non-participation of the Market

Committee in the enactment of Ordinance No.
7522 supposedly in accordance with Republic
Act No. 6039, an amendment to the City
Charter of Manila, providing that "the market
committee shall formulate, recommend and
adopt, subject to the ratification of the
municipal board, and approval of the mayor,
policies and rules or regulation repealing or
maneding existing provisions of the market
code" does not infect the ordinance with any
germ of invalidity. 17 The function of the
committee is purely recommendatory as the
underscored phrase suggests, its
recommendation is without binding effect on
the Municipal Board and the City Mayor. Its
prior acquiescence of an intended or proposed
city ordinance is not a condition sine qua non
before the Municipal Board could enact such
ordinance. The native power of the Municipal
Board to legislate remains undisturbed even in
the slightest degree. It can move in its own
initiative and the Market Committee cannot
demur. At most, the Market Committee may
serve as a legislative aide of the Municipal
Board in the enactment of city ordinances
affecting the city markets or, in plain words, in
the gathering of the necessary data, studies and
the collection of consensus for the proposal of
ordinances regarding city markets. Much less
could it be said that Republic Act 6039 intended
to delegate to the Market Committee the
adoption of regulatory measures for the
operation and administration of the city
markets. Potestas delegata non delegare potest.

5. Private respondent bewails that the market

stall fees imposed in the disputed ordinance are
diverted to the exclusive private use of the
Asiatic Integrated Corporation since the
collection of said fees had been let by the City of
Manila to the said corporation in a
"Management and Operating Contract." The
assumption is of course saddled on erroneous
premise. The fees collected do not go direct to
the private coffers of the corporation. Ordinance
No. 7522 was not made for the corporation but
for the purpose of raising revenues for the city.
That is the object it serves. The entrusting of the
collection of the fees does not destroy the public
purpose of the ordinance. So long as the
purpose is public, it does not matter whether
the agency through which the money is
dispensed is public or private. The right to tax
depends upon the ultimate use, purpose and
object for which the fund is raised. It is not
dependent on the nature or character of the
person or corporation whose intermediate
agency is to be used in applying it. The people
may be taxed for a public purpose, although it
be under the direction of an individual or
private corporation. 18

Nor can the ordinance be stricken down as

violative of Section 3(e) of the Anti-Graft and
Corrupt Practices Act because the increased
rates of market stall fees as levied by the
ordinance will necessarily inure to the
unwarranted benefit and advantage of the
corporation. 19 We are concerned only with the
issue whether the ordinance in question is intra
vires. Once determined in the affirmative, the
measure may not be invalidated because of
consequences that may arise from its
enforcement. 20

ACCORDINGLY, the decision of the court below

is hereby reversed and set aside. Ordinance No.
7522 of the City of Manila, dated June 15, 1975,
is hereby held to have been validly enacted. No.
costs.

SO ORDERED.

Castro, C.J., Barredo, Makasiar, Antonio,

Muñoz Palma, Aquino and Concepcion, Jr., JJ.,
concur.

Teehankee, J., reserves his vote.

Separate Opinions

FERNANDO, J., concurring:

But qualifies his assent as to an ordinance intra

vires not being open to question "because of
consequences that may arise from its
enforcement."

Atlas Consolidated Mining Corporation v CIR

| GR Nos. 141104 & 148763 | 08 June 2007

G.R. Nos. 141104 & 148763 June 8,

2007

ATLAS CONSOLIDATED MINING AND

DEVELOPMENT CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court are the consolidated cases

involving the unsuccessful claims of herein
petitioner Atlas Consolidated Mining and
Development Corporation (petitioner
corporation) for the refund/credit of the input
Value Added Tax (VAT) on its purchases of
capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992,
the denial of which by the Court of Tax Appeals
(CTA), was affirmed by the Court of Appeals.

Petitioner corporation is engaged in the

business of mining, production, and sale of
various mineral products, such as gold, pyrite,
and copper concentrates. It is a VAT-registered
taxpayer. It was initially issued VAT
Registration No. 32-A-6-002224, dated 1
January 1988, but it had to register anew with
the appropriate revenue district office (RDO) of
the Bureau of Internal Revenue (BIR) when it
moved its principal place of business, and it was
re-issued VAT Registration No. 32-0-004622,
dated 15 August 1990.1

G.R. No. 141104

Petitioner corporation filed with the BIR its VAT

Return for the first quarter of 1992.2 It alleged
that it likewise filed with the BIR the
corresponding application for the refund/credit
of its input VAT on its purchases of capital
goods and on its zero-rated sales in the amount
of P26,030,460.00.3 When its application for
refund/credit remained unresolved by the BIR,
petitioner corporation filed on 20 April 1994 its
Petition for Review with the CTA, docketed as
CTA Case No. 5102. Asserting that it was a
"zero-rated VAT person," it prayed that the CTA
order herein respondent Commissioner of
Internal Revenue (respondent Commissioner) to
refund/credit petitioner corporation with the
amount of P26,030,460.00, representing the
input VAT it had paid for the first quarter of
1992. The respondent Commissioner opposed
and sought the dismissal of the petition for
review of petitioner corporation for failure to
state a cause of action. After due trial, the CTA
promulgated its Decision4 on 24 November
1997 with the following disposition –

WHEREFORE, in view of the foregoing, the

instant claim for refund is hereby DENIED on
the ground of prescription, insufficiency of
evidence and failure to comply with Section 230
of the Tax Code, as amended. Accordingly, the
petition at bar is hereby DISMISSED for lack of
merit.

The CTA denied the motion for reconsideration

of petitioner corporation in a Resolution5 dated
15 April 1998.
When the case was elevated to the Court of
Appeals as CA-G.R. SP No. 47607, the appellate
court, in its Decision,6 dated 6 July 1999,
dismissed the appeal of petitioner corporation,
finding no reversible error in the CTA Decision,
dated 24 November 1997. The subsequent
motion for reconsideration of petitioner
corporation was also denied by the Court of
Appeals in its Resolution,7 dated 14 December
1999.

Thus, petitioner corporation comes before this

Court, via a Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court,
assigning the following errors committed by the
Court of Appeals –

THE COURT OF APPEALS ERRED IN

AFFIRMING THE REQUIREMENT OF
REVENUE REGULATIONS NO. 2-88 THAT AT
LEAST 70% OF THE SALES OF THE [BOARD
OF INVESTMENTS (BOI)]-REGISTERED FIRM
MUST CONSIST OF EXPORTS FOR ZERO-
RATING TO APPLY.

II

THE COURT OF APPEALS ERRED IN

AFFIRMING THAT PETITIONER FAILED TO
SUBMIT SUFFICIENT EVIDENCE SINCE
FAILURE TO SUBMIT PHOTOCOPIES OF VAT
INVOICES AND RECEIPTS IS NOT A FATAL
DEFECT.

III

THE COURT OF APPEALS ERRED IN RULING

THAT THE JUDICIAL CLAIM WAS FILED
BEYOND THE PRESCRIPTIVE PERIOD SINCE
THE JUDICIAL CLAIM WAS FILED WITHIN
TWO (2) YEARS FROM THE FILING OF THE
VAT RETURN.

IV
THE COURT OF APPEALS ERRED IN NOT
ORDERING CTA TO ALLOW THE RE-OPENING
OF THE CASE FOR PETITIONER TO PRESENT
ADDITIONAL EVIDENCE.8

G.R. No. 148763

G.R. No. 148763 involves almost the same set

of facts as in G.R. No. 141104 presented above,
except that it relates to the claims of petitioner
corporation for refund/credit of input VAT on
its purchases of capital goods and on its zero-
rated sales made in the last three taxable
quarters of 1990.

Petitioner corporation filed with the BIR its VAT

Returns for the second, third, and fourth
quarters of 1990, on 20 July 1990, 18 October
1990, and 20 January 1991, respectively. It
submitted separate applications to the BIR for
the refund/credit of the input VAT paid on its
purchases of capital goods and on its zero-rated
sales, the details of which are presented as
follows –

Date of Application

Period Covered

Amount Applied For

21 August 1990

2nd Quarter, 1990

P 54,014,722.04

21 November 1990

3rd Quarter, 1990

75,304,774.77

19 February 1991

4th Quarter, 1990

43,829,766.10

When the BIR failed to act on its applications

for refund/credit, petitioner corporation filed
with the CTA the following petitions for review –

Date Filed

Period Covered

CTA Case No.

20 July 1992

2nd Quarter, 1990

4831

9 October 1992

3rd Quarter, 1990

4859

14 January 1993

4th Quarter, 1990

4944

which were eventually consolidated. The

respondent Commissioner contested the
foregoing Petitions and prayed for the dismissal
thereof. The CTA ruled in favor of respondent
Commissioner and in its Decision,9 dated 30
October 1997, dismissed the Petitions mainly
on the ground that the prescriptive periods for
filing the same had expired. In a Resolution,10
dated 15 January 1998, the CTA denied the
motion for reconsideration of petitioner
corporation since the latter presented no new
matter not already discussed in the court's prior
Decision. In the same Resolution, the CTA also
denied the alternative prayer of petitioner
corporation for a new trial since it did not fall
under any of the grounds cited under Section 1,
Rule 37 of the Revised Rules of Court, and it
was not supported by affidavits of merits
required by Section 2 of the same Rule.

Petitioner corporation appealed its case to the

Court of Appeals, where it was docketed as CA-
G.R. SP No. 46718. On 15 September 2000, the
Court of Appeals rendered its Decision,11
finding that although petitioner corporation
timely filed its Petitions for Review with the CTA,
it still failed to substantiate its claims for the
refund/credit of its input VAT for the last three
quarters of 1990. In its Resolution,12 dated 27
June 2001, the appellate court denied the
motion for reconsideration of petitioner
corporation, finding no cogent reason to reverse
its previous Decision.

Aggrieved, petitioner corporation filed with this

Court another Petition for Review on Certiorari
under Rule 45 of the Revised Rules of Court,
docketed as G.R. No. 148763, raising the
following issues –

A.

WHETHER OR NOT THE COURT OF APPEALS

ERRED IN HOLDING THAT PETITIONER'S
CLAIM IS BARRED UNDER REVENUE
REGULATIONS NOS. 2-88 AND 3-88 I.E., FOR
FAILURE TO PTOVE [sic] THE 70%
THRESHOLD FOR ZERO-RATING TO APPLY
AND FOR FAILURE TO ESTABLISH THE
FACTUAL BASIS FOR THE INSTANT CLAIM.

B.

WHETHER OR NOT THE COURT OF APPEALS

ERRED IN FINDING THAT THERE IS NO BASIS
TO GRANT PETITIONER'S MOTION FOR NEW
TRIAL.

There being similarity of parties, subject matter,

and issues, G.R. Nos. 141104 and 148763 were
consolidated pursuant to a Resolution, dated 4
September 2006, issued by this Court. The
ruling of this Court in these cases hinges on
how it will resolve the following key issues: (1)
prescription of the claims of petitioner
corporation for input VAT refund/credit; (2)
validity and applicability of Revenue
Regulations No. 2-88 imposing upon petitioner
corporation, as a requirement for the VAT zero-
rating of its sales, the burden of proving that the
buyer companies were not just BOI-registered
but also exporting 70% of their total annual
production; (3) sufficiency of evidence presented
by petitioner corporation to establish that it is
indeed entitled to input VAT refund/credit; and
(4) legal ground for granting the motion of
petitioner corporation for re-opening of its cases
or holding of new trial before the CTA so it could
be given the opportunity to present the required
evidence.

Prescription

The prescriptive period for filing an application

for tax refund/credit of input VAT on zero-rated
sales made in 1990 and 1992 was governed by
Section 106(b) and (c) of the Tax Code of 1977,
as amended, which provided that –

SEC. 106. Refunds or tax credits of input tax. –

x x x.

(b) Zero-rated or effectively zero-rated sales. –

Any person, except those covered by paragraph
(a) above, whose sales are zero-rated may,
within two years after the close of the quarter
when such sales were made, apply for the
issuance of a tax credit certificate or refund of
the input taxes attributable to such sales to the
extent that such input tax has not been applied
against output tax.

xxxx

(e) Period within which refund of input taxes

may be made by the Commissioner. – The
Commissioner shall refund input taxes within
60 days from the date the application for refund
was filed with him or his duly authorized
representative. No refund of input taxes shall be
allowed unless the VAT-registered person files
an application for refund within the period
prescribed in paragraphs (a), (b) and (c) as the
case may be.

By a plain reading of the foregoing provision, the

two-year prescriptive period for filing the
application for refund/credit of input VAT on
zero-rated sales shall be determined from the
close of the quarter when such sales were made.

Petitioner contends, however, that the said two-

year prescriptive period should be counted, not
from the close of the quarter when the zero-
rated sales were made, but from the date of
filing of the quarterly VAT return and payment
of the tax due 20 days thereafter, in accordance
with Section 110(b) of the Tax Code of 1977, as
amended, quoted as follows –

SEC. 110. Return and payment of value-added

tax. – x x x.

(b) Time for filing of return and payment of tax.

– The return shall be filed and the tax paid
within 20 days following the end of each quarter
specifically prescribed for a VAT-registered
person under regulations to be promulgated by
the Secretary of Finance: Provided, however,
That any person whose registration is cancelled
in accordance with paragraph (e) of Section 107
shall file a return within 20 days from the
cancellation of such registration.

It is already well-settled that the two-year

prescriptive period for instituting a suit or
proceeding for recovery of corporate income tax
erroneously or illegally paid under Section
23013 of the Tax Code of 1977, as amended,
was to be counted from the filing of the final
adjustment return. This Court already set out
in ACCRA Investments Corporation v. Court of
Appeals,14 the rationale for such a rule, thus –

Clearly, there is the need to file a return first

before a claim for refund can prosper inasmuch
as the respondent Commissioner by his own
rules and regulations mandates that the
corporate taxpayer opting to ask for a refund
must show in its final adjustment return the
income it received from all sources and the
amount of withholding taxes remitted by its
withholding agents to the Bureau of Internal
Revenue. The petitioner corporation filed its
final adjustment return for its 1981 taxable
year on April 15, 1982. In our Resolution dated
April 10, 1989 in the case of Commissioner of
Internal Revenue v. Asia Australia Express, Ltd.
(G.R. No. 85956), we ruled that the two-year
prescriptive period within which to claim a
refund commences to run, at the earliest, on the
date of the filing of the adjusted final tax return.
Hence, the petitioner corporation had until
April 15, 1984 within which to file its claim for
refund.

Considering that ACCRAIN filed its claim for

refund as early as December 29, 1983 with the
respondent Commissioner who failed to take
any action thereon and considering further that
the non-resolution of its claim for refund with
the said Commissioner prompted ACCRAIN to
reiterate its claim before the Court of Tax
Appeals through a petition for review on April
13, 1984, the respondent appellate court
manifestly committed a reversible error in
affirming the holding of the tax court that
ACCRAIN's claim for refund was barred by
prescription.

It bears emphasis at this point that the

rationale in computing the two-year prescriptive
period with respect to the petitioner
corporation's claim for refund from the time it
filed its final adjustment return is the fact that
it was only then that ACCRAIN could ascertain
whether it made profits or incurred losses in its
business operations. The "date of payment",
therefore, in ACCRAIN's case was when its tax
liability, if any, fell due upon its filing of its final
adjustment return on April 15, 1982.

In another case, Commissioner of Internal

Revenue v. TMX Sales, Inc.,15 this Court
further expounded on the same matter –
A re-examination of the aforesaid minute
resolution of the Court in the Pacific Procon
case is warranted under the circumstances to
lay down a categorical pronouncement on the
question as to when the two-year prescriptive
period in cases of quarterly corporate income
tax commences to run. A full-blown decision in
this regard is rendered more imperative in the
light of the reversal by the Court of Tax Appeals
in the instant case of its previous ruling in the
Pacific Procon case.

Section 292 (now Section 230) of the National

Internal Revenue Code should be interpreted in
relation to the other provisions of the Tax Code
in order to give effect the legislative intent and
to avoid an application of the law which may
lead to inconvenience and absurdity. In the case
of People vs. Rivera (59 Phil. 236 [1933]), this
Court stated that statutes should receive a
sensible construction, such as will give effect to
the legislative intention and so as to avoid an
unjust or an absurd conclusion.
INTERPRETATIO TALIS IN AMBIGUIS SEMPER
FRIENDA EST, UT EVITATUR INCONVENIENS
ET ABSURDUM. Where there is ambiguity,
such interpretation as will avoid inconvenience
and absurdity is to be adopted. Furthermore,
courts must give effect to the general legislative
intent that can be discovered from or is
unraveled by the four corners of the statute,
and in order to discover said intent, the whole
statute, and not only a particular provision
thereof, should be considered. (Manila Lodge No.
761, et al. vs. Court of Appeals, et al. 73 SCRA
162 [1976) Every section, provision or clause of
the statute must be expounded by reference to
each other in order to arrive at the effect
contemplated by the legislature. The intention
of the legislator must be ascertained from the
whole text of the law and every part of the act is
to be taken into view. (Chartered Bank vs.
Imperial, 48 Phil. 931 [1921]; Lopez vs. El Hoger
Filipino, 47 Phil. 249, cited in Aboitiz Shipping
Corporation vs. City of Cebu, 13 SCRA 449
[1965]).
Thus, in resolving the instant case, it is
necessary that we consider not only Section 292
(now Section 230) of the National Internal
Revenue Code but also the other provisions of
the Tax Code, particularly Sections 84, 85 (now
both incorporated as Section 68), Section 86
(now Section 70) and Section 87 (now Section
69) on Quarterly Corporate Income Tax
Payment and Section 321 (now Section 232) on
keeping of books of accounts. All these
provisions of the Tax Code should be
harmonized with each other.

xxxx

Therefore, the filing of a quarterly income tax

returns required in Section 85 (now Section 68)
and implemented per BIR Form 1702-Q and
payment of quarterly income tax should only be
considered mere installments of the annual tax
due. These quarterly tax payments which are
computed based on the cumulative figures of
gross receipts and deductions in order to arrive
at a net taxable income, should be treated as
advances or portions of the annual income tax
due, to be adjusted at the end of the calendar
or fiscal year. This is reinforced by Section 87
(now Section 69) which provides for the filing of
adjustment returns and final payment of
income tax. Consequently, the two-year
prescriptive period provided in Section 292 (now
Section 230) of the Tax Code should be
computed from the time of filing the Adjustment
Return or Annual Income Tax Return and final
payment of income tax.

In the case of Collector of Internal Revenue vs.

Antonio Prieto (2 SCRA 1007 [1961]), this Court
held that when a tax is paid in installments, the
prescriptive period of two years provided in
Section 306 (Section 292) of the National
Internal Revenue Code should be counted from
the date of the final payment. This ruling is
reiterated in Commissioner of Internal Revenue
vs. Carlos Palanca (18 SCRA 496 [1966]),
wherein this Court stated that where the tax
account was paid on installment, the
computation of the two-year prescriptive period
under Section 306 (Section 292) of the Tax Code,
should be from the date of the last installment.

In the instant case, TMX Sales, Inc. filed a suit

for a refund on March 14, 1984. Since the two-
year prescriptive period should be counted from
the filing of the Adjustment Return on April
15,1982, TMX Sales, Inc. is not yet barred by
prescription.

The very same reasons set forth in the afore-

cited cases concerning the two-year prescriptive
period for claims for refund of illegally or
erroneously collected income tax may also apply
to the Petitions at bar involving the same
prescriptive period for claims for refund/credit
of input VAT on zero-rated sales.

It is true that unlike corporate income tax,

which is reported and paid on installment every
quarter, but is eventually subjected to a final
adjustment at the end of the taxable year, VAT
is computed and paid on a purely quarterly
basis without need for a final adjustment at the
end of the taxable year. However, it is also
equally true that until and unless the VAT-
registered taxpayer prepares and submits to the
BIR its quarterly VAT return, there is no way of
knowing with certainty just how much input
VAT16 the taxpayer may apply against its
output VAT;17 how much output VAT it is due
to pay for the quarter or how much excess input
VAT it may carry-over to the following quarter;
or how much of its input VAT it may claim as
refund/credit. It should be recalled that not
only may a VAT-registered taxpayer directly
apply against his output VAT due the input VAT
it had paid on its importation or local purchases
of goods and services during the quarter; the
taxpayer is also given the option to either (1)
carry over any excess input VAT to the
succeeding quarters for application against its
future output VAT liabilities, or (2) file an
application for refund or issuance of a tax credit
certificate covering the amount of such input
VAT.18 Hence, even in the absence of a final
adjustment return, the determination of any
output VAT payable necessarily requires that
the VAT-registered taxpayer make adjustments
in its VAT return every quarter, taking into
consideration the input VAT which are
creditable for the present quarter or had been
carried over from the previous quarters.

Moreover, when claiming refund/credit, the

VAT-registered taxpayer must be able to
establish that it does have refundable or
creditable input VAT, and the same has not
been applied against its output VAT liabilities –
information which are supposed to be reflected
in the taxpayer's VAT returns. Thus, an
application for refund/credit must be
accompanied by copies of the taxpayer's VAT
return/s for the taxable quarter/s concerned.

Lastly, although the taxpayer's refundable or

creditable input VAT may not be considered as
illegally or erroneously collected, its
refund/credit is a privilege extended to qualified
and registered taxpayers by the very VAT
system adopted by the Legislature. Such input
VAT, the same as any illegally or erroneously
collected national internal revenue tax, consists
of monetary amounts which are currently in the
hands of the government but must rightfully be
returned to the taxpayer. Therefore, whether
claiming refund/credit of illegally or
erroneously collected national internal revenue
tax, or input VAT, the taxpayer must be given
equal opportunity for filing and pursuing its
claim.

For the foregoing reasons, it is more practical

and reasonable to count the two-year
prescriptive period for filing a claim for
refund/credit of input VAT on zero-rated sales
from the date of filing of the return and payment
of the tax due which, according to the law then
existing, should be made within 20 days from
the end of each quarter. Having established
thus, the relevant dates in the instant cases are
summarized and reproduced below –
Period Covered

Date of Filing (Return w/ BIR)

Date of Filing (Application w/ BIR)

Date of Filing (Case w/ CTA)

2nd Quarter, 1990

20 July 1990

21 August 1990

20 July 1992

3rd Quarter, 1990

18 October 1990

21 November 1990

9 October 1992

4th Quarter, 1990

20 January 1991

19 February 1991

14 January 1993

1st Quarter, 1992

20 April 1992

--

20 April 1994

The above table readily shows that the

administrative and judicial claims of petitioner
corporation for refund of its input VAT on its
zero-rated sales for the last three quarters of
1990 were all filed within the prescriptive period.
However, the same cannot be said for the claim
of petitioner corporation for refund of its input
VAT on its zero-rated sales for the first quarter
of 1992. Even though it may seem that
petitioner corporation filed in time its judicial
claim with the CTA, there is no showing that it
had previously filed an administrative claim
with the BIR. Section 106(e) of the Tax Code of
1977, as amended, explicitly provided that no
refund of input VAT shall be allowed unless the
VAT-registered taxpayer filed an application for
refund with respondent Commissioner within
the two-year prescriptive period. The
application of petitioner corporation for
refund/credit of its input VAT for the first
quarter of 1992 was not only unsigned by its
supposed authorized representative, Ma. Paz R.
Semilla, Manager-Finance and Treasury, but it
was not dated, stamped, and initialed by the
BIR official who purportedly received the same.
The CTA, in its Decision,19 dated 24 November
1997, in CTA Case No. 5102, made the following
observations –

This Court, likewise, rejects any probative value

of the Application for Tax Credit/Refund of VAT
Paid (BIR Form No. 2552) [Exhibit "B'] formally
offered in evidence by the petitioner on account
of the fact that it does not bear the BIR stamp
showing the date when such application was
filed together with the signature or initial of the
receiving officer of respondent's Bureau. Worse
still, it does not show the date of application and
the signature of a certain Ma. Paz R. Semilla
indicated in the form who appears to be
petitioner's authorized filer.

A review of the records reveal that the original

of the aforecited application was lost during the
time petitioner transferred its office (TSN, p. 6,
Hearing of December 9, 1994). Attempt was
made to prove that petitioner exerted efforts to
recover the original copy, but to no avail.
Despite this, however, We observe that
petitioner completely failed to establish the
missing dates and signatures abovementioned.
On this score, said application has no probative
value in demonstrating the fact of its filing
within two years after the [filing of the VAT
return for the quarter] when petitioner's sales of
goods were made as prescribed under Section
106(b) of the Tax Code. We believe thus that
petitioner failed to file an application for refund
in due form and within the legal period set by
law at the administrative level. Hence, the case
at bar has failed to satisfy the requirement on
the prior filing of an application for refund with
the respondent before the commencement of a
judicial claim for refund, as prescribed under
Section 230 of the Tax Code. This fact
constitutes another one of the many reasons for
not granting petitioner's judicial claim.

As pointed out by the CTA, in serious doubt is

not only the fact of whether petitioner
corporation timely filed its administrative claim
for refund of its input VAT for the first quarter
of 1992, but also whether petitioner corporation
actually filed such administrative claim in the
first place. For failing to prove that it had earlier
filed with the BIR an application for
refund/credit of its input VAT for the first
quarter of 1992, within the period prescribed by
law, then the case instituted by petitioner
corporation with the CTA for the refund/credit
of the very same tax cannot prosper.

Revenue Regulations No. 2-88 and the 70%

export requirement

Under Section 100(a) of the Tax Code of 1977,

as amended, a 10% VAT was imposed on the
gross selling price or gross value in money of
goods sold, bartered or exchanged. Yet, the
same provision subjected the following sales
made by VAT-registered persons to 0% VAT –

(1) Export sales; and

(2) Sales to persons or entities whose exemption

under special laws or international agreements
to which the Philippines is a signatory
effectively subjects such sales to zero-rate.
"Export Sales" means the sale and shipment or
exportation of goods from the Philippines to a
foreign country, irrespective of any shipping
arrangement that may be agreed upon which
may influence or determine the transfer of
ownership of the goods so exported, or foreign
currency denominated sales. "Foreign currency
denominated sales", means sales to
nonresidents of goods assembled or
manufactured in the Philippines, for delivery to
residents in the Philippines and paid for in
convertible foreign currency remitted through
the banking system in the Philippines.

These are termed zero-rated sales. A zero-rated

sale is still considered a taxable transaction for
VAT purposes, although the VAT rate applied is
0%. A sale by a VAT-registered taxpayer of
goods and/or services taxed at 0% shall not
result in any output VAT, while the input VAT
on its purchases of goods or services related to
such zero-rated sale shall be available as tax
credit or refund.20

Petitioner corporation questions the validity of

Revenue Regulations No. 2-88 averring that the
said regulations imposed additional
requirements, not found in the law itself, for the
zero-rating of its sales to Philippine Smelting
and Refining Corporation (PASAR) and
Philippine Phosphate, Inc. (PHILPHOS), both of
which are registered not only with the BOI, but
also with the then Export Processing Zone
Authority (EPZA).21

The contentious provisions of Revenue

Regulations No. 2-88 read –

SEC. 2. Zero-rating. – (a) Sales of raw materials

to BOI-registered exporters. – Sales of raw
materials to export-oriented BOI-registered
enterprises whose export sales, under rules and
regulations of the Board of Investments, exceed
seventy percent (70%) of total annual
production, shall be subject to zero-rate under
the following conditions:
"(1) The seller shall file an application with the
BIR, ATTN.: Division, applying for zero-rating
for each and every separate buyer, in
accordance with Section 8(d) of Revenue
Regulations No. 5-87. The application should be
accompanied with a favorable recommendation
from the Board of Investments."

"(2) The raw materials sold are to be used

exclusively by the buyer in the manufacture,
processing or repacking of his own registered
export product;

"(3) The words "Zero-Rated Sales" shall be

prominently indicated in the sales invoice. The
exporter (buyer) can no longer claim from the
Bureau of Internal Revenue or any other
government office tax credits on their zero-rated
purchases;

(b) Sales of raw materials to foreign buyer. –

Sales of raw materials to a nonresident foreign
buyer for delivery to a resident local export-
oriented BOI-registered enterprise to be used in
manufacturing, processing or repacking of the
said buyer's goods and paid for in foreign
currency, inwardly remitted in accordance with
Central Bank rules and regulations shall be
subject to zero-rate.

It is the position of the respondent

Commissioner, affirmed by the CTA and the
Court of Appeals, that Section 2 of Revenue
Regulations No. 2-88 should be applied in the
cases at bar; and to be entitled to the zero-
rating of its sales to PASAR and PHILPHOS,
petitioner corporation, as a VAT-registered
seller, must be able to prove not only that
PASAR and PHILPHOS are BOI-registered
corporations, but also that more than 70% of
the total annual production of these
corporations are actually exported. Revenue
Regulations No. 2-88 merely echoed the
requirement imposed by the BOI on export-
oriented corporations registered with it.
While this Court is not prepared to strike down
the validity of Revenue Regulations No. 2-88, it
finds that its application must be limited and
placed in the proper context. Note that Section
2 of Revenue Regulations No. 2-88 referred only
to the zero-rated sales of raw materials to
export-oriented BOI-registered enterprises
whose export sales, under BOI rules and
regulations, should exceed seventy percent
(70%) of their total annual production.

Section 2 of Revenue Regulations No. 2-88,

should not have been applied to the zero-rating
of the sales made by petitioner corporation to
PASAR and PHILPHOS. At the onset, it must be
emphasized that PASAR and PHILPHOS, in
addition to being registered with the BOI, were
also registered with the EPZA and located
within an export-processing zone. Petitioner
corporation does not claim that its sales to
PASAR and PHILPHOS are zero-rated on the
basis that said sales were made to export-
oriented BOI-registered corporations, but
rather, on the basis that the sales were made to
EPZA-registered enterprises operating within
export processing zones. Although sales to
export-oriented BOI-registered enterprises and
sales to EPZA-registered enterprises located
within export processing zones were both
deemed export sales, which, under Section
100(a) of the Tax Code of 1977, as amended,
shall be subject to 0% VAT distinction must be
made between these two types of sales because
each may have different substantiation
requirements.

The Tax Code of 1977, as amended, gave a

limited definition of export sales, to wit: "The
sale and shipment or exportation of goods from
the Philippines to a foreign country, irrespective
of any shipping arrangement that may be
agreed upon which may influence or determine
the transfer of ownership of the goods so
exported, or foreign currency denominated
sales." Executive Order No. 226, otherwise
known as the Omnibus Investments Code of
1987 - which, in the years concerned (i.e., 1990
and 1992), governed enterprises registered with
both the BOI and EPZA, provided a more
comprehensive definition of export sales, as
quoted below:

"ART. 23. "Export sales" shall mean the

Philippine port F.O.B. value, determined from
invoices, bills of lading, inward letters of credit,
landing certificates, and other commercial
documents, of export products exported directly
by a registered export producer or the net
selling price of export product sold by a
registered export producer or to an export
trader that subsequently exports the same:
Provided, That sales of export products to
another producer or to an export trader shall
only be deemed export sales when actually
exported by the latter, as evidenced by landing
certificates of similar commercial documents:
Provided, further, That without actual
exportation the following shall be considered
constructively exported for purposes of this
provision: (1) sales to bonded manufacturing
warehouses of export-oriented manufacturers;
(2) sales to export processing zones; (3) sales to
registered export traders operating bonded
trading warehouses supplying raw materials
used in the manufacture of export products
under guidelines to be set by the Board in
consultation with the Bureau of Internal
Revenue and the Bureau of Customs; (4) sales
to foreign military bases, diplomatic missions
and other agencies and/or instrumentalities
granted tax immunities, of locally
manufactured, assembled or repacked products
whether paid for in foreign currency or not:
Provided, further, That export sales of
registered export trader may include
commission income; and Provided, finally, That
exportation of goods on consignment shall not
be deemed export sales until the export
products consigned are in fact sold by the
consignee.

Sales of locally manufactured or assembled

goods for household and personal use to
Filipinos abroad and other non-residents of the
Philippines as well as returning Overseas
Filipinos under the Internal Export Program of
the government and paid for in convertible
foreign currency inwardly remitted through the
Philippine banking systems shall also be
considered export sales. (Underscoring ours.)

The afore-cited provision of the Omnibus

Investments Code of 1987 recognizes as export
sales the sales of export products to another
producer or to an export trader, provided that
the export products are actually exported. For
purposes of VAT zero-rating, such producer or
export trader must be registered with the BOI
and is required to actually export more than 70%
of its annual production.

Without actual exportation, Article 23 of the

Omnibus Investments Code of 1987 also
considers constructive exportation as export
sales. Among other types of constructive
exportation specifically identified by the said
provision are sales to export processing zones.
Sales to export processing zones are subjected
to special tax treatment. Article 77 of the same
Code establishes the tax treatment of goods or
merchandise brought into the export processing
zones. Of particular relevance herein is
paragraph 2, which provides that "Merchandise
purchased by a registered zone enterprise from
the customs territory and subsequently brought
into the zone, shall be considered as export
sales and the exporter thereof shall be entitled
to the benefits allowed by law for such
transaction."

Such tax treatment of goods brought into the

export processing zones are only consistent
with the Destination Principle and Cross Border
Doctrine to which the Philippine VAT system
adheres. According to the Destination
Principle,22 goods and services are taxed only
in the country where these are consumed. In
connection with the said principle, the Cross
Border Doctrine23 mandates that no VAT shall
be imposed to form part of the cost of the goods
destined for consumption outside the territorial
border of the taxing authority. Hence, actual
export of goods and services from the
Philippines to a foreign country must be free of
VAT, while those destined for use or
consumption within the Philippines shall be
imposed with 10% VAT.24 Export processing
zones25 are to be managed as a separate
customs territory from the rest of the
Philippines and, thus, for tax purposes, are
effectively considered as foreign territory. For
this reason, sales by persons from the
Philippine customs territory to those inside the
export processing zones are already taxed as
exports.

Plainly, sales to enterprises operating within the

export processing zones are export sales, which,
under the Tax Code of 1977, as amended, were
subject to 0% VAT. It is on this ground that
petitioner corporation is claiming refund/credit
of the input VAT on its zero-rated sales to
PASAR and PHILPHOS.

The distinction made by this Court in the

preceding paragraphs between the zero-rated
sales to export-oriented BOI-registered
enterprises and zero-rated sales to EPZA-
registered enterprises operating within export
processing zones is actually supported by
subsequent development in tax laws and
regulations. In Revenue Regulations No. 7-95,
the Consolidated VAT Regulations, as
amended,26 the BIR defined with more
precision what are zero-rated export sales –

(1) The sale and actual shipment of goods from

the Philippines to a foreign country, irrespective
of any shipping arrangement that may be
agreed upon which may influence or determine
the transfer of ownership of the goods so
exported paid for in acceptable foreign currency
or its equivalent in goods or services, and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) The sale of raw materials or packaging
materials to a non-resident buyer for delivery to
a resident local export-oriented enterprise to be
used in manufacturing, processing, packing or
repacking in the Philippines of the said buyer's
goods and paid for in acceptable foreign
currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);

(3) The sale of raw materials or packaging

materials to an export-oriented enterprise
whose export sales exceed seventy percent (70%)
of total annual production;

Any enterprise whose export sales exceed 70%

of the total annual production of the preceding
taxable year shall be considered an export-
oriented enterprise upon accreditation as such
under the provisions of the Export Development
Act (R.A. 7844) and its implementing rules and
regulations;

(4) Sale of gold to the Bangko Sentral ng

Pilipinas (BSP); and

(5) Those considered export sales under Articles

23 and 77 of Executive Order No. 226,
otherwise known as the Omnibus Investments
Code of 1987, and other special laws, e.g.
Republic Act No. 7227, otherwise known as the
Bases Conversion and Development Act of 1992.

The Tax Code of 1997, as amended,27 later

adopted the foregoing definition of export sales,
which are subject to 0% VAT.

This Court then reiterates its conclusion that

Section 2 of Revenue Regulations No. 2-88,
which applied to zero-rated export sales to
export-oriented BOI-registered enterprises,
should not be applied to the applications for
refund/credit of input VAT filed by petitioner
corporation since it based its applications on
the zero-rating of export sales to enterprises
registered with the EPZA and located within
export processing zones.
Sufficiency of evidence

There can be no dispute that the taxpayer-

claimant has the burden of proving the legal
and factual bases of its claim for tax credit or
refund, but once it has submitted all the
required documents, it is the function of the BIR
to assess these documents with purposeful
dispatch.28 It therefore falls upon herein
petitioner corporation to first establish that its
sales qualify for VAT zero-rating under the
existing laws (legal basis), and then to present
sufficient evidence that said sales were actually
made and resulted in refundable or creditable
input VAT in the amount being claimed (factual
basis).

It would initially appear that the applications

for refund/credit filed by petitioner corporation
cover only input VAT on its purportedly zero-
rated sales to PASAR and PHILPHOS; however,
a more thorough perusal of its applications,
VAT returns, pleadings, and other records of
these cases would reveal that it is also claiming
refund/credit of its input VAT on purchases of
capital goods and sales of gold to the Central
Bank of the Philippines (CBP).

This Court finds that the claims for

refund/credit of input VAT of petitioner
corporation have sufficient legal bases.

As has been extensively discussed herein,

Section 106(b)(2), in relation to Section 100(a)(2)
of the Tax Code of 1977, as amended, allowed
the refund/credit of input VAT on export sales
to enterprises operating within export
processing zones and registered with the EPZA,
since such export sales were deemed to be
effectively zero-rated sales.29 The fact that
PASAR and PHILPHOS, to whom petitioner
corporation sold its products, were operating
inside an export processing zone and duly
registered with EPZA, was never raised as an
issue herein. Moreover, the same fact was
already judicially recognized in the case Atlas
Consolidated Mining & Development
Corporation v. Commissioner of Internal
Revenue.30 Section 106(c) of the same Code
likewise permitted a VAT-registered taxpayer to
apply for refund/credit of the input VAT paid on
capital goods imported or locally purchased to
the extent that such input VAT has not been
applied against its output VAT. Meanwhile, the
effective zero-rating of sales of gold to the CBP
from 1989 to 199131 was already affirmed by
this Court in Commissioner of Internal Revenue
v. Benguet Corporation,32 wherein it ruled that
–

At the time when the subject transactions were

consummated, the prevailing BIR regulations
relied upon by respondent ordained that gold
sales to the Central Bank were zero-rated. The
BIR interpreted Sec. 100 of the NIRC in relation
to Sec. 2 of E.O. No. 581 s. 1980 which
prescribed that gold sold to the Central Bank
shall be considered export and therefore shall
be subject to the export and premium duties. In
coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank
Circular No. 960 which states that all sales of
gold to the Central Bank are considered
constructive exports. x x x.

This Court now comes to the question of

whether petitioner corporation has sufficiently
established the factual bases for its applications
for refund/credit of input VAT. It is in this
regard that petitioner corporation has failed,
both in the administrative and judicial level.

Applications for refund/credit of input VAT with

the BIR must comply with the appropriate
revenue regulations. As this Court has already
ruled, Revenue Regulations No. 2-88 is not
relevant to the applications for refund/credit of
input VAT filed by petitioner corporation;
nonetheless, the said applications must have
been in accordance with Revenue Regulations
No. 3-88, amending Section 16 of Revenue
Regulations No. 5-87, which provided as follows
–
SECTION 16. Refunds or tax credits of input tax.
–

xxxx

(c) Claims for tax credits/refunds. – Application

for Tax Credit/Refund of Value-Added Tax Paid
(BIR Form No. 2552) shall be filed with the
Revenue District Office of the city or
municipality where the principal place of
business of the applicant is located or directly
with the Commissioner, Attention: VAT Division.

A photocopy of the purchase invoice or receipt

evidencing the value added tax paid shall be
submitted together with the application. The
original copy of the said invoice/receipt,
however, shall be presented for cancellation
prior to the issuance of the Tax Credit
Certificate or refund. In addition, the following
documents shall be attached whenever
applicable:

xxxx

"3. Effectively zero-rated sale of goods and

services.

"i) photo copy of approved application for zero-

rate if filing for the first time.

"ii) sales invoice or receipt showing name of the

person or entity to whom the sale of goods or
services were delivered, date of delivery, amount
of consideration, and description of goods or
services delivered.

"iii) evidence of actual receipt of goods or

services.

"4. Purchase of capital goods.

"i) original copy of invoice or receipt showing the

date of purchase, purchase price, amount of
value-added tax paid and description of the
capital equipment locally purchased.
"ii) with respect to capital equipment imported,
the photo copy of import entry document for
internal revenue tax purposes and the
confirmation receipt issued by the Bureau of
Customs for the payment of the value-added tax.

"5. In applicable cases,

where the applicant's zero-rated transactions

are regulated by certain government agencies, a
statement therefrom showing the amount and
description of sale of goods and services, name
of persons or entities (except in case of exports)
to whom the goods or services were sold, and
date of transaction shall also be submitted.

In all cases, the amount of refund or tax credit

that may be granted shall be limited to the
amount of the value-added tax (VAT) paid
directly and entirely attributable to the zero-
rated transaction during the period covered by
the application for credit or refund.

Where the applicant is engaged in zero-rated

and other taxable and exempt sales of goods
and services, and the VAT paid (inputs) on
purchases of goods and services cannot be
directly attributed to any of the aforementioned
transactions, the following formula shall be
used to determine the creditable or refundable
input tax for zero-rated sale:

Amount of Zero-rated Sale

Total Sales

X
Total Amount of Input Taxes
=
Amount Creditable/Refundable

In case the application for refund/credit of

input VAT was denied or remained unacted
upon by the BIR, and before the lapse of the
two-year prescriptive period, the taxpayer-
applicant may already file a Petition for Review
before the CTA. If the taxpayer's claim is
supported by voluminous documents, such as
receipts, invoices, vouchers or long accounts,
their presentation before the CTA shall be
governed by CTA Circular No. 1-95, as amended,
reproduced in full below –

In the interest of speedy administration of

justice, the Court hereby promulgates the
following rules governing the presentation of
voluminous documents and/or long accounts,
such as receipts, invoices and vouchers, as
evidence to establish certain facts pursuant to
Section 3(c), Rule 130 of the Rules of Court and
the doctrine enunciated in Compania Maritima
vs. Allied Free Workers Union (77 SCRA 24), as
well as Section 8 of Republic Act No. 1125:

1. The party who desires to introduce as

evidence such voluminous documents must,
after motion and approval by the Court, present:

(a) a Summary containing, among others, a

chronological listing of the numbers, dates and
amounts covered by the invoices or receipts and
the amount/s of tax paid; and (b) a Certification
of an independent Certified Public Accountant
attesting to the correctness of the contents of
the summary after making an examination,
evaluation and audit of the voluminous receipts
and invoices. The name of the accountant or
partner of the firm in charge must be stated in
the motion so that he/she can be commissioned
by the Court to conduct the audit and,
thereafter, testify in Court relative to such
summary and certification pursuant to Rule 32
of the Rules of Court.

2. The method of individual presentation of

each and every receipt, invoice or account for
marking, identification and comparison with
the originals thereof need not be done before the
Court or Clerk of Court anymore after the
introduction of the summary and CPA
certification. It is enough that the receipts,
invoices, vouchers or other documents covering
the said accounts or payments to be introduced
in evidence must be pre-marked by the party
concerned and submitted to the Court in order
to be made accessible to the adverse party who
desires to check and verify the correctness of
the summary and CPA certification. Likewise,
the originals of the voluminous receipts,
invoices or accounts must be ready for
verification and comparison in case doubt on
the authenticity thereof is raised during the
hearing or resolution of the formal offer of
evidence.

Since CTA Cases No. 4831, 4859, 4944,33 and

5102,34 were still pending before the CTA when
the said Circular was issued, then petitioner
corporation must have complied therewith
during the course of the trial of the said cases.

In Commissioner of Internal Revenue v. Manila

Mining Corporation,35 this Court denied the
claim of therein respondent, Manila Mining
Corporation, for refund of the input VAT on its
supposed zero-rated sales of gold to the CBP
because it was unable to substantiate its claim.
In the same case, this Court emphasized the
importance of complying with the
substantiation requirements for claiming
refund/credit of input VAT on zero-rated sales,
to wit –

For a judicial claim for refund to prosper,

however, respondent must not only prove that
it is a VAT registered entity and that it filed its
claims within the prescriptive period. It must
substantiate the input VAT paid by purchase
invoices or official receipts.

This respondent failed to do.

Revenue Regulations No. 3-88 amending

Revenue Regulations No. 5-87 provides the
requirements in claiming tax credits/refunds.

xxxx

Under Section 8 of RA1125, the CTA is

described as a court of record. As cases filed
before it are litigated de novo, party litigants
should prove every minute aspect of their cases.
No evidentiary value can be given the purchase
invoices or receipts submitted to the BIR as the
rules on documentary evidence require that
these documents must be formally offered
before the CTA.

This Court thus notes with approval the

following findings of the CTA:

x x x [S]ale of gold to the Central Bank should

not be subject to the 10% VAT-output tax but
this does not ipso fact mean that [the seller] is
entitled to the amount of refund sought as it is
required by law to present evidence showing the
input taxes it paid during the year in question.
What is being claimed in the instant petition is
the refund of the input taxes paid by the herein
petitioner on its purchase of goods and services.
Hence, it is necessary for the Petitioner to show
proof that it had indeed paid the input taxes
during the year 1991. In the case at bar,
Petitioner failed to discharge this duty. It did not
adduce in evidence the sales invoice, receipts or
other documents showing the input value
added tax on the purchase of goods and services.

xxx

Section 8 of Republic Act 1125 (An Act Creating

the Court of Tax Appeals) provides categorically
that the Court of Tax Appeals shall be a court
of record and as such it is required to conduct
a formal trial (trial de novo) where the parties
must present their evidence accordingly if they
desire the Court to take such evidence into
consideration. (Emphasis and italics supplied)

A "sales or commercial invoice" is a written

account of goods sold or services rendered
indicating the prices charged therefor or a list
by whatever name it is known which is used in
the ordinary course of business evidencing sale
and transfer or agreement to sell or transfer
goods and services.
A "receipt" on the other hand is a written
acknowledgment of the fact of payment in
money or other settlement between seller and
buyer of goods, debtor or creditor, or person
rendering services and client or customer.

These sales invoices or receipts issued by the

supplier are necessary to substantiate the
actual amount or quantity of goods sold and
their selling price, and taken collectively are the
best means to prove the input VAT payments.36

Although the foregoing decision focused only on

the proof required for the applicant for
refund/credit to establish the input VAT
payments it had made on its purchases from
suppliers, Revenue Regulations No. 3-88 also
required it to present evidence proving actual
zero-rated VAT sales to qualified buyers, such
as (1) photocopy of the approved application for
zero-rate if filing for the first time; (2) sales
invoice or receipt showing the name of the
person or entity to whom the goods or services
were delivered, date of delivery, amount of
consideration, and description of goods or
services delivered; and (3) the evidence of actual
receipt of goods or services.

Also worth noting in the same decision is the

weight given by this Court to the certification by
the independent certified public accountant
(CPA), thus –

Respondent contends, however, that the

certification of the independent CPA attesting to
the correctness of the contents of the summary
of suppliers' invoices or receipts which were
examined, evaluated and audited by said CPA
in accordance with CTA Circular No. 1-95 as
amended by CTA Circular No. 10-97 should
substantiate its claims.

There is nothing, however, in CTA Circular No.

1-95, as amended by CTA Circular No. 10-97,
which either expressly or impliedly suggests
that summaries and schedules of input VAT
payments, even if certified by an independent
CPA, suffice as evidence of input VAT payments.

xxxx

The circular, in the interest of speedy

administration of justice, was promulgated to
avoid the time-consuming procedure of
presenting, identifying and marking of
documents before the Court. It does not relieve
respondent of its imperative task of pre-
marking photocopies of sales receipts and
invoices and submitting the same to the court
after the independent CPA shall have examined
and compared them with the originals. Without
presenting these pre-marked documents as
evidence – from which the summary and
schedules were based, the court cannot verify
the authenticity and veracity of the independent
auditor's conclusions.

There is, moreover, a need to subject these

invoices or receipts to examination by the CTA
in order to confirm whether they are VAT
invoices. Under Section 21 of Revenue
Regulation, No. 5-87, all purchases covered by
invoices other than a VAT invoice shall not be
entitled to a refund of input VAT.

xxxx

While the CTA is not governed strictly by

technical rules of evidence, as rules of
procedure are not ends in themselves but are
primarily intended as tools in the
administration of justice, the presentation of
the purchase receipts and/or invoices is not
mere procedural technicality which may be
disregarded considering that it is the only
means by which the CTA may ascertain and
verify the truth of the respondent's claims.

The records further show that respondent

miserably failed to substantiate its claims for
input VAT refund for the first semester of 1991.
Except for the summary and schedules of input
VAT payments prepared by respondent itself, no
other evidence was adduced in support of its
claim.

As for respondent's claim for input VAT refund

for the second semester of 1991, it employed the
services of Joaquin Cunanan & Co. on account
of which it (Joaquin Cunanan & Co.) executed
a certification that:

We have examined the information shown below

concerning the input tax payments made by the
Makati Office of Manila Mining Corporation for
the period from July 1 to December 31, 1991.
Our examination included inspection of the
pertinent suppliers' invoices and official
receipts and such other auditing procedures as
we considered necessary in the circumstances.
xxx

As the certification merely stated that it used

"auditing procedures considered necessary"
and not auditing procedures which are in
accordance with generally accepted auditing
principles and standards, and that the
examination was made on "input tax payments
by the Manila Mining Corporation," without
specifying that the said input tax payments are
attributable to the sales of gold to the Central
Bank, this Court cannot rely thereon and
regard it as sufficient proof of the respondent's
input VAT payments for the second semester.37

As for the Petition in G.R. No. 141104, involving

the input VAT of petitioner corporation on its
zero-rated sales in the first quarter of 1992, this
Court already found that the petitioner
corporation failed to comply with Section 106(b)
of the Tax Code of 1977, as amended, imposing
the two-year prescriptive period for the filing of
the application for refund/credit thereof. This
bars the grant of the application for
refund/credit, whether administratively or
judicially, by express mandate of Section 106(e)
of the same Code.

Granting arguendo that the application of

petitioner corporation for the refund/credit of
the input VAT on its zero-rated sales in the first
quarter of 1992 was actually and timely filed,
petitioner corporation still failed to present
together with its application the required
supporting documents, whether before the BIR
or the CTA. As the Court of Appeals ruled –

In actions involving claims for refund of taxes

assessed and collected, the burden of proof
rests on the taxpayer. As clearly discussed in
the CTA's decision, petitioner failed to
substantiate its claim for tax refunds. Thus:

"We note, however, that in the cases at bar,

petitioner has relied totally on Revenue
Regulations No. 2-88 in determining
compliance with the documentary requirements
for a successful refund or issuance of tax credit.
Unmentioned is the applicable and specific
amendment later introduced by Revenue
Regulations No. 3-88 dated April 7, 1988
(issued barely after two months from the
promulgation of Revenue Regulations No. 2-88
on February 15, 1988), which amended Section
16 of Revenue Regulations No. 5-87 on refunds
or tax credits of input tax. x x x.

xxxx

"A thorough examination of the evidence

submitted by the petitioner before this court
reveals outright the failure to satisfy
documentary requirements laid down under the
above-cited regulations. Specifically, petitioner
was not able to present the following documents,
to wit:

"a) sales invoices or receipts;

"b) purchase invoices or receipts;

"c) evidence of actual receipt of goods;

"d) BOI statement showing the amount and

description of sale of goods, etc.
"e) original or attested copies of invoice or
receipt on capital equipment locally purchased;
and

"f) photocopy of import entry document and

confirmation receipt on imported capital
equipment.

"There is the need to examine the sales invoices

or receipts in order to ascertain the actual
amount or quantity of goods sold and their
selling price. Without them, this Court cannot
verify the correctness of petitioner's claim
inasmuch as the regulations require that the
input taxes being sought for refund should be
limited to the portion that is directly and
entirely attributable to the particular zero-rated
transaction. In this instance, the best evidence
of such transaction are the said sales invoices
or receipts.

"Also, even if sales invoices are produced, there

is the further need to submit evidence that such
goods were actually received by the buyer, in
this case, by CBP, Philp[h]os and PASAR.

xxxx

"Lastly, this Court cannot determine whether

there were actual local and imported purchase
of capital goods as well as domestic purchase of
non-capital goods without the required
purchase invoice or receipt, as the case may be,
and confirmation receipts.

"There is, thus, the imperative need to submit

before this Court the original or attested
photocopies of petitioner's invoices or receipts,
confirmation receipts and import entry
documents in order that a full ascertainment of
the claimed amount may be achieved.

"Petitioner should have taken the foresight to

introduce in evidence all of the missing
documents abovementioned. Cases filed before
this Court are litigated de novo. This means that
party litigants should endeavor to prove at the
first instance every minute aspect of their cases
strictly in accordance with the Rules of Court,
most especially on documentary evidence." (pp.
37-42, Rollo)

Tax refunds are in the nature of tax exemptions.

It is regarded as in derogation of the sovereign
authority, and should be construed in
strictissimi juris against the person or entity
claiming the exemption. The taxpayer who
claims for exemption must justify his claim by
the clearest grant of organic or statute law and
should not be permitted to stand on vague
implications (Asiatic Petroleum Co. v. Llanes,
49 Phil. 466; Northern Phil. Tobacco Corp. v.
Mun. of Agoo, La Union, 31 SCRA 304; Reagan
v. Commissioner, 30 SCRA 968; Asturias Sugar
Central, Inc. v. Commissioner of Customs, 29
SCRA 617; Davao Light and Power Co., Inc. v.
Commissioner of Customs, 44 SCRA 122).

There is no cogent reason to fault the CTA's

conclusion that the SGV's certificate is "self-
destructive", as it finds comfort in the very
SGV's stand, as follows:

"It is our understanding that the above

procedure are sufficient for the purpose of the
Company. We make no presentation regarding
the sufficiency of these procedures for such
purpose. We did not compare the total of the
input tax claimed each quarter against the
pertinent VAT returns and books of accounts.
The above procedures do not constitute an
audit made in accordance with generally
accepted auditing standards. Accordingly, we
do not express an opinion on the company's
claim for input VAT refund or credit. Had we
performed additional procedures, or had we
made an audit in accordance with generally
accepted auditing standards, other matters
might have come to our attention that we would
have accordingly reported on."

The SGV's "disclaimer of opinion" carries much

weight as it is petitioner's independent auditor.
Indeed, SGV expressed that it "did not compare
the total of the input tax claimed each quarter
against the VAT returns and books of
accounts."38

Moving on to the Petition in G.R. No. 148763,

concerning the input VAT of petitioner
corporation on its zero-rated sales in the second,
third, and fourth quarters of 1990, the appellate
court likewise found that petitioner corporation
failed to sufficiently establish its claims. Already
disregarding the declarations made by the
Court of Appeals on its erroneous application of
Revenue Regulations No. 2-88, quoted
hereunder is the rest of the findings of the
appellate court after evaluating the evidence
submitted in accordance with the requirements
under Revenue Regulations No. 3-88 –

The Secretary of Finance validly adopted

Revenue Regulations [No.] x x x 3-98 pursuant
to Sec. 245 of the National Internal Revenue
Code, which recognized his power to
"promulgate all needful rules and regulations
for the effective enforcement of the provisions of
this Code." Thus, it is incumbent upon a
taxpayer intending to file a claim for refund of
input VATs or the issuance of a tax credit
certificate with the BIR x x x to prove sales to
such buyers as required by Revenue
Regulations No. 3-98. Logically, the same
evidence should be presented in support of an
action to recover taxes which have been paid.

x x x Neither has [herein petitioner corporation]

presented sales invoices or receipts showing
sales of gold, copper concentrates, and pyrite to
the CBP, [PASAR], and [PHILPHOS],
respectively, and the dates and amounts of the
same, nor any evidence of actual receipt by the
said buyers of the mineral products. It merely
presented receipts of purchases from suppliers
on which input VATs were allegedly paid. Thus,
the Court of Tax Appeals correctly denied the
claims for refund of input VATs or the issuance
of tax credit certificates of petitioner
[corporation]. Significantly, in the resolution,
dated 7 June 2000, this Court directed the
parties to file memoranda discussing, among
others, the submission of proof for "its
[petitioner's] sales of gold, copper concentrates,
and pyrite to buyers." Nevertheless, the parties,
including the petitioner, failed to address this
issue, thereby necessitating the affirmance of
the ruling of the Court of Tax Appeals on this
point.39

This Court is, therefore, bound by the foregoing

facts, as found by the appellate court, for well-
settled is the general rule that the jurisdiction
of this Court in cases brought before it from the
Court of Appeals, by way of a Petition for Review
on Certiorari under Rule 45 of the Revised Rules
of Court, is limited to reviewing or revising
errors of law; findings of fact of the latter are
conclusive.40 This Court is not a trier of facts.
It is not its function to review, examine and
evaluate or weigh the probative value of the
evidence presented.41

The distinction between a question of law and a

question of fact is clear-cut. It has been held
that "[t]here is a question of law in a given case
when the doubt or difference arises as to what
the law is on a certain state of facts; there is a
question of fact when the doubt or difference
arises as to the truth or falsehood of alleged
facts."42

Whether petitioner corporation actually made

zero-rated sales; whether it paid input VAT on
these sales in the amount it had declared in its
returns; whether all the input VAT subject of its
applications for refund/credit can be attributed
to its zero-rated sales; and whether it had not
previously applied the input VAT against its
output VAT liabilities, are all questions of fact
which could only be answered after reviewing,
examining, evaluating, or weighing the
probative value of the evidence it presented, and
which this Court does not have the jurisdiction
to do in the present Petitions for Review on
Certiorari under Rule 45 of the revised Rules of
Court.
Granting that there are exceptions to the
general rule, when this Court looked into
questions of fact under particular
circumstances,43 none of these exist in the
instant cases. The Court of Appeals, in both
cases, found a dearth of evidence to support the
claims for refund/credit of the input VAT of
petitioner corporation, and the records bear out
this finding. Petitioner corporation itself cannot
dispute its non-compliance with the
requirements set forth in Revenue Regulations
No. 3-88 and CTA Circular No. 1-95, as
amended. It concentrated its arguments on its
assertion that the substantiation requirements
under Revenue Regulations No. 2-88 should not
have applied to it, while being conspicuously
silent on the evidentiary requirements
mandated by other relevant regulations.

Re-opening of cases/holding of new trial before

the CTA

This Court now faces the final issue of whether

the prayer of petitioner corporation for the re-
opening of its cases or holding of new trial
before the CTA for the reception of additional
evidence, may be granted. Petitioner
corporation prays that the Court exercise its
discretion on the matter in its favor, consistent
with the policy that rules of procedure be
liberally construed in pursuance of substantive
justice.

This Court, however, cannot grant the prayer of

petitioner corporation.

An aggrieved party may file a motion for new

trial or reconsideration of a judgment already
rendered in accordance with Section 1, Rule 37
of the revised Rules of Court, which provides –

SECTION 1. Grounds of and period for filing

motion for new trial or reconsideration. – Within
the period for taking an appeal, the aggrieved
party may move the trial court to set aside the
judgment or final order and grant a new trial for
one or more of the following causes materially
affecting the substantial rights of said party:

(a) Fraud, accident, mistake or excusable

negligence which ordinary prudence could not
have guarded against and by reason of which
such aggrieved party has probably been
impaired in his rights; or

(b) Newly discovered evidence, which he could

not, with reasonable diligence, have discovered
and produced at the trial, and which if
presented would probably alter the result.

Within the same period, the aggrieved party

may also move fore reconsideration upon the
grounds that the damages awarded are
excessive, that the evidence is insufficient to
justify the decision or final order, or that the
decision or final order is contrary to law.

In G.R. No. 148763, petitioner corporation

attempts to justify its motion for the re-opening
of its cases and/or holding of new trial before
the CTA by contending that the "[f]ailure of its
counsel to adduce the necessary evidence
should be construed as excusable negligence or
mistake which should constitute basis for such
re-opening of trial as for a new trial, as counsel
was of the belief that such evidence was
rendered unnecessary by the presentation of
unrebutted evidence indicating that respondent
[Commissioner] has acknowledged the sale of
[sic] PASAR and [PHILPHOS] to be zero-rated."
44 The CTA denied such motion on the ground
that it was not accompanied by an affidavit of
merit as required by Section 2, Rule 37 of the
revised Rules of Court. The Court of Appeals
affirmed the denial of the motion, but apart
from this technical defect, it also found that
there was no justification to grant the same.

On the matter of the denial of the motion of the

petitioner corporation for the re-opening of its
cases and/or holding of new trial based on the
technicality that said motion was
unaccompanied by an affidavit of merit, this
Court rules in favor of the petitioner corporation.
The facts which should otherwise be set forth in
a separate affidavit of merit may, with equal
effect, be alleged and incorporated in the motion
itself; and this will be deemed a substantial
compliance with the formal requirements of the
law, provided, of course, that the movant, or
other individual with personal knowledge of the
facts, take oath as to the truth thereof, in effect
converting the entire motion for new trial into
an affidavit.45 The motion of petitioner
corporation was prepared and verified by its
counsel, and since the ground for the motion
was premised on said counsel's excusable
negligence or mistake, then the obvious
conclusion is that he had personal knowledge of
the facts relating to such negligence or mistake.
Hence, it can be said that the motion of
petitioner corporation for the re-opening of its
cases and/or holding of new trial was in
substantial compliance with the formal
requirements of the revised Rules of Court.

Even so, this Court finds no sufficient ground

for granting the motion of petitioner corporation
for the re-opening of its cases and/or holding of
new trial.

In G.R. No. 141104, petitioner corporation

invokes the Resolution,46 dated 20 July 1998,
by the CTA in another case, CTA Case No. 5296,
involving the claim of petitioner corporation for
refund/credit of input VAT for the third quarter
of 1993. The said Resolution allowed the re-
opening of CTA Case No. 5296, earlier
dismissed by the CTA, to give the petitioner
corporation the opportunity to present the
missing export documents.

The rule that the grant or denial of motions for

new trial rests on the discretion of the trial
court,47 may likewise be extended to the CTA.
When the denial of the motion rests upon the
discretion of a lower court, this Court will not
interfere with its exercise, unless there is proof
of grave abuse thereof.48
That the CTA granted the motion for re-opening
of one case for the presentation of additional
evidence and, yet, deny a similar motion in
another case filed by the same party, does not
necessarily demonstrate grave abuse of
discretion or arbitrariness on the part of the
CTA. Although the cases involve identical
parties, the causes of action and the evidence to
support the same can very well be different. As
can be gleaned from the Resolution, dated 20
July 1998, in CTA Case No. 5296, petitioner
corporation was claiming refund/credit of the
input VAT on its zero-rated sales, consisting of
actual export sales, to Mitsubishi Metal
Corporation in Tokyo, Japan. The CTA took into
account the presentation by petitioner
corporation of inward remittances of its export
sales for the quarter involved, its Supply
Contract with Mitsubishi Metal Corporation, its
1993 Annual Report showing its sales to the
said foreign corporation, and its application for
refund. In contrast, the present Petitions
involve the claims of petitioner corporation for
refund/credit of the input VAT on its purchases
of capital goods and on its effectively zero-rated
sales to CBP and EPZA-registered enterprises
PASAR and PHILPHOS for the second, third,
and fourth quarters of 1990 and first quarter of
1992. There being a difference as to the bases
of the claims of petitioner corporation for
refund/credit of input VAT in CTA Case No.
5926 and in the Petitions at bar, then, there are
resulting variances as to the evidence required
to support them.

Moreover, the very same Resolution, dated 20

July 1998, in CTA Case No. 5296, invoked by
petitioner corporation, emphasizes that the
decision of the CTA to allow petitioner
corporation to present evidence "is applicable
pro hac vice or in this occasion only as it is the
finding of [the CTA] that petitioner [corporation]
has established a few of the aforementioned
material points regarding the possible existence
of the export documents together with the prior
and succeeding returns for the quarters
involved, x x x" [Emphasis supplied.] Therefore,
the CTA, in the present cases, cannot be bound
by its ruling in CTA Case No. 5296, when these
cases do not involve the exact same
circumstances that compelled it to grant the
motion of petitioner corporation for re-opening
of CTA Case No. 5296.

Finally, assuming for the sake of argument that

the non-presentation of the required documents
was due to the fault of the counsel of petitioner
corporation, this Court finds that it does not
constitute excusable negligence or mistake
which would warrant the re-opening of the
cases and/or holding of new trial.

Under Section 1, Rule 37 of the Revised Rules

of Court, the "negligence" must be excusable
and generally imputable to the party because if
it is imputable to the counsel, it is binding on
the client. To follow a contrary rule and allow a
party to disown his counsel's conduct would
render proceedings indefinite, tentative, and
subject to re-opening by the mere subterfuge of
replacing the counsel. What the aggrieved
litigant should do is seek administrative
sanctions against the erring counsel and not
ask for the reversal of the court's ruling.49

As elucidated by this Court in another case,50

the general rule is that the client is bound by
the action of his counsel in the conduct of his
case and he cannot therefore complain that the
result of the litigation might have been
otherwise had his counsel proceeded differently.
It has been held time and again that blunders
and mistakes made in the conduct of the
proceedings in the trial court as a result of the
ignorance, inexperience or incompetence of
counsel do not qualify as a ground for new trial.
If such were to be admitted as valid reasons for
re-opening cases, there would never be an end
to litigation so long as a new counsel could be
employed to allege and show that the prior
counsel had not been sufficiently diligent,
experienced or learned.
Moreover, negligence, to be "excusable," must
be one which ordinary diligence and prudence
could not have guarded against.51 Revenue
Regulations No. 3-88, which was issued on 15
February 1988, had been in effect more than
two years prior to the filing by petitioner
corporation of its earliest application for
refund/credit of input VAT involved herein on
21 August 1990. CTA Circular No. 1-95 was
issued only on 25 January 1995, after
petitioner corporation had filed its Petitions
before the CTA, but still during the pendency of
the cases of petitioner corporation before the tax
court. The counsel of petitioner corporation
does not allege ignorance of the foregoing
administrative regulation and tax court circular,
only that he no longer deemed it necessary to
present the documents required therein
because of the presentation of alleged
unrebutted evidence of the zero-rated sales of
petitioner corporation. It was a judgment call
made by the counsel as to which evidence to
present in support of his client's cause, later
proved to be unwise, but not necessarily
negligent.

Neither is there any merit in the contention of

petitioner corporation that the non-
presentation of the required documentary
evidence was due to the excusable mistake of
its counsel, a ground under Section 1, Rule 37
of the revised Rules of Court for the grant of a
new trial. "Mistake," as it is referred to in the
said rule, must be a mistake of fact, not of law,
which relates to the case.52 In the present case,
the supposed mistake made by the counsel of
petitioner corporation is one of law, for it was
grounded on his interpretation and evaluation
that Revenue Regulations No. 3-88 and CTA
Circular No. 1-95, as amended, did not apply to
his client's cases and that there was no need to
comply with the documentary requirements set
forth therein. And although the counsel of
petitioner corporation advocated an erroneous
legal position, the effects thereof, which did not
amount to a deprivation of his client's right to
be heard, must bind petitioner corporation. The
question is not whether petitioner corporation
succeeded in establishing its interests, but
whether it had the opportunity to present its
side.53

Besides, litigation is a not a "trial and error"

proceeding. A party who moves for a new trial
on the ground of mistake must show that
ordinary prudence could not have guarded
against it. A new trial is not a refuge for the
obstinate.54 Ordinary prudence in these cases
would have dictated the presentation of all
available evidence that would have supported
the claims for refund/credit of input VAT of
petitioner corporation. Without sound legal
basis, counsel for petitioner corporation
concluded that Revenue Regulations No. 3-88,
and later on, CTA Circular No. 1-95, as
amended, did not apply to its client's claims.
The obstinacy of petitioner corporation and its
counsel is demonstrated in their failure, nay,
refusal, to comply with the appropriate
administrative regulations and tax court
circular in pursuing the claims for
refund/credit, now subject of G.R. Nos. 141104
and 148763, even though these were separately
instituted in a span of more than two years. It
is also evident in the failure of petitioner
corporation to address the issue and to present
additional evidence despite being given the
opportunity to do so by the Court of Appeals. As
pointed out by the appellate court, in its
Decision, dated 15 September 2000, in CA-G.R.
SP No. 46718 –

x x x Significantly, in the resolution, dated 7

June 2000, this Court directed the parties to file
memoranda discussing, among others, the
submission of proof for "its [petitioner's] sales of
gold, copper concentrates, and pyrite to
buyers." Nevertheless, the parties, including the
petitioner, failed to address this issue, thereby
necessitating the affirmance of the ruling of the
Court of Tax Appeals on this point.55

Summary
Hence, although this Court agreed with the
petitioner corporation that the two-year
prescriptive period for the filing of claims for
refund/credit of input VAT must be counted
from the date of filing of the quarterly VAT
return, and that sales to EPZA-registered
enterprises operating within economic
processing zones were effectively zero-rated and
were not covered by Revenue Regulations No. 2-
88, it still denies the claims of petitioner
corporation for refund of its input VAT on its
purchases of capital goods and effectively zero-
rated sales during the second, third, and fourth
quarters of 1990 and the first quarter of 1992,
for not being established and substantiated by
appropriate and sufficient evidence. Petitioner
corporation is also not entitled to the re-opening
of its cases and/or holding of new trial since the
non-presentation of the required documentary
evidence before the BIR and the CTA by its
counsel does not constitute excusable
negligence or mistake as contemplated in
Section 1, Rule 37 of the revised Rules of Court.

WHEREFORE, premises considered, the instant

Petitions for Review are hereby DENIED, and
the Decisions, dated 6 July 1999 and 15
September 2000, of the Court of Appeals in CA-
G.R. SP Nos. 47607 and 46718, respectively,
are hereby AFFIRMED. Costs against petitioner.

Ynares-Santiago, Chairperson, Austria-

Martinez, Nachura, JJ., concur.

National Development Company v CIR | GR

No. 53961 | 30 June 1987

G.R. No. L-53961

NATIONAL DEVELOPMENT COMPANY,

petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
respondent.

CRUZ, J.:
We are asked to reverse the decision of the
Court of Tax Appeals on the ground that it is
erroneous. We have carefully studied it and find
it is not; on the contrary, it is supported by law
and doctrine. So finding, we affirm.

Reduced to simplest terms, the background

facts are as follows.

The national Development Company entered

into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of
twelve ocean-going vessels. 1 The purchase
price was to come from the proceeds of bonds
issued by the Central Bank. 2 Initial payments
were made in cash and through irrevocable
letters of credit. 3 Fourteen promissory notes
were signed for the balance by the NDC and, as
required by the shipbuilders, guaranteed by the
Republic of the Philippines. 4 Pursuant thereto,
the remaining payments and the interests
thereon were remitted in due time by the NDC
to Tokyo. The vessels were eventually completed
and delivered to the NDC in Tokyo. 5

The NDC remitted to the shipbuilders in Tokyo

the total amount of US$4,066,580.70 as
interest on the balance of the purchase price.
No tax was withheld. The Commissioner then
held the NDC liable on such tax in the total sum
of P5,115,234.74. Negotiations followed but
failed. The BIR thereupon served on the NDC a
warrant of distraint and levy to enforce
collection of the claimed amount. 6 The NDC
went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a

slight reduction of the tax deficiency in the sum
of P900.00, representing the compromise
penalty. 7 The NDC then came to this Court in
a petition for certiorari.

The petition must fail for the following reasons.

The Japanese shipbuilders were liable to tax on
the interest remitted to them under Section 37
of the Tax Code, thus:

SEC. 37. Income from sources within the

Philippines. — (a) Gross income from sources
within the Philippines. — The following items of
gross income shall be treated as gross income
from sources within the Philippines:

(1) Interest. — Interest derived from sources

within the Philippines, and interest on bonds,
notes, or other interest-bearing obligations of
residents, corporate or otherwise;

xxx xxx xxx

The petitioner argues that the Japanese

shipbuilders were not subject to tax under the
above provision because all the related activities
— the signing of the contract, the construction
of the vessels, the payment of the stipulated
price, and their delivery to the NDC — were
done in Tokyo. 8 The law, however, does not
speak of activity but of "source," which in this
case is the NDC. This is a domestic and resident
corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law,

that the Government's right to levy and collect
income tax on interest received by foreign
corporations not engaged in trade or business
within the Philippines is not planted upon the
condition that 'the activity or labor — and the
sale from which the (interest) income flowed had
its situs' in the Philippines. The law specifies:
'Interest derived from sources within the
Philippines, and interest on bonds, notes, or
other interest-bearing obligations of residents,
corporate or otherwise.' Nothing there speaks of
the 'act or activity' of non-resident corporations
in the Philippines, or place where the contract
is signed. The residence of the obligor who pays
the interest rather than the physical location of
the securities, bonds or notes or the place of
payment, is the determining factor of the source
of interest income. (Mertens, Law of Federal
Income Taxation, Vol. 8, p. 128, citing A.C.
Monk & Co. Inc. 10 T.C. 77; Sumitomo Bank,
Ltd., 19 BTA 480; Estate of L.E. Mckinnon, 6
BTA 412; Standard Marine Ins. Co., Ltd., 4 BTA
853; Marine Ins. Co., Ltd., 4 BTA 867.)
Accordingly, if the obligor is a resident of the
Philippines the interest payment paid by him
can have no other source than within the
Philippines. The interest is paid not by the bond,
note or other interest-bearing obligations, but
by the obligor. (See mertens, Id., Vol. 8, p. 124.)

Here in the case at bar, petitioner National

Development Company, a corporation duly
organized and existing under the laws of the
Republic of the Philippines, with address and
principal office at Calle Pureza, Sta. Mesa,
Manila, Philippines unconditionally promised to
pay the Japanese shipbuilders, as obligor in
fourteen (14) promissory notes for each vessel,
the balance of the contract price of the twelve
(12) ocean-going vessels purchased and
acquired by it from the Japanese corporations,
including the interest on the principal sum at
the rate of five per cent (5%) per annum. (See
Exhs. "D", D-1" to "D-13", pp. 100-113, CTA
Records; par. 11, Partial Stipulation of Facts.)
And pursuant to the terms and conditions of
these promisory notes, which are duly signed by
its Vice Chairman and General Manager,
petitioner remitted to the Japanese
shipbuilders in Japan during the years 1960,
1961, and 1962 the sum of $830,613.17,
$1,654,936.52 and $1,541.031.00, respectively,
as interest on the unpaid balance of the
purchase price of the aforesaid vessels. (pars.
13, 14, & 15, Partial Stipulation of Facts.)

The law is clear. Our plain duty is to apply it as

written. The residence of the obligor which paid
the interest under consideration, petitioner
herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly
organized and existing under the laws of the
Philippines, it is a domestic corporation,
resident of the Philippines. (Sec. 84(c), National
Internal Revenue Code.) The interest paid by
petitioner, which is admittedly a resident of the
Philippines, is on the promissory notes issued
by it. Clearly, therefore, the interest remitted to
the Japanese shipbuilders in Japan in 1960,
1961 and 1962 on the unpaid balance of the
purchase price of the vessels acquired by
petitioner is interest derived from sources
within the Philippines subject to income tax
under the then Section 24(b)(1) of the National
Internal Revenue Code. 9

There is no basis for saying that the interest

payments were obligations of the Republic of
the Philippines and that the promissory notes
of the NDC were government securities exempt
from taxation under Section 29(b)[4] of the Tax
Code, reading as follows:

SEC. 29. Gross Income. — xxxx xxx xxx xxx

(b) Exclusion from gross income. — The

following items shall not be included in gross
income and shall be exempt from taxation
under this Title:

xxx xxx xxx

(4) Interest on Government Securities. —

Interest upon the obligations of the Government
of the Republic of the Philippines or any political
subdivision thereof, but in the case of such
obligations issued after approval of this Code,
only to the extent provided in the act
authorizing the issue thereof. (As amended by
Section 6, R.A. No. 82; emphasis supplied)

The law invoked by the petitioner as authorizing

the issuance of securities is R.A. No. 1407,
which in fact is silent on this matter. C.A. No.
182 as amended by C.A. No. 311 does carry
such authorization but, like R.A. No. 1407, does
not exempt from taxes the interests on such
securities.
It is also incorrect to suggest that the Republic
of the Philippines could not collect taxes on the
interest remitted because of the undertaking
signed by the Secretary of Finance in each of the
promissory notes that:

Upon authority of the President of the Republic

of the Philippines, the undersigned, for value
received, hereby absolutely and unconditionally
guarantee (sic), on behalf of the Republic of the
Philippines, the due and punctual payment of
both principal and interest of the above note.10

There is nothing in the above undertaking

exempting the interests from taxes. Petitioner
has not established a clear waiver therein of the
right to tax interests. Tax exemptions cannot be
merely implied but must be categorically and
unmistakably expressed. 11 Any doubt
concerning this question must be resolved in
favor of the taxing power. 12

Nowhere in the said undertaking do we find any

inhibition against the collection of the disputed
taxes. In fact, such undertaking was made by
the government in consonance with and
certainly not against the following provisions of
the Tax Code:

Sec. 53(b).Nonresident aliens. — All persons,

corporations and general co-partnership
(companies colectivas), in whatever capacity
acting, including lessees or mortgagors of real
or personal capacity, executors, administrators,
receivers, conservators, fiduciaries, employers,
and all officers and employees of the
Government of the Philippines having control,
receipt, custody; disposal or payment of interest,
dividends, rents, salaries, wages, premiums,
annuities, compensations, remunerations,
emoluments, or other fixed or determinable
annual or categorical gains, profits and income
of any nonresident alien individual, not engaged
in trade or business within the Philippines and
not having any office or place of business
therein, shall (except in the cases provided for
in subsection (a) of this section) deduct and
withhold from such annual or periodical gains,
profits and income a tax to twenty (now 30%)
per centum thereof: ...

Sec. 54. Payment of corporation income tax at

source. — In the case of foreign corporations
subject to taxation under this Title not engaged
in trade or business within the Philippines and
not having any office or place of business
therein, there shall be deducted and withheld at
the source in the same manner and upon the
same items as is provided in section fifty-three
a tax equal to thirty (now 35%) per centum
thereof, and such tax shall be returned and paid
in the same manner and subject to the same
conditions as provided in that section:....

Manifestly, the said undertaking of the Republic

of the Philippines merely guaranteed the
obligations of the NDC but without diminution
of its taxing power under existing laws.

In suggesting that the NDC is merely an

administrator of the funds of the Republic of the
Philippines, the petitioner closes its eyes to the
nature of this entity as a corporation. As such,
it is governed in its proprietary activities not
only by its charter but also by the Corporation
Code and other pertinent laws.

The petitioner also forgets that it is not the NDC

that is being taxed. The tax was due on the
interests earned by the Japanese shipbuilders.
It was the income of these companies and not
the Republic of the Philippines that was subject
to the tax the NDC did not withhold.

In effect, therefore, the imposition of the

deficiency taxes on the NDC is a penalty for its
failure to withhold the same from the Japanese
shipbuilders. Such liability is imposed by
Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. — Every

person required to deduct and withhold any tax
under this section shall make return thereof, in
duplicate, on or before the fifteenth day of April
of each year, and, on or before the time fixed by
law for the payment of the tax, shall pay the
amount withheld to the officer of the
Government of the Philippines authorized to
receive it. Every such person is made personally
liable for such tax, and is indemnified against
the claims and demands of any person for the
amount of any payments made in accordance
with the provisions of this section. (As amended
by Section 9, R.A. No. 2343.)

In Philippine Guaranty Co. v. The

Commissioner of Internal Revenue and the
Court of Tax Appeals, 13 the Court quoted with
approval the following regulation of the BIR on
the responsibilities of withholding agents:

In case of doubt, a withholding agent may

always protect himself by withholding the tax
due, and promptly causing a query to be
addressed to the Commissioner of Internal
Revenue for the determination whether or not
the income paid to an individual is not subject
to withholding. In case the Commissioner of
Internal Revenue decides that the income paid
to an individual is not subject to withholding,
the withholding agent may thereupon remit the
amount of a tax withheld. (2nd par., Sec. 200,
Income Tax Regulations).

"Strict observance of said steps is required of a

withholding agent before he could be released
from liability," so said Justice Jose P. Bengson,
who wrote the decision. "Generally, the law
frowns upon exemption from taxation; hence,
an exempting provision should be construed
strictissimi juris." 14

The petitioner was remiss in the discharge of its

obligation as the withholding agent of the
government an so should be held liable for its
omission.

WHEREFORE, the appealed decision is

AFFIRMED, without any pronouncement as to
costs. It is so ordered.
Teehankee, C.J., Yap, Fernan, Narvasa,
Melencio-Herrera, Gutierrez, Jr., Paras,
Feliciano, Gancayno, Padilla, Bidin, Sarmiento
and Cortez, JJ., concur

Manila International Airport Authority v

City of Pasay | GR No. 163072 | 02 April
2009

G.R. No. 163072 April 2, 2009

MANILA INTERNATIONAL AIRPORT

AUTHORITY, Petitioner,
vs.
CITY OF PASAY, SANGGUNIANG
PANGLUNGSOD NG PASAY, CITY MAYOR OF
PASAY, CITY TREASURER OF PASAY, and CITY
ASSESSOR OF PASAY, Respondents.

DECISION

CARPIO, J.:

This is a petition for review on certiorari1 of the

Decision2 dated 30 October 2002 and the
Resolution dated 19 March 2004 of the Court of
Appeals in CA-G.R. SP No. 67416.

The Facts

Petitioner Manila International Airport

Authority (MIAA) operates and administers the
Ninoy Aquino International Airport (NAIA)
Complex under Executive Order No. 903 (EO
903),3 otherwise known as the Revised Charter
of the Manila International Airport Authority.
EO 903 was issued on 21 July 1983 by then
President Ferdinand E. Marcos. Under Sections
34 and 225 of EO 903, approximately 600
hectares of land, including the runways, the
airport tower, and other airport buildings, were
transferred to MIAA. The NAIA Complex is
located along the border between Pasay City
and Parañaque City.

On 28 August 2001, MIAA received Final

Notices of Real Property Tax Delinquency from
the City of Pasay for the taxable years 1992 to
2001. MIAA’s real property tax delinquency for
its real properties located in NAIA Complex,
Ninoy Aquino Avenue, Pasay City (NAIA Pasay
properties) is tabulated as follows:

TAX DECLA-RATION TAXABLE YEAR TAX

DUE PENALTY TOTAL
A7-183-08346 1997-2001
243,522,855.00 123,351,728.18
366,874,583.18
A7-183-05224 1992-2001
113,582,466.00 71,159,414.98
184,741,880.98
A7-191-00843 1992-2001 54,454,800.00
34,115,932.20 88,570,732.20
A7-191-00140 1992-2001 1,632,960.00
1,023,049.44 2,656,009.44
A7-191-00139 1992-2001 6,068,448.00
3,801,882.85 9,870,330.85
A7-183-05409 1992-2001 59,129,520.00
37,044,644.28 96,174,164.28
A7-183-05410 1992-2001 20,619,720.00
12,918,254.58 33,537,974.58
A7-183-05413 1992-2001 7,908,240.00
4,954,512.36 12,862,752.36
A7-183-05412 1992-2001 18,441,981.20
11,553,901.13 29,995,882.33
A7-183-05411 1992-2001
109,946,736.00 68,881,630.13
178,828,366.13
A7-183-05245 1992-2001 7,440,000.00
4,661,160.00 12,101,160.00
GRAND TOTAL P642,747,726.20
P373,466,110.13 P1,016,213,836.33
On 24 August 2001, the City of Pasay, through
its City Treasurer, issued notices of levy and
warrants of levy for the NAIA Pasay properties.
MIAA received the notices and warrants of levy
on 28 August 2001. Thereafter, the City Mayor
of Pasay threatened to sell at public auction the
NAIA Pasay properties if the delinquent real
property taxes remain unpaid.

On 29 October 2001, MIAA filed with the Court

of Appeals a petition for prohibition and
injunction with prayer for preliminary
injunction or temporary restraining order. The
petition sought to enjoin the City of Pasay from
imposing real property taxes on, levying against,
and auctioning for public sale the NAIA Pasay
properties.

On 30 October 2002, the Court of Appeals

dismissed the petition and upheld the power of
the City of Pasay to impose and collect realty
taxes on the NAIA Pasay properties. MIAA filed
a motion for reconsideration, which the Court
of Appeals denied. Hence, this petition.

The Court of Appeals’ Ruling

The Court of Appeals held that Sections 193

and 234 of Republic Act No. 7160 or the Local
Government Code, which took effect on 1
January 1992, withdrew the exemption from
payment of real property taxes granted to
natural or juridical persons, including
government-owned or controlled corporations,
except local water districts, cooperatives duly
registered under Republic Act No. 6938, non-
stock and non-profit hospitals and educational
institutions. Since MIAA is a government-owned
corporation, it follows that its tax exemption
under Section 21 of EO 903 has been
withdrawn upon the effectivity of the Local
Government Code.

The Issue

The issue raised in this petition is whether the

NAIA Pasay properties of MIAA are exempt from
real property tax.

The Court’s Ruling

The petition is meritorious.

In ruling that MIAA is not exempt from paying

real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government
Code which read:
SECTION 193. Withdrawal of Tax Exemption
Privileges. – Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations, except local
water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code.

SECTION 234. Exemptions from Real Property

Tax. – The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions
except when the beneficial use thereof has been
granted, for consideration or otherwise to a
taxable person;

(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;

(c) All machineries and equipment that are

actually, directly and exclusively used by local
water districts and government owned or
controlled corporations engaged in the supply
and distribution of water and/or generation and
transmission of electric power;

(d) All real property owned by duly registered

cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution

control and environment protection.

Except as provided herein, any exemption from

payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-
owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

The Court of Appeals held that as a

government-owned corporation, MIAA’s tax
exemption under Section 21 of EO 903 has
already been withdrawn upon the effectivity of
the Local Government Code in 1992.

In Manila International Airport Authority v.

Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport
lands and buildings of MIAA are exempt from
tax under existing laws. The 2006 MIAA case
originated from a petition for prohibition and
injunction which MIAA filed with the Court of
Appeals, seeking to restrain the City of
Parañaque from imposing real property tax on,
levying against, and auctioning for public sale
the airport lands and buildings located in
Parañaque City. The only difference between the
2006 MIAA case and this case is that the 2006
MIAA case involved airport lands and buildings
located in Parañaque City while this case
involved airport lands and buildings located in
Pasay City. The 2006 MIAA case and this case
raised the same threshold issue: whether the
local government can impose real property tax
on the airport lands, consisting mostly of the
runways, as well as the airport buildings, of
MIAA. In the 2006 MIAA case, this Court held:

To summarize, MIAA is not a government-

owned or controlled corporation under Section
2(13) of the Introductory Provisions of the
Administrative Code because it is not organized
as a stock or non-stock corporation. Neither is
MIAA a government-owned or controlled
corporation under Section 16, Article XII of the
1987 Constitution because MIAA is not required
to meet the test of economic viability. MIAA is a
government instrumentality vested with
corporate powers and performing essential
public services pursuant to Section 2(10) of the
Introductory Provisions of the Administrative
Code. As a government instrumentality, MIAA is
not subject to any kind of tax by local
governments under Section 133(o) of the Local
Government Code. The exception to the
exemption in Section 234(a) does not apply to
MIAA because MIAA is not a taxable entity
under the Local Government Code. Such
exception applies only if the beneficial use of
real property owned by the Republic is given to
a taxable entity.

Finally, the Airport Lands and Buildings of

MIAA are properties devoted to public use and
thus are properties of public dominion.
Properties of public dominion are owned by the
State or the Republic. Article 420 of the Civil
Code provides:

Art. 420. The following things are property of

public dominion:

(1) Those intended for public use, such as roads,

canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without

being for public use, and are intended for some
public service or for the development of the
national wealth.

The term "ports x x x constructed by the State"

includes airports and seaports. The Airport
Lands and Buildings of MIAA are intended for
public use, and at the very least intended for
public service. Whether intended for public use
or public service, the Airport Lands and
Buildings are properties of public dominion. As
properties of public dominion, the Airport
Lands and Buildings are owned by the Republic
and thus exempt from real estate tax under
Section 234(a) of the Local Government Code.7
(Emphasis in the original)

The definition of "instrumentality" under

Section 2(10) of the Introductory Provisions of
the Administrative Code of 1987 uses the
phrase "includes x x x government-owned or
controlled corporations" which means that a
government "instrumentality" may or may not
be a "government-owned or controlled
corporation." Obviously, the term government
"instrumentality" is broader than the term
"government-owned or controlled corporation."
Section 2(10) provides:

SEC. 2. General Terms Defined.– x x x

(10) Instrumentality refers to any agency of the

national Government, not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. This term
includes regulatory agencies, chartered
institutions and government-owned or
controlled corporations.

The term "government-owned or controlled

corporation" has a separate definition under
Section 2(13)8 of the Introductory Provisions of
the Administrative Code of 1987:

SEC. 2. General Terms Defined.– x x x

(13) Government-owned or controlled

corporation refers to any agency organized as a
stock or non-stock corporation, vested with
functions relating to public needs whether
governmental or proprietary in nature, and
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of
its capital stock: Provided, That government-
owned or controlled corporations may further
be categorized by the department of Budget, the
Civil Service Commission, and the Commission
on Audit for the purpose of the exercise and
discharge of their respective powers, functions
and responsibilities with respect to such
corporations.

The fact that two terms have separate

definitions means that while a government
"instrumentality" may include a "government-
owned or controlled corporation," there may be
a government "instrumentality" that will not
qualify as a "government-owned or controlled
corporation."

A close scrutiny of the definition of

"government-owned or controlled corporation"
in Section 2(13) will show that MIAA would not
fall under such definition. MIAA is a
government "instrumentality" that does not
qualify as a "government-owned or controlled
corporation." As explained in the 2006 MIAA
case:

A government-owned or controlled corporation

must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock
or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock
divided into shares. MIAA has no stockholders
or voting shares. x x x

Section 3 of the Corporation Code defines a

stock corporation as one whose "capital stock is
divided into shares and x x x authorized to
distribute to the holders of such shares
dividends x x x." MIAA has capital but it is not
divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is
not a stock corporation.

xxx

MIAA is also not a non-stock corporation

because it has no members. Section 87 of the
Corporation Code defines a non-stock
corporation as "one where no part of its income
is distributable as dividends to its members,
trustees or officers." A non-stock corporation
must have members. Even if we assume that
the Government is considered as the sole
member of MIAA, this will not make MIAA a
non-stock corporation. Non-stock corporations
cannot distribute any part of their income to
their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury. This
prevents MIAA from qualifying as a non-stock
corporation.

Section 88 of the Corporation Code provides

that non-stock corporations are "organized for
charitable, religious, educational, professional,
cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and
like chambers." MIAA is not organized for any of
these purposes. MIAA, a public utility, is
organized to operate an international and
domestic airport for public use.

Since MIAA is neither a stock nor a non-stock

corporation, MIAA does not qualify as a
government-owned or controlled corporation.
What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested

with corporate powers to perform efficiently its
governmental functions. MIAA is like any other
government instrumentality, the only difference
is that MIAA is vested with corporate powers. x
xx

When the law vests in a government

instrumentality corporate powers, the
instrumentality does not become a corporation.
Unless the government instrumentality is
organized as a stock or non-stock corporation,
it remains a government instrumentality
exercising not only governmental but also
corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain, police
authority and the levying of fees and charges.
At the same time, MIAA exercises "all the
powers of a corporation under the Corporation
Law, insofar as these powers are not
inconsistent with the provisions of this
Executive Order."9

Thus, MIAA is not a government-owned or

controlled corporation but a government
instrumentality which is exempt from any kind
of tax from the local governments. Indeed, the
exercise of the taxing power of local government
units is subject to the limitations enumerated
in Section 133 of the Local Government Code.10
Under Section 133(o)11 of the Local
Government Code, local government units have
no power to tax instrumentalities of the national
government like the MIAA. Hence, MIAA is not
liable to pay real property tax for the NAIA Pasay
properties.

Furthermore, the airport lands and buildings of

MIAA are properties of public dominion
intended for public use, and as such are exempt
from real property tax under Section 234(a) of
the Local Government Code. However, under
the same provision, if MIAA leases its real
property to a taxable person, the specific
property leased becomes subject to real
property tax.12 In this case, only those portions
of the NAIA Pasay properties which are leased
to taxable persons like private parties are
subject to real property tax by the City of Pasay.

WHEREFORE, we GRANT the petition. We SET

ASIDE the Decision dated 30 October 2002 and
the Resolution dated 19 March 2004 of the
Court of Appeals in CA-G.R. SP No. 67416. We
DECLARE the NAIA Pasay properties of the
Manila International Airport Authority EXEMPT
from real property tax imposed by the City of
Pasay. We declare VOID all the real property tax
assessments, including the final notices of real
property tax delinquencies, issued by the City
of Pasay on the NAIA Pasay properties of the
Manila International Airport Authority, except
for the portions that the Manila International
Airport Authority has leased to private parties.

No costs.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:
REYNATO S. PUNO
Chief Justice

LEONARDO A. QUISUMBING
Associate Justice CONSUELO YNARES-
SANTIAGO
Associate Justice
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice RENATO C. CORONA
Associate Justice
CONCHITA CARPIO MORALES
Associate Justice DANTE O. TINGA
Associate Justice
MINITA V. CHICO-NAZARIO
Associate Justice PRESBITERO J.
VELASCO, JR.
Associate Justice
ANTONIO EDUARDO B. NACHURA
Associate Justice TERESITA J. LEONARDO-
DE CASTRO
Associate Justice
ARTURO D. BRION
Associate Justice DIOSDADO M. PERALTA
Associate Justice
CERTIFICATION

Pursuant to Section 13, Article VIII of the

Constitution, I certify that the conclusions in
the above Decision were reached in
consultation before the case was assigned to the
writer of the opinion of the Court.

REYNATO S. PUNO
Chief Justice

Footnotes

1 Under Rule 45 of the 1997 Rules of Civil

Procedure.

2 Penned by Associate Justice Ruben T. Reyes

(now retired Supreme Court Justice) with
Associate Justices Remedios Salazar-Fernando
and Edgardo F. Sundiam, concurring.
3 Providing for a Revision of Executive Order No.
778 Creating the Manila International Airport
Authority, Transferring Existing Assets of the
Manila International Airport to the Authority,
and Vesting the Authority with Power to
Administer and Operate the Manila
International Airport.

4 Section 3 of EO 903 reads:

SEC. 3. Creation of the Manila International

Airport Authority. There is hereby established a
body corporate to be known as the Manila
International Airport Authority which shall be
attached to the Ministry of Transportation and
Communications. The principal office of the
Authority shall be located at the New Manila
International Airport. The Authority may
establish such offices, branches, agencies or
subsidiaries as it may deem proper and
necessary; Provided, that any subsidiary that
may be organized shall have the prior approval
of the President.

The land where the Airport is presently located

as well as the surrounding land area of
approximately six hundred hectares, are hereby
transferred, conveyed and assigned to the
ownership and administration of the Authority,
subject to existing rights, if any. The Bureau of
Lands and other appropriate government
agencies shall undertake an actual survey of
the area transferred within one year from the
promulgation of this Executive Order and the
corresponding title to be issued in the name of
the Authority. Any portion thereof shall not be
disposed through the sale or through any other
mode unless specifically approved by the
President of the Philippines.

5 Section 22 of EO 903 reads:

SEC. 22. Transfer of Existing Facilities and

Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other
property, movable and immovable, belonging to
the Airport, and all assets, powers, rights,
interests and privileges belonging to the Bureau
of Air Transportation relating to airport works
or air operations, including all equipment which
are necessary for the operation of crash fire and
rescue facilities, are hereby transferred to the
Authority.

6 G.R. No. 155650, 20 July 2006, 495 SCRA

591.

7 Id. at 644-645.

8 Section 2(13) of the Introductory Provisions of

the Administrative Code of 1987 reads:

SEC. 2. General Terms Defined.– x x x

(13) Government-owned or controlled

corporation refers to any agency organized as a
stock or non-stock corporation, vested with
functions relating to public needs whether
governmental or proprietary in nature, and
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of
its capital stock: Provided, That government-
owned or controlled corporations may further
be categorized by the department of Budget, the
Civil Service Commission, and the Commission
on Audit for the purpose of the exercise and
discharge of their respective powers, functions
and responsibilities with respect to such
corporations.

9 Supra note 6 at 615-618.

10 Philippine Fisheries Development Authority

v. Court of Appeals, G.R. No. 150301, 2 October
2007, 534 SCRA 490.

11 Section 133(o) of the Local Government Code

reads:

SECTION 133. Common Limitations on the

Taxing Powers of the Local Government Units. –
Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

xxx

(o) Taxes, fees or charges of any kind on the

National Government, its agencies and
instrumentalities, and local government units.

12 Manila International Airport Authority v.

Court of Appeals, supra note 6.

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION

YNARES-SANTIAGO, J.:

Indeed, as pointed out by Justice Antonio T.

Carpio, the Court has twice reaffirmed the
ruling in Manila International Airport Authority
v. Court of Appeals1 in the subsequent cases of
Philippine Fisheries Development Authority v.
Court of Appeals2 and Philippine Fisheries
Development Authority v. Court of Appeals.3
However, upon further study of the issues
presented in said cases, I agree with Justice
Dante O. Tinga that the Manila International
Airport Authority (MIAA) ruling was incorrectly
rationalized, particularly on the unwieldy
characterization of MIAA as a species of a
government instrumentality. I submit that the
present ponencia of Justice Carpio perpetuates
the error which I find imperative for the Court
to correct.

Nevertheless, unlike Justice Tinga’s

rationalization, I find that there is no more need
to belabor the issue of whether the MIAA is a
government-owned or controlled corporation
(GOCC) or a government instrumentality in
order to resolve the issue of whether the airport
properties are subject to real property tax.
Instead, I subscribe to the "simple, direct and
painless approach" proposed by Justice Antonio
Eduardo B. Nachura that it is imperative to "fine
tune" the Court’s ruling in Mactan Cebu
International Airport Authority v. Marcos4 vis-
à-vis that in Manila International Airport
Authority v. Court of Appeals;5 and that what
needs only to be ascertained is whether the
airport properties are owned by the Republic;
and if such, then said properties are exempt
from real property tax, by applying Section 234
of Republic Act No. 7160 (R.A. No. 7160) or the
Local Government Code (LGC).

Pursuant to Section 232 of the LGC, a province

or city or municipality within the Metropolitan
Manila Area is vested with the power to levy an
annual ad valorem tax on real property such as
land, building, machinery, and other
improvement not hereafter specifically
exempted. Corollarily, Section 234 thereof
provides an enumeration of certain properties
which are exempt from payment of the real
property tax, among which is "real property
owned by the Republic of the Philippines or any
of its political subdivisions except when the
beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person."

Article 420 of the Civil Code enumerates the

properties of public dominion, to wit:

Art. 420: The following things are property of

public dominion:

(1) Those intended for public use, such as roads,

canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without

being for public use, and are intended for some
public service or for the development of the
national wealth.

There is no question that the airport and all its

installations, facilities and equipment, are
intended for public use and are, thus,
properties of public dominion.

Concededly, the Court ruled in Mactan Cebu

International Airport Authority v. Marcos6 that:

The crucial issues then to be addressed are: (a)

whether the parcels of land in question belong
to the Republic of the Philippines whose
beneficial use has been granted to the petitioner,
and (b) whether the petitioner is a "taxable
persons."

Section 15 of [MCIAA’s] Charter provides:

Sec. 15. Transfer of Existing Facilities and

Intangible Assets. – Al existing public airport
facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to
or presently administered by the airports, and
all assets, powers, rights, interests and
privileges relating on airport works or air
operations, including all equipment which are
necessary for the operations of air navigation,
aerodome control towers, crash, fire, and rescue
facilities are hereby transferred to the Authority:
Provided, however, that the operations control
of all equipment necessary for the operation of
radio aids to air navigation, airways
communication, the approach control office,
and the area control center shall be retained by
the Air Transportation Office. No equipment,
however, shall be removed by the Air
Transportation Office from Mactan without the
concurrence of the Authority. The Authority
may assist in the maintenance of the Air
Transportation Office equipment.

The "airports" referred to are the "Lahug Air

Port" in Cebu City and the "Mactan
International Airport in the Province of Cebu,"
which belonged to the Republic of the
Philippines, then under the Air Transportation
Office (ATO).

It may be reasonable to assume that the term

"lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and
includes the parcels of land the respondent City
of Cebu seeks to levy on for real property taxes.
This section involves a "transfer" of the "lands"
among other thins, to the petitioner and not just
the transfer of the beneficial use thereof, with
the ownership being retained by the Republic of
the Philippines.

This "transfer" is actually an absolute

conveyance of the ownership thereof because
the petitioner’s authorized capital stock
consists of, inter alia, "the value of such real
estate owned and/or administered by the
airports." Hence, the petitioner is now the owner
of the land in question and the exception in
Section 234© of the LGC is inapplicable.

Meanwhile, Executive Order No. 9037 or the

Revised Charter of the Manila International
Airport Authority, provides in Section 3 thereof
that –

xxxx

The land where the Airport is presently located

as well as the surrounding land area of
approximately six hundred hectares, are hereby
transferred, conveyed and assigned to the
ownership and administration of the Authority,
subject to existing rights, if any. The Bureau of
Lands and other appropriate government
agencies shall undertake an actual survey of
the area transferred within one year from the
promulgation of this Executive Order and the
corresponding title to be issued in the name of
the Authority. Any portion thereof shall not be
disposed through sale or through any other
mode unless specifically approved by the
President of the Philippines.

Regardless of the apparent transfer of title of the

said properties to MIAA, I submit that the latter
is only holding the properties for the benefit of
the Republic in its capacity as agent thereof. It
is to be noted that despite the conveyance of the
title to the said properties to the MIAA, however,
the latter could not in any way dispose of the
same through sale or through any other mode
unless specifically approved by the President of
the Republic.8 Even MIAA’s borrowing power is
dictated upon by the President. Thus, MIAA
could raise funds, either from local or
international sources, by way of loans, credits
or securities, and other borrowing instruments,
create pledges, mortgages and other voluntary
lines or encumbrances on any of its assets or
properties, only after consultation with the
Secretary of Finance and with the approval of
the President. In addition, MIAA’s total
outstanding indebtedness could exceed its net
worth only upon express authorization by the
President. 9

I fully agree with Justice Nachura that "even if

MIAA holds the record title over the airport
properties, such holding can only be for the
benefit of the Republic, that MIAA exercises an
essentially public function."

In sum, the airport and all its installations,

facilities and equipment of the MIAA, are
properties of public dominion and should thus
be exempted from payment of real property tax,
except those properties where the beneficial use
thereof has been granted, for consideration or
otherwise, to a taxable person.

ACCORDINGLY, I vote to grant the petition.

CONSUELO YNARES-SANTIAGO
Associate Justice

Footnotes

1 G.R. No. 155650, July 20, 2006, 495 SCRA

591.

2 G.R. No. 169836, July 31, 2007, 528 SCRA

707.

3 G.R. No. 151301, October 2, 2007, 534 SCRA

490.
4 330 Phil. 392 [1996].

5 Supra note 1.

6 Supra note 4.

7 July 21, 1983.

8 E.O. 903, Sec. 3.

9 E.O. 903, Sec. 16.

The Lawphil Project - Arellano Law Foundation

DISSENTING OPINION

TINGA, J.:

I maintain my dissent expressed in the 2006

ruling in MIAA v. City of Parañaque1 (the
"Parañaque case.")

The majority relies on two main points drawn

from the 2006 Parañaque case in this instance
as it rules once again that the MIAA is exempt
from realty taxes assessed by the City of Pasay.
First, because MIAA is a government
instrumentality, it somehow finds itself exempt
from the said taxes, supposedly by operation of
the Local Government Code. Second, the
subject properties are allegedly owned by the
Republic of the Philippines, notwithstanding
that legal title thereto is in the name of the MIAA,
which is a distinct and independent juridical
personality from the Republic.

I.

Once again, attempts are drawn to classify

MIAA as a government instrumentality, and not
as a government owned or controlled
corporation. Such characterization was
apparently insisted upon in order to tailor-fit
the MIAA to Section 133 of the Local
Government Code, which reads:
Sec. 133. Common Limitations on the Taxing
Powers of Local Government Units.— Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

xxx

15. Taxes, fees or charges of any kind on the

National Government, its agencies and
instrumentalities and local government units.
(emphasis and underscoring supplied).

How was the Parañaque case able to define the

MIAA as a instrumentality of the National
Government? The case propounded that MIAA
was not a GOCC:

There is no dispute that a government-owned or

controlled corporation is not exempt from real
estate tax. However, MIAA is not a government-
owned or controlled corporation. Section 2(13)
of the Introductory Provisions of the
Administrative Code of 1987 defines a
government-owned or controlled corporation as
follows:

SEC. 2. General Terms Defined. — . . .

(13) Government-owned or controlled

corporation refers to any agency organized as a
stock or non-stock corporation, vested with
functions relating to public needs whether
governmental or proprietary in nature, and
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one (51) percent of
its capital stock: . . . . (Emphasis supplied)

A government-owned or controlled corporation

must be "organized as a stock or non-stock
corporation." MIAA is not organized as a stock
or non-stock corporation. MIAA is not a stock
corporation because it has no capital stock
divided into shares. MIAA has no stockholders
or voting shares.

xxx

Clearly, under its Charter, MIAA does not have

capital stock that is divided into shares.

Section 3 of the Corporation Code 10 defines a

stock corporation as one whose "capital stock is
divided into shares and . . . authorized to
distribute to the holders of such shares
dividends . . . ." MIAA has capital but it is not
divided into shares of stock. MIAA has no
stockholders or voting shares. Hence, MIAA is
not a stock corporation.

MIAA is also not a non-stock corporation

because it has no members. Section 87 of the
Corporation Code defines a non-stock
corporation as "one where no part of its income
is distributable as dividends to its members,
trustees or officers." A non-stock corporation
must have members. Even if we assume that
the Government is considered as the sole
member of MIAA, this will not make MIAA a
non-stock corporation. Non-stock corporations
cannot distribute any part of their income to
their members. Section 11 of the MIAA Charter
mandates MIAA to remit 20% of its annual gross
operating income to the National Treasury. 11
This prevents MIAA from qualifying as a non-
stock corporation.

Section 88 of the Corporation Code provides

that non-stock corporations are "organized for
charitable, religious, educational, professional,
cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and
like chambers." MIAA is not organized for any of
these purposes. MIAA, a public utility, is
organized to operate an international and
domestic airport for public use.2

This "black or white" categorization of "stock"

and "non-stock" corporations utterly disregards
the fact that nothing in the Constitution
prevents Congress from creating government
owned or controlled corporations in whatever
structure it deems necessary. Note that this
definitions of "stock" and "non-stock"
corporations are taken from the Administrative
Code, and not the Constitution. The
Administrative Code is a statute, and is thus
not superior in hierarchy to any other
subsequent statute created by Congress,
including the charters for GOCCs.

Since MIAA was presumed not to be a stock or

non-stock corporation, the majority in the
Parañaque case then strived to fit it into a
category.

Since MIAA is neither a stock nor a non-stock

corporation, MIAA does not qualify as a
government-owned or controlled corporation.
What then is the legal status of MIAA within the
National Government?

MIAA is a government instrumentality vested

with corporate powers to perform efficiently its
governmental functions. MIAA is like any other
government instrumentality, the only difference
is that MIAA is vested with corporate powers.
Section 2(10) of the Introductory Provisions of
the Administrative Code defines a government
"instrumentality" as follows:

SEC. 2. General Terms Defined. –– . . .

(10) Instrumentality refers to any agency of the

National Government, not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. . . .
(Emphasis supplied)

When the law vests in a government

instrumentality corporate powers, the
instrumentality does not become a corporation.
Unless the government instrumentality is
organized as a stock or non-stock corporation,
it remains a government instrumentality
exercising not only governmental but also
corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain, police
authority and the levying of fees and charges.
At the same time, MIAA exercises "all the
powers of a corporation under the Corporation
Law, insofar as these powers are not
inconsistent with the provisions of this
Executive Order."3

Unfortunately, this cited statutory definition of

an "instrumentality" is incomplete. Worse, the
omitted portion from Section 2(10) completely
contradicts the premise of the ponente that an
instrumentality is mutually exclusive from a
GOCC. For the provision reads in full, with the
omitted portion highlighted, thus:

(10)Instrumentality refers to any agency of the

National Government not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. This term
includes regulatory agencies, chartered
institutions and government—owned or
controlled corporations.

This previous omission had not escaped the

attention of the outside world. For example,
lawyer Gregorio Batiller, Jr., has written a paper
on the Parañaque case entitled "A Tale of Two
Airports," which is published on the Internet.4
He notes therein:

Also of interest was the dissenting opinion of

Justice Dante Tinga to the effect that the
majority opinion failed to quote in full the
definition of "government instrumentality:"

The Majority gives the impression that a

government instrumentality is a distinct
concept from a government corporation. Most
tellingly, the majority selectively cites a portion
of Section 2(10) of the Administrative Code of
1987, as follows:

Instrumentality refers to any agency of the

National Government not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. xxx
(emphasis omitted)"

However, Section 2(10) of the Administrative

Code, when read in full, makes an important
clarification which the majority does not show.
The portions omitted by the majority are
highlighted below: xxx

"(10)Instrumentality refers to any agency of the

National Government not integrated within the
department framework, vested with special
functions or jurisdiction by, law endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. This term
includes regulatory agencies, chartered
institutions and government – owned or
controlled corporations.

So the majority opinion effectively begged the

question in finding that the MIAA was not a
GOCC but a mere government instrumentality,
which is other than a GOCC.5

The Office of the President itself was alarmed by

the redefinition made by the MIAA case of
instrumentalities, causing it on 29 December
2006 to issue Executive Order No. 596 creating
the unwieldy category of "Government
Instrumentality Vested with Corporate Powers
or Government Corporate Entities" just so that
it was clear that these newly defined
"instrumentalities" or "government corporate
entities" still fell within the jurisdiction of the
Office of the Government Corporate Counsel.
The E.O. reads in part:
EXECUTIVE ORDER NO. 596

DEFINING AND INCLUDING "GOVERNMENT

INSTRUMENTRALITY VESTED WITH
CORPORATE POWERS" OR "GOVERNMENT
CORPORATE ENTITIES" UNDER THE
JURISDICTION OF THE OFFICE OF THE
GOVERNMENT CORPORATE COUNSEL (OGCC)
AS PRINCIPAL LAW OFFICE OF
GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCs) AND FOR OTHER
PURPOSES.

WHEREAS, the Office of the Government

Corporate Counsel (OGCC), as the principal law
office of all Government-Owned or Controlled
Corporations (GOCCs), including their
subsidiaries, other corporate offsprings and
government acquired assets corporations, plays
a very significant role in safeguarding the legal
interests and providing the legal requirements
of all GOCCs;

WHEREAS, there is an imperative need to

integrate, strengthen and rationalize the powers
and jurisdiction of the OGCC in the light of the
Decision of the Supreme Court dated July 20,
2006, in the case of "Manila International
Airport Authority vs. Court of Appeals, City of
Parañaque, et al" (G.R. No. 155650), where the
High Court differentiated "government
corporate entities" and government
instrumentalities with corporate powers" from
GOCCs for purposes of the provisions of the
Local Government Code on real estate taxes,
and other fees and charges imposed by local
government units;

WHEREAS, in the interest of an effective

administration of justice, the application and
definition of the term "GOCCs" need to be
further clarified and rationalized to have
consistency in referring to the term and to avoid
unintended conflicts and/or confusion’

NOW, THEREFORE, I, GLORIA MACAPAGAL-

ARROYO, President of the Republic of the
Philippines, by virtue of the powers vested in my
by law, do hereby order:

SECTION 1. The Office of the Government

Corporate Counsel (OGCC) shall be the
principal law office of all GOCCs, except as may
otherwise be provided by their respective
charter or authorized by the President, their
subsidiaries, corporate offsprings, and
government acquired asset corporations. The
OGCC shall likewise be the principal law of the
"government instrumentality vested with
corporate powers" or "government corporate
entity," as defined by the Supreme Court in the
case of "MIAA v. Court of Appeals, City of
Parañaque, et al.," supra, notable examples of
which are: Manila International Airport
Authority (MIAA), Mactan International Airport
Authority, the Philippine Ports Authority (PPA),
Philippine Deposit Insurance Corporation
(PDIC), Metropolitan Water and Sewerage
Services (MWSS), Philippine Rice Research
Institute (PRRI), Laguna Lake Development
Authority (LLDA), Fisheries Development
Authority (FDA), Bases Conversion
Development Authority (BCDA), Cebu Port
Authority (CPA), Cagayan de Oro Port Authority,
and San Fernando Port Authority.

SECTION 2. As provided under PD 2029, series

of 1986, the term GOCCs is defined as a stock
or non-stock corporation, whether performing
governmental or proprietary functions, which is
directly chartered by a special law or if
organized under the general corporation law, is
owned or controlled by the government directly,
or indirectly, through a parent corporation or
subsidiary corporation, to the extent of at least
majority of its outstanding capital stock or of its
outstanding voting capital stock.

Under Section 2(10) of the Introductory

Provisions of the Administrative Code of 1987,
a government "instrumentality" refers to any
agency of the National Government, not
integrated within the department framework,
vested with special functions or jurisdiction by
law, endowed with some, if not all corporate
powers, administering special funds, and
enjoying operational autonomy, usually
through a charter.

SECTION 3. The following corporations are

considered GOCCs under the conditions and/or
circumstances indicated:

a) A corporation organized under the general

corporation law under private ownership at
least a majority of the shares of stock of which
were conveyed to a government financial
institution, whether by foreclosure or otherwise,
or a subsidiary corporation of a government
corporation organized exclusively to own and
manage, or lease, or operate specific assets
acquired by a government financial institution
in satisfaction of debts incurred therewith and
which in any case by enunciated policy of the
government is required to be disposed of to
private ownership within a specified period of
time, shall not be considered a GOCC before
such disposition and even if the ownership or
control thereof is subsequently transferred to
another GOCC;

b) A corporation created by special law which is

explicitly intended under that law for ultimate
transfer to private ownership under certain
specified conditions shall be considered a
GOCC, until it is transferred to private
ownership;

c) A corporation that is authorized to be

established by special law, but which is still
required under that law to register with the
Securities and Exchange Commission in order
to acquire a juridical personality, shall not, on
the basis of the special law alone, be considered
a GOCC.

xxx

Reading this Executive Order, one cannot help

but get the impression that the Republic of the
Philippines, ostensibly the victorious party in
the Parañaque case, felt that the 2006 ponencia
redefining "instrumentalities" was wrong.
Ostensibly, the Office of the Government
Corporate Counsel, the winning counsel in the
MIAA case, cooperated in the drafting of this
E.O. and probably also felt that the redefinition
of "instrumentalities" was wrong. I had pointed
out in my Dissent to the MIAA case that under
the framework propounded in that case, GOCCs
such as the Philippine Ports Authority, the
Bases Conversion Development Authority, the
Philippine Economic Zone Authority, the Light
Rail Transit Authority, the Bangko Sentral ng
Pilipinas, the National Power Corporation, the
Lung Center of the Philippines, and even the
Philippine Institute of Traditional and
Alternative Health Care have been reclassified
as instrumentalities instead of GOCCs.

Notably, GOCCs are mandated by Republic Act

No. 7656 to remit 50% of their annual net
earnings as cash, stock or property dividends to
the National Government. By denying
categorization of those above-mentioned
corporations as GOCCs, the Court in MIAA
effectively gave its imprimatur to those entities
to withhold remitting

50% of their annual net earnings to the National

Government. Hence, the necessity of E.O. No.
596 to undo the destructive effects of the
Parañaque case on the national coffers.

In a welcome development, the majority now

acknowledges the existence of that second
clause in Section 2(10) of the Introductory
Provisions of the Administrative Code, the
clause which made explicit that government
instrumentalities include GOCCs. In truth, I
had never quite understood this hesitation in
plainly saying that GOCCs are
instrumentalities. That fact is really of little
consequence in determining whether or not the
MIAA or other government instrumentalities or
GOCCs are exempt from real property taxes.
As I had consistently explained, the liability of
such entities is mandated by Section 232, in
relation with Section 234 of the Local
Government Code. Section 232 lays down the
general rule that provinces, cities or
municipalities within Metro Manila may levy an
ad valorem tax on real property "not hereinafter
specifically exempted." Such specific
exemptions are enumerated in Section 234, and
the only exemption tied to government
properties extends to "real property owned by
the Republic of the Philippines or any of its
political subdivisions except when the beneficial
use thereof has been granted…to a taxable
person."6

Moreover, the final paragraph of Section 234

explains that "[e]xcept as provided herein [in
Section 234], any exemption from payment of
real property tax previously granted to, or
presently enjoyed by all persons, whether
natural or juridical, including all government-
owned or –controlled corporations are hereby
withdrawn upon the effectivity of this Code."

What are the implications of Section 232 in

relation to Section 234 as to the liability for real
property taxes of government instrumentalities
such as MIAA?

1) All persons, whether natural or juridical,

including GOCCs are liable for real property
taxes.

2) The only exempt properties are those owned

by the Republic or any of its political
subdivisions.

3) So-called "government corporate entities," so

long as they have juridical personality distinct
from the Republic of the Philippines or any of
its political subdivisions, are liable for real
property taxes.

4) After the enactment of the Local Government

Code in 1991, Congress remained free to
reenact tax exemptions from real property taxes
to government instrumentalities, as it did with
the Government Service Insurance System in
1997.

It is that simple. The most honest intellectual

argument favoring the exemption of the MIAA
from real property taxes corresponds with the
issue of whether its properties may be deemed
as "owned by the Republic or any of its political
subdivisions". The matter of whether MIAA is a
GOCC or an instrumentality or a "government
corporate entity" should in fact be irrelevant.
However, the framework established by the
ponente beginning with the Parañaque case has
inexplicably and unnecessarily included the
question of what is a GOCC? That issue, utterly
irrelevant to settling the question of MIAA’s tax
liability, has caused nothing but distraction and
confusion.

It should be remembered that prior to the

Parañaque case, the prevailing rule on taxation
of GOCCs was as enunciated in Mactan Cebu
International Airport v. Hon. Marcos.7 That rule
was a highly sensible rule that gave due respect
to national government prerogatives and the
devolution of taxing powers to local
governments. Neither did Mactan Cebu prevent
Congress from enacting legislation exempting
selected GOCCs to be exempt from real property
taxes.

A significant portion of my Dissenting Opinion

in the Parañaque case was devoted to
explaining Mactan Cebu, and criticizing the
ponencia for implicitly rejecting that doctrine
without categorically saying so. In the years
since, significant confusion has arisen on
whether Mactan Cebu and the framework it
established in real property taxation of GOCCs
and instrumentalities, remains extant. Batiller
makes the same point in his paper, expressly
asking why "the Supreme Court did not
explicitly declare that the Mactan Cebu
International Airport case was deemed
repealed." He added:
Inevitably, the refusal of the Supreme Court to
clarify whether its Decision in the Mactan Cebu
International Airport case is deemed repealed
would leave us with an ambiguous situation
where two (2) of our major international airports
are treated differently tax wise: one in Cebu
which is deemed to be a GOCC subject to real
estate taxes and the other in Manila which is
not a GOCC and exempt from real estate taxes.

Where lies the substantial difference between

the two (2) airports? Your guess is as good as
mine.8

There are no good reasons why the Court

should not reassert the Mactan Cebu doctrine.
Under that ruling, real properties owned by the
Republic of the Philippines or any of its political
subdivisions are exempted from the payment of
real property taxes, while instrumentalities or
GOCCs are generally exempted from local
government taxes, save for real property taxes.
At the same time, Congress is free should it so
desire to exempt particular GOCCs or
instrumentalities from real property taxes by
enacting legislation for that purpose. This
paradigm is eminently more sober than that
created by the Parañaque case, which
attempted to amend the Constitution by
elevating as a constitutional principle, the real
property tax exemption of all government
instrumentalities, most of which also happen to
be GOCCs. Considering that the Constitution
itself is supremely deferential to the notion of
local government rule and the power of local
governments to generate revenue through local
taxes, the idea that not even the local
government code could subject such
"instrumentalities" to local taxes is plainly
absurd.

II.

I do recognize that the present majority opinion

has chosen to lay equal, if not greater emphasis
on the premise that the MIAA properties are
supposedly of public dominion, and as such are
exempt from realty taxes under Section 234(a)
of the Local Government Code. Again, I
respectfully disagree.

It is Article 420 of the Civil Code which defines

what are properties of public dominion. I do not
doubt that Article 420 can be interpreted in
such a way that airport properties, such as its
runways, hangars and the like, can be
considered akin to ports or roads, both of

which are among those properties considered as

part of the public dominion under Article 420(1).
It may likewise be possible that those properties
considered as "property of public dominion"
under Article 420 of the Civil Code are also
"property owned by the Republic," which under
Section 234 of the Local Government Code, are
exempt from real property taxes.

The necessary question to ask is whether

properties which are similar in character to
those enumerated under Article 420(1) may be
considered still part of the public dominion if,
by virtue of statute, ownership thereof is vested
in a GOCC which has independent juridical
personality from the Republic of the Philippines.
The question becomes even more complex if, as
in the case of MIAA, the law itself authorizes
such GOCC to sell the properties in question.

One of the most recognizable characteristics of

public dominion properties is that they are
placed outside the commerce of man and
cannot be alienated or leased or otherwise be
the subject matter of contracts.9 The fact is that
the MIAA may, by law, alienate, lease or place
the airport properties as the subject matter of
contracts. The following provisions of the MIAA
charter make that clear:

SECTION 5. Functions, Powers, and Duties. —

The Authority shall have the following functions,
powers and duties:

xxx xxx xxx

(i) To acquire, purchase, own, administer, lease,
mortgage, sell or otherwise dispose of any land,
building, airport facility, or property of whatever
kind and nature, whether movable or
immovable, or any interest therein;

xxx

SECTION 16. Borrowing Power. — The

Authority may, after consultation with the
Minister of Finance and with the approval of the
President of the Philippines, as recommended
by the Minister of Transportation and
Communications, raise funds, either from local
or international sources, by way of loans,
credits or securities, and other borrowing
instruments, with the power to create pledges,
mortgages and other voluntary liens or
encumbrances on any of its assets or properties.

There is thus that contradiction where property

which ostensibly is classified as part of the
public dominion under Article 420 of the Civil
Code is nonetheless classified to lie within the
commerce of man by virtue of a subsequent law
such as the MIAA charter. In order for the Court
to classify the MIAA properties as part of public
dominion, it will be necessary to invalidate the
provisions of the MIAA charter allowing the
Authority to lease, sell, create pledges,
mortgages and other voluntary liens or
encumbrances on any of the airport properties.
The provisions of the MIAA charter could not
very well be invalidated with the Civil Code as
basis, since the MIAA charter and the Civil Code
are both statutes, and thus of equal rank in the
hierarchy of laws, and more significantly the
Civil Code was enacted earlier and therefore
could not be the repealing law.

If there is a provision in the Constitution that

adopted the definition of and limitations on
public dominion properties as found in the Civil
Code, then the aforequoted provisions from the
MIAA charter allowing the Authority to place its
properties within the commerce of man may be
invalidated. The Constitution however does not
do so, confining itself instead to a general
statement that "all lands of the public domain,
waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and
fauna, and other natural resources are owned
by the State." Note though that under Article
420, public dominion properties are not
necessarily owned by the State, the two
subsections thereto referring to (a) properties
intended for public use; and (b) those which
belong to the State and are intended for some
public service or for the development of the
national wealth.10 In Laurel v.

Garcia,11 the Court notably acknowledged that

"property of public dominion is not owned by
the State but pertains to the State." Thus, there
is no equivalence between the concept of public
dominion under the Civil Code, and of public
domain under the Constitution.

Accordingly, the framework of public dominion

properties is one that is statutory, rather than
constitutional in design. That being the case,
Congress is able by law to segregate properties
which ostensibly are, by their nature, part of the
public dominion under Article 420(1) of the Civil
Code, and place them within the commerce of
man by vesting title thereto in an independent
juridical personality such as the MIAA, and
authorizing their sale, lease, mortgage and
other similar encumbrances. When Congress
accomplishes that by law, the properties could
no longer be considered as part of the public
dominion.

This point has been recognized by previous

jurisprudence which I had cited in my dissent
in the Parañaque case. For example, in
Philippine Ports Authority v. City of Iloilo, the
Court stated that "properties of public dominion
are owned by the general public and cannot be
declared to be owned by a public corporation,
such as [the Philippine Ports Authority]."12 I
had likewise previously explained:
The second Public Ports Authority case, penned
by Justice Callejo, likewise lays down useful
doctrines in this regard. The Court refuted the
claim that the properties of the PPA were owned
by the Republic of the Philippines, noting that
PPA's charter expressly transferred ownership
over these properties to the PPA, a situation
which similarly obtains with MIAA. The Court
even went as far as saying that the fact that the
PPA "had not been issued any torrens title over
the port and port facilities and appurtenances
is of no legal consequence. A torrens title does
not, by itself, vest ownership; it is merely an
evidence of title over properties. . . . It has never
been recognized as a mode of acquiring
ownership over real properties."

The Court further added:

. . . The bare fact that the port and its facilities

and appurtenances are accessible to the general
public does not exempt it from the payment of
real property taxes. It must be stressed that the
said port facilities and appurtenances are the
petitioner's corporate patrimonial properties,
not for public use, and that the operation of the
port and its facilities and the administration of
its buildings are in the nature of ordinary
business. The petitioner is clothed, under P.D.
No. 857, with corporate status and corporate
powers in the furtherance of its proprietary
interests . . . The petitioner is even empowered
to invest its funds in such government
securities approved by the Board of Directors,
and derives its income from rates, charges or
fees for the use by vessels of the port premises,
appliances or equipment. . . . Clearly then, the
petitioner is a profit-earning corporation; hence,
its patrimonial properties are subject to tax.

There is no doubt that the properties of the

MIAA, as with the PPA, are in a sense, for public
use. A similar argument was propounded by the
Light Rail Transit Authority in Light Rail Transit
Authority v. Central Board of Assessment, 118
which was cited in Philippine Ports Authority
and deserves renewed emphasis. The Light Rail
Transit Authority (LRTA), a body corporate,
"provides valuable transportation facilities to
the paying public." 119 It claimed that its
carriage-ways and terminal stations are
immovably attached to government-owned

national roads, and to impose real property

taxes thereupon would be to impose taxes on
public roads. This view did not persuade the
Court, whose decision was penned by Justice
(now Chief Justice) Panganiban. It was noted:

Though the creation of the LRTA was impelled

by public service — to provide mass
transportation to alleviate the traffic and
transportation situation in Metro Manila — its
operation undeniably partakes of ordinary
business. Petitioner is clothed with corporate
status and corporate powers in the furtherance
of its proprietary objectives. Indeed, it operates
much like any private corporation engaged in
the mass transport industry. Given that it is
engaged in a service-oriented commercial
endeavor, its carriageways and terminal
stations are patrimonial property subject to tax,
notwithstanding its claim of being a
government-owned or controlled corporation.

xxx xxx xxx

Petitioner argues that it merely operates and

maintains the LRT system, and that the actual
users of the carriageways and terminal stations
are the commuting public. It adds that the
public use character of the LRT is not negated
by the fact that revenue is obtained from the
latter's operations.

We do not agree. Unlike public roads which are

open for use by everyone, the LRT is accessible
only to those who pay the required fare. It is
thus apparent that petitioner does not exist
solely for public service, and that the LRT
carriageways and terminal stations are not
exclusively for public use. Although petitioner is
a public utility, it is nonetheless profit-earning.
It actually uses those carriageways and
terminal stations in its public utility business
and earns money therefrom.

xxx xxx xxx

Even granting that the national government

indeed owns the carriageways and terminal
stations, the exemption would not apply
because their beneficial use has been granted
to petitioner, a taxable entity.

There is no substantial distinction between the

properties held by the PPA, the LRTA, and the
MIAA. These three entities are in the business
of operating facilities that promote public
transportation.

The majority further asserts that MIAA's

properties, being part of the public dominion,
are outside the commerce of man. But if this is
so, then why does Section 3 of MIAA's charter
authorize the President of the Philippines to
approve the sale of any of these properties? In
fact, why does MIAA's charter in the first place
authorize the transfer of these airport
properties, assuming that indeed these are
beyond the commerce of man?13

III.

In the present case, the City of Pasay had issued

notices of levy and warrants of levy for the NAIA
Pasay properties, leading MIAA to file with the
Court of Appeals a petition for prohibition and
injunction, seeking to enjoin the City of Pasay
from imposing real property taxes, levying
against and auctioning for public sale the NAIA
Pasay properties.

In the Parañaque case, I had expressed that

while MIAA was liable for the realty taxes, its
properties could not be foreclosed upon by the
local government unit seeking the taxes. I
explained then:

Despite the fact that the City of Parañaque

ineluctably has the power to impose real
property taxes over the MIAA, there is an
equally relevant statutory limitation on this
power that must be fully upheld. Section 3 of
the MIAA charter states that "[a]ny portion [of
the [lands transferred, conveyed and assigned
to the ownership and administration of the
MIAA] shall not be disposed through sale or
through any other mode unless specifically
approved by the President of the Philippines."

Nothing in the Local Government Code, even

with its wide grant of powers to LGUs, can be
deemed as repealing this prohibition under
Section 3, even if it effectively forecloses one
possible remedy of the LGU in the collection of
delinquent real property taxes. While the Local
Government Code withdrew all previous local
tax exemptions of the MIAA and other natural
and juridical persons, it did not similarly
withdraw any previously enacted prohibitions
on properties owned by GOCCs, agencies or
instrumentalities. Moreover, the resulting legal
effect, subjecting on one hand the MIAA to local
taxes but on the other hand shielding its
properties from any form of sale or disposition,
is not contradictory or paradoxical, onerous as
its effect may be on the LGU. It simply means
that the LGU has to find another way to collect
the taxes due from MIAA, thus paving the way
for a mutually acceptable negotiated solution.

Accordingly, I believe that MIAA is entitled to a

writ of prohibition and injunctive relief
enjoining the City of Pasay from auctioning for
public sale the NAIA Pasay properties. Thus, the
Court of Appeals erred when it denied those
reliefs to the MIAA.

I VOTE to PARTIALLY GRANT the petition and

to issue the Writ of Prohibition insofar as it
would enjoin the City of Pasay from auctioning
for public sale the NAIA Pasay properties. In all
other respects, I respectfully dissent.

DANTE O. TINGA
Associate Justice
Footnotes

1 G.R. No. 155630, 20 July 2006, 495 SCRA

591.

2 Supra note 1 at 615-616.

3 Supra note 1 at 617-618.

4 See
http://www.gbdlr.com/articles/pdf/A_TALE_O
F_TWO_AIRPORTS_vol%5B1% 5D.pdf

5 Supra note 4.

6 Local Government Code, Sec. 234(a).

7 330 Phil. 392 (1996).

8 Supra note 4.

9 Villarico v. Sarmiento, G.R. No. 136438, 11

November 2004, 442 SCRA 110.

10 See Civil Code, Art. 420.

11 G.R. No. 92013, 25 July 1990, 187 SCRA

797.

12 G.R. No. 109791, 14 July 2003, 406 SCRA

88.

13 Supra note 1 at 694-696, J. Tinga,

dissenting.

The Lawphil Project - Arellano Law Foundation

SEPARATE OPINION

NACHURA, J.:

Are airport properties subject to real property

tax? The question seriously begs for a definitive
resolution, in light of our ostensibly
contradictory decisions1 that may have
generated no small measure of confusion even
among lawyers and magistrates.

Hereunder, I propose a simple, direct and

painless approach to arrive at an acceptable
answer to the question.

I.

Real property tax is a direct tax on the

ownership of lands and buildings or other
improvements thereon, not specially exempted,
and is payable regardless of whether the
property is used or not, although the value may
vary in accordance with such factor. The tax is
usually single or indivisible, although the land
and building or improvements erected thereon
are assessed separately, except when the land
and building or improvements belong to
separate owners.2

The power to levy this tax is vested in local

government units (LGUs). Thus, Republic Act
(R.A.) No. 7160, or the Local Government Code
(LGC) of 1991,3 provides:

Under Book II, Title II, Chapter IV-Imposition of

Real Property Tax

Section 232. Power to Levy Real Property Tax.—

A province or city or a municipality within the
Metropolitan Manila Area may levy an annual
ad valorem tax on real property such as land,
building, machinery, and other improvement
not hereinafter specifically exempted.4

A significant innovation in the LGC is the

withdrawal, subject to some exceptions, of all
tax exemption privileges of all natural or
juridical persons, including government-owned
and controlled corporations (GOCCs), thus:

Under Book II, Title I, Chapter V-Miscellaneous

Provisions

Section 193. Withdrawal of Tax Exemption

Privileges.—Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations, except local
water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code.5

This is where the controversy started. The

airport authorities, formerly exempt from
paying taxes, are now being obliged to pay real
property tax on airport properties.

To challenge the real property tax assessments,

the airport authorities invoke two provisions of
the LGC—one is stated in Book II, Title I,
Chapter I on General Provisions, which reads:

Section 133. Common Limitations on the

Taxing Powers of Local Government Units.—
Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

(a) Income tax, except when levied on banks and

other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies

and other acquisitions mortis causa, except as
otherwise provided herein;

(d) Customs duties, registration fees of vessel

and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues
except wharfage on wharves constructed and
maintained by the local government unit
concerned;

(e) Taxes, fees, and charges and other

impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions
of local government units in the guise of charges
for wharfage, tolls for bridges or otherwise, or
other taxes, fees, or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and

aquatic products when sold by marginal
farmers or fishermen;

(g) Taxes on business enterprises certified to by

the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;

(h) Excise taxes on articles enumerated under

the National Internal Revenue Code, as
amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value-added tax (VAT) on sales,

barters or exchanges or similar transactions on
goods or services except as otherwise provided
herein;

(j) Taxes on the gross receipts of transportation

contractors and persons engaged in the
transportation of passengers or freight by hire
and common carriers by air, land or water,
except as provided in this Code;

(k) Taxes on premiums paid by way of

reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of

motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof,
except tricycles;

(m) Taxes, fees, or other charges on Philippine

products actually exported, except as otherwise
provided herein;

(n) Taxes, fees, or charges, on Countryside and

Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and Republic Act Numbered Sixty-nine
hundred thirty-eight (R.A. No. 6938) otherwise
known as the "Cooperative Code of the
Philippines" respectively; and

(o) Taxes, fees or charges of any kind on the

National Government, its agencies and
instrumentalities, and local government units.6

and the other in Book II, Title I, Chapter IV on

Imposition of Real Property Tax:

Section 234. Exemptions from Real Property

Tax.—The following are exempted from payment
of the real property tax:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions
except when the beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person;

(b) Charitable institutions, churches,

parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and
all lands, buildings, and improvements actually,
directly, and exclusively used for religious,
charitable or educational purposes;

(c) All machineries and equipment that are

actually, directly and exclusively used by local
water districts and government-owned or
controlled corporations engaged in the supply
and distribution of water and/or generation and
transmission of electric power;

(d) All real property owned by duly registered

cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution

control and environmental protection.

Except as provided herein, any exemption from

payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-
owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.7
In Mactan Cebu International Airport Authority
(MCIAA) v. Marcos,8 the Court ruled that
Section 133(o) is qualified by Sections 232 and
234. Thus, MCIAA could not seek refuge in
Section 133(o), but only in Section 234(a)
provided it could establish that the properties
were owned by the Republic of the Philippines.
The Court ratiocinated, thus:

[R]eading together Sections 133, 232, and 234

of the LGC, we conclude that as a general rule,
as laid down in Section 133, the taxing powers
of local government units cannot extend to the
levy of, inter alia, "taxes, fees and charges of any
kind on the National Government, its agencies
and instrumentalities, and local government
units"; however, pursuant to Section 232,
provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property
owned by the Republic of the Philippines or any
of its political subdivisions except when the
beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person,"
as provided in item (a) of the first paragraph of
Section 234.

As to tax exemptions or incentives granted to or

presently enjoyed by natural or juridical
persons, including government-owned and
controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are
withdrawn upon the effectivity of the LGC,
except those granted to local water districts,
cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and
educational institutions, and unless otherwise
provided in the LGC. The latter proviso could
refer to Section 234 which enumerates the
properties exempt from real property tax. But
the last paragraph of Section 234 further
qualifies the retention of the exemption insofar
as real property taxes are concerned by limiting
the retention only to those enumerated therein;
all others not included in the enumeration lost
the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the
Republic of the Philippines or any of its political
subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property
has been granted to a taxable person for
consideration or otherwise.

Since the last paragraph of Section 234

unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real
property taxes granted to natural or juridical
persons, including government-owned or
controlled corporations, except as provided in
the said section, and the petitioner is,
undoubtedly, a government-owned corporation,
it necessarily follows that its exemption from
such tax granted it in Section 14 of its Charter,
R.A. No. 6958, has been withdrawn. Any claim
to the contrary can only be justified if the
petitioner can seek refuge under any of the
exceptions provided in Section 234, but not
under Section 133, as it now asserts, since, as
shown above, the said section is qualified by
Sections 232 and 234.

In short, the petitioner can no longer invoke the

general rule in Section 133 that the taxing
powers of the local government units cannot
extend to the levy of:

(o) taxes, fees or charges of any kind on the

National Government, its agencies or
instrumentalities, and local government units.9

In addition, the Court went on to hold that the

properties comprising the Lahug International
Airport and the Mactan International Airport
are no longer owned by the Republic, the latter
having conveyed the same absolutely to MCIAA.

About a decade later, however, the Court ruled

in Manila International Airport Authority (MIAA)
v. Court of Appeals,10 that the airport
properties, this time comprising the Ninoy
Aquino International Airport (NAIA), are exempt
from real property tax. It justified its ruling by
categorizing MIAA as a government
instrumentality specifically exempted from
paying tax by Section 133(o) of R.A. No. 7160. It
further reasoned that the subject properties are
properties of public dominion, owned by the
Republic, and are only held in trust by MIAA,
thus:

Under Section 2(10) and (13) of the Introductory

Provisions of the Administrative Code, which
governs the legal relation and status of
government units, agencies and offices within
the entire government machinery, MIAA is a
government instrumentality and not a
government-owned or controlled corporation.
Under Section 133(o) of the Local Government
Code, MIAA as a government instrumentality is
not a taxable person because it is not subject to
"[t]axes, fees or charges of any kind" by local
governments. The only exception is when MIAA
leases its real property to a "taxable person" as
provided in Section 234(a) of the Local
Government Code, in which case the specific
real property leased becomes subject to real
estate tax. Thus, only portions of the Airport
Lands and Buildings leased to taxable persons
like private parties are subject to real estate tax
by the City of Parañaque.

Under Article 420 of the Civil Code, the Airport

Lands and Buildings of MIAA, being devoted to
public use, are properties of public dominion
and thus owned by the State or the Republic of
the Philippines. Article 420 specifically
mentions "ports x x x constructed by the State,"
which includes public airports and seaports, as
properties of public dominion and owned by the
Republic. As properties of public dominion
owned by the Republic, there is no doubt
whatsoever that the Airport Lands and
Buildings are expressly exempt from real estate
tax under Section 234(a) of the Local
Government Code. This Court has also
repeatedly ruled that properties of public
dominion are not subject to execution or
foreclosure sale.11
II.

In this case, we are confronted by the very same

issue.

A basic principle in statutory construction

decrees that, to discover the general legislative
intent, the whole statute, and not only a
particular provision thereof, should be
considered. Every section, provision or clause in
the law must be read and construed in reference
to each other in order to arrive at the true
intention of the legislature.12

Notably, Section 133 of the LGC speaks of the

general limitations on the taxing power of LGUs.
This is reinforced by its inclusion in Title I,
Chapter I entitled "General Provisions" on "Local
Government Taxation." On the other hand,
Section 234, containing the enumeration of the
specific exemptions from real property tax, is in
Chapter IV entitled "Imposition of Real Property
Tax" under Title II on "Real Property Taxation."
When read together, Section 234, a specific
provision, qualifies Section 133, a general
provision.

Indeed, whenever there is a particular

enactment and a general enactment in the same
statute, and the latter, taken in its most
comprehensive sense, will overrule the former,
the particular enactment must be operative,
and the general enactment must be taken to
affect only the other parts of the statute to
which it may properly apply.13 Otherwise
stated, where there are two acts or provisions,
one of which is special and particular, and
certainly includes the matter in question, and
the other general, which, if standing alone, will
include the same matter and thus conflict with
the special act or provision, the special must be
taken as intended to constitute an exception to
the general act or provision, especially when
such general and special acts or provisions are
contemporaneous, as the legislature is not to be
presumed to have intended a conflict.14
Mactan Cebu therefore adheres to the
intendment of the law insofar as it holds that
MCIAA cannot seek refuge in Section 133(o);
that it can only invoke Section 234(a) so long as
it can establish that the properties were owned
by the Republic of the Philippines. To repeat,
Section 234, which specifies the properties
exempted from real property tax, prevails over
the general limitations on the taxing power of
LGUs stated in Section 133.

Thus, if Section 133(o) is not to be a haven, then,

I respectfully submit that it is no longer
necessary to dichotomize between a government
instrumentality and a GOCC. As stressed by the
Court in Mactan Cebu, what need only be
ascertained is whether the airport properties
are owned by the Republic if the airport
Authority is to be freed from the burden of
paying the real property tax. Similarly, in MIAA,
with the Court’s finding that the NAIA lands and
buildings are owned by the Republic, the airport
Authority does not have to pay real property tax
to the City of Parañaque.

III.

As pointed out earlier, Mactan Cebu and MIAA

ostensibly contradict each other. While the first
considers airport properties as subject to real
property tax, the second exempts the same from
this imposition. The conflict, however, is more
apparent than real. The divergent conclusions
in the two cases proceed from different premises;
hence, the resulting contradiction.

To elucidate, in Mactan Cebu, the Court

focused on the proper interpretation of Sections
133, 232 and 234 of the LGC, and emphasized
the nature of the tax exemptions granted by law.
Mactan Cebu categorized the exemptions as
based on the ownership, character and use of
the property, thus:

(a) Ownership Exemptions. Exemptions from

real property taxes on the basis of ownership
are real properties owned by: (i) the Republic, (ii)
a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real

property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (iii)
non-profit or religious cemeteries.

(c) Usage exemptions. Exempted from real

property taxes on the basis of the actual, direct
and exclusive use to which they are devoted are:
(i) all lands, buildings and improvements which
are actually directly and exclusively used for
religious, charitable or educational purposes; (ii)
all machineries and equipment actually,
directly and exclusively used by local water
districts or by government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation and
transmission of electric power; and (iii) all
machinery and equipment used for pollution
control and environmental protection.

To help provide a healthy environment in the

midst of the modernization of the country, all
machinery and equipment for pollution control
and environmental protection may not be taxed
by local governments.15

For the airport properties to be exempt from real

property tax, they must fall within the
mentioned categories. Logically, the airport
properties can only qualify under the first
exemption–by virtue of ownership. But, as
already mentioned, the Court, nevertheless,
ruled in Mactan Cebu that the said properties
are no longer owned by the Republic having
been conveyed absolutely to the airport
Authority, thus:

Section 15 of the petitioner’s Charter provides:

Sec. 15. Transfer of Existing Facilities and

Intangible Assets. — All existing public airport
facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to
or presently administered by the airports, and
all assets, powers, rights, interests and
privileges relating on airport works or air
operations, including all equipment which are
necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and
rescue facilities are hereby transferred to the
Authority: Provided, however, that the
operations control of all equipment necessary
for the operation of radio aids to air navigation,
airways communication, the approach control
office, and the area control center shall be
retained by the Air Transportation Office. No
equipment, however, shall be removed by the
Air Transportation Office from Mactan without
the concurrence of the Authority. The Authority
may assist in the maintenance of the Air
Transportation Office equipment.

The "airports" referred to are the "Lahug Air

Port" in Cebu City and the "Mactan
International Airport in the Province of Cebu,"
which belonged to the Republic of the
Philippines, then under the Air Transportation
Office (ATO).

It may be reasonable to assume that the term

"lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and
includes the parcels of land the respondent City
of Cebu seeks to levy on for real property taxes.
This section involves a "transfer" of the "lands,"
among other things, to the petitioner and not
just the transfer of the beneficial use thereof,
with the ownership being retained by the
Republic of the Philippines.

This "transfer" is actually an absolute

conveyance of the ownership thereof because
the petitioner’s authorized capital stock
consists of, inter alia, "the value of such real
estate owned and/or administered by the
airports." Hence, the petitioner is now the owner
of the land in question and the exception in
Section 234(c) of the LGC is inapplicable.16
In MIAA, a different conclusion was reached by
the Court on two grounds. It first banked on the
general provision limiting the taxing power of
LGUs as stated in Section 133(o) of the LGC that,
unless otherwise provided in the Code, the
exercise of the taxing powers of LGUs shall not
extend to the levy of taxes, fees or charges of
any kind on the National Government, its
agencies and instrumentalities, and LGUs. The
Court took pains in characterizing airport
authorities as government instrumentalities,
quite obviously, in order to apply the said
provision.

After doing so, the Court then shifted its

attention and proceeded to focus on the issue of
who owns the property to determine whether
the case falls within the purview of Section
234(a). Ratiocinating that airport properties are
of public dominion which pertain to the state
and that the airport Authority is a mere trustee
of the Republic, the Court ruled that the said
properties are exempt from real property tax,
thus:

2. Airport Lands and Buildings of MIAA are

Owned by the Republic

a. Airport Lands and Buildings are of Public

Dominion

The Airport Lands and Buildings of MIAA are

property of public dominion and therefore
owned by the State or the Republic of the
Philippines. The Civil Code provides:

xxxx

No one can dispute that properties of public

dominion mentioned in Article 420 of the Civil
Code, like "roads, canals, rivers, torrents, ports
and bridges constructed by the State," are
owned by the State. The term "ports" includes
seaports and airports. The MIAA Airport Lands
and Buildings constitute a "port" constructed
by the State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are
properties of public dominion and thus owned
by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to

public use because they are used by the public
for international and domestic travel and
transportation. The fact that the MIAA collects
terminal fees and other charges from the public
does not remove the character of the Airport
Lands and Buildings as properties for public
use. The operation by the government of a
tollway does not change the character of the
road as one for public use. Someone must pay
for the maintenance of the road, either the
public indirectly through the taxes they pay the
government, or only those among the public
who actually use the road through the toll fees
they pay upon using the road. The tollway
system is even a more efficient and equitable
manner of taxing the public for the
maintenance of public roads.

The charging of fees to the public does not

determine the character of the property whether
it is of public dominion or not. Article 420 of the
Civil Code defines property of public dominion
as one "intended for public use." Even if the
government collects toll fees, the road is still
"intended for public use" if anyone can use the
road under the same terms and conditions as
the rest of the public. The charging of fees, the
limitation on the kind of vehicles that can use
the road, the speed restrictions and other
conditions for the use of the road do not affect
the public character of the road.

The terminal fees MIAA charges to passengers,

as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that
maintains the operations of MIAA. The
collection of such fees does not change the
character of MIAA as an airport for public use.
Such fees are often termed user’s tax. This
means taxing those among the public who
actually use a public facility instead of taxing all
the public including those who never use the
particular public facility. A user’s tax is more
equitable — a principle of taxation mandated in
the 1987 Constitution.

The Airport Lands and Buildings of MIAA, which

its Charter calls the "principal airport of the
Philippines for both international and domestic
air traffic," are properties of public dominion
because they are intended for public use. As
properties of public dominion, they
indisputably belong to the State or the Republic
of the Philippines.

b. Airport Lands and Buildings are Outside the

Commerce of Man

The Airport Lands and Buildings of MIAA are

devoted to public use and thus are properties of
public dominion. As properties of public
dominion, the Airport Lands and Buildings are
outside the commerce of man. The Court has
ruled repeatedly that properties of public
dominion are outside the commerce of man. As
early as 1915, this Court already ruled in
Municipality of Cavite v. Rojas that properties
devoted to public use are outside the commerce
of man, thus:

xxxx

Again in Espiritu v. Municipal Council, the

Court declared that properties of public
dominion are outside the commerce of man:

xxxx

The Court has also ruled that property of public

dominion, being outside the commerce of man,
cannot be the subject of an auction sale.

Properties of public dominion, being for public

use, are not subject to levy, encumbrance or
disposition through public or private sale. Any
encumbrance, levy on execution or auction sale
of any property of public dominion is void for
being contrary to public policy. Essential public
services will stop if properties of public
dominion are subject to encumbrances,
foreclosures and auction sale. This will happen
if the City of Parañaque can foreclose and
compel the auction sale of the 600-hectare
runway of the MIAA for non-payment of real
estate tax.

Before MIAA can encumber the Airport Lands

and Buildings, the President must first
withdraw from public use the Airport Lands and
Buildings. Sections 83 and 88 of the Public
Land Law or Commonwealth Act No. 141, which
"remains to this day the existing general law
governing the classification and disposition of
lands of the public domain other than timber
and mineral lands," provide:

xxxx

Thus, unless the President issues a

proclamation withdrawing the Airport Lands
and Buildings from public use, these properties
remain properties of public dominion and are
inalienable. Since the Airport Lands and
Buildings are inalienable in their present status
as properties of public dominion, they are not
subject to levy on execution or foreclosure sale.
As long as the Airport Lands and Buildings are
reserved for public use, their ownership
remains with the State or the Republic of the
Philippines.

The authority of the President to reserve lands

of the public domain for public use, and to
withdraw such public use, is reiterated in
Section 14, Chapter 4, Title I, Book III of the
Administrative Code of 1987, which states:

xxxx

There is no question, therefore, that unless the

Airport Lands and Buildings are withdrawn by
law or presidential proclamation from public
use, they are properties of public dominion,
owned by the Republic and outside the
commerce of man.

c. MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands
and Buildings in trust for the Republic. Section
48, Chapter 12, Book I of the Administrative
Code allows instrumentalities like MIAA to hold
title to real properties owned by the Republic,
thus:

xxxx

In MIAA’s case, its status as a mere trustee of

the Airport Lands and Buildings is clearer
because even its executive head cannot sign the
deed of conveyance on behalf of the Republic.
Only the President of the Republic can sign
such deed of conveyance.

d. Transfer to MIAA was Meant to Implement a

Reorganization

The MIAA Charter, which is a law, transferred

to MIAA the title to the Airport Lands and
Buildings from the Bureau of Air
Transportation of the Department of
Transportation and Communications. The
MIAA Charter provides:

xxxx

The MIAA Charter transferred the Airport Lands

and Buildings to MIAA without the Republic
receiving cash, promissory notes or even stock
since MIAA is not a stock corporation.

The whereas clauses of the MIAA Charter

explain the rationale for the transfer of the
Airport Lands and Buildings to MIAA, thus:

xxxx

The transfer of the Airport Lands and Buildings

from the Bureau of Air Transportation to MIAA
was not meant to transfer beneficial ownership
of these assets from the Republic to MIAA. The
purpose was merely to reorganize a division in
the Bureau of Air Transportation into a separate
and autonomous body. The Republic remains
the beneficial owner of the Airport Lands and
Buildings. MIAA itself is owned solely by the
Republic. No party claims any ownership rights
over MIAA’s assets adverse to the Republic.

The MIAA Charter expressly provides that the

Airport Lands and Buildings "shall not be
disposed through sale or through any other
mode unless specifically approved by the
President of the Philippines." This only means
that the Republic retained the beneficial
ownership of the Airport Lands and Buildings
because under Article 428 of the Civil Code,
only the "owner has the right to x x x dispose of
a thing." Since MIAA cannot dispose of the
Airport Lands and Buildings, MIAA does not
own the Airport Lands and Buildings.

At any time, the President can transfer back to

the Republic title to the Airport Lands and
Buildings without the Republic paying MIAA
any consideration. Under Section 3 of the MIAA
Charter, the President is the only one who can
authorize the sale or disposition of the Airport
Lands and Buildings. This only confirms that
the Airport Lands and Buildings belong to the
Republic.

e. Real Property Owned by the Republic is Not

Taxable

Section 234(a) of the Local Government Code

exempts from real estate tax any "[r]eal property
owned by the Republic of the Philippines."
Section 234(a) provides:

xxxx

This exemption should be read in relation with

Section 133(o) of the same Code, which
prohibits local governments from imposing
"[t]axes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities x x x." The real properties
owned by the Republic are titled either in the
name of the Republic itself or in the name of
agencies or instrumentalities of the National
Government. The Administrative Code allows
real property owned by the Republic to be titled
in the name of agencies or instrumentalities of
the national government. Such real properties
remain owned by the Republic and continue to
be exempt from real estate tax.

The Republic may grant the beneficial use of its

real property to an agency or instrumentality of
the national government. This happens when
title of the real property is transferred to an
agency or instrumentality even as the Republic
remains the owner of the real property. Such
arrangement does not result in the loss of the
tax exemption. Section 234(a) of the Local
Government Code states that real property
owned by the Republic loses its tax exemption
only if the "beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person." MIAA, as a government
instrumentality, is not a taxable person under
Section 133(o) of the Local Government Code.
Thus, even if we assume that the Republic has
granted to MIAA the beneficial use of the Airport
Lands and Buildings, such fact does not make
these real properties subject to real estate tax.

However, portions of the Airport Lands and

Buildings that MIAA leases to private entities
are not exempt from real estate tax. For example,
the land area occupied by hangars that MIAA
leases to private corporations is subject to real
estate tax. In such a case, MIAA has granted the
beneficial use of such land area for a
consideration to a taxable person and therefore
such land area is subject to real estate tax. In
Lung Center of the Philippines v. Quezon City,
the Court ruled:

x x x x17

In the ultimate, I submit that the two rulings do

not really contradict, but, instead, complement
each one. Mactan Cebu provides the proper rule
that, in order to determine whether airport
properties are exempt from real property tax, it
is Section 234, not Section 133, of the LGC that
should be determinative of the properties
exempt from the said tax. MIAA then lays down
the correct doctrine that airport properties are
of public dominion pertaining to the state,
hence, falling within the ambit of Section 234(a)
of the LGC.

However, because of the confusion generated by

the apparently conflicting decisions, a fine
tuning of Mactan Cebu and MIAA is imperative.

IV.

Parenthetically, while the basis of a real

property tax assessment is actual use,18 the
tax itself is directed to the ownership of the
lands and buildings or other improvements
thereon.19 Public policy considerations dictate
that property of the State and of its municipal
subdivisions devoted to governmental uses and
purposes is generally exempt from taxation
although no express provision in the law is
made therefor.20 In the instant case, the
legislature specifically provided that real
property owned by the Republic of the
Philippines or any of its political subdivisions is
exempt from real property tax, except, of course,
when the beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person. The principal basis of the
exemption is likewise ownership.21

Indeed, emphasis should be made on the

ownership of the property, rather than on the
airport Authority being a taxable entity. This
strategy makes it unnecessary to determine
whether MIAA is an instrumentality or a GOCC,
as painstakingly expounded by the ponente.

Likewise, this approach provides a convenient

escape from Justice Tinga’s proposition that the
MIAA is a taxable entity liable to pay real
property taxes, but the airport properties are
exempt from levy on execution to satisfy the tax
liability. I fear that this hypothesis may trench
on the Constitutional principle of uniformity of
taxation,22 because a tax lawfully levied and
assessed against a taxable governmental entity
will not be lienable while like assessments
against all other taxable entities of the same tax
district will be lienable.23

The better option, then, is for the Court to

concentrate on the nature of the tax as a tax on
ownership and to directly apply the pertinent
real property tax provisions of the LGC,
specifically those dealing with the exemption
based on ownership, to the case at bar.

The phrase, "property owned by the Republic"

in Section 234, actually refers to those
identified as public property in our laws.
Following MIAA, we go to Articles 420 and 421
of the Civil Code which provide:

Art. 420. The following things are property of

public dominion:

(1) Those intended for public use, such as roads,

canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without

being for public use, and are intended for some
public service or for the development of the
national wealth.

Art. 421. All other property of the State, which

is not of the character stated in the preceding
article, is patrimonial property.

From the afore-quoted, we readily deduce that

airport properties are of public dominion. The
"port" in the enumeration certainly includes an
airport. With its beacons, landing fields,
runways, and hangars, an airport is analogous
to a harbor with its lights, wharves and docks;
the one is the landing place and haven of ships
that navigate the water, the other of those that
navigate the air.24 Ample authority further
supports the proposition that the term "roads"
include runways and landing strips.25 Airports,
therefore, being properties of public dominion,
are of the Republic.

At this point, I cannot help but air the

observation that the legislature may have really
intended the phrase "owned by the Republic" in
Section 234 to refer to, among others,
properties of public dominion. This is because
"public dominion" does not carry the idea of
ownership. Tolentino, an authority in civil law,
explains:

This article shows that there is a distinction

between dominion and ownership. Private
ownership is defined elsewhere in the Code; but
the meaning of public dominion is nowhere
defined. From the context of various provisions,
it is clear that public dominion does not carry
the idea of ownership; property of public
dominion is not owned by the State, but
pertains to the State, which as territorial
sovereign exercises certain juridical
prerogatives over such property. The ownership
of such property, which has the special
characteristics of a collective ownership for the
general use and enjoyment, by virtue of their
application to the satisfaction of the collective
needs, is in the social group, whether national,
provincial, or municipal. Their purpose is not to
serve the State as a juridical person, but the
citizens; they are intended for the common and
public welfare, and so they cannot be the object
of appropriation, either by the State or by
private persons. The relation of the State to this
property arises from the fact that the State is
the juridical representative of the social group,
and as such it takes care of them, preserves
them and regulates their use for the general
welfare.26

Be that as it may, the legislative intent to

exempt from real property tax the properties of
the Republic remains clear. The soil
constituting the NAIA airport and the runways
cannot be taxed, being properties of public
dominion and pertaining to the Republic. This
is true even if the title to the said property is in
the name of MIAA. Practical ownership, rather
than the naked legal title, must control,
particularly because, as a matter of practice,
the record title may be in the name of a
government agency or department rather than
in the name of the Republic.

In this case, even if MIAA holds the record title

over the airport properties, such holding can
only be for the benefit of the Republic,27
especially when we consider that MIAA
exercises an essentially public function.28
Further, where property, the title to which is in
the name of the principal, is immune from taxes,
it remains immune even if the title is standing
in the name of an agent or trustee for such
principal.29

Properties of public dominion are held in trust

by the state or the Republic for the people.30
The national government and the bodies it has
created that exercise delegated authority are,
pursuant to the general principles of public law,
mere agents of the Republic. Here, insofar as it
deals with the subject properties, MIAA, a
governmental creation exercising delegated
powers, is a mere agent of the Republic, and the
latter, to repeat, is the trustee of the properties
for the benefit of all the people.31

Our ruling in MIAA, therefore, insofar as it

holds that the airport Authority is a "trustee of
the Republic," may not have been precise. It
would have been more sound, legally that is, to
consider the relationship between the Republic
and the airport Authority as principal and agent,
rather than as trustor and trustee.

The history of the subject airport attests to this

proposition, thus:

The country's premier airport was originally a

US Air Force Base, which was turned over to the
Philippine government in 1948. It started
operations as a civil aviation airport with
meager facilities, then consisting of the present
domestic runway as its sole landing strip, and
a small building northwest of this runway as its
sole passenger terminal.

The airport's international runway and

associated taxiway were built in 1953; followed
in 1961 by the construction of a control tower
and a terminal building for the exclusive use of
international passengers at the southwest
intersection of the two runways. These
structures formed the key components of an
airport system that came to be known as the
Manila International Airport (MIA).

Like other national airports, the MIA was first

managed and operated by the National Airports
Corporation, an agency created on June 5, 1948
by virtue of Republic Act No. 224. This was
abolished in 1951 and [in] its stead, the MIA
Division was created under the Civil
Aeronautics Administration (CAA) of the
Department of Commerce and Industry.

On October 19, 1956, the entire CAA, including

the MIA Division, was transferred to the
Department of Public Works, Transportation
and Communications.

In 1979, the CAA was renamed Bureau of Air

Transportation following the creation of an
exclusive Executive Department for
Transportation and Communications.

It is worthwhile to note at this point that while

the MIA General Manager then carried the rank
of a Division Chief only, it became a matter of
policy and practice that he be appointed by no
less than the President of the Philippines since
the magnitude of its impact on the country's
economy has acquired such national
importance and recognition.

During the seventies, the Philippine tourism

and industry experienced a phenomenal
upsurge in the country's manpower exports,
resulting in more international flight
frequencies to Manila which grew by more than
four times.
Executive Order No. 381 promulgated by then
President Marcos authorized the development of
Manila International Airport to meet the needs
of the coming decades.

A feasibility study/airport master plan was

drawn up in 1973 by Airways Engineering
Corporation, the financing of which was
source[d] from a US$29.6 Million loan arranged
with the Asian Development Bank (ADB). The
detailed Engineering Design of the new MIA
Development Project (MIADP) was undertaken
by Renardet-Sauti/Transplan/F.F. Cruz
Consultants while the design of the IPT building
was prepared by Architect L.V. Locsin and
Associates.

In 1974, the final engineering design was

adopted by the Philippine Government. This
was concurred by the ADB on September 18,
1975 and became known as the "Scheme E-5
Modified Plan." Actual work on the project
started in the second quarter of 1978.

On March 4, 1982, EXECUTIVE ORDER NO.

778 was signed into law, abolishing the MIA
Division under the BAT and creating in its stead
the MANILA INTERNATIONAL AIRPORT
AUTHORITY (MIAA), vested with the power to
administer and operate the Manila
International Airport (MIA).

Though MIAA was envisioned to be autonomous,

Letter of Instructions (LOI) No. 1245, signed 31
May 1982, clarified that for purpose of policy
integration and program coordination, the MIAA
Management shall be under the general
supervision but not control of the then Ministry
of Transportation and Communications.

On July 21, 1983, Executive Order No. 903 was

promulgated, providing that 65% of MIAA's
annual gross operating income be reverted to
the general fund for the maintenance and
operation of other international and domestic
airports in the country. It also scaled down the
equity contribution of the National Government
to MIAA: from PhP 10 billion to PhP 2.5 billion
and removed the provision exempting MIAA
from the payment of corporate tax.

Another revision in the MIAA Charter followed

with the promulgation of Executive Order No.
909, signed September 16, 1983, increasing the
membership of the MIAA Board to nine (9)
Directors with the inclusion of two other
members to be appointed by the Philippine
President.

The last amendment to the MIAA Charter was

made on July 26, 1987 through Executive
Order No. 298 which provided for a more
realistic income sharing arrangement between
MIAA and the National Government. It provided
that instead of the 65% of gross operating
income, only 20% of MIAA's gross income,
exclusive of income generated from the
passenger terminal fees and utility charges,
shall revert to the general fund of the National
Treasury. EO 298 also reorganized the MIAA
Board and raised the capitalization to its
original magnitude of PhP 10 billion.

The post 1986 Revolution period will not be

complete without mention of the renaming of
MIA to Ninoy Aquino International Airport with
the enactment of Republic Act No. 6639 on
August 17, 1987. While this legislation renamed
the airport complex, the MIA Authority would
still retain its corporate name since it did not
amend the original or revised charters of
MIAA.32

The MIAA Charter further provides that any

portion of the airport cannot be disposed of by
the Authority through sale or through any other
mode unless specifically approved by the
President of the Philippines.33 It is also noted
that MIAA’s board of directors is practically
controlled by the national government, the
members thereof being officials of the executive
branch.34 Likewise, the Authority cannot levy
and collect dues, charges, fees or assessments
for the use of the airport premises, works,
appliances, facilities or concessions, or for any
service provided by it, without the approval of
several executive departments.35 These
provisions are consistent with an agency
relationship. Let it be remembered that one of
the principal elements of an agency relationship
is the existence of some degree of control by the
principal over the conduct and activities of the
agent. In this regard, while an agent undertakes
to act on behalf of his principal and subject to
his control, a trustee as such is not subject to
the control of the beneficiary, except that he is
under a duty to deal with the trust property for
the latter’s benefit in accordance with the terms
of the trust and can be compelled by the
beneficiary to perform his duty.36

Finally, to consider MIAA as a "trustee of the

Republic" will sanction the technical creation of
a second trust in which the Republic, which is
already a trustee, becomes the second trustor
and the airport Authority a second trustee.
Although I do not wish to belabor the point, I
submit that the validity of such a scenario
appears doubtful. Sufficient authority, however,
supports the proposition that a trustee can
delegate his duties to an agent provided he
properly supervises and controls the agent’s
conduct.37 In this case, we can rightly say that
the Republic, as the trustee of the public
dominion airport properties for the benefit of
the people, has delegated to MIAA the
administration of the said properties subject, as
shown above, to the executive department’s
supervision and control.

In fine, the properties comprising the NAIA

being of public dominion which pertain to the
State, the same should be exempt from real
property tax following Section 234(a) of the LGC.

One last word. Given the foregoing disquisition,

I find no necessity for this Court to abandon its
ruling in Mactan. On the premise that the
rationale for exempting airport properties from
payment of real estate taxes is ownership
thereof by the Republic, the Mactan ruling is
impeccable in its logic and its conclusion
should remain undisturbed. Having
harmonized the apparently divergent views, we
need no longer fear any fierce disagreements in
the future.

I therefore vote to grant the petition.

ANTONIO EDUARDO B. NACHURA

Associate Justice

National Development Company v Cebu City

| GR No. 51593 | 05 November 1992

G.R. No. 51593 November 5, 1992

NATIONAL DEVELOPMENT COMPANY,

plaintiff-appellee,
vs.
CEBU CITY and AUGUSTO PACIS as Treasurer
of Cebu City, defendant-appellants.

BELLOSILLO, J.:

Is a public land reserved by the President for

warehousing purposes in favor of a government-
owned or controlled corporation, 1 as well as the
warehouse subsequently erected thereon,
exempt from real property tax?

Petitioner National Development Company

(NDC), a government-owned or controlled
corporation (GOCC) existing by virtue of C.A.
182 2 and E.O. 399, 3 is authorized to engage
in commercial, industrial, mining, agricultural
and other enterprises necessary or contributory
to economic development or important to public
interest. It also operates, in furtherance of its
objectives, subsidiary corporations one of which
is the now defucnt National Warehousing
Corporation (NWC). 4

On August 10, 1939, the President issued

Proclamation No. 430 5 reserving Block no. 4,
Reclamation Area No. 4, of Cebu City,
consisting of 4,599 square meters, for
warehousing purposes under the
administration of NWC. 6 Subsequently, in
1940, a warehouse with a floor area of 1,940
square meters more or less, was constructed
thereon. 7

On October 4, 1947, E.O. 93 dissolved NWC 8

with NDC taking over its assets and functions.
9

Commencing 1948, Cebu City (CEBU) assessed

and collected from NDC real estate taxes on the
land and the warehouse thereon. 10 By the first
quarter of 1970, a total of P100,316.31 was paid
by NDC 11 of which only P3,895.06 was under
protest. 12

On 20 March 1970, NDC wrote the City

Assessor demanding full refund of the real
estate taxes paid to CEBU claiming that the
land and the warehouse standing thereon
belonged to the Republic and therefore exempt
from taxation. 13 CEBU did not acquiesce in the
demand, hence, the present suit filed 25
October 1972 in the Court of First Instance of
Manila.

On 29 May 1973, the Court of First Instance of

Manila, Branch XXII, promulgated a decision 14
the dispositive portion of which reads —

WHEREFORE, judgment is hereby rendered

sentencing the City of Cebu, thru the Treasurer
of said City, to refund to the plaintiff, National
Development Company, the real estate taxes
paid by it for the parcel of land covered by
Presidential Proclamation No. 430 of August 10,
1939, and the warehouse erected thereon from
and after October 25, 1966, with interests
thereon at the legal rate from the date of the
filing of the complaint and the costs of the suit.

The defendants appealed to the Court of

Appeals which however certified the case to Us
as one involving pure questions of law,
pursuant to Sec. 17, R.A. 296.

In this appeal, CEBU assigns five (5) errors 15

imputed to the trial court which may be
synopsized into whether NDC is exempted from
payment of the real estate taxes on the land
reserved by the President for warehousing
purposes as well as the warehouse constructed
thereon, and in the affirmative, whether NDC
may recover in refund unprotested real estate
taxes it paid from 1948 to 1970.

On the first question, CEBU insists on taxability

of the subject properties, claiming that no law
grants NDC exemption from real estate taxes,
and that NDC, as recipient of the land reserved
by the President pursuant to Sec. 83 of the
Public Land Act, 16 is liable for payment or
ordinary (real estate) taxes under Sec. 115
therefore. CEBU contends that the properties
have ceased to be tax exempt under the
Assessment Law. 17 when the government
disposed of them in favor of NDC, and even
assuming that title to the land remains with the
government (ownership being the basis for real
estate taxability under the Assessment Law),
the Supreme Court rulings establish increasing
rather than "ownership" as basis for real estate
tax liability.

On the other hand, NDC maintains the Sec. 3

of the Assessment Law, which exempts
properties owned by the Republic from real
estate tax, includes subject properties in the
exemption. It invokes the ruling in Board of
Assessment Appeals vs. CTA & NWSA 18 which
held that properties of NWSA, a GOCC, were
exempt from real estate tax because Sec. 3 of
the Assessment Law applied to all government
properties whether held in governmental or
proprietary capacity. NDC rejects the
applicability of Sec. 115 of the Public Land Act
to the subject land, claiming that provision
contemplates dispositions of public land with
eventual transfer of title. In addition, NDC
believes that it is neither a grantee of a public
land nor an applicant within the purview of the
same provision.

As already adverted to, one of the principal

issues before Us is the interpretation of a
provision of the Assessment Law, the precursor
of the then Real Property Tax Code and the
Local Government Code, where "ownership" of
the property and not "use" is the test of tax
liability. 19

Section, 3 par. (a), of the Assessment Law, on

which NDC claims real estate tax exemption,
provides —

Section 3. Property exempt from tax. — The

exemptions shall be as follows: (a) Property
owned by the United States of America, the
Commonwealth of the Philippines, any province,
city, municipality at municipal district . . .

The same opinion of NDC was passed upon in

National Development Co. v. Province of Nueva
Ecija 20 where We held that its properties were
not comprehended in Sec. 3, par (a), of the
Assessment Law. In part, We stated:

1. Commonwealth Act No. 182 which created

NDC contains no provision exempting it from
the payment of real estate tax on properties it
may acquire . . . There is justification in the
contention of plaintiff-appellee that . . . [I]t is
undeniable that to any municipality the
principal source of revenue with which it would
defray its operation will came from real property
taxes. If the National Development Company
would be exempt from paying real property
taxes over these properties, the town of
Gabaldon will bee deprived of much needed
revenues with which it will maintain itself and
finance the compelling needs of its inhabitants
(p. 6, Brief of Plaintiff-Appellee).

2. Defendant-appellant NDC does not come

under classification of municipal or public
corporation in the sense that it may sue and be
sued in the same manner as any other private
corporations, and in this sense, it is an entity
different from the government, defendant
corporation may be sued without its consent,
and is subject to taxation. In the case NDC vs.
Jose Yulo Tobias, 7 SCRA 692, it was held
that . . . plaintiff is neither the Government of
the Republic nor a branch or subdivision
thereof, but a government owned and controlled
corporation which cannot be said to exercise a
sovereign function (Association Cooperativa de
Credito Agricola de Miagao vs. Monteclaro, 74
Phil. 281). it is a business corporation, and as
such, its causes of action are subject to the
statute of limitations. . . . That plaintiff herein
does not exercise sovereign powers — and,
hence, cannot invoke the exemptions thereof ––
but is an agency for the performance of purely
corporate, proprietary or business functions, is
apparent from its Organic Act (Commonwealth
Act 182, as amended by Commonwealth Act
311) pursuant to Section 3 of which it "shall be
subject to the provisions of the Corporation Law
insofar as they are not inconsistent" with the
provisions of said Commonwealth Act, "and
shall have the general powers mentioned in
said" Corporation Law, and, hence, "may engage
in commercial, industrial, mining, agricultural,
and other enterprises which may be necessary
or contributory to the economic development of
the country, or important in the public
interest," as well as "acquire, hold, mortgage
and alienate personal and real property in the
Philippines or elsewhere; . . . make contracts of
any kind and description", and "perform any
and all acts which a corporation or natural
persons is authorized to perform under the laws
now existing or which may be enacted
hereafter."

We find no compelling reason why the foregoing

ruling, although referring to lands which would
eventually be transferred to private individuals,
should not apply equally to this case.

NDC cites Board of Assessment Appeals,

Province of Laguna v. Court of Tax Appeal and
National Waterworks and Sewerage Authority
(NWSA). In that case, We held that properties of
NWSA, a GOCC, were exempt from real estate
tax because Sec. 3, par (c), of R.A. 470 did not
distinguish between those possessed by the
government in
sovereign/governmental/political capacity and
those in private/proprietary/patrimonial
character.

The conflict between NDC v. Nueva Ecija, supra,

and BAA v. CTA and NWSA, supra, is more
superficial than real. The NDC decision speaks
of properties owned by NDC, while the BAA
ruling concerns properties belonging to the
Republic. The latter case appears to be
exceptional because the parties therein
stipulated —

1. That the petitioner National Waterworks

and Sewerage Authority (NAWASA) is a public
corporation created by virtue of Republic Act.
No. 1383, and that it is owned by the
Government of the Philippines as well as all
property comprising waterworks and sewerage
systems placed under it (Emphasis supplied).

There, the Court observed: "It is conceded, in

the stipulation of facts, that the property
involved in this case "is owned by the
Government of the Philippines." Hence, it
belongs to the Republic of the Philippines and
falls squarely within letter of the above
provision."

In the case at bar, no similar statement appears

in the stipulation of facts, hence, ownership of
subject properties should first be established.
For, while it may be stated that the Republic
owns NDC, it does not necessary follow that
properties owned by NDC, are also owned by
Republic — in the same way that stockholders
are not ipso facto owners of the properties of
their corporation.

The Republic, like any individual, may form a

corporation with personality and existence
distinct from its own. The separate personality
allows a GOCC to hold and possess properties
in its own name and, thus, permit greater
independence and flexibility in its operations. It
may, therefore, be stated that tax exemption of
property owned by the Republic of the
Philippines "refers to properties owned by the
Government and by its agencies which do not
have separate and distinct personalities
(unincorporated entities). We find the separate
opinion of Justice Bautista-Angelo in Gonzales
v. Hechanova, et al., 21 appropriate and
enlightening —

. . . The Government of the Republic of the

Philippines under the Revised Administrative
Code refers to that entity through which the
functions of government are exercised,
including the various arms through which
political authority is made effective whether
they be provincial, municipal or other form of
local government, whereas a government
instrumentality refers to corporations owned or
controlled by the government to promote certain
aspects of the economic life of our people. A
government agency therefore, must necessarily
after refer to the government itself to the
Republic, as distinguished from any
government instrumentality which has a
personality distinct and separate from it
(Section 2).

The foregoing discussion does not mean that

because NDC, like most GOCC's engages in
commercial enterprises all properties of the
government and its unincorporated agencies
possessed in propriety character are taxable.
Similarly, in the case at bar, NDC proceeded on
the premise that the BAA ruling declared all
properties owed by GOCC's as properties in the
name of the Republic, hence, exempt under Sec.
3 of the Assessment Law. 22

To come within the ambit of the exemption

provided in Art. 3, par. (a), of the Assessment
Law, it is important to establish that the
property is owned by the government or its
unincorporated agency, and once government
ownership is determined, the nature of the use
of the property, whether for proprietary or
sovereign purposes, becomes immaterial. What
appears to have been ceded to NWC (later
transferred to NDC), in the case before Us, is
merely the administration of the property while
the government retains ownership of what has
been declared reserved for warehousing
purposes under Proclamation No. 430.

Incidentally, the parties never raised the issued

the issue of ownership from the court a quo to
this Court.

A reserved land is defined as a "[p]ublic land

that has been withheld or kept back from sale
or disposition." 23 The land remains "absolute
property of the government." 24 The
government "does not part with its title by
reserving them (lands), but simply gives notice
to all the world that it desires them for a certain
purpose." 25 Absolute disposition of land is not
implied from reservation; 26 it merely means "a
withdrawal of a specified portion of the public
domain from disposal under the land laws and
the appropriation thereof, for the time being, to
some particular use or purpose of the general
government." 27 As its title remains with the
Republic, the reserved land is clearly recovered
by the tax exemption provision.

CEBU nevertheless contends that the

reservation of the property in favor of NWC or
NDC is a form of disposition of public land
which, subjects the recipient (NDC ) to real
estate taxation under Sec. 115 of the Public
Land Act. as amended by R.A. 436, 28 which
estate:

Sec 115. All lands granted by virtue of this Act,

including homesteads upon which final proof
has not been made or approved shall, even
though and while the title remains in the State,
be subject to the ordinary taxes, which shall be
paid by the grantee or the applicant, beginning
with the year next following the one in which the
homestead application has been filed, or the
concession has been approved, or the contract
has been signed, as the case may be, on the
basis of the value fixed in such filing, approval
or signing of the application, concession or
contract.

The essential question then is whether lands

reserved pursuant to Sec. 83 are comprehended
in Sec. 115 and, therefore, taxable.

Section 115 of the Public Land Act should be

treated as an exception to Art. 3, par. (a), of the
Assessment Law. While ordinary public lands
are tax exempt because title thereto belongs to
the Republic, Sec. 115 subjects them to real
estate tax even before ownership thereto is
transferred in the name of the beneficiaries. Sec.
115 comprehends three (3) modes of disposition
of Lands under the Public Land Act, to wit:
homestead, concession, and contract.

Liability to real property taxes under Sec. 115

is predicated on (a) filing of homestead
application, (b) approval of concession and, (c)
signing of contract. Significantly, without these
words, the date of the accrual of the real estate
tax would be indeterminate. Since NDC is not a
homesteader and no "contract" (bilateral
agreement) was signed, it would appear, then,
that reservation under Sec. 83, being a
unilateral act of the President, falls under
"concession".

"Concession" as a technical term under the

Public Land Act is synonymous with
"alienation" and "disposition", and is defined in
Sec. 10 as "any of the methods authorized by
this Act for the acquisition, lease, use, or benefit
of the lands of the public domain other than
timber or mineral lands." Logically, where Sec.
115 contemplates authorized methods for
acquisition, lease, use, or benefit under the Act,
the taxability of the land would depend on
whether reservation under Sec. 83 is one such
method of acquisition, etc. Tersely put, is
reservation synonymous with alienation? Or,
are the two terms antithetical and mutually
exclusive? Indeed, reservation connotes
retention, while concession (alienation) signifies
cession.

Section 8 and 88 of the Public Land Act provide

that reserved lands are excluded from that may
be subject of disposition, to wit –—

Sec. 8. Only those lands shall be declared

open to disposition or concession which have
been officially delimited and classified and,
when practicable, surveyed, and which have not
been reserved for public or quasi-public uses,
nor appropriated by the Government, nor in any
manner become private property , nor those on
which a private right authorized and recognized
by this Act or any valid law may be claimed, or
which, having been reserved or appropriated,
have ceased to be so.

Sec. 88. The tract or tracts of land reserved

under the provisions of section eighty-three
shall be non-alienable and shall not be subject
to occupation, entry, sale, lease, or other
disposition until again declared alienable under
the provisions of this Act or by proclamation of
the President (Emphasis supplied)

As We view it, the effect of reservation under Sec.

83 is to segregate a piece of public land and
transform it into non-alienable or non-
disposable under the Public Land Act. Section
115, on the other hand, applies to disposable
public lands. Clearly, therefore, Sec. 115 does
not apply to lands reserved under Sec. 83.
Consequently, the subject reserved public land
remains tax exempt.

However, as regards the warehouse constructed

on a public reservation, a different rule should
apply because "[t]he exemption of public
property from taxation does not extend to
improvements on the public lands made by pre-
emptioners, homesteaders and other claimants,
or occupants, at their own expense, and these
are taxable by the state . . ." 29 Consequently,
the warehouse constructed on the reserved land
by NWC (now under administration by NDC),
indeed, should properly be assessed real estate
tax as such improvement does not appear to
belong to the Republic.

Since the reservation is exempt from realty tax,

the erroneous tax payments collected by CEBU
should be refunded to NDC. This is in
consonance with Sec. 40, par. (a) of the former
Real Property Tax Code which exempted from
taxation real property owned by the Republic of
the Philippines or any of its political
subdivisions, as well as any GOCC so exempt
by its charter. 30

As regards the requirement of paying under

protest before judicial recourse, CEBU argues
that in any case NDC is not entitled to refund
because Sec. 75 of R.A. 3857, the Revised
Charter of the City of Cebu, 31 requires
payment under protest before resorting to
judicial action for tax refund; that it could not
have acted on the first demand letter of NDC of
20 May 1970 because it was sent to the City
Assessor and not to the City Treasurer; that,
consequently, there having been no appropriate
prior demand, resort to judicial remedy is
premature; and, that even on the premise that
there was proper demand, NDC has yet to
exhaust administrative remedies by way of
appeal to the Department of Finance and/or
Auditor General before taking judicial action.

NDC does not agree. It disputes the applicability

of the payment-under-protest requirement is
Sec. 75 of the Revised Cebu City Charter
because the issue is not the validity of tax
assessment but recovery of erroneous
payments under Arts. 2154 and 2155 of the
Civil Code. 32 It cites the case of East Asiatic
Co., Ltd. v. City of Davao 33 which held that
where the tax is unauthorized, "it is not a tax
assessed under the charter of the appellant City
of Davao and for that reason no protest is
necessary for a claim or demand for its refund."
In Ramie Textiles, Inc. vs. Mathay, Sr., 34 We
held —
. . . Protest is not a requirement in order that a
taxpayer who paid under a mistaken belief that
it is required by law, may claim for a refund.
Section 54 35 of Commonwealth Act No. 470
does not apply to petitioner which could
conceivably not have been expected to protest a
payment it honestly believed to be due. The
same refers only to the case where the taxpayer,
despite his knowledge of the erroneous or illegal
assessment, still pays and fails to make the
proper protest, for in such case, he should
manifest an unwillingness to pay, and failing so,
the taxpayer is deemed to have waved his right
to claim a refund.

In the case at bar, petitioner, therefore, cannot

be said to have waived his right. He had no
knowledge of the fact that it was exempted from
payment of the realty tax under Commonwealth
Act No. 470. Payment was made through error
or mistake, in the honest belief that petitioner
was liable, and therefore could not have been
made under protest, but with complete
voluntariness. In any case, a taxpayer should
not be held to suffer loss by his good intention
to comply with what he believes is his legal
obligation, where such obligation does not
really exist . . . The fact that petitioner paid thru
error or mistake, and the government accepted
the payment, gave rise to the application of the
principle of solutio indebiti under Article 2154
of the New Civil Code, which provides that "if
something is received when there is no right to
demand it, and it was unduly delivered through
mistake, the obligation to return it arises."
There is, therefore, created a tie or juridical
relation in the nature of solutio indebiti,
expressly classified as quasi-contract under
Section 2, Chapter I of Title XVII of the New Civil
code.

The quasi-contract of solutio indebiti is one of

the concrete manifestations of the ancient
principle that no one shall enrich himself
unjustly at the expense of another . . . Hence, it
would seem unedifying for the government, that
knowing it has no right at all to collect or to
receive money for alleged taxes paid by mistake,
it would be reluctant to return the same . . .
Petitioner is not unsatisfied in the assessment
of its property. Assessment having been made,
it paid the real estate taxes without knowing
that it is exempt.

As regards the claim for refund of tax payments

spanning more than twenty (20) years, We also
said in Ramie Textiles that —

Solutio indebiti is a quasi-contract, and the

instant case being in the nature of solutio
indebiti, the claim for refund must be
commenced within six (6) years from date of
payment pursuant to Article 1145 (2) of the New
Civil Code 36 . . .

We sustain the appellate court to the extent that

its decision covers improperly collected taxes on
the reserved land under Proclamation No. 430,
thus —

The defense of prescription invoked by the

defendant which counsel for the plaintiff,
however, did not answer in its memorandum, is
partly well-taken. Actions for refund of taxes
illegally collected must be commenced within
six (6) years from the date of collection. . . . .

The stipulation of facts and the pleadings filed

by the parties do not contain data specifying
when and how much were paid by the year, of
the taxes sought to be refunded. Accordingly,
the Court has no other alternative but to order
the refund of an undetermined amount based,
however, on the date of payment counted six (6)
years backward from October 25, 1972, when
the complaint in this case was filed. 37

As regards exhaustion of administrative

remedies, We agree with the trial court that the
case constitutes an exception to the rule, as it
involves purely question of law. 38 Specifically,
on the requirement of appeal to the Secretary of
Finance, We further held in the same Ramie
Textiles that "[E]qually not applicable is Section
17 of Commonwealth Act No. 470 39 cited by
respondent in relation to the right of a, property
owner to contest the validity of assessment . . ."

Respondent CEBU likewise invites Our

attention to the availability of appeal to the
Government Auditing Office although no
authority is cited to Us. We do not find any
either to sustain the procedure.

WHEREFORE, finding that National

Development Company (NDC) is exempt from
real estate tax on the reserved land but liable
for the warehouse erected thereon, the decision
appealed from is accordingly MODIFIED.
Consequently, let this case be remanded to the
court of origin, now the Regional Trial Court of
Manila, to determine the proper liability of NDC,
particularly on its warehouse, and effect the
corresponding refund, payment or set-off, as
the case may be, conformably with this decision.
No costs.

SO ORDERED.

Cruz, Padilla and Griño-Aquino, JJ., concur.

Medialdea, J., is on leave.

Mactan Cebu International Airport Authority

v Marcos | GR No. 120082 | 11 September
1996

[G.R. No. 120082. September 11, 1996]

MACTAN CEBU INTERNATIONAL AIRPORT

AUTHORITY, petitioner, vs. HON. FERDINAND
J. MARCOS, in his capacity as the Presiding
Judge of the Regional Trial Court, Branch 20,
Cebu City, THE CITY OF CEBU, represented by
its Mayor, HON. TOMAS R. OSMEA, and
EUSTAQUIO B. CESA, respondents.
DECISION

DAVIDE, JR., J.:

For review under Rule 45 of the Rules of Court
on a pure question of law are the decision of 22
March 1995[1] of the Regional Trial Court (RTC)
of Cebu City, Branch 20, dismissing the petition
for declaratory relief in Civil Case No. CEB-
16900, entitled Mactan Cebu International
Airport Authority vs. City of Cebu, and its order
of 4 May 1995[2]denying the motion to
reconsider the decision.

We resolved to give due course to this petition

for it raises issues dwelling on the scope of the
taxing power of local government units and the
limits of tax exemption privileges of
government-owned and controlled corporations.

The uncontradicted factual antecedents are

summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport

Authority (MCIAA) was created by virtue of
Republic Act No. 6958, mandated to principally
undertake the economical, efficient and
effective control, management and supervision
of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu
City, x x x and such other airports as may be
established in the Province of Cebu x x x (Sec.
3, RA 6958). It is also mandated to:

a) encourage, promote and develop

international and domestic air traffic in the
Central Visayas and Mindanao regions as a
means of making the regions centers of
international trade and tourism, and
accelerating the development of the means of
transportation and communication in the
country; and,

b) upgrade the services and facilities of the

airports and to formulate internationally
acceptable standards of airport accommodation
and service.

Since the time of its creation, petitioner MCIAA

enjoyed the privilege of exemption from
payment of realty taxes in accordance with
Section 14 of its Charter:

Sec. 14. Tax Exemptions. -- The Authority shall

be exempt from realty taxes imposed by the
National Government or any of its political
subdivisions, agencies and instrumentalities x
x x.

On October 11, 1994, however, Mr. Eustaquio

B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded
payment for realty taxes on several parcels of
land belonging to the petitioner (Lot Nos. 913-
G, 743, 88 SWO, 948-A, 989-A, 474, 109(931),
I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd.,
746 and 991-A), located at Barrio Apas and
Barrio Kasambagan, Lahug, Cebu City, in the
total amount of P2,229,078.79.

Petitioner objected to such demand for payment

as baseless and unjustified, claiming in its favor
the aforecited Section 14 of RA 6958 which
exempts it from payment of realty taxes. It was
also asserted that it is an instrumentality of the
government performing governmental functions,
citing Section 133 of the Local Government
Code of 1991 which puts limitations on the
taxing powers of local government units:

Section 133. Common Limitations on the

Taxing Powers of Local Government Units. --
Unless otherwise provided herein, the exercise
of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

a) x x x

xxx

o) Taxes, fees or charges of any kind on the

National Government, its agencies and
instrumentalities, and local government units.
(underscoring supplied)
Respondent City refused to cancel and set aside
petitioners realty tax account, insisting that the
MCIAA is a government-controlled corporation
whose tax exemption privilege has been
withdrawn by virtue of Sections 193 and 234 of
the Local Government Code that took effect on
January 1, 1992:

Section 193. Withdrawal of Tax Exemption

Privilege. Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons whether
natural or juridical, including government-
owned or controlled corporations, except local
water districts, cooperatives duly registered
under RA No. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code. (underscoring supplied)

xxx

Section 234. Exemptions from Real Property

Taxes. x x x

(a) x x x

xxx

(e) x x x

Except as provided herein, any exemption from

payment of real property tax previously granted
to, or presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

As the City of Cebu was about to issue a

warrant of levy against the properties of
petitioner, the latter was compelled to pay its
tax account under protest and thereafter filed a
Petition for Declaratory Relief with the Regional
Trial Court of Cebu, Branch 20, on December
29, 1994. MCIAA basically contended that the
taxing powers of local government units do not
extend to the levy of taxes or fees of any kind on
an instrumentality of the national government.
Petitioner insisted that while it is indeed a
government-owned corporation, it nonetheless
stands on the same footing as an agency or
instrumentality of the national government by
the very nature of its powers and functions.

Respondent City, however, asserted that MCIAA

is not an instrumentality of the government but
merely a government-owned corporation
performing proprietary functions. As such, all
exemptions previously granted to it were
deemed withdrawn by operation of law, as
provided under Sections 193 and 234 of the
Local Government Code when it took effect on
January 1, 1992.[3]

The petition for declaratory relief was docketed

as Civil Case No. CEB-16900.

In its decision of 22 March 1995,[4] the trial

court dismissed the petition in light of its
findings, to wit:

A close reading of the New Local Government

Code of 1991 or RA 7160 provides the express
cancellation and withdrawal of exemption of
taxes by government-owned and controlled
corporation per Sections after the effectivity of
said Code on January 1, 1992, to wit: [proceeds
to quote Sections 193 and 234]

Petitioners claimed that its real properties

assessed by respondent City Government of
Cebu are exempted from paying realty taxes in
view of the exemption granted under RA 6958
to pay the same (citing Section 14 of RA 6958).

However, RA 7160 expressly provides that All

general and special laws, acts, city charters,
decrees [sic], executive orders, proclamations
and administrative regulations, or part of parts
thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or
modified accordingly. (/f/, Section 534, RA
7160).
With that repealing clause in RA 7160, it is safe
to infer and state that the tax exemption
provided for in RA 6958 creating petitioner had
been expressly repealed by the provisions of the
New Local Government Code of 1991.

So that petitioner in this case has to pay the

assessed realty tax of its properties effective
after January 1, 1992 until the present.

This Courts ruling finds expression to give

impetus and meaning to the overall objectives
of the New Local Government Code of 1991, RA
7160. It is hereby declared the policy of the
State that the territorial and political
subdivisions of the State shall enjoy genuine
and meaningful local autonomy to enable them
to attain their fullest development as self-reliant
communities and make them more effective
partners in the attainment of national goals.
Toward this end, the State shall provide for a
more responsive and accountable local
government structure instituted through a
system of decentralization whereby local
government units shall be given more powers,
authority, responsibilities, and resources. The
process of decentralization shall proceed from
the national government to the local
government units. x x x[5]

Its motion for reconsideration having been

denied by the trial court in its 4 May 1995 order,
the petitioner filed the instant petition based on
the following assignment of errors:

I. RESPONDENT JUDGE ERRED IN FAILING

TO RULE THAT THE PETITIONER IS VESTED
WITH GOVERNMENT POWERS AND
FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR
AGENCY OF THE GOVERNMENT.

II. RESPONDENT JUDGE ERRED IN RULING

THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAXES TO THE CITY OF CEBU.
Anent the first assigned error, the petitioner
asserts that although it is a government-owned
or controlled corporation, it is mandated to
perform functions in the same category as an
instrumentality of Government. An
instrumentality of Government is one created to
perform governmental functions primarily to
promote certain aspects of the economic life of
the people.[6] Considering its task not merely to
efficiently operate and manage the Mactan-
Cebu International Airport, but more
importantly, to carry out the Government
policies of promoting and developing the
Central Visayas and Mindanao regions as
centers of international trade and tourism, and
accelerating the development of the means of
transportation and communication in the
country,[7] and that it is an attached agency of
the Department of Transportation and
Communication (DOTC),[8] the petitioner may
stand in [sic] the same footing as an agency or
instrumentality of the national government.
Hence, its tax exemption privilege under Section
14 of its Charter cannot be considered
withdrawn with the passage of the Local
Government Code of 1991 (hereinafter LGC)
because Section 133 thereof specifically states
that the `taxing powers of local government
units shall not extend to the levy of taxes or fees
or charges of any kind on the national
government, its agencies and instrumentalities.

As to the second assigned error, the petitioner

contends that being an instrumentality of the
National Government, respondent City of Cebu
has no power nor authority to impose realty
taxes upon it in accordance with the aforesaid
Section 133 of the LGC, as explained in Basco
vs. Philippine Amusement and Gaming
Corporation:[9]

Local governments have no power to tax

instrumentalities of the National Government.
PAGCOR is a government owned or controlled
corporation with an original charter, PD 1869.
All of its shares of stock are owned by the
National Government. . . .
PAGCOR has a dual role, to operate and
regulate gambling casinos. The latter role is
governmental, which places it in the category of
an agency or instrumentality of the Government.
Being an instrumentality of the Government,
PAGCOR should be and actually is exempt from
local taxes. Otherwise, its operation might be
burdened, impeded or subjected to control by a
mere Local government.

The states have no power by taxation or

otherwise, to retard, impede, burden or in any
manner control the operation of constitutional
laws enacted by Congress to carry into
execution the powers vested in the federal
government. (McCulloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)

This doctrine emanates from the supremacy of

the National Government over local
governments.

Justice Holmes, speaking for the Supreme

Court, made reference to the entire absence of
power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of
the United States (Johnson v. Maryland, 254
US 51) and it can be agreed that no state or
political subdivision can regulate a federal
instrumentality in such a way as to prevent it
from consummating its federal responsibilities,
or even to seriously burden it in the
accomplishment of them. (Antieau, Modern
Constitutional Law, Vol. 2, p. 140)

Otherwise, mere creatures of the State can

defeat National policies thru extermination of
what local authorities may perceive to be
undesirable activities or enterprise using the
power to tax as a tool for regulation (U.S. v.
Sanchez, 340 US 42). The power to tax which
was called by Justice Marshall as the power to
destroy (Mc Culloch v. Maryland, supra) cannot
be allowed to defeat an instrumentality or
creation of the very entity which has the
inherent power to wield it. (underscoring
supplied)

It then concludes that the respondent Judge

cannot therefore correctly say that the
questioned provisions of the Code do not
contain any distinction between a government
corporation performing governmental functions
as against one performing merely proprietary
ones such that the exemption privilege
withdrawn under the said Code would apply to
all government corporations. For it is clear from
Section 133, in relation to Section 234, of the
LGC that the legislature meant to exclude
instrumentalities of the national government
from the taxing powers of the local government
units.

In its comment, respondent City of Cebu alleges

that as a local government unit and a political
subdivision, it has the power to impose, levy,
assess, and collect taxes within its jurisdiction.
Such power is guaranteed by the
Constitution[10] and enhanced further by the
LGC. While it may be true that under its Charter
the petitioner was exempt from the payment of
realty taxes,[11] this exemption was withdrawn
by Section 234 of the LGC. In response to the
petitioners claim that such exemption was not
repealed because being an instrumentality of
the National Government, Section 133 of the
LGC prohibits local government units from
imposing taxes, fees, or charges of any kind on
it, respondent City of Cebu points out that the
petitioner is likewise a government-owned
corporation, and Section 234 thereof does not
distinguish between government-owned or
controlled corporations performing
governmental and purely proprietary functions.
Respondent City of Cebu urges this Court to
apply by analogy its ruling that the Manila
International Airport Authority is a government-
owned corporation,[12] and to reject the
application of Basco because it was
promulgated . . . before the enactment and the
signing into law of R.A. No. 7160, and was not,
therefore, decided in the light of the spirit and
intention of the framers of the said law.

As a general rule, the power to tax is an incident

of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so
that security against its abuse is to be found
only in the responsibility of the legislature
which imposes the tax on the constituency who
are to pay it. Nevertheless, effective limitations
thereon may be imposed by the people through
their Constitutions.[13] Our Constitution, for
instance, provides that the rule of taxation shall
be uniform and equitable and Congress shall
evolve a progressive system of taxation.[14] So
potent indeed is the power that it was once
opined that the power to tax involves the power
to destroy.[15] Verily, taxation is a destructive
power which interferes with the personal and
property rights of the people and takes from
them a portion of their property for the support
of the government. Accordingly, tax statutes
must be construed strictly against the
government and liberally in favor of the
taxpayer.[16] But since taxes are what we pay
for civilized society,[17] or are the lifeblood of
the nation, the law frowns against exemptions
from taxation and statutes granting tax
exemptions are thus construed strictissimi juris
against the taxpayer and liberally in favor of the
taxing authority.[18] A claim of exemption from
tax payments must be clearly shown and based
on language in the law too plain to be
mistaken.[19] Elsewise stated, taxation is the
rule, exemption therefrom is the exception.[20]
However, if the grantee of the exemption is a
political subdivision or instrumentality, the
rigid rule of construction does not apply
because the practical effect of the exemption is
merely to reduce the amount of money that has
to be handled by the government in the course
of its operations.[21]

The power to tax is primarily vested in the

Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no
longer merely by virtue of a valid delegation as
before, but pursuant to direct authority
conferred by Section 5, Article X of the
Constitution.[22] Under the latter, the exercise
of the power may be subject to such guidelines
and limitations as the Congress may provide
which, however, must be consistent with the
basic policy of local autonomy.

There can be no question that under Section 14

of R.A. No. 6958 the petitioner is exempt from
the payment of realty taxes imposed by the
National Government or any of its political
subdivisions, agencies, and instrumentalities.
Nevertheless, since taxation is the rule and
exemption therefrom the exception, the
exemption may thus be withdrawn at the
pleasure of the taxing authority. The only
exception to this rule is where the exemption
was granted to private parties based on material
consideration of a mutual nature, which then
becomes contractual and is thus covered by the
non-impairment clause of the Constitution.[23]

The LGC, enacted pursuant to Section 3, Article

X of the Constitution, provides for the exercise
by local government units of their power to tax,
the scope thereof or its limitations, and the
exemptions from taxation.

Section 133 of the LGC prescribes the common

limitations on the taxing powers of local
government units as follows:

SEC. 133. Common Limitations on the Taxing

Power of Local Government Units. Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

(a) Income tax, except when levied on banks and

other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies
and other acquisitions mortis causa, except as
otherwise provided herein;

(d) Customs duties, registration fees of vessel

and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues
except wharfage on wharves constructed and
maintained by the local government unit
concerned;

(e) Taxes, fees and charges and other

impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions
of local government units in the guise of charges
for wharfage, tolls for bridges or otherwise, or
other taxes, fees or charges in any form
whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and

aquatic products when sold by marginal
farmers or fishermen;

(g) Taxes on business enterprises certified to by

the Board of Investments as pioneer or non-
pioneer for a period of six (6) and four (4) years,
respectively from the date of registration;

(h) Excise taxes on articles enumerated under

the National Internal Revenue Code, as
amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value-added tax (VAT) on sales,

barters or exchanges or similar transactions on
goods or services except as otherwise provided
herein;

(j) Taxes on the gross receipts of transportation

contractors and persons engaged in the
transportation of passengers or freight by hire
and common carriers by air, land or water,
except as provided in this Code;

(k) Taxes on premiums paid by way of

reinsurance or retrocession;
(l) Taxes, fees or charges for the registration of
motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof,
except, tricycles;

(m) Taxes, fees, or other charges on Philippine

products actually exported, except as otherwise
provided herein;

(n) Taxes, fees, or charges, on Countryside and

Barangay Business Enterprises and
cooperatives duly registered under R.A. No.
6810 and Republic Act Numbered Sixty-nine
hundred thirty-eight (R.A. No. 6938) otherwise
known as the Cooperatives Code of the
Philippines respectively; and

(o) TAXES, FEES OR CHARGES OF ANY KIND

ON THE NATIONAL GOVERNMENT, ITS
AGENCIES AND INSTRUMENTALITIES, AND
LOCAL GOVERNMENT UNITS. (emphasis
supplied)

Needless to say, the last item (item o) is

pertinent to this case. The taxes, fees or charges
referred to are of any kind; hence, they include
all of these, unless otherwise provided by the
LGC. The term taxes is well understood so as to
need no further elaboration, especially in light
of the above enumeration. The term fees means
charges fixed by law or ordinance for the
regulation or inspection of business or
activity,[24] while charges are pecuniary
liabilities such as rents or fees against persons
or property.[25]

Among the taxes enumerated in the LGC is real

property tax, which is governed by Section 232.
It reads as follows:

SEC. 232. Power to Levy Real Property Tax. A

province or city or a municipality within the
Metropolitan Manila Area may levy an annual
ad valorem tax on real property such as land,
building, machinery, and other improvements
not hereafter specifically exempted.
Section 234 of the LGC provides for the
exemptions from payment of real property taxes
and withdraws previous exemptions therefrom
granted to natural and juridical persons,
including government-owned and controlled
corporations, except as provided therein. It
provides:

SEC. 234. Exemptions from Real Property Tax.

The following are exempted from payment of the
real property tax:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions
except when the beneficial use thereof had been
granted, for consideration or otherwise, to a
taxable person;

(b) Charitable institutions, churches,

parsonages or convents appurtenant thereto,
mosques, nonprofit or religious cemeteries and
all lands, buildings and improvements actually,
directly, and exclusively used for religious,
charitable or educational purposes;

(c) All machineries and equipment that are

actually, directly and exclusively used by local
water districts and government-owned or
controlled corporations engaged in the supply
and distribution of water and/or generation and
transmission of electric power;

(d) All real property owned by duly registered

cooperatives as provided for under R.A. No.
6938; and

(e) Machinery and equipment used for pollution

control and environmental protection.

Except as provided herein, any exemption from

payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether
natural or juridical, including all government-
owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
These exemptions are based on the ownership,
character, and use of the property. Thus:

(a) Ownership Exemptions. Exemptions from

real property taxes on the basis of ownership
are real properties owned by: (i) the Republic, (ii)
a province, (iii) a city, (iv) a municipality, (v) a
barangay, and (vi) registered cooperatives.

(b) Character Exemptions. Exempted from real

property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and
temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (iii)
non-profit or religious cemeteries.

(c) Usage exemptions. Exempted from real

property taxes on the basis of the actual, direct
and exclusive use to which they are devoted are:
(i) all lands, buildings and improvements which
are actually directly and exclusively used for
religious, charitable or educational purposes; (ii)
all machineries and equipment actually,
directly and exclusively used by local water
districts or by government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation and
transmission of electric power; and (iii) all
machinery and equipment used for pollution
control and environmental protection.

To help provide a healthy environment in the

midst of the modernization of the country, all
machinery and equipment for pollution control
and environmental protection may not be taxed
by local governments.

2. Other Exemptions Withdrawn. All other

exemptions previously granted to natural or
juridical persons including government-owned
or controlled corporations are withdrawn upon
the effectivity of the Code.[26]

Section 193 of the LGC is the general provision

on withdrawal of tax exemption privileges. It
provides:
SEC. 193. Withdrawal of Tax Exemption
Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations, except local
water districts, cooperatives duly registered
under R.A. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code.

On the other hand, the LGC authorizes local

government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

SEC. 192. Authority to Grant Tax Exemption

Privileges.-- Local government units may,
through ordinances duly approved, grant tax
exemptions, incentives or reliefs under such
terms and conditions as they may deem
necessary.

The foregoing sections of the LGC speak of: (a)

the limitations on the taxing powers of local
government units and the exceptions to such
limitations; and (b) the rule on tax exemptions
and the exceptions thereto. The use of
exceptions or provisos in these sections, as
shown by the following clauses:

(1) unless otherwise provided herein in the

opening paragraph of Section 133;

(2) Unless otherwise provided in this Code in

Section 193;

(3) not hereafter specifically exempted in

Section 232; and

(4) Except as provided herein in the last

paragraph of Section 234

initially hampers a ready understanding of the

sections. Note, too, that the aforementioned
clause in Section 133 seems to be inaccurately
worded. Instead of the clause unless otherwise
provided herein, with the herein to mean, of
course, the section, it should have used the
clause unless otherwise provided in this Code.
The former results in absurdity since the
section itself enumerates what are beyond the
taxing powers of local government units and,
where exceptions were intended, the exceptions
are explicitly indicated in the next. For instance,
in item (a) which excepts income taxes when
levied on banks and other financial institutions;
item (d) which excepts wharfage on wharves
constructed and maintained by the local
government unit concerned; and item (1) which
excepts taxes, fees and charges for the
registration and issuance of licenses or permits
for the driving of tricycles. It may also be
observed that within the body itself of the
section, there are exceptions which can be
found only in other parts of the LGC, but the
section interchangeably uses therein the clause
except as otherwise provided herein as in items
(c) and (i), or the clause except as provided in
this Code in item (j). These clauses would be
obviously unnecessary or mere surplusages if
the opening clause of the section were Unless
otherwise provided in this Code instead of
Unless otherwise provided herein. In any event,
even if the latter is used, since under Section
232 local government units have the power to
levy real property tax, except those exempted
therefrom under Section 234, then Section 232
must be deemed to qualify Section 133.

Thus, reading together Sections 133, 232, and

234 of the LGC, we conclude that as a general
rule, as laid down in Section 133, the taxing
powers of local government units cannot extend
to the levy of, inter alia, taxes, fees and charges
of any kind on the National Government, its
agencies and instrumentalities, and local
government units; however, pursuant to
Section 232, provinces, cities, and
municipalities in the Metropolitan Manila Area
may impose the real property tax except on,
inter alia, real property owned by the Republic
of the Philippines or any of its political
subdivisions except when the beneficial use
thereof has been granted, for consideration or
otherwise, to a taxable person, as provided in
item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or

presently enjoyed by natural or juridical
persons, including government-owned and
controlled corporations, Section 193 of the LGC
prescribes the general rule, viz., they are
withdrawn upon the effectivity of the LGC,
except those granted to local water districts,
cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and
educational institutions, and unless otherwise
provided in the LGC. The latter proviso could
refer to Section 234 which enumerates the
properties exempt from real property tax. But
the last paragraph of Section 234 further
qualifies the retention of the exemption insofar
as real property taxes are concerned by limiting
the retention only to those enumerated therein;
all others not included in the enumeration lost
the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the
Republic of the Philippines or any of its political
subdivisions covered by item (a) of the first
paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property
has been granted to a taxable person for
consideration or otherwise.

Since the last paragraph of Section 234

unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real
property taxes granted to natural or juridical
persons, including government-owned or
controlled corporations, except as provided in
the said section, and the petitioner is,
undoubtedly, a government-owned corporation,
it necessarily follows that its exemption from
such tax granted it in Section 14 of its Charter,
R.A. No. 6958, has been withdrawn. Any claim
to the contrary can only be justified if the
petitioner can seek refuge under any of the
exceptions provided in Section 234, but not
under Section 133, as it now asserts, since, as
shown above, the said section is qualified by
Sections 232 and 234.

In short, the petitioner can no longer invoke the

general rule in Section 133 that the taxing
powers of the local government units cannot
extend to the levy of:

(o) taxes, fees or charges of any kind on the

National Government, its agencies or
instrumentalities, and local government units.

It must show that the parcels of land in

question, which are real property, are any one
of those enumerated in Section 234, either by
virtue of ownership, character, or use of the
property. Most likely, it could only be the first,
but not under any explicit provision of the said
section, for none exists. In light of the
petitioners theory that it is an instrumentality
of the Government, it could only be within the
first item of the first paragraph of the section by
expanding the scope of the term Republic of the
Philippines to embrace its instrumentalities and
agencies. For expediency, we quote:

(a) real property owned by the Republic of the

Philippines, or any of its political subdivisions
except when the beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person.

This view does not persuade us. In the first

place, the petitioners claim that it is an
instrumentality of the Government is based on
Section 133(o), which expressly mentions the
word instrumentalities; and, in the second
place, it fails to consider the fact that the
legislature used the phrase National
Government, its agencies and instrumentalities
in Section 133(o), but only the phrase Republic
of the Philippines or any of its political
subdivisions in Section 234(a).

The terms Republic of the Philippines and

National Government are not interchangeable.
The former is broader and synonymous with
Government of the Republic of the Philippines
which the Administrative Code of 1987 defines
as the corporate governmental entity through
which the functions of government are
exercised throughout the Philippines, including,
save as the contrary appears from the context,
the various arms through which political
authority is made affective in the Philippines,
whether pertaining to the autonomous regions,
the provincial, city, municipal or barangay
subdivisions or other forms of local
government.[27] These autonomous regions,
provincial, city, municipal or barangay
subdivisions are the political subdivisions.[28]

On the other hand, National Government refers

to the entire machinery of the central
government, as distinguished from the different
forms of local governments.[29] The National
Government then is composed of the three great
departments: the executive, the legislative and
the judicial.[30]

An agency of the Government refers to any of

the various units of the Government, including
a department, bureau, office, instrumentality,
or government-owned or controlled corporation,
or a local government or a distinct unit
therein;[31] while an instrumentality refers to
any agency of the National Government, not
integrated within the department framework,
vested with special functions or jurisdiction by
law, endowed with some if not all corporate
powers, administering special funds, and
enjoying operational autonomy, usually
through a charter. This term includes
regulatory agencies, chartered institutions and
government-owned and controlled
corporations.[32]

If Section 234(a) intended to extend the

exception therein to the withdrawal of the
exemption from payment of real property taxes
under the last sentence of the said section to
the agencies and instrumentalities of the
National Government mentioned in Section
133(o), then it should have restated the wording
of the latter. Yet, it did not. Moreover, that
Congress did not wish to expand the scope of
the exemption in Section 234(a) to include real
property owned by other instrumentalities or
agencies of the government including
government-owned and controlled corporations
is further borne out by the fact that the source
of this exemption is Section 40(a) of P.D. No.
464, otherwise known as The Real Property Tax
Code, which reads:

SEC. 40. Exemptions from Real Property Tax.

The exemption shall be as follows:

(a) Real property owned by the Republic of the

Philippines or any of its political subdivisions
and any government-owned or controlled
corporation so exempt by its charter: Provided,
however, That this exemption shall not apply to
real property of the above-mentioned entities
the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person.

Note that as reproduced in Section 234(a), the

phrase and any government-owned or
controlled corporation so exempt by its charter
was excluded. The justification for this
restricted exemption in Section 234(a) seems
obvious: to limit further tax exemption
privileges, especially in light of the general
provision on withdrawal of tax exemption
privileges in Section 193 and the special
provision on withdrawal of exemption from
payment of real property taxes in the last
paragraph of Section 234. These policy
considerations are consistent with the State
policy to ensure autonomy to local
governments[33] and the objective of the LGC
that they enjoy genuine and meaningful local
autonomy to enable them to attain their fullest
development as self-reliant communities and
make them effective partners in the attainment
of national goals.[34] The power to tax is the
most effective instrument to raise needed
revenues to finance and support myriad
activities of local government units for the
delivery of basic services essential to the
promotion of the general welfare and the
enhancement of peace, progress, and prosperity
of the people. It may also be relevant to recall
that the original reasons for the withdrawal of
tax exemption privileges granted to
government-owned and controlled corporations
and all other units of government were that
such privilege resulted in serious tax base
erosion and distortions in the tax treatment of
similarly situated enterprises, and there was a
need for these entities to share in the
requirements of development, fiscal or
otherwise, by paying the taxes and other
charges due from them.[35]

The crucial issues then to be addressed are: (a)

whether the parcels of land in question belong
to the Republic of the Philippines whose
beneficial use has been granted to the petitioner,
and (b) whether the petitioner is a taxable
person.

Section 15 of the petitioners Charter provides:

Sec. 15. Transfer of Existing Facilities and

Intangible Assets. All existing public airport
facilities, runways, lands, buildings and other
properties, movable or immovable, belonging to
or presently administered by the airports, and
all assets, powers, rights, interests and
privileges relating on airport works or air
operations, including all equipment which are
necessary for the operations of air navigation,
aerodrome control towers, crash, fire, and
rescue facilities are hereby transferred to the
Authority: Provided, however, that the
operations control of all equipment necessary
for the operation of radio aids to air navigation,
airways communication, the approach control
office, and the area control center shall be
retained by the Air Transportation Office. No
equipment, however, shall be removed by the
Air Transportation Office from Mactan without
the concurrence of the Authority. The Authority
may assist in the maintenance of the Air
Transportation Office equipment.
The airports referred to are the Lahug Air Port
in Cebu City and the Mactan International
Airport in the Province of Cebu,[36] which
belonged to the Republic of the Philippines,
then under the Air Transportation Office
(ATO).[37]

It may be reasonable to assume that the term

lands refer to lands in Cebu City then
administered by the Lahug Air Port and
includes the parcels of land the respondent City
of Cebu seeks to levy on for real property taxes.
This section involves a transfer of the lands,
among other things, to the petitioner and not
just the transfer of the beneficial use thereof,
with the ownership being retained by the
Republic of the Philippines.

This transfer is actually an absolute conveyance

of the ownership thereof because the petitioners
authorized capital stock consists of, inter alia,
the value of such real estate owned and/or
administered by the airports.[38] Hence, the
petitioner is now the owner of the land in
question and the exception in Section 234(c) of
the LGC is inapplicable.

Moreover, the petitioner cannot claim that it

was never a taxable person under its Charter. It
was only exempted from the payment of real
property taxes. The grant of the privilege only in
respect of this tax is conclusive proof of the
legislative intent to make it a taxable person
subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not

a taxable person for purposes of real property
tax, in light of the foregoing disquisitions, it had
already become, even if it be conceded to be an
agency or instrumentality of the Government, a
taxable person for such purpose in view of the
withdrawal in the last paragraph of Section 234
of exemptions from the payment of real property
taxes, which, as earlier adverted to, applies to
the petitioner.
Accordingly, the position taken by the petitioner
is untenable. Reliance on Basco vs. Philippine
Amusement and Gaming Corporation[39] is
unavailing since it was decided before the
effectivity of the LGC. Besides, nothing can
prevent Congress from decreeing that even
instrumentalities or agencies of the
Government performing governmental
functions may be subject to tax. Where it is
done precisely to fulfill a constitutional
mandate and national policy, no one can doubt
its wisdom.

WHEREFORE, the instant petition is DENIED.

The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in
Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Narvasa, C.J., (Chairman), Melo, Francisco, and

Panganiban, JJ., concur.

Republic v City of Parañaque | GR No.

191109 | 18 July 2012

G.R. No. 191109 July 18, 2012

REPUBLIC OF THE PHILIPPINES, represented

by the PHILIPPINE RECLAMATION AUTHORITY
(PRA), Petitioner,
vs.
CITY OF PARANAQUE, Respondent.

DECISION

MENDOZA, J.:

This is a petition for review on certiorari under

Rule 45 of the 1997 Rules of Civil Procedure, on
pure questions of law, assailing the January 8,
2010 Order1 of the Regional Trial Court,
Branch 195, Parafiaque City (RTC), which ruled
that petitioner Philippine Reclamation
Authority (PRA) is a government-owned and
controlled corporation (GOCC), a taxable entity,
and, therefore, . not exempt from payment of
real property taxes. The pertinent portion of the
said order reads:

In view of the finding of this court that petitioner

is not exempt from payment of real property
taxes, respondent Parañaque City Treasurer
Liberato M. Carabeo did not act xxx without or
in excess of jurisdiction, or with grave abuse of
discretion amounting to lack or in excess of
jurisdiction in issuing the warrants of levy on
the subject properties.

WHEREFORE, the instant petition is dismissed.

The Motion for Leave to File and Admit Attached
Supplemental Petition is denied and the
supplemental petition attached thereto is not
admitted.

The Public Estates Authority (PEA) is a

government corporation created by virtue of
Presidential Decree (P.D.) No. 1084 (Creating
the Public Estates Authority, Defining its
Powers and Functions, Providing Funds
Therefor and For Other Purposes) which took
effect on February 4,

1977 to provide a coordinated, economical and

efficient reclamation of lands, and the
administration and operation of lands
belonging to, managed and/or operated by, the
government with the object of maximizing their
utilization and hastening their development
consistent with public interest.

On February 14, 1979, by virtue of Executive

Order (E.O.) No. 525 issued by then President
Ferdinand Marcos, PEA was designated as the
agency primarily responsible for integrating,
directing and coordinating all reclamation
projects for and on behalf of the National
Government.

On October 26, 2004, then President Gloria

Macapagal-Arroyo issued E.O. No. 380
transforming PEA into PRA, which shall
perform all the powers and functions of the PEA
relating to reclamation activities.

By virtue of its mandate, PRA reclaimed several

portions of the foreshore and offshore areas of
Manila Bay, including those located in
Parañaque City, and was issued Original
Certificates of Title (OCT Nos. 180, 202, 206,
207, 289, 557, and 559) and Transfer
Certificates of Title (TCT Nos. 104628, 7312,
7309, 7311, 9685, and 9686) over the reclaimed
lands.

On February 19, 2003, then Parañaque City

Treasurer Liberato M. Carabeo (Carabeo) issued
Warrants of Levy on PRA’s reclaimed properties
(Central Business Park and Barangay San
Dionisio) located in Parañaque City based on
the assessment for delinquent real property
taxes made by then Parañaque City Assessor
Soledad Medina Cue for tax years 2001 and
2002.

On March 26, 2003, PRA filed a petition for

prohibition with prayer for temporary
restraining order (TRO) and/or writ of
preliminary injunction against Carabeo before
the RTC.

On April 3, 2003, after due hearing, the RTC

issued an order denying PRA’s petition for the
issuance of a temporary restraining order.

On April 4, 2003, PRA sent a letter to Carabeo

requesting the latter not to proceed with the
public auction of the subject reclaimed
properties on April 7, 2003. In response,
Carabeo sent a letter stating that the public
auction could not be deferred because the RTC
had already denied PRA’s TRO application.

On April 25, 2003, the RTC denied PRA’s prayer

for the issuance of a writ of preliminary
injunction for being moot and academic
considering that the auction sale of the subject
properties on April 7, 2003 had already been
consummated.
On August 3, 2009, after an exchange of several
pleadings and the failure of both parties to
arrive at a compromise agreement, PRA filed a
Motion for Leave to File and Admit Attached
Supplemental Petition which sought to declare
as null and void the assessment for real
property taxes, the levy based on the said
assessment, the public auction sale conducted
on April 7, 2003, and the Certificates of Sale
issued pursuant to the auction sale.

On January 8, 2010, the RTC rendered its

decision dismissing PRA’s petition. In ruling
that PRA was not exempt from payment of real
property taxes, the RTC reasoned out that it
was a GOCC under Section 3 of P.D. No. 1084.
It was organized as a stock corporation because
it had an authorized capital stock divided into
no par value shares. In fact, PRA admitted its
corporate personality and that said properties
were registered in its name as shown by the
certificates of title. Therefore, as a GOCC, local
tax exemption is withdrawn by virtue of Section
193 of Republic Act (R.A.) No. 7160 Local
Government Code (LGC) which was the
prevailing law in 2001 and 2002 with respect to
real property taxation. The RTC also ruled that
the tax exemption claimed by PRA under E.O.
No. 654 had already been expressly repealed by
R.A. No. 7160 and that PRA failed to comply
with the procedural requirements in Section
206 thereof.

Not in conformity, PRA filed this petition for

certiorari assailing the January 8, 2010 RTC
Order based on the following GROUNDS

THE TRIAL COURT GRAVELY ERRED IN

FINDING THAT PETITIONER IS LIABLE TO PAY
REAL PROPERTY TAX ON THE SUBJECT
RECLAIMED LANDS CONSIDERING

THAT PETITIONER IS AN INCORPORATED

INSTRUMENTALITY OF THE NATIONAL
GOVERNMENT AND IS, THEREFORE, EXEMPT
FROM PAYMENT OF REAL PROPERTY TAX
UNDER SECTIONS 234(A) AND 133(O) OF
REPUBLIC ACT 7160 OR THE LOCAL
GOVERNMENT CODE VIS-À-VIS MANILA
INTERNATIONAL AIRPORT AUTHORITY V.
COURT OF APPEALS.

II

THE TRIAL COURT GRAVELY ERRED IN

FAILING TO CONSIDER THAT RECLAIMED
LANDS ARE PART OF THE PUBLIC DOMAIN
AND, HENCE, EXEMPT FROM REAL
PROPERTY TAX.

PRA asserts that it is not a GOCC under Section

2(13) of the Introductory Provisions of the
Administrative Code. Neither is it a GOCC
under Section 16, Article XII of the 1987
Constitution because it is not required to meet
the test of economic viability. Instead, PRA is a
government instrumentality vested with
corporate powers and performing an essential
public service pursuant to Section 2(10) of the
Introductory Provisions of the Administrative
Code. Although it has a capital stock divided
into shares, it is not authorized to distribute
dividends and allotment of surplus and profits
to its stockholders. Therefore, it may not be
classified as a stock corporation because it
lacks the second requisite of a stock corporation
which is the distribution of dividends and
allotment of surplus and profits to the
stockholders.

It insists that it may not be classified as a non-

stock corporation because it has no members
and it is not organized for charitable, religious,
educational, professional, cultural, recreational,
fraternal, literary, scientific, social, civil service,
or similar purposes, like trade, industry,
agriculture and like chambers as provided in
Section 88 of the Corporation Code.

Moreover, PRA points out that it was not created

to compete in the market place as there was no
competing reclamation company operated by
the private sector. Also, while PRA is vested with
corporate powers under P.D. No. 1084, such
circumstance does not make it a corporation
but merely an incorporated instrumentality and
that the mere fact that an incorporated
instrumentality of the National Government
holds title to real property does not make said
instrumentality a GOCC. Section 48, Chapter
12, Book I of the Administrative Code of 1987
recognizes a scenario where a piece of land
owned by the Republic is titled in the name of a
department, agency or instrumentality.

Thus, PRA insists that, as an incorporated

instrumentality of the National Government, it
is exempt from payment of real property tax
except when the beneficial use of the real
property is granted to a taxable person. PRA
claims that based on Section 133(o) of the LGC,
local governments cannot tax the national
government which delegate to local
governments the power to tax.

It explains that reclaimed lands are part of the

public domain, owned by the State, thus,
exempt from the payment of real estate taxes.
Reclaimed lands retain their inherent potential
as areas for public use or public service. While
the subject reclaimed lands are still in its hands,
these lands remain public lands and form part
of the public domain. Hence, the assessment of
real property taxes made on said lands, as well
as the levy thereon, and the public sale thereof
on April 7, 2003, including the issuance of the
certificates of sale in favor of the respondent
Parañaque City, are invalid and of no force and
effect.

On the other hand, the City of Parañaque

(respondent) argues that PRA since its creation
consistently represented itself to be a GOCC.
PRA’s very own charter (P.D. No. 1084) declared
it to be a GOCC and that it has entered into
several thousands of contracts where it
represented itself to be a GOCC. In fact, PRA
admitted in its original and amended petitions
and pre-trial brief filed with the RTC of
Parañaque City that it was a GOCC.

Respondent further argues that PRA is a stock

corporation with an authorized capital stock
divided into 3 million no par value shares, out
of which 2 million shares have been subscribed
and fully paid up. Section 193 of the LGC of
1991 has withdrawn tax exemption privileges
granted to or presently enjoyed by all persons,
whether natural or juridical, including GOCCs.

Hence, since PRA is a GOCC, it is not exempt

from the payment of real property tax.

THE COURT’S RULING

The Court finds merit in the petition.

Section 2(13) of the Introductory Provisions of

the Administrative Code of 1987 defines a
GOCC as follows:

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled

corporation refers to any agency organized as a
stock or non-stock corporation, vested with
functions relating to public needs whether
governmental or proprietary in nature, and
owned by the Government directly or through
its instrumentalities either wholly, or, where
applicable as in the case of stock corporations,
to the extent of at least fifty-one

(51) percent of its capital stock: x x x.

On the other hand, Section 2(10) of the

Introductory Provisions of the Administrative
Code defines a government "instrumentality" as
follows:

SEC. 2. General Terms Defined. –– x x x x

(10) Instrumentality refers to any agency of the

National Government, not integrated within the
department framework, vested with special
functions or jurisdiction by law, endowed with
some if not all corporate powers, administering
special funds, and enjoying operational
autonomy, usually through a charter. x x x

From the above definitions, it is clear that a

GOCC must be "organized as a stock or non-
stock corporation" while an instrumentality is
vested by law with corporate powers. Likewise,
when the law makes a government
instrumentality operationally autonomous, the
instrumentality remains part of the National
Government machinery although not integrated
with the department framework.

When the law vests in a government

instrumentality corporate powers, the
instrumentality does not necessarily become a
corporation. Unless the government
instrumentality is organized as a stock or non-
stock corporation, it remains a government
instrumentality exercising not only
governmental but also corporate powers.

Many government instrumentalities are vested

with corporate powers but they do not become
stock or non-stock corporations, which is a
necessary condition before an agency or
instrumentality is deemed a GOCC. Examples
are the Mactan International Airport Authority,
the Philippine Ports Authority, the University of
the Philippines, and Bangko Sentral ng
Pilipinas. All these government
instrumentalities exercise corporate powers but
they are not organized as stock or non-stock
corporations as required by Section 2(13) of the
Introductory Provisions of the Administrative
Code. These government instrumentalities are
sometimes loosely called government corporate
entities. They are not, however, GOCCs in the
strict sense as understood under the
Administrative Code, which is the governing law
defining the legal relationship and status of
government entities.2

Correlatively, Section 3 of the Corporation Code

defines a stock corporation as one whose
"capital stock is divided into shares and x x x
authorized to distribute to the holders of such
shares dividends x x x." Section 87 thereof
defines a non-stock corporation as "one where
no part of its income is distributable as
dividends to its members, trustees or officers."
Further, Section 88 provides that non-stock
corporations are "organized for charitable,
religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social,
civil service, or similar purposes, like trade,
industry, agriculture and like chambers."

Two requisites must concur before one may be

classified as a stock corporation, namely: (1)
that it has capital stock divided into shares; and
(2) that it is authorized to distribute dividends
and allotments of surplus and profits to its
stockholders. If only one requisite is present, it
cannot be properly classified as a stock
corporation. As for non-stock corporations, they
must have members and must not distribute
any part of their income to said members.3

In the case at bench, PRA is not a GOCC

because it is neither a stock nor a non-stock
corporation. It cannot be considered as a stock
corporation because although it has a capital
stock divided into no par value shares as
provided in Section 74 of P.D. No. 1084, it is not
authorized to distribute dividends, surplus
allotments or profits to stockholders. There is
no provision whatsoever in P.D. No. 1084 or in
any of the subsequent executive issuances
pertaining to PRA, particularly, E.O. No. 525,5
E.O. No. 6546 and EO No. 7987 that authorizes
PRA to distribute dividends, surplus allotments
or profits to its stockholders.

PRA cannot be considered a non-stock

corporation either because it does not have
members. A non-stock corporation must have
members.8 Moreover, it was not organized for
any of the purposes mentioned in Section 88 of
the Corporation Code. Specifically, it was
created to manage all government reclamation
projects.
Furthermore, there is another reason why the
PRA cannot be classified as a GOCC. Section 16,
Article XII of the 1987 Constitution provides as
follows:

Section 16. The Congress shall not, except by

general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned or controlled
corporations may be created or established by
special charters in the interest of the common
good and subject to the test of economic
viability.

The fundamental provision above authorizes

Congress to create GOCCs through special
charters on two conditions: 1) the GOCC must
be established for the common good; and 2) the
GOCC must meet the test of economic viability.
In this case, PRA may have passed the first
condition of common good but failed the second
one - economic viability. Undoubtedly, the
purpose behind the creation of PRA was not for
economic or commercial activities. Neither was
it created to compete in the market place
considering that there were no other competing
reclamation companies being operated by the
private sector. As mentioned earlier, PRA was
created essentially to perform a public service
considering that it was primarily responsible for
a coordinated, economical and efficient
reclamation, administration and operation of
lands belonging to the government with the
object of maximizing their utilization and
hastening their development consistent with
the public interest. Sections 2 and 4 of P.D. No.
1084 reads, as follows:

Section 2. Declaration of policy. It is the

declared policy of the State to provide for a
coordinated, economical and efficient
reclamation of lands, and the administration
and operation of lands belonging to, managed
and/or operated by the government, with the
object of maximizing their utilization and
hastening their development consistent with
the public interest.

Section 4. Purposes. The Authority is hereby

created for the following purposes:

(a) To reclaim land, including foreshore and

submerged areas, by dredging, filling or other
means, or to acquire reclaimed land;

(b) To develop, improve, acquire, administer,

deal in, subdivide, dispose, lease and sell any
and all kinds of lands, buildings, estates and
other forms of real property, owned, managed,
controlled and/or operated by the government.

(c) To provide for, operate or administer such

services as may be necessary for the efficient,
economical and beneficial utilization of the
above properties.

The twin requirement of common good and

economic viability was lengthily discussed in
the case of Manila International Airport
Authority v. Court of Appeals,9 the pertinent
portion of which reads:

Third, the government-owned or controlled

corporations created through special charters
are those that meet the two conditions
prescribed in Section 16, Article XII of the
Constitution.

The first condition is that the government-

owned or controlled corporation must be
established for the common good. The second
condition is that the government-owned or
controlled corporation must meet the test of
economic viability. Section 16, Article XII of the
1987 Constitution provides:

SEC. 16. The Congress shall not, except by

general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned or controlled
corporations may be created or established by
special charters in the interest of the common
good and subject to the test of economic
viability.

The Constitution expressly authorizes the

legislature to create "government-owned or
controlled corporations" through special
charters only if these entities are required to
meet the twin conditions of common good and
economic viability. In other words, Congress
has no power to create government-owned or
controlled corporations with special charters
unless they are made to comply with the two
conditions of common good and economic
viability. The test of economic viability applies
only to government-owned or controlled
corporations that perform economic or
commercial activities and need to compete in
the market place. Being essentially economic
vehicles of the State for the common good —
meaning for economic development purposes —
these government-owned or controlled
corporations with special charters are usually
organized as stock corporations just like
ordinary private corporations.

In contrast, government instrumentalities

vested with corporate powers and performing
governmental or public functions need not meet
the test of economic viability. These
instrumentalities perform essential public
services for the common good, services that
every modern State must provide its citizens.
These instrumentalities need not be
economically viable since the government may
even subsidize their entire operations. These
instrumentalities are not the "government-
owned or controlled corporations" referred to in
Section 16, Article XII of the 1987 Constitution.

Thus, the Constitution imposes no limitation

when the legislature creates government
instrumentalities vested with corporate powers
but performing essential governmental or
public functions. Congress has plenary
authority to create government
instrumentalities vested with corporate powers
provided these instrumentalities perform
essential government functions or public
services. However, when the legislature creates
through special charters corporations that
perform economic or commercial activities,
such entities — known as "government-owned
or controlled corporations" — must meet the
test of economic viability because they compete
in the market place.

This is the situation of the Land Bank of the

Philippines and the Development Bank of the
Philippines and similar government-owned or
controlled corporations, which derive their
incometo meet operating expenses solely from
commercial transactions in competition with
the private sector. The intent of the Constitution
is to prevent the creation of government-owned
or controlled corporations that cannot survive
on their own in the market place and thus
merely drain the public coffers.

Commissioner Blas F. Ople, proponent of the

test of economic viability, explained to the
Constitutional Commission the purpose of this
test, as follows:

MR. OPLE: Madam President, the reason for

this concern is really that when the government
creates a corporation, there is a sense in which
this corporation becomes exempt from the test
of economic performance. We know what
happened in the past. If a government
corporation loses, then it makes its claim upon
the taxpayers' money through new equity
infusions from the government and what is
always invoked is the common good. That is the
reason why this year, out of a budget of P115
billion for the entire government, about P28
billion of this will go into equity infusions to
support a few government financial institutions.
And this is all taxpayers' money which could
have been relocated to agrarian reform, to social
services like health and education, to augment
the salaries of grossly underpaid public
employees. And yet this is all going down the
drain.
Therefore, when we insert the phrase
"ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on
future enthusiasts for state capitalism to
excuse themselves from the responsibility of
meeting the market test so that they become
viable. And so, Madam President, I reiterate, for
the committee's consideration and I am glad
that I am joined in this proposal by
Commissioner Foz, the insertion of the
standard of "ECONOMIC VIABILITY OR THE
ECONOMIC TEST," together with the common
good.1âwphi1

Father Joaquin G. Bernas, a leading member of

the Constitutional Commission, explains in his
textbook The 1987 Constitution of the Republic
of the Philippines: A Commentary:

The second sentence was added by the 1986

Constitutional Commission. The significant
addition, however, is the phrase "in the interest
of the common good and subject to the test of
economic viability." The addition includes the
ideas that they must show capacity to function
efficiently in business and that they should not
go into activities which the private sector can do
better. Moreover, economic viability is more
than financial viability but also includes
capability to make profit and generate benefits
not quantifiable in financial terms.

Clearly, the test of economic viability does not

apply to government entities vested with
corporate powers and performing essential
public services. The State is obligated to render
essential public services regardless of the
economic viability of providing such service. The
non-economic viability of rendering such
essential public service does not excuse the
State from withholding such essential services
from the public.

However, government-owned or controlled

corporations with special charters, organized
essentially for economic or commercial
objectives, must meet the test of economic
viability. These are the government-owned or
controlled corporations that are usually
organized under their special charters as stock
corporations, like the Land Bank of the
Philippines and the Development Bank of the
Philippines. These are the government-owned
or controlled corporations, along with
government-owned or controlled corporations
organized under the Corporation Code, that fall
under the definition of "government-owned or
controlled corporations" in Section 2(10) of the
Administrative Code. [Emphases supplied]

This Court is convinced that PRA is not a GOCC

either under Section 2(3) of the Introductory
Provisions of the Administrative Code or under
Section 16, Article XII of the 1987 Constitution.
The facts, the evidence on record and
jurisprudence on the issue support the position
that PRA was not organized either as a stock or
a non-stock corporation. Neither was it created
by Congress to operate commercially and
compete in the private market. Instead, PRA is
a government instrumentality vested with
corporate powers and performing an essential
public service pursuant to Section 2(10) of the
Introductory Provisions of the Administrative
Code. Being an incorporated government
instrumentality, it is exempt from payment of
real property tax.

Clearly, respondent has no valid or legal basis

in taxing the subject reclaimed lands managed
by PRA. On the other hand, Section 234(a) of
the LGC, in relation to its Section 133(o),
exempts PRA from paying realty taxes and
protects it from the taxing powers of local
government units.

Sections 234(a) and 133(o) of the LGC provide,

as follows:

SEC. 234. Exemptions from Real Property Tax –

The following are exempted from payment of the
real property tax:
(a) Real property owned by the Republic of the
Philippines or any of its political subdivisions
except when the beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person.

xxxx

SEC. 133. Common Limitations on the Taxing

Powers of Local Government Units. – Unless
otherwise provided herein, the exercise of the
taxing powers of provinces, cities,
municipalities, and barangays shall not extend
to the levy of the following:

xxxx

(o) Taxes, fees or charges of any kinds on the

National Government, its agencies and
instrumentalities, and local government units.
[Emphasis supplied]

It is clear from Section 234 that real property

owned by the Republic of the Philippines (the
Republic) is exempt from real property tax
unless the beneficial use thereof has been
granted to a taxable person. In this case, there
is no proof that PRA granted the beneficial use
of the subject reclaimed lands to a taxable
entity. There is no showing on record either that
PRA leased the subject reclaimed properties to
a private taxable entity.

This exemption should be read in relation to

Section 133(o) of the same Code, which
prohibits local governments from imposing
"taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities x x x." The Administrative
Code allows real property owned by the
Republic to be titled in the name of agencies or
instrumentalities of the national government.
Such real properties remain owned by the
Republic and continue to be exempt from real
estate tax.
Indeed, the Republic grants the beneficial use
of its real property to an agency or
instrumentality of the national government.
This happens when the title of the real property
is transferred to an agency or instrumentality
even as the Republic remains the owner of the
real property. Such arrangement does not
result in the loss of the tax exemption, unless
"the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable
person."10

The rationale behind Section 133(o) has also

been explained in the case of the Manila
International Airport Authority,11 to wit:

Section 133(o) recognizes the basic principle

that local governments cannot tax the national
government, which historically merely
delegated to local governments the power to tax.
While the 1987 Constitution now includes
taxation as one of the powers of local
governments, local governments may only
exercise such power "subject to such guidelines
and limitations as the Congress may provide."

When local governments invoke the power to tax

on national government instrumentalities, such
power is construed strictly against local
governments. The rule is that a tax is never
presumed and there must be clear language in
the law imposing the tax. Any doubt whether a
person, article or activity is taxable is resolved
against taxation. This rule applies with greater
force when local governments seek to tax
national government instrumentalities.

Another rule is that a tax exemption is strictly

construed against the taxpayer claiming the
exemption. However, when Congress grants an
exemption to a national government
instrumentality from local taxation, such
exemption is construed liberally in favor of the
national government instrumentality. As this
Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the
case of exemptions running to the benefit of the
government itself or its agencies. In such case
the practical effect of an exemption is merely to
reduce the amount of money that has to be
handled by government in the course of its
operations. For these reasons, provisions
granting exemptions to government agencies
may be construed liberally, in favor of non tax-
liability of such agencies.

There is, moreover, no point in national and

local governments taxing each other, unless a
sound and compelling policy requires such
transfer of public funds from one government
pocket to another.

There is also no reason for local governments to

tax national government instrumentalities for
rendering essential public services to
inhabitants of local governments. The only
exception is when the legislature clearly
intended to tax government instrumentalities
for the delivery of essential public services for
sound and compelling policy considerations.
There must be express language in the law
empowering local governments to tax national
government instrumentalities. Any doubt
whether such power exists is resolved against
local governments.

Thus, Section 133 of the Local Government

Code states that "unless otherwise provided" in
the Code, local governments cannot tax
national government instrumentalities. As this
Court held in Basco v. Philippine Amusements
and Gaming Corporation:

The states have no power by taxation or

otherwise, to retard, impede, burden or in any
manner control the operation of constitutional
laws enacted by Congress to carry into
execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of
the National Government over local
governments.

"Justice Holmes, speaking for the Supreme

Court, made reference to the entire absence of
power on the part of the States to touch, in that
way (taxation) at least, the instrumentalities of
the United States (Johnson v. Maryland, 254
US 51) and it can be agreed that no state or
political subdivision can regulate a federal
instrumentality in such a way as to prevent it
from consummating its federal responsibilities,
or even to seriously burden it in the
accomplishment of them." (Antieau, Modern
Constitutional Law, Vol. 2, p. 140, emphasis
supplied)

Otherwise, mere creatures of the State can

defeat National policies thru extermination of
what local authorities may perceive to be
undesirable activities or enterprise using the
power to tax as "a tool for regulation." (U.S. v.
Sanchez, 340 US 42)

The power to tax which was called by Justice

Marshall as the "power to destroy" (McCulloch
v. Maryland, supra) cannot be allowed to defeat
an instrumentality or creation of the very entity
which has the inherent power to wield it.
[Emphases supplied]

The Court agrees with PRA that the subject

reclaimed lands are still part of the public
domain, owned by the State and, therefore,
exempt from payment of real estate taxes.

Section 2, Article XII of the 1987 Constitution

reads in part, as follows:

Section 2. All lands of the public domain, waters,

minerals, coal, petroleum, and other mineral
oils, all forces of potential energy, fisheries,
forests or timber, wildlife, flora and fauna, and
other natural resources are owned by the State.
With the exception of agricultural lands, all
other natural resources shall not be alienated.
The exploration, development, and utilization of
natural resources shall be under the full control
and supervision of the State. The State may
directly undertake such activities, or it may
enter into co-production, joint venture, or
production-sharing agreements with Filipino
citizens, or corporations or associations at least
60 per centum of whose capital is owned by
such citizens. Such agreements may be for a
period not exceeding twenty-five years,
renewable for not more than twenty-five years,
and under such terms and conditions as may
provided by law. In cases of water rights for
irrigation, water supply, fisheries, or industrial
uses other than the development of waterpower,
beneficial use may be the measure and limit of
the grant.

Similarly, Article 420 of the Civil Code

enumerates properties belonging to the State:

Art. 420. The following things are property of

public dominion:

(1) Those intended for public use, such as roads,

canals, rivers, torrents, ports and bridges
constructed by the State, banks, shores,
roadsteads, and others of similar character;

(2) Those which belong to the State, without

being for public use, and are intended for some
public service or for the development of the
national wealth. [Emphases supplied]

Here, the subject lands are reclaimed lands,

specifically portions of the foreshore and
offshore areas of Manila Bay. As such, these
lands remain public lands and form part of the
public domain. In the case of Chavez v. Public
Estates Authority and AMARI Coastal
Development Corporation,12 the Court held
that foreshore and submerged areas irrefutably
belonged to the public domain and were
inalienable unless reclaimed, classified as
alienable lands open to disposition and further
declared no longer needed for public service.
The fact that alienable lands of the public
domain were transferred to the PEA (now PRA)
and issued land patents or certificates of title in
PEA’s name did not automatically make such
lands private. This Court also held therein that
reclaimed lands retained their inherent
potential as areas for public use or public
service.

As the central implementing agency tasked to

undertake reclamation projects nationwide,
with authority to sell reclaimed lands, PEA took
the place of DENR as the government agency
charged with leasing or selling reclaimed lands
of the public domain. The reclaimed lands being
leased or sold by PEA are not private lands, in
the same manner that DENR, when it disposes
of other alienable lands, does not dispose of
private lands but alienable lands of the public
domain. Only when qualified private parties
acquire these lands will the lands become
private lands. In the hands of the government
agency tasked and authorized to dispose of
alienable of disposable lands of the public
domain, these lands are still public, not private
lands.

Furthermore, PEA's charter expressly states

that PEA "shall hold lands of the public domain"
as well as "any and all kinds of lands." PEA can
hold both lands of the public domain and
private lands. Thus, the mere fact that alienable
lands of the public domain like the Freedom
Islands are transferred to PEA and issued land
patents or certificates of title in PEA's name
does not automatically make such lands
private.13

Likewise, it is worthy to mention Section 14,

Chapter 4, Title I, Book III of the Administrative
Code of 1987, thus:

SEC 14. Power to Reserve Lands of the Public

and Private Dominion of the Government.-

(1)The President shall have the power to reserve

for settlement or public use, and for specific
public purposes, any of the lands of the public
domain, the use of which is not otherwise
directed by law. The reserved land shall
thereafter remain subject to the specific public
purpose indicated until otherwise provided by
law or proclamation.

Reclaimed lands such as the subject lands in

issue are reserved lands for public use. They are
properties of public dominion. The ownership of
such lands remains with the State unless they
are withdrawn by law or presidential
proclamation from public use.

Under Section 2, Article XII of the 1987

Constitution, the foreshore and submerged
areas of Manila Bay are part of the "lands of the
public domain, waters x x x and other natural
resources" and consequently "owned by the
State." As such, foreshore and submerged areas
"shall not be alienated," unless they are
classified as "agricultural lands" of the public
domain. The mere reclamation of these areas by
PEA does not convert these inalienable natural
resources of the State into alienable or
disposable lands of the public domain. There
must be a law or presidential proclamation
officially classifying these reclaimed lands as
alienable or disposable and open to disposition
or concession. Moreover, these reclaimed lands
cannot be classified as alienable or disposable
if the law has reserved them for some public or
quasi-public use.

As the Court has repeatedly ruled, properties of

public dominion are not subject to execution or
foreclosure sale.14 Thus, the assessment, levy
and foreclosure made on the subject reclaimed
lands by respondent, as well as the issuances of
certificates of title in favor of respondent, are
without basis.

WHEREFORE, the petition is GRANTED. The

January 8, 2010 Order of the Regional Trial
Court, Branch 195, Parañaque City, is
REVERSED and SET ASIDE. All reclaimed
properties owned by the Philippine Reclamation
Authority are hereby declared EXEMPT from
real estate taxes. All real estate tax assessments,
including the final notices of real estate tax
delinquencies, issued by the City of Parañaque
on the subject reclaimed properties; the
assailed auction sale, dated April 7, 2003; and
the Certificates of Sale subsequently issued by
the Parañaque City Treasurer in favor of the
City of Parañaque, are all declared VOID.

SO ORDERED.

Republic (DOTC) v City of Mandaluyong | GR

No. 184879 | 23 February 2011

G.R. No. 184879 February 23, 2011

REPUBLIC OF THE PHILIPPINES

(DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS), Petitioner,
vs.
CITY OF MANDALUYONG, Respondent.

RESOLUTION

PEREZ, J.:

The subject of this petition for review on

certiorari is the writ of possession issued in
favor of respondent City of Mandaluyong by the
Regional Trial Court (RTC Branch 213), Branch
213, Mandaluyong City of real properties
forming part of the EDSA Metro Rail Transit
(MRT) III.

Petitioner Republic of the Philippines (Republic)

is represented in this suit by the Department of
Transportation and Communications (DOTC),
which is the primary policy, planning,
programming, regulating and administrative
entity of the executive branch of the government
in the promotion, development, and regulation
of dependable and coordinated networks of
transportation and communications systems,
as well as in the fast, safe, efficient, and reliable
postal, transportation and communications
services; while respondent City Government of
Mandaluyong is a local government unit tasked,
among others, with meeting the priority needs
and service requirements of its constituents in
Mandaluyong City.1

The material facts and events leading to this

controversy are as follows:

On 8 August 1997, the DOTC entered into a

Revised and Restated Agreement to Build, Lease
and Transfer a Light Rail System for EDSA (BLT)
with Metro Rail Transit Corporation Limited
(Metro Rail), a foreign corporation. Under the
BLT Agreement, Metro Rail shall be responsible
for the design, construction, equipping,
completion, testing, and commissioning of the
Light Rail Transit System-LRTS Phase I (EDSA
MRT III).2 The DOTC shall operate the same but
ownership of the EDSA MRT III shall remain
with Metro Rail during the Revenue and
Construction periods. At the end of the Revenue
Period,3 Metro Rail shall transfer to DOTC its
title to and all of its rights and interests therein,
in exchange for US$1.00.4

On even date, Metro Rail then assigned all its

rights and obligations under the BLT Agreement
to Metro Rail Transit Corporation (MRTC), a
domestic corporation.

In an agreement dated 15 July 2000, Metro Rail

turned over the EDSA MRT III System to the
DOTC for its operation.5

In a joint resolution dated 5 April 2001, the City

Assessors of Mandaluyong City, Quezon City,
Makati City and Pasay City fixed the current
and market value of EDSA MRT III at US$655
Million or P32.75 Billion, and which will be
divided proportionately according to distance
traversed among these cities.6

On 4 June 2001, the Office of the City Assessor

of Mandaluyong issued Tax Declaration No. D-
013-06267 in the name of MRTC, fixing the
market value of the railways, train cars, three
(3) stations and miscellaneous expenses at
P5,974,365,000.00 and the assessed value at
P4,779,492,000.00.7 Subsequently on 18 June
2001, the said Office of the City Assessor of
Mandaluyong City demanded payment of real
property taxes due under the aforesaid tax
declaration.8

The computation of real property tax of MRTC

was pegged at P317,250,730.23 from the
taxable year 2000 until August 2001.9 Two (2)
years later or on August 2003, another demand
was made on MRTC placing the deficiency real
estate tax due to the City of Mandaluyong at
P769,784,981.52.10

Initially, a Notice of Delinquency dated 24 June

2005 was sent to MRTC wherein the assessed
deficiency real property tax amounted to
P12,843,928.79,11 however the City Treasurer
of Mandaluyong issued another Notice of
Delinquency on 7 September 2005 rectifying the
24 June 2005 notice by increasing the
deficiency real property tax to
P1,306,617,522.96.12

On the same date, the City Treasurer issued

and served a Warrant of Levy upon MRTC with
the corresponding Notices of Levy upon the City
Assessor and the Registrar of Deeds of
Mandaluyong City.13

On 5 December 2005, petitioner Republic filed

a case for Declaration of Nullity of Real Property
Tax Assessment and Warrant of Levy with a
prayer for a Temporary Restraining Order (TRO)
and Writ of Preliminary Injunction before the
Regional Trial Court (RTC Branch 208), Branch
208, Mandaluyong City, docketed as Civil Case
No. MC05-2882.

Petitioner Republic alleged that since Metro Rail

had transferred to the DOTC the actual use,
possession and operation of the EDSA MRT III
System, Metro Rail or MRTC does not have
actual or beneficial use and possession of the
EDSA MRT III properties as to subject it to
payment of real estate taxes. On the other hand,
notwithstanding the transfer to DOTC of the
actual use, possession and operation of the
EDSA MRT III, petitioner Republic is not liable
because local government units are legally
proscribed from imposing taxes of any kind on
it under Section 133(o) of Republic Act No. 7160.
Likewise, under Section 234 of the same law,
petitioner is exempted from payment of real
property tax.14

MRTC filed a complaint-in-intervention and

sought to declare the nullity of the real property
tax assessments.

The posting and publication of the Notice of

Auction were made on 26 February 2006 and 5
March 2006.15

On 22 March 2006, the RTC Branch 208,

through Presiding Judge Esteban A. Tacla, Jr.,
denied both petitioner Republic’s and MRTC’s
applications for TRO.16

Consequently, on 24 March 2006, a public

auction was conducted. For lack of bidders, the
real properties were forfeited in favor of the City
of Mandaluyong for the price of
P1,483,700,100.18.17

On 15 September 2006, the RTC Branch 208

issued an order denying petitioner and MRTC’s
application for issuance of a writ of preliminary
injunction. A motion for reconsideration was
filed but it was eventually denied on 9 March
2007. The issue on the validity of tax
assessment however is pending before that
court.

Petitioner Republic filed a petition for certiorari

before the Court of Appeals challenging the
denial of both the TRO and injunction by RTC
Branch 208.

Meanwhile, respondent manifested before the

Court of Appeals that due to the failure of MRTC
to exercise the right of redemption, the City
Treasurer of Mandaluyong executed a Final
Deed of Sale in favor of the purchaser in the
auction sale. Subsequently, Tax Declaration No.
D-013-06267 in MRTC’s name was cancelled
and Tax Declaration No. D-013-10636 was
issued in its place.18

On 11 April 2008, respondent filed an ex parte

petition praying for the issuance of a writ of
possession before RTC Branch 213 of
Mandaluyong and docketed as LRC Case No.
MC-08-460.19 Petitioner Republic countered
that the instant petition does not fall within the
cases when a writ of possession may be issued.
Moreover, petitioner argued that the pendency
of Civil Case No. MC05-2882 assailing the
validity of the tax assessment and the
subsequent auction sale of the properties pre-
empts the issuance of said writ.20

On 30 July 2008, the RTC Branch 213, through

Judge Carlos A. Valenzuela, granted the
petition for the issuance of a writ of
possession.21 A subsequent motion for
reconsideration filed by petitioner was denied
for lack of merit.22

While MRTC appealed said order to the Court of

Appeals, petitioner Republic filed the instant
case raising a question of law, i.e. the propriety
of the issuance of a writ of possession. To
support its main thesis that the RTC Branch
213 erred in issuing a writ of possession,
petitioner claims that since EDSA MRT
properties are beneficially owned by DOTC, it
should not have been assessed for payment of
real property taxes. Being a governmental entity,
it is exempt from payment of real property tax
under Section 234 of the Local Government
Code. Therefore, no tax delinquency exist
authorizing respondent to sell the subject
properties through public auction. It then
follows that respondent has no legal right to a
writ of possession.231avvphi1

Petitioner Republic then asserts that the

auction sale conducted by respondent cannot
be likened to an extrajudicial foreclosure sale of
a real estate mortgage under Act No. 3135 as a
justification for the issuance of a writ of
possession. Petitioner Republic reasons that the
EDSA MRT properties were not put up as a
collateral or security for a loan or indebtedness
which was secured from respondent, nor was
there any mortgage contract voluntarily entered
into by petitioner or even by MRTC.24

Finally, petitioner Republic adds that all

requisites of litis pendencia exist in CA-G.R. SP
No. 98334, which is a case for denial of
injunction and TRO and in the present case,
concerning the issuance of a writ of possession
because there is identity of parties, rights
asserted and reliefs prayer for. Respondent
seeks to acquire possession over the EDSA MRT
III properties on the basis of its tax assessments
and auction sale, which petitioner Republic
seeks to permanently enjoin respondent from
enjoying when it initiated Civil Case No. MC05-
2882. The pendency of CA-G.R. SP No. 98334
before the Court of Appeals, assailing the
Orders denying respondent’s prayer for a TRO
and injunction should have pre-empted the
issuance of the writ of possession by reason of
litis pendencia.25

In a Resolution dated 10 November 2008, this

Court directed the parties to maintain the
status quo and enjoined the enforcement and
implementation of the Order and Writ of
Possession dated 22 October 2008.26

Respondent filed its comment refuting the

allegations of petitioner. Respondent does not
contest petitioner’s immunity from local taxes.
In fact, it has assessed MRTC, and not
petitioner, for real property tax. Respondent
defends the RTC’s issuance of a writ of
possession after it was established that there
was a valid foreclosure sale of MRTC’s
properties for non-payment of real property
taxes and after the title had been consolidated
in respondent’s name. Respondent also avers
that the subject public auction sale is an
execution sale within the purview of Section 33,
Rule 39 of the Rules of Court, thus a writ of
possession was validly issued. Respondent
subscribes to this Court’s ruling in Ong v. Court
of Appeals27 which clarified that there is no
forum shopping where a petition for the
issuance of a writ of possession is filed despite
the pendency of an action for annulment of
mortgage and foreclosure sale.28

This case is, ultimately, between a local

government’s power to tax and the national
government’s privilege of tax exemption. That
issue needs full hearing and deliberation, as
indeed, the issue pends before the RTC, at first
instance. Such trial of facts and issues must
proceed. It should not be pre-empted by the
present petition that deals with precisely the
herein respondent’s intended end result.

A writ of possession is a mere incident in the

transfer of title.29 In the instant case, it
stemmed from the exercise of alleged ownership
by respondent over EDSA MRT III properties by
virtue of a tax delinquency sale. The issue of
whether the auction sale should be enjoined is
still pending before the Court of Appeals.
Pending determination, it is premature for
respondent to have conducted the auction sale
and caused the transfer of title over the real
properties to its name. The denial by the RTC to
issue an injunction or TRO does not
automatically give respondent the liberty to
proceed with the actions sought to be enjoined,
especially so in this case where a certiorari
petition assailing the denial is still being
deliberated in the Court of Appeals. All the more
it is premature for the RTC to issue a writ of
possession where the ownership of the subject
properties is derived from an auction sale, the
validity of which is still being threshed out in
the Court of Appeals. The RTC should have held
in abeyance the issuance of a writ of possession.
At this juncture, the writ issued is premature
and has no force and effect.

WHEREFORE, the petition is GRANTED. The

Decision and Order dated 30 July 2008 and 6
October 2008, respectively of RTC Branch 213
of Mandaluyong City in LRC Case No. M-08-460
are hereby VACATED and SET ASIDE. The
status quo Order dated 10 November 2008 is
MAINTAINED. The Court of Appeals is
ORDERED to resolve CA-G.R. SP No. 98334
with deliberate dispatch.

SO ORDERED.

GSIS v Group Management Corporation | GR

Nos. 167000 & 167001 | 08 June 2011

GOVERNMENT SERVICE INSURANCE SYSTEM

(GSIS),
Petitioner,

- versus -

GROUP MANAGEMENT CORPORATION (GMC)

AND LAPU-LAPU DEVELOPMENT & HOUSING
CORPORATION (LLDHC),
Respondents.
x-----------------------x
GROUP MANAGEMENT CORPORATION (GMC),
Petitioner,

- versus -

LAPU-LAPU DEVELOPMENT & HOUSING

CORPORATION (LLDHC) and GOVERNMENT
SERVICE INSURANCE SYSTEM (GSIS),
Respondents.
G.R. No. 167000
G.R. No. 169971

Present:

CORONA, C.J.,
Chairperson,
VELASCO, JR.,
LEONARDO-DE CASTRO,
DEL CASTILLO, and
PEREZ, JJ.
Promulgated:

June 8, 2011
x-------------------------------
---------------------x

DECISION

LEONARDO-DE CASTRO, J.:

At bar are two consolidated Petitions for Review

on Certiorari concerning 78 parcels of land
located in Barrio Marigondon, Lapu-Lapu City.
The parties in both cases have been in litigation
over these lots for the last two decades in what
seems to be an endless exercise of filing
repetitious suits before the Court of Appeals
and even this Court, questioning the various
decisions and resolutions issued by the two
separate trial courts involved. With this
decision, it is intended that all legal disputes
among the parties concerned, particularly over
all the issues involved in these cases, will finally
come to an end
In the Petition in G.R. No. 167000, the
Government Service Insurance System (GSIS)
seeks to reverse and set aside the November 25,
2004 Decision[1] and January 20, 2005
Resolution[2] of the Twentieth Division of the
Court of Appeals in CA-G.R. SP No. 85096 and
to annul and set aside the March 11, 2004[3]
and May 7, 2004[4] Orders of the Regional Trial
Court (RTC) of Lapu-Lapu City (Lapu-Lapu RTC)
in Civil Case No. 2203-L.

In the Petition in G.R. No. 169971, Group

Management Corporation (GMC) seeks to
reverse and set aside the September 23, 2005
Decision[5] in CA-G.R. SP No. 84382 wherein
the Special Nineteenth Division of the Court of
Appeals annulled and set aside the March 11,
2004 Order of the Lapu-Lapu RTC in Civil Case
No. 2203-L.

Both these cases stem from the same

undisputed factual antecedents as follows:

Lapu-Lapu Development & Housing

Corporation[6] (LLDHC) was the registered
owner of seventy-eight (78) lots (subject lots),
situated in Barrio Marigondon, Lapu-Lapu City.

On February 4, 1974, LLDHC and the GSIS

entered into a Project and Loan Agreement for
the development of the subject lots. GSIS agreed
to extend a Twenty-Five Million Peso-loan
(P25,000,000.00) to LLDHC, and in return,
LLDHC will develop, subdivide, and sell its lots
to GSIS members. To secure the payment of the
loan, LLDHC executed a real estate mortgage
over the subject lots in favor of GSIS.

For LLDHCs failure to fulfill its obligations,

GSIS foreclosed the mortgage. As the lone
bidder in the public auction sale, GSIS acquired
the subject lots, and eventually was able to
consolidate its ownership over the subject lots
with the corresponding transfer certificates of
title (TCTs) issued in its name.
On November 19, 1979, GMC offered to
purchase on installments the subject lots from
GSIS for a total price of One Million One
Hundred Thousand Pesos (P1,100,000.00), with
the aggregate area specified as 423,177 square
meters. GSIS accepted the offer and on
February 26, 1980, executed a Deed of
Conditional Sale over the subject lots. However,
when GMC discovered that the total area of the
subject lots was only 298,504 square meters, it
wrote GSIS and proposed to proportionately
reduce the purchase price to conform to the
actual total area of the subject lots. GSIS
approved this proposal and an Amendment to
the Deed of Conditional Sale was executed to
reflect the final sales agreement between GSIS
and GMC.

On April 23, 1980, LLDHC filed a complaint for

Annulment of Foreclosure with Writ of
Mandatory Injunction against GSIS before the
RTC of Manila (Manila RTC). This became Civil
Case No. R-82-3429[7] and was assigned to
Branch 38.

On November 3, 1989, GMC filed its own

complaint against GSIS for Specific
Performance with Damages before the Lapu-
Lapu RTC. The complaint was docketed as Civil
Case No. 2203-L and it sought to compel GSIS
to execute a Final Deed of Sale over the subject
lots since the purchase price had already been
fully paid by GMC. GSIS, in defense, submitted
to the court a Commission on Audit (COA)
Memorandum dated April 3, 1989, purportedly
disallowing in audit the sale of the subject lots
for apparent inherent irregularities, the sale
price to GMC being lower than GSISs purchase
price at the public auction. LLDHC, having been
allowed to intervene, filed a Motion to Dismiss
GMCs complaint. When this motion was denied,
LLDHC filed its Answer-in-Intervention and
participated in the ensuing proceedings as an
intervenor.

GMC, on February 1, 1992, filed its own Motion

to Intervene with a Complaint-in-Intervention in
Civil Case No. R-82-3429. This was dismissed
on February 17, 1992 and finally denied on
March 23, 1992 by the Manila RTC on the
ground that GMC can protect its interest in
another proceeding.[8]

On February 24, 1992, after a full-blown trial,

the Lapu-Lapu RTC rendered its Decision[9] in
Civil Case No. 2203-L, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered

ordering defendant to:

1. Execute the final deed of absolute

sale and deliver the seventy-eight (78)
certificates of title covering said seventy-eight
(78) parcels of land to the [Group Management
Corporation (GMC)];

2. Pay [GMC] actual damages, plus

attorneys fees and expenses of litigation, in the
amount of P285,638.88 and P100,000.00
exemplary damages;

3. [D]ismissing in toto intervenors

complaint-in-intervention for lack of evidence of
legal standing and legal interest in the suit, as
well as failure to substantiate any cause of
action against either [GMC] or [GSIS].[10]

In deciding in favor of GMC, the Lapu-Lapu RTC

held that there existed a valid and binding sales
contract between GSIS and GMC, which GSIS
could not continue to ignore without any
justifiable reason especially since GMC had
already fully complied with its obligations. [11]

The Lapu-Lapu RTC found GSISs invocation of

COAs alleged disapproval of the sale belated
and self-serving. The Lapu-Lapu RTC said that
COA, in disapproving GSISs sale of the subject
lots to GMC, violated its own circular which
excludes the disposal by a government owned
and/or controlled corporation of its acquired
assets (e.g., foreclosed assets or collaterals
acquired in the regular course of business).[12]
The Lapu-Lapu RTC also held that COA may not
intrude into GSISs charter-granted power to
dispose of its acquired assets within five years
from acquisition by preventing/aborting the
sale in question by refusing to pass it in
audit.[13] Moreover, the Lapu-Lapu RTC held
that the GSIS-proferred COA Memorandum was
inadmissible in evidence not only because as a
mere photocopy it failed to measure up to the
best evidence rule under the Revised Rules of
Court, but also because no one from COA, not
even the auditor who supposedly prepared it,
was ever presented to testify to the veracity of
its contents or its due execution.[14]

In dismissing LLDHCs complaint-in-

intervention, the Lapu-Lapu RTC held that
LLDHC failed to prove its legal personality as a
party-intervenor and all it was able to establish
was a suggestion of right for [GSIS] to renege
[on] the sale for reasons peculiar to [GSIS] but
not transmissible nor subject to invocation by
[LLDHC].[15]

LLDHC and GSIS filed their separate Notices of

Appeal but these were dismissed by the Lapu-
Lapu RTC on December 6, 1993.[16]

On May 10, 1994, the Manila RTC rendered a

Decision[17] in Civil Case No. R-82-3429. The
Manila RTC held that GSIS was unable to prove
the alleged violations committed by LLDHC to
warrant the foreclosure of the mortgage over the
subject lots. Thus, the Manila RTC annulled the
foreclosure made by GSIS and ordered LLDHC
to pay GSIS the balance of its loan with interest,
to wit:

WHEREFORE, judgment is hereby rendered:

1. ANNULLING the foreclosure by the

defendant GSIS of the mortgage over the
seventy-eight (78) parcels of land here involved:

2. CANCELLING the consolidated certificates

of [title] issued in the name of GSIS and
directing the Register of Deeds of Lapu-Lapu
City to issue new certificates of [title] over those
seventy-eight (78) parcels of land in the name of
the plaintiff, in exactly the same condition as
they were before the foreclosure;

3. ORDERING the plaintiff to pay the GSIS

the amount of P9,200,000.00 with interest
thereon at the rate of twelve (12%) percent per
annum commencing from October 12, 1989
until fully paid; and

4. ORDERING defendant GSIS to execute a

properly registrable release of discharge of
mortgage over the parcels of land here involved
after full payment of such amount by the
plaintiff.

All claims and counterclaims by the parties as

against each other are hereby dismissed.

No pronouncement as to costs.[18]

Armed with the Manila RTC decision, LLDHC,

on July 27, 1994, filed before the Court of
Appeals a Petition for Annulment of Judgment
of the Lapu-Lapu RTC Decision in Civil Case No.
2203-L.[19] LLDHC alleged that the Manila RTC
decision nullified the sale of the subject lots to
GMC and consequently, the Lapu-Lapu RTC
decision was also nullified.

This petition, docketed as CA-G.R. SP No.

34696, was dismissed by the Court of Appeals
on December 29, 1994.[20] The Court of
Appeals, in finding that the grounds LLDHC
relied on were without merit, said:

In fine, there being no showing from the

allegations of the petition that the respondent
court is without jurisdiction over the subject
matter and of the parties in Civil Case No. 2309
[2203-L], petitioner has no cause of action for
the annulment of judgment. The complaint
must allege ultimate facts for the annulment of
the decision (Avendana v. Bautista, 142 SCRA
41). We find none in this case.[21]

No appeal having been taken by LLDHC, the

decision of the Court of Appeals in CA-G.R. SP
No. 34696 became final and executory on
January 28, 1995, as stated in the Entry of
Final Judgment dated August 18, 1995.[22]

On February 2, 1995, LLDHC filed before this

Court a Petition for Certiorari[23] docketed as
G.R. No. 118633. LLDHC, in seeking to annul
the February 24, 1992 Decision of the Lapu-
Lapu RTC, again alleged that the Manila RTC
Decision nullified the Lapu-Lapu RTC Decision.

Finding the petition a mere reproduction of the

Petition for Annulment filed before the Court of
Appeals in CA-G.R. SP No. 34696, this Court, in
a Resolution[24] dated September 6, 1996,
dismissed the petition in this wise:

In a last ditch attempt to annul the February 24,

1992 Decision of the respondent court, this
petition was brought before us on February 2,
1995.

Dismissal of this petition is inevitable.

The instant petition which is captioned, For:

Certiorari With Preliminary Injunction, is
actually another Petition for Annulment of
Judgment of the February 24, 1992 Decision of
the respondent Regional Trial Court of Lapu-
lapu City, Branch 27 in Civil Case No. 2203-L.
A close perusal of this petition as well as the
Petition for Annulment of Judgment brought by
the petitioner before the Court of Appeals in CA-
G.R. SP No. 34696 reveals that the instant
petition is a mere reproduction of the
petition/complaint filed before the appellate
tribunal for annulment of judgment.
Paragraphs two (2) to eighteen (18) of this
petition were copied verbatim from the Petition
for Annulment of Judgment earlier filed in the
court a quo, except for the designation of the
parties thereto, i.e., plaintiff was changed to
petitioner, defendant to respondent. In fact,
even the prayer in this petition is the same
prayer in the Petition for Annulment of
Judgment dismissed by the Court of Appeals, x
x x.

xxxx

Under Section 9(2) of Batas Pambansa Blg. 129,

otherwise known as The Judiciary
Reorganization Act of 1980, it is the Court of
Appeals (then the Intermediate Appellate Court),
and not this Court, which has jurisdiction to
annul judgments of Regional Trial Courts, viz:

SEC. 9. Jurisdiction -- The Intermediate

Appellate Court shall exercise:

xxxx

(2) Exclusive original jurisdiction over actions

for annulment of judgments of Regional Trial
Courts; and

xxxx

Thus, this Court apparently has no jurisdiction

to entertain a petition which is evidently
another petition to annul the February 24, 1992
Decision of the respondent Branch 27, Regional
Trial Court of Lapu-lapu City, it appearing that
jurisdiction thereto properly pertains to the
Court of Appeals. Such a petition was brought
before the appellate court, but due to
petitioners failure to nullify Judge Risos
Decision in said forum, LLDHC, apparently at a
loss as to what legal remedy to take, brought
the instant petition under the guise of a petition
for certiorari under Rule 65 seeking once again
to annul the judgment of Branch 27.

Instead of filing this petition for certiorari under

Rule 65, which is essentially another Petition to
Annul Judgment, petitioner LLDHC should
have filed a timely Petition for Review under
Rule 45 of the Revised Rules of Court of the
decision of the Court of Appeals, dated
December 29, 1994, dismissing the Petition for
Annulment of Judgment filed by the petitioner
LLDHC before the court a quo. But, this is all
academic now. The appellate courts decision
had become final and executory on January 28,
1995.[25]

Despite such pronouncements, this Court,

nevertheless, passed upon the merits of
LLDHCs Petition for Certiorari in G.R. No.
118633. This Court said that the petition,
which was truly for annulment of judgment,[26]
cannot prosper because the two grounds on
which a judgment may be annulled were not
present in the case.[27] Going further, this
Court held that even if the petition were to be
given due course as a petition for certiorari
under Rule 65 of the Revised Rules of Court, it
would still be dismissible for not being brought
within a reasonable period of time as it took
LLDHC almost three years from the time it
received the February 24, 1992 decision until
the time it brought this action.[28]

LLDHCs motion for reconsideration was denied

with finality[29] on November 18, 1996, and on
February 18, 1997, an Entry of Judgment[30]
was made certifying that the September 6, 1996
Resolution of this Court in G.R. No. 118633 had
become final and executory on December 23,
1996.

Consequently, on November 28, 1996, the

Lapu-Lapu RTC issued an Order[31] directing
the execution of the judgment in Civil Case No.
2203-L. A corresponding Writ of Execution[32]
was issued on December 17, 1996. The Motions
to Stay Execution filed by LLDHC and GSIS
were denied by the Lapu-Lapu RTC on February
19, 1997.[33]

Meanwhile, on December 27, 1996, the Court of

Appeals rendered a Decision[34] in the separate
appeals taken by GSIS and LLDHC from the
May 10, 1994 Manila RTC Decision in Civil Case
No. R-82-3429. This case, docketed as CA-G.R.
CV No. 49117, affirmed the Manila RTC
decision with modification insofar as awarding
LLDHC attorneys fees and litigation expenses.

On March 3, 1997, GSIS came to this Court on

a Petition for Review of the Court of Appeals
decision in CA-G.R. CV No. 49117. This was
docketed as G.R. No. 127732 and was
dismissed on April 14, 1997[35] due to late
filing, the due date being January 31, 1997.
This dismissal became final and executory on
May 30, 1997.[36]

On March 8, 1997, LLDHC filed a Petition for

Certiorari with preliminary injunction before
the Court of Appeals, praying that GMC and the
Lapu-Lapu RTC be ordered to cease and desist
from proceeding with the execution of its
Decision in Civil Case No. 2203-L, on the theory
that the Manila RTC decision was a supervening
event which made it mandatory for the Lapu-
Lapu RTC to stop the execution of its decision.
This case was docketed as CA-G.R. SP No.
44052. On July 16, 1997, the Court of Appeals
issued an Order temporarily restraining the
Lapu-Lapu RTC and GMC from executing the
February 24, 1992 decision in Civil Case No.
2203-L so as not to render the resolution of the
case moot and academic.[37]

On July 21, 1997, because of GSISs continued

refusal to implement the December 17, 1996
Writ of Execution, the Lapu-Lapu RTC, upon
GMCs motion, issued an Order[38] redirecting
its instructions to the Register of Deeds of Lapu-
Lapu City, to wit:

WHEREFORE, the defendant GSIS having

refused to implement the Order of this Court
dated December 17, 1996 the Court in
accordance with Rule 39, Sec. 10-a of the 1997
Rules of Procedure, hereby directs the Register
of Deeds of Lapu-lapu City to cancel the
Transfer Certificate of Titles of the properties
involved in this case and to issue new ones in
the name of the plaintiff and to deliver the same
to the latter within ten (10) days after this Order
shall have become final.[39]

While the TRO issued by the Court of Appeals

in CA-G.R. SP No. 44052 was in effect, the
Manila RTC, on August 1, 1997, issued a Writ
of Execution[40] of its judgment in Civil Case No.
R-82-3429. On August 7, 1997, the Sheriff
implemented the Writ and ordered the Register
of Deeds of Lapu-Lapu City to cancel the
consolidated certificates of title issued in the
name of GSIS and to issue new ones in favor of
LLDHC. In conformity with the TRO, the Lapu-
Lapu RTC on August 19, 1997, ordered[41] the
suspension of its July 21, 1997 Order. With no
similar restraining order against the execution
of the Manila RTC Decision, a Writ of Possession
was issued on August 21, 1997 to cause GSIS
and all persons claiming rights under it to
vacate the properties in question and to place
LLDHC in peaceful possession thereof.[42]

On October 23, 1997, the Lapu-Lapu RTC,

being aware of the events that have taken place
while the TRO was in effect, issued an Order[43]
reiterating its previous Orders of November 28,
1996, December 17, 1996, and July 21, 1997.
The Lapu-Lapu RTC held that since the
restraining order issued by the Court of Appeals
in CA-G.R. SP No. 44052 had already lapsed by
operation of law, and the February 24, 1992
Decision in Civil Case No. 2203-L had not only
become final and executory but had been
affirmed and upheld by both the Court of
Appeals and this Court, the inescapable
mandate was to give due course to the efficacy
of its decision. The Lapu-Lapu RTC thus
directed the Register of Deeds of Lapu-Lapu
City to effect the transfer of the titles to the
subject lots in favor of GMC and declared any
and all acts done by the Register of Deeds of
Lapu-Lapu City null and void starting with the
surreptitious issuance of the new certificates of
title in the name of [LLDHC], contrary to its
decision and orders.[44]
On November 13, 1997, LLDHC filed before the
Court of Appeals another Petition for Certiorari
with preliminary injunction and motion to
consolidate with CA-G.R. SP No. 44052. This
case was docketed as CA-G.R. SP No. 45946,
but was dismissed[45] on November 20, 1997
for LLDHCs failure to comply with Section 1,
Rule 65 of the 1997 Rules of Civil Procedure
which requires the petition to be accompanied
by, among others, copies of all pleadings and
documents relevant and pertinent thereto.[46]

The petition in CA-G.R. SP No. 44052 would

likewise be dismissed[47] by the Court of
Appeals on January 9, 1998, but this time, on
the merits, to wit:

The validity of the decision of the respondent

judge in Civil Case No. 2303-L has thus been
brought both before this Court and to the
Supreme Court by the petitioner. In both
instances the respondent judge has been
upheld. The instant petition is petitioners latest
attempt to resist the implementation or
execution of that decision using as a shield a
decision of a Regional Trial Court in the
National Capital Region. We are not prepared to
allow it. The applicable rule and jurisprudence
are clear. The prevailing party is entitled as a
matter of right to a writ of execution, and the
issuance thereof is a ministerial duty
compellable by mandamus. We do not believe
that there exists in this instance a supervening
event which would justify a deviation from this
rule.[48]

Prior to this, however, on November 28, 1997,

the Lapu-Lapu RTC, acting on GMCs Omnibus
Motion, made the following orders: for LLDHC
to show cause why it should not be declared in
contempt; for a writ of preliminary prohibitory
injunction to be issued to restrain all persons
acting on LLDHCs orders from carrying out
such orders in defiance of its final and
executory judgment; and for a writ of
preliminary mandatory injunction to be issued
to direct the ouster of LLDHC. The Lapu-Lapu
RTC also declared the Register of Deeds of
Lapu-Lapu City in contempt and directed the
Office of the City Sheriff to implement the above
orders and to immediately detain and confine
the Register of Deeds of Lapu-Lapu City at the
City Jail if he continues to refuse to transfer the
titles of the subject lots after ten days from
receipt of this order.[49]

On December 22, 1997, the Lapu-Lapu RTC

denied[50] the motion for reconsideration filed
by the Register of Deeds of Lapu-Lapu City. In
separate motions, LLDHC, and again the
Register of Deeds of Lapu-Lapu City, sought the
reconsideration of the November 28, 1997 and
December 22, 1997 Orders. On May 27, 1998,
the Lapu-Lapu RTC, acting under a new
judge,[51] granted both motions and
accordingly set aside the November 28, 1997
and December 22, 1997 Orders.[52]

With the denial[53] of its motion for

reconsideration on August 4, 1998, GMC came
to this Court on a Petition for Certiorari,
Prohibition and Mandamus, seeking to set aside
the May 27, 1998 Order of the Lapu-Lapu RTC
in Civil Case No. 2203-L. The Petition was
referred to the Court of Appeals, which under
Batas Pambansa Blg. 129, exercises original
jurisdiction to issue such writs.[54] This was
docketed as CA-G.R. SP No. 50650.

On April 30, 1999, the Court of Appeals

rendered its Decision[55] in CA-G.R. SP No.
50650, the dispositive portion of which reads:

WHEREFORE, the petition being partly

meritorious, the Court hereby resolves as
follows:

(1) To AFFIRM the Orders of May 28,

1998 and August 4, 1998 in Civil Case No.
2203-L insofar as they set aside the order
holding respondent Register of Deeds guilty of
indirect contempt of court and to NULLIFY said
orders in so far as they set aside the directives
contained in paragraphs (a) and (b) and (c) of
the order dated November 28, 1997.

(2) To DECLARE without FORCE and

EFFECT insofar as petitioner Group
Management Corporation is concerned the
decision in Civil Case No. R-82-3429 as well as
the orders and writs issued for its execution and
enforcement: and

(3) To ENJOIN respondent Lapu-Lapu

Development and Housing Corporation, along
with its agents and representatives and/or
persons/public officials/employees acting in its
interest, specifically respondent Regional Trial
Court of Manila Branch 38, and respondent
Register of Deeds of Lapu-Lapu City, from
obstructing, interfering with or in any manner
delaying the implementation/execution/
enforcement by the Lapu-Lapu City RTC of its
order and writ of execution in Civil Case No.
2203-L.

For lack of sufficient basis the charge of

contempt of court against respondent Lapu-
Lapu Development and Housing Corporation
and the public respondents is hereby
DISMISSED.[56]

With the denial of LLDHCs motion for

reconsideration on December 29, 1999,[57]
LLDHC, on January 26, 2000, filed before this
Court a Petition for Review on Certiorari
assailing the April 30, 1999 decision of the
Court of Appeals in CA-G.R. SP No. 50650. This
petition was docketed as G.R. No. 141407.

This Court dismissed LLDHCs petition and

upheld the decision of the Court of Appeals in
CA-G.R. SP No. 50650 in its decision dated
September 9, 2002.[58] LLDHCs Motion for
Reconsideration and Second Motion for
Reconsideration were also denied on November
13, 2002[59] and February 3, 2003,[60]
respectively.
The September 9, 2002 decision of this Court in
G.R. No. 141407 became final on March 10,
2003.[61]

On March 11, 2004, the Lapu-Lapu RTC, acting

on GMCs Motion for Execution, issued an
Order[62] the dispositive portion of which reads:

WHEREFORE, in light of the foregoing

considerations, plaintiff Group Management
Corporations motion is GRANTED, while
defendant GSIS motion to stay the issuance of
a writ of execution is denied for lack of merit.
Consequently, the Sheriff of this Court is
directed to proceed with the immediate
implementation of this Courts decision dated
February 24, 1992, by enforcing completely this
Courts Order of Execution dated November 28,
1996, the writ of execution dated December 17,
1996, the Order dated July 21, 1997, the Order
dated October 23 1997, the Order dated
November 28, 1997 and the Order dated
December 22, 1997.[63]

On May 7, 2004, the Lapu-Lapu RTC denied[64]

the motions for reconsideration filed by LLDHC
and GSIS.
On May 27, 2004, LLDHC filed before the Court
of Appeals a Petition for Certiorari, Prohibition
and Mandamus[65] against the Lapu-Lapu RTC
for having issued the Orders of March 11, 2004
and May 7, 2004 (assailed Orders). This petition
docketed as CA-G.R. SP No. 84382, sought the
annulment of the assailed Orders and for the
Court of Appeals to command the Lapu-Lapu
RTC to desist from further proceeding in Civil
Case No. 2203-L, to dismiss GMCs Motion for
Execution, and for the issuance of a Temporary
Restraining Order (TRO)/Writ of Preliminary
Injunction against the Lapu-Lapu RTC and
GMC.

On July 6, 2004, GSIS filed its own Petition for

Certiorari and Prohibition with Preliminary
Injunction and Temporary Restraining Order[66]
before the Court of Appeals to annul the
assailed Orders of the Lapu-Lapu RTC, to
prohibit the judge therein and the Register of
Deeds of Lapu-Lapu City from implementing
such assailed Orders, and for the issuance of a
TRO and writ of preliminary injunction to
maintain the status quo while the case is under
litigation. This petition was docketed as CA-G.R.
SP No. 85096.

The Court of Appeals initially dismissed

outright LLDHCs petition for failure to attach
the Required Secretarys Certificate/Board
Resolution authorizing petitioner to initiate the
petition,[67] but in a Resolution[68] dated
August 2, 2004, after having found the
explanation for the mistake satisfactory, the
Court of Appeals, on equitable consideration
and for the purpose of preserving the status quo
during the pendency of the appeal,[69] issued a
TRO against the Lapu-Lapu RTC from enforcing
its jurisdiction and judgment/order in Civil
Case No. 2203-L until further orders. In its
August 30, 2004 Resolution,[70] the Court of
Appeals, without resolving the case on its
merits, also issued a Writ of Preliminary
Injunction, commanding the Lapu-Lapu RTC to
cease and desist from implementing the
assailed Orders in Civil Case No. 2203-L, until
further orders.

On November 25, 2004, the Twentieth Division

of the Court of Appeals promulgated its decision
in CA-G.R. SP No. 85096. It dismissed GSISs
petition and affirmed the assailed Orders of
March 11, 2004 and May 7, 2004. The Court of
Appeals found no merit in GSISs petition since
the judgment in Civil Case No. 2203-L, which
was decided way back on February 24, 1992,
had long become final and executory, which
meant that the Lapu-Lapu RTC had no legal
obstacle to cause said judgment to be executed
and enforced. The Court of Appeals quoted in
full, portions of this Courts Decision in G.R. No.
141407 to underscore the fact that no less than
the Supreme Court had declared that the
decision in Civil Case No. 2203-L was valid and
binding and had become final and executory a
long time ago and had not been in any way
nullified by the decision rendered by the Manila
RTC on May 10, 1994 in Civil Case No. R-82-
3429. On January 20, 2005, the Court of
Appeals upheld its decision and denied GSISs
Motion for Reconsideration.[71]

However, on September 23, 2005, the Special

Nineteenth Division of the Court of Appeals
came out with its own decision in CA-G.R. SP
No. 84382. It granted LLDHCs petition,
contrary to the Court of Appeals decision in CA-
G.R. SP No. 85096, and annulled and set aside
the March 11, 2004 Order of the Lapu-Lapu
RTC in this wise:

WHEREFORE, finding merit in the instant

Petition for Certiorari, Prohibition and
Mandamus, the same is hereby GRANTED, and
the assailed Order, dated March 11, 2004, of
the Regional Trial Court, 7th Judicial Region,
Branch 27, Lapulapu City, in Civil Case No.
2203-L is ANNULLED AND SET ASIDE.

Accordingly, respondent Judge Benedicto

Cobarde is hereby ORDERED:

a) to DESIST from further proceeding in Civil

Case No. 2203-L; and

b) to DISMISS GMCs Motion for Execution

in the abovementioned case;

Meanwhile, the Writ of Preliminary Injunction

earlier issued is hereby declared PERMANENT.
No pronouncement as to costs.[72]

GSIS[73] and GMC[74] are now before this

Court, with their separate Petitions for Review
on Certiorari, assailing the decisions of the
Court of Appeals in CA-G.R. SP No. 85096 and
CA-G.R. SP No. 84382, respectively.

G.R. No. 167000

In G.R. No. 167000, GSIS is assailing the
Orders issued by the Lapu-Lapu RTC on March
11, 2004 and May 7, 2004 for being legally
unenforceable on GSIS because the titles of the
78 lots in Marigondon, Lapu-Lapu City were
already in LLDHCs name, due to the final and
executory judgment rendered by the Manila
RTC in Civil Case No. R-82-3429. GSIS
contends that it is legally and physically
impossible for it to comply with the assailed
Orders as the subject matter to be delivered or
performed have already been taken away from
[75] GSIS. GSIS asserts that the circumstances
which have arisen, from the judgment of the
Manila RTC to the cancellation of GSISs titles,
are supervening events which should be
considered as an exception to the doctrine of
finality of judgments because they render the
execution of the final and executory judgment
of the Lapu-Lapu RTC in Civil Case No. 2203-L
unjust and inequitable. GSIS further claims
that it should not be made to pay damages of
any kind because its funds and properties are
exempt from execution, garnishment, and other
legal processes under Section 39 of Republic
Act No. 8291.
LLDHC, in its Compliance,[76] believes that it
was impleaded in this case as a mere nominal
party since it filed its own Petition for Certiorari
before the Court of Appeals, which was granted
in CA-G.R. SP No. 84382. LLDHC essentially
agrees with GSIS that the implementation of the
assailed Orders have become legally impossible
due to the fully implemented Writ of Execution
issued by the Manila RTC in Civil Case No. R-
82-3429. LLDHC alleges that because of this
supervening event, GSIS cannot be compelled
to execute a final deed of sale in GMCs favor,
and LLDHC cannot be divested of its titles,
ownership and possession of the subject
properties.[77]

GMC in its comment[78] argues that GSIS has

no legal standing to institute this petition
because it has no more interest in the subject
lots, since it is no longer in possession and the
titles thereto have already been registered in
LLDHCs name. GMC claims that the decision of
the Special Nineteenth Division of the Court of
Appeals is barred by res judicata, and that
LLDHC is guilty of forum shopping for filing
several petitions before the Court of Appeals
and this Court with the same issues and
arguments. GMC also asserts that the judgment
in Civil Case No. R-82-3429 is enforceable only
between GSIS and LLDHC as GMC was not a
party to the case, and that the Manila RTC
cannot overrule the Lapu-Lapu RTC, they being
co-equal courts.

G.R. No. 169971

In G.R. No. 169971, GMC is praying that the

decision of the Special Nineteenth Division of
the Court of Appeals in CA-G.R. SP No. 84382
be reversed and set aside. GMC is claiming that
the Court of Appeals, in rendering the said
decision, committed a palpable legal error by
overruling several final decisions rendered by
the Lapu-Lapu RTC, the Court of Appeals, and
this Court.[79] GMC claims that the Lapu-Lapu
RTCs duty to continue with the implementation
of its orders is purely ministerial as the
judgment has not only become final and
executory, but has been affirmed by both the
Court of Appeals and the Supreme Court in
several equally final and executory
decisions.[80] GMC, repeating its arguments in
G.R. No. 167000, maintains that the petition is
barred by res judicata, that there is forum
shopping, and that the Manila RTC decision is
not binding on GMC.
LLDHC in its comment[81] insists that there is
a supervening event which rendered it
necessary to stay the execution of the judgment
of the Lapu-Lapu RTC. LLDHC also asserts that,
as correctly found by the Court of Appeals in
CA-G.R. SP No. 84382, the Lapu-Lapu RTC
decision in Civil Case No. 2203-L was not
affirmed with finality by the Court of Appeals
and the Supreme Court as the decision was not
reviewed on the merits.
SUMMARY OF THE ISSUES

The present case is peculiar in the sense that it

involves two conflicting final and executory
decisions of two different trial courts. Moreover,
one of the RTC decisions had been fully
executed and implemented. To complicate
things further, the parties have previously filed
several petitions, which have reached not only
the Court of Appeals but also this Court. Upon
consolidation of the two petitions, this Court
has narrowed down the issues to the following:

1. Whether or not the decision of the Manila

RTC in Civil Case No. R-82-3429 constitutes a
supervening event, which should be admitted
as an exception to the doctrine of finality of
judgments.

2. Whether or not the September 23, 2005

Decision of the Special Nineteenth Division of
the Court of Appeals in CA-G.R. SP No. 84382
and GSISs Petition in G.R. No. 167000 are
barred by res judicata.

3. Whether or not there is a legal and physical

impossibility for GSIS to comply with the March
11, 2004 and May 7, 2004 Orders of the Lapu-
Lapu RTC in Civil Case No. 2203-L.

4. Whether or not LLDHC and GSIS are guilty

of forum shopping.

DISCUSSION

First Issue:
Supervening Event

It is well-settled that once a judgment attains

finality, it becomes immutable and unalterable.
It may not be changed, altered or modified in
any way even if the modification were for the
purpose of correcting an erroneous conclusion
of fact or law. This is referred to as the doctrine
of finality of judgments, and this doctrine
applies even to the highest court of the land.[82]
This Court explained its rationale in this wise:

The doctrine of finality of judgment is grounded

on fundamental considerations of public policy
and sound practice, and that, at the risk of
occasional errors, the judgments or orders of
courts must become final at some definite time
fixed by law; otherwise, there would be no end
to litigations, thus setting to naught the main
role of courts of justice which is to assist in the
enforcement of the rule of law and the
maintenance of peace and order by settling
justiciable controversies with finality.[83]

This Court has, on several occasions, ruled that

the doctrine of finality of judgments admits of
certain exceptions, namely: the correction of
clerical errors, the so-called nunc pro tunc
entries which cause no prejudice to any party,
void judgments, and whenever circumstances
transpire after the finality of the decision which
render its execution unjust and inequitable.[84]

Both GSIS and LLDHC claim that the execution

of the decision and orders in Civil Case No.
2203-L should be stayed because of the
occurrence of supervening events which render
the execution of the judgment impossible,
unfair, unjust and inequitable.[85] However, in
order for an event to be considered a
supervening event to justify the alteration or
modification of a final judgment, the event must
have transpired after the judgment has become
final and executory, to wit:

Supervening events refer to facts which

transpire after judgment has become final and
executory or to new circumstances which
developed after the judgment has acquired
finality, including matters which the parties
were not aware of prior to or during the trial as
they were not yet in existence at that time.[86]
The Lapu-Lapu RTC Decision in Civil Case No.
2203-L was promulgated on February 24, 1992,
while the Manila RTC Decision in Civil Case No.
R-82-3429 was promulgated on May 10, 1994.
As early as December 6, 1993, both GSISs and
LLDHCs appeals of the Lapu-Lapu RTC
Decision were dismissed by the said RTC.[87]
Only GSIS moved to reconsider this dismissal,
which was denied on July 6, 1994.[88] Strictly
speaking, the Lapu Lapu RTC Decision should
have attained finality at that stage; however,
LLDHC filed with the Court of Appeals its
Petition for Annulment of Judgment (CA-G.R.
SP No. 34696) on July 27, 1994 and it used
therein the Manila RTC Decision as its main
ground for annulment of the Lapu-Lapu RTC
decision.

The Court of Appeals nonetheless dismissed

LLDHCs Petition for Annulment of Judgment, in
CA-G.R. SP No. 34696,[89] and that became
final and executory on January 28, 1995,[90]
after LLDHC interposed no appeal. The entry of
judgment in this case was issued on August 18,
1995.[91] Moreover, the similar petition of
LLDHC before this Court in G.R. No. 118633
was decided on September 6, 1996 and became
final and executory on December 23, 1996.
Therefore, the ruling by the Manila RTC is
evidently not a supervening event. It was
already in existence even before the decision in
Civil Case No. 2203-L attained finality.

Just as LLDHC and GSIS, as the losing parties,

had the right to file their respective appeals
within the prescribed period, GMC, as the
winning party in Civil Case No. 2203-L, equally
had the correlative right to benefit from the
finality of the resolution of its case,[92] to wit:

A final judgment vests in the prevailing party a

right recognized and protected by law under the
due process clause of the Constitution. A final
judgment is a vested interest which it is right
and equitable that the government should
recognize and protect, and of which the
individual could not be deprived arbitrarily
without injustice.[93] (Citations omitted.)

Since the Manila RTC decision does not

constitute a supervening event, there is
therefore neither reason nor justification to
alter, modify or annul the Lapu-Lapu RTC
Decision and Orders, which have long become
final and executory. Thus, in the present case,
GMC must not be deprived of its right to enjoy
the fruits of a final verdict.

It is settled in jurisprudence that to stay

execution of a final judgment, a supervening
event must create a substantial change in the
rights or relations of the parties which would
render execution of a final judgment unjust,
impossible or inequitable making it imperative
to stay immediate execution in the interest of
justice.[94]

However, what would be unjust and inequitable

is for the Court to accord preference to the
Manila RTC Decision on this occasion when in
the past, the Court of Appeals and this Court
have repeatedly, consistently, and with finality
rejected LLDHCs moves to use the Manila RTC
Decision as a ground to annul, and/or to bar
the execution of, the Lapu Lapu RTC Decision.
To be sure, in the Decision dated September 9,
2002 in G.R. No. 141407, penned by former
Chief Justice Artemio V. Panganiban, the Court
already passed upon the lack of effect of the
Manila RTC Decision on the finality of the Lapu
Lapu RTC decision in this wise:

The records of the case clearly show that the

Lapulapu Decision has become final and
executory and is thus valid and binding upon
the parties. Obviously, petitioner [LLDHC] is
again trying another backdoor attempt to annul
the final and executory Decision of the
Lapulapu RTC.
First, it was petitioner that filed on March 11,
1992 a Notice of Appeal contesting the
Lapulapu RTC Judgment in Civil Case No.
2203-L rendered on February 24, 1992. The
Notice was however rejected by the said RTC for
being frivolous and dilatory. Since petitioner
had done nothing thereafter, the Decision
clearly became final and executory.

However, upon receipt of the Manila RTC

Decision, petitioner found a new tool to evade
the already final Lapulapu Decision by seeking
the annulment of the latter in a Petition with the
CA. However, the appellate court dismissed the
action, because petitioner had been unable to
prove any of the grounds for annulment; namely
lack of jurisdiction or extrinsic fraud. Because
no appeal had been taken by petitioner, the
ruling of the CA also became final and executory.

Second, the Supreme Court likewise recognized

the finality of the CA Decision when it threw out
LLDHCs Petition for Certiorari in GR No.
118633. This Court ruled thus:

Instead of filing this petition for certiorari under

Rule 65, which is essentially another Petition to
Annul Judgment, petitioner LLDHC should
have filed a timely Petition for Review under
Rule 45 of the Revised Rules of Court of the
decision of the Court of Appeals, dated
December 29, 1994, dismissing the Petition for
Annulment of Judgment filed by the petitioner
LLDHC before the court a quo. But this is all
academic now. The appellate courts decision
had become final and executory on January 28,
1995.

Jurisprudence mandates that when a decision

becomes final and executory, it becomes valid
and binding upon the parties and their
successors in interest. Such decision or order
can no longer be disturbed or reopened no
matter how erroneous it may have been.
Petitioners failure to file an appeal within the
reglementary period renders the judgment final
and executory. The perfection of an appeal in
the manner and within the period prescribed by
law is mandatory. Failure to conform to the
rules regarding appeal will render the judgment
final and executory and, hence, unappealable.
Therefore, since the Lapulapu Decision has
become final and executory, its execution has
become mandatory and ministerial on the part
of the judge.

The CA correctly ruled that the Lapulapu

Judgment is binding upon petitioner [LLDHC]
which, by its own motion, participated as an
intervenor. In fact, the latter filed an Answer in
Intervention and thereafter actively took part in
the trial. Thus, having had an opportunity to be
heard and to seek a reconsideration of the
action or ruling it complained of, it cannot claim
that it was denied due process of law. What the
law prohibits is the absolute absence of the
opportunity to be heard. Jurisprudence teaches
that a party cannot feign denial of due process
if it has been afforded the opportunity to
present its side.

Petitioner likewise claims that Private

Respondent GMC cannot escape the adverse
effects of the final and executory judgment of
the Manila RTC.

Again, we do not agree. A trial court has no

power to stop an act that has been authorized
by another trial court of equal rank. As correctly
stated by the CA, the Decision rendered by the
Manila RTC -- while final and executory --
cannot bind herein private respondent [GMC],
which was not a party to the case before the said
RTC. A personal judgment is binding only upon
the parties, their agents, representatives and
successors in interest.

Third, petitioner grievously errs in insisting that

the judgment of the Manila RTC nullified that of
the Lapulapu RTC. As already adverted to
earlier, courts of coequal and coordinate
jurisdiction may not interfere with or pass upon
each others orders or processes, since they have
the same power and jurisdiction. Except in
extreme situations authorized by law, they are
proscribed from doing so.[95](Emphases
supplied.)
It likewise does not escape the attention of this
Court that the only reason the Manila RTC
Decision was implemented ahead of the Lapu
Lapu RTC Decision was that LLDHC
successfully secured a TRO from the Court of
Appeals through its petition for certiorari
docketed as CA-G.R. SP No. 44052, which was
eventually dismissed by the appellate court. The
Court of Appeals ruled that the Manila RTC
Decision did not constitute a supervening event
that would forestall the execution of the Lapu
Lapu RTC Decision. This decision of the Court
of Appeals likewise became final and executory
in 1998.

It bears repeating that the issue of whether or

not the Manila RTC Decision could nullify or
render unenforceable the Lapu Lapu RTC
Decision has been litigated many times over in
different fora. It would be the height of inequity
if the Court were to now reverse the Court of
Appeals and its own final and executory rulings
and allow GSIS to prevent the execution of the
Lapu Lapu RTC Decision on the same legal
grounds previously discredited by the courts.

Second Issue:
Res Judicata

GMC asserts that the September 23, 2005

Decision of the Special Nineteenth Division of
the Court of Appeals in CA-G.R. SP No. 84382
and the petition herein by GSIS in G.R. No.
167000 are barred by res judicata as the issues
involved had been fully resolved not only by the
lower courts but by this Court as well. GSIS and
LLDHC both insist that res judicata does not
apply as this Court has not yet rendered a
decision involving the same or any similar
petition.[96] The petitions by LLDHC before the
Court of Appeals and GSIS before this Court
both prayed for the annulment of the March 11,
2004 and May 7, 2004 Orders of the Lapu-Lapu
RTC in Civil Case No. 2203-L. These assailed
Orders were both issued to resolve the parties
motions and to have the February 24, 1992
judgment implemented and executed.

In Republic of the Philippines (Civil Aeronautics

Administration) v. Yu, [97] this Court
expounded on the concept of res judicata and
explained it in this wise:

Res judicata literally means a matter adjudged;

a thing judicially acted upon or decided; a thing
or matter settled by judgment. Res judicata lays
the rule that an existing final judgment or
decree rendered on the merits, and without
fraud or collusion, by a court of competent
jurisdiction, upon any matter within its
jurisdiction, is conclusive of the rights of the
parties or their privies, in all other actions or
suits in the same or any other judicial tribunal
of concurrent jurisdiction on the points and
matters in issue in the first suit.[98]

In Villanueva v. Court of Appeals,[99] we

enumerated the elements of res judicata as
follows:

a) The former judgment or order must be

final;

b) It must be a judgment or order on the

merits, that is, it was rendered after a
consideration of the evidence or stipulations
submitted by the parties at the trial of the case;

c) It must have been rendered by a court

having jurisdiction over the subject matter and
the parties; and

d) There must be, between the first and

second actions, identity of parties, of subject
matter and of cause of action. This requisite is
satisfied if the two (2) actions are substantially
between the same parties.[100]
All three parties herein are in agreement with
the facts that led to the petitions in this case.
However, not all of them agree that the matters
involved in this case have already been
judicially settled. While GMC contends that
GSISs petition is barred by res judicata, both
GSIS and LLDHC assert that this Court has not
yet decided any similar petition, thus disputing
the claim of res judicata.

Res judicata has two concepts: (1) "bar by prior

judgment" as enunciated in Rule 39, Section
47(b) of the 1997 Rules of Civil Procedure; and
(2) "conclusiveness of judgment" in Rule 39,
Section 47(c), which reads as follows:

(b) In other cases, the judgment or final order is,

with respect to the matter directly adjudged or
as to any other matter that could have been
raised in relation thereto, conclusive between
the parties and their successors in interest by
title subsequent to the commencement of the
action or special proceeding, litigating for the
same thing and under the same title and in the
same capacity; and

(c) In any other litigation between the same

parties or their successors in interest, that only
is deemed to have been adjudged in a former
judgment or final order which appears upon its
face to have been so adjudged, or which was
actually and necessarily included therein or
necessary thereto.

In explaining the two concepts of res judicata,

this Court held that:

There is "bar by prior judgment" when, as

between the first case where the judgment was
rendered, and the second case that is sought to
be barred, there is identity of parties, subject
matter, and causes of action. But where there
is identity of parties and subject matter in the
first and second cases, but no identity of causes
of action, the first judgment is conclusive only
as to those matters actually and directly
controverted and determined and not as to
matters merely involved therein. This is
"conclusiveness of judgment." Under the
doctrine of conclusiveness of judgment, facts
and issues actually and directly resolved in a
former suit cannot again be raised in any future
case between the same parties, even if the latter
suit may involve a different claim or cause of
action. The identity of causes of action is not
required but merely identity of issues.[101]

In Pealosa v. Tuason,[102] we laid down the test

in determining whether or not the causes of
action in the first and second cases are identical:

Would the same evidence support and establish

both the present and former cause of action? If
so, the former recovery is a bar; if otherwise, it
does not stand in the way of the former
action.[103]

Res judicata clearly exists in G.R. No. 167000

and in CA-G.R. SP No. 84382 because both
GSISs and LLDHCs actions put in issue the
validity of the Lapu-Lapu RTC Decision and
were based on the assumption that it has either
been modified, altered or nullified by the Manila
RTC Decision.

In CA-G.R. SP No. 84382, LLDHC sought to

annul the assailed Orders of the Lapu-Lapu
RTC and to order the judge therein to desist
from further proceeding in Civil Case No. 2203-
L. LLDHC sought for the same reliefs in its
Petition for Annulment of Judgment in CA-G.R.
SP No. 34696 and G.R. No. 118633, in its
Petition for Certiorari in CA-G.R. SP No. 44052,
and in its Petition for Review on Certiorari in
G.R. No. 141407, all of which have been decided
with finality.

In G.R. No. 167000, GSIS is praying for the

reversal of the November 25, 2004 Decision and
January 20, 2005 Resolution in CA-G.R. SP No.
85096, wherein the Court of Appeals affirmed
the assailed Orders. The validity of these
assailed Orders hinges on the validity of the
Lapu-Lapu RTC Decision, which issue had
already been decided with finality by both the
Court of Appeals and this Court.

Notwithstanding the difference in the forms of

actions GSIS and LLDHC filed, the doctrine of
res judicata still applies considering that the
parties were litigating the same thing, i.e., the
78 lots in Marigondon, Lapu-Lapu City, and
more importantly, the same contentions and
evidence were used in all causes of action. As
this Court held in Mendiola v. Court of
Appeals[104]:

The test of identity of causes of action lies not

in the form of an action but on whether the
same evidence would support and establish the
former and the present causes of action. The
difference of actions in the aforesaid cases is of
no moment. x x x.[105]

The doctrine of res judicata makes a final

judgment on the merits rendered by a court of
competent jurisdiction conclusive as to the
rights of the parties and their privies and
amounts to an absolute bar to subsequent
actions involving the same claim, demand, or
cause of action.[106] Even a finding of
conclusiveness of judgment operates as
estoppel with respect to matters in issue or
points controverted, on the determination of
which the finding or judgment was
anchored.[107]

Evidently, this Court could dispose of this case

simply upon the application of the principle of
res judicata. It is clear that GSISs petition in
G.R. No. 167000 and LLDHCs petition in CA-
G.R. SP No. 84382 should have never reached
those stages for having been barred by a final
and executory judgment on their claims.
However, considering the nature of the case
before us, this Court is compelled to make a
final determination of the issues in the interest
of substantial justice and to end the wasteful
use of our courts time and resources.

Third Issue:
GSISs Compliance with the
Lapu-Lapu RTC Judgment and Orders

GSIS asserts that the assailed Orders cannot be

enforced upon it given the physical and legal
impossibility for it to comply as the titles over
the subject properties were transferred to
LLDHC under the Manila RTC writ of execution.

A closer perusal of the March 11, 2004 and May

7, 2004 Orders shows that GSISs argument
holds no water. The May 7, 2004 Order denied
GSISs and LLDHCs motions for reconsideration
of the March 11, 2004 Order. The March 11,
2004 Order resolved GMCs urgent
manifestation and motion to proceed with the
implementation of the February 24, 1992 final
and executory decision and GSISs and LLDHCs
opposition thereto, as well as GSISs motion to
stay the issuance of a writ of execution against
it. The dispositive portion of the Order reads:

WHEREFORE, in the light of the foregoing

considerations, plaintiff Group Management
Corporations motion is GRANTED, while
defendant GSIS motion to stay the issuance of
a writ of execution is denied for lack of merit.
Consequently, the Sheriff of this Court is
directed to proceed with the immediate
implementation of this Courts decision dated
February 24, 1992, by enforcing completely this
Courts Order of Execution dated November 28,
1996, the writ of execution dated December 17,
1996, the Order dated July 21, 1997, the Order
dated October 23, 1997, the Order dated
November 28, 1997 and the Order dated
December 22, 1997.[108] (Emphasis ours.)

While the previous orders and writs of execution

issued by the Lapu-Lapu RTC required the GSIS
to execute the final deed of sale and to deliver
the subject properties, the Lapu-Lapu RTC, in
its subsequent Orders, modified this by
directing its order to the Register of Deeds of
Lapu-Lapu City. In its July 21, 1997 Order,[109]
the Lapu-Lapu RTC, seeing GSISs obstinate
refusal to implement the courts previous orders,
directed the Register of Deeds of Lapu-Lapu
City to cancel the Transfer Certificates of Title
of the subject properties and to issue new ones
in the name of GMC, and to deliver the same to
GMC. Moreover, in its October 23, 1997 Order,
the Lapu-Lapu RTC, noting the implemented
judgment of the Manila RTC, declared the
issuance of new titles to LLDHC null and void
for being contrary to the courts February 24,
1992 decision and directed the Register of
Deeds to effect the transfer of the titles to GMC.

Considering that the assailed Orders merely

directed the Lapu-Lapu RTCs Sheriff to proceed
with the implementation of the courts previous
orders, that is, to make sure that the Register
of Deeds of Lapu-Lapu City complied with the
orders, GSIS had nothing to comply with insofar
as the titles to, and possession of, the subject
properties were concerned, the Orders being
clearly directed towards the Sheriff of the Lapu-
Lapu RTC and the Register of Deeds of Lapu-
Lapu City. Hence, GSISs argument of legal and
physical impossibility of compliance with the
assailed Orders is baseless.

GSIS also argues that it cannot be the subject

[of any] execution including [the] payment of
any damage and other monetary judgments
because all GSIS funds and properties are
absolutely and expressly exempt from execution
and other legal processes under Section 39 of
Republic Act No. 8291.[110]

Section 39 of Republic Act No. 8291 provides:

SECTION 39. Exemption from Tax, Legal

Process and Lien. It is hereby declared to be the
policy of the State that the actuarial solvency of
the funds of the GSIS shall be preserved and
maintained at all times and that contribution
rates necessary to sustain the benefits under
this Act shall be kept as low as possible in order
not to burden the members of the GSIS and
their employers. Taxes imposed on the GSIS
tend to impair the actuarial solvency of its
funds and increase the contribution rate
necessary to sustain the benefits of this Act.
Accordingly, notwithstanding any laws to the
contrary, the GSIS, its assets, revenues
including all accruals thereto, and benefits paid,
shall be exempt from all taxes, assessments,
fees, charges or duties of all kinds. These
exemptions shall continue unless expressly and
specifically revoked and any assessment
against the GSIS as of the approval of this Act
are hereby considered paid. Consequently, all
laws, ordinances, regulations, issuances,
opinions or jurisprudence contrary to or in
derogation of this provision are hereby deemed
repealed, superseded and rendered ineffective
and without legal force and effect.

xxxx

The funds and/or the properties referred to

herein as well as the benefits, sums or monies
corresponding to the benefits under this Act
shall be exempt from attachment, garnishment,
execution, levy or other processes issued by the
courts, quasi judicial agencies or administrative
bodies including Commission on Audit (COA)
disallowances and from all financial obligations
of the members, including his pecuniary
accountability arising from or caused or
occasioned by his exercise or performance of his
official functions or duties, or incurred relative
to or in connection with his position or work
except when his monetary liability, contractual
or otherwise, is in favor of the GSIS.

This Court, in Rubia v. Government Service

Insurance System,[111] held that the
exemption of GSIS is not absolute and does not
encompass all of its funds, to wit:
In so far as Section 39 of the GSIS charter
exempts the GSIS from execution, suffice it to
say that such exemption is not absolute and
does not encompass all the GSIS funds. By way
of illustration and as may be gleaned from the
Implementing Rules and Regulation of the GSIS
Act of 1997, one exemption refers to social
security benefits and other benefits of GSIS
members under Republic Act No. 8291 in
connection with financial obligations of the
members to other parties. The pertinent GSIS
Rule provides:

Rule XV. Funds of the GSIS

Section 15.7 Exemption of Benefits of Members

from Tax, Attachment, Execution, Levy or other
Legal Processes. The social security benefits
and other benefits of GSIS members under R.A.
8291 shall be exempt from tax, attachment,
garnishment, execution, levy or other processes
issued by the courts, quasi-judicial agencies or
administrative bodies in connection with all
financial obligations of the member, including
his pecuniary accountability arising from or
caused or occasioned by his exercise or
performance of his official functions or duties or
incurred in connection with his position or work,
as well as COA disallowances. Monetary liability
in favor of the GSIS, however, may be deducted
from the benefits of the member. [Emphasis
supplied]

The processual exemption of the GSIS funds

and properties under Section 39 of the GSIS
Charter, in our view, should be read
consistently with its avowed principal purpose:
to maintain actuarial solvency of the GSIS in
the protection of assets which are to be used to
finance the retirement, disability and life
insurance benefits of its members. Clearly, the
exemption should be limited to the purposes
and objects covered. Any interpretation that
would give it an expansive construction to
exempt all GSIS assets from legal processes
absolutely would be unwarranted.
Furthermore, the declared policy of the State in
Section 39 of the GSIS Charter granting GSIS
an exemption from tax, lien, attachment, levy,
execution, and other legal processes should be
read together with the grant of power to the
GSIS to invest its "excess funds" under Section
36 of the same Act. Under Section 36, the GSIS
is granted the ancillary power to invest in
business and other ventures for the benefit of
the employees, by using its excess funds for
investment purposes. In the exercise of such
function and power, the GSIS is allowed to
assume a character similar to a private
corporation. Thus, it may sue and be sued, as
also, explicitly granted by its charter. Needless
to say, where proper, under Section 36, the
GSIS may be held liable for the contracts it has
entered into in the course of its business
investments. For GSIS cannot claim a special
immunity from liability in regard to its business
ventures under said Section. Nor can it deny
contracting parties, in our view, the right of
redress and the enforcement of a claim,
particularly as it arises from a purely
contractual relationship, of a private character
between an individual and the GSIS.[112]

This ruling has been reiterated in the more

recent case of Government Service Insurance
System v. Regional Trial Court of Pasig City,
Branch 71,[113] wherein GSIS, which was also
the petitioner in that case, asked to reverse this
Courts findings in Rubia and grant GSIS
absolute immunity. This Court rejected that
plea and held that GSIS should not be allowed
to hide behind such immunity especially since
its obligation arose from its own wrongful action
in a business transaction.

In this case, the monetary judgments against

GSIS arose from its failure to comply with its
private and contractual obligation to GMC. As
such, GSIS cannot claim immunity from the
enforcement of the final and executory
judgment against it.[114]
Fourth Issue:
Forum Shopping

On the issue of forum shopping, this Court

already found LLDHC guilty of forum shopping
and was adjudged to pay treble costs way back
in 2002 in G.R. No. 141407[115]:

There is forum shopping whenever, as a result

of an adverse opinion in one forum, a party
seeks a favorable opinion (other than by appeal
or certiorari) from another. In Gatmaytan v. CA,
the petitioner therein repeatedly availed itself of
several judicial remedies in different courts,
simultaneously or successively. All those
remedies were substantially founded on the
same transactions and the same essential facts
and circumstances; and all raised substantially
the same issues either pending in, or already
resolved adversely by, some other court. This
Court held that therein petitioner was trying to
increase his chances of obtaining a favorable
decision by filing multiple suits in several
courts. Hence, he was found guilty of forum
shopping.
In the present case, after the Lapulapu RTC had
rendered its Decision in favor of private
respondent, petitioner filed several petitions
before this Court and the CA essentially seeking
the annulment thereof. True, petitioner had
filed its Complaint in the Manila RTC before
private respondent filed its own suit in the
Lapulapu RTC. Records, however, show that
private respondent learned of the Manila case
only when petitioner filed its Motion for
Intervention in the Lapulapu RTC. When GMC
filed its own Motion to Intervene in the Manila
RTC, it was promptly rebuffed by the judge
therein. On the other hand, petitioner was able
to present its side and to participate fully in the
proceedings before the Lapulapu RTC.
On July 27, 1994, almost two years after the
dismissal of its appeal by the Lapulapu RTC,
petitioner filed in the CA a suit for the
annulment of that RTC judgment. On December
29, 1994, this suit was rejected by the CA in a
Decision which became final and executory on
January 28, 1995, after no appeal was taken by
petitioner. However, this action did not stop
petitioner. On February 2, 1995, it filed with
this Court another Petition deceptively cloaked
as certiorari, but which in reality sought the
annulment of the Lapulapu Decision. This
Court dismissed the Petition on September 6,
1996. Petitioners Motion for Reconsideration
was denied with finality on November 18, 1996.
On November 28, 1996, Judge Risos of the
Lapulapu RTC directed the execution of the
judgment in the case filed before it. The Motion
to Stay Execution filed by petitioner was denied
on February 19, 1997. Undaunted, it filed in
this Court another Petition for Certiorari,
Prohibition and Mandamus. On September 21,
1998, we referred the Petition to the CA for
appropriate action. This new Petition again
essentially sought to annul the final and
executory Decision rendered by the Lapulapu
RTC. Needless to say, the new suit was
unsuccessful. Still, this rejection did not stop
petitioner. It brought before this Court the
present Petition for Review on Certiorari
alleging the same facts and circumstances and
raising the same issues already decided by this
Court in G.R. No. 118633.

First Philippine International Bank v. CA

stresses that what is truly important to consider
in determining whether forum shopping exists
is the vexation caused the courts and the
parties-litigants by one who asks different
courts and/or administrative agencies to rule
on the same or related facts and causes and/or
to grant the same or substantially the same
relief, in the process creating the possibility of
conflicting rulings and decisions.

Petitioner in the present case sued twice before

the CA and thrice before this Court, alleging
substantially the same facts and circumstances,
raising essentially the same issues, and praying
for almost identical reliefs for the annulment of
the Decision rendered by the Lapulapu RTC.
This insidious practice of repeatedly bringing
essentially the same action -- albeit disguised in
various nomenclatures -- before different courts
at different times is forum shopping no less.
Because of petitioners actions, the execution of
the Lapulapu Decision has been needlessly
delayed and several courts vexed.[116]

There is forum shopping when two or more

actions or proceedings, other than appeal or
certiorari, involving the same parties for the
same cause of action, are instituted either
simultaneously or successively to obtain a more
favorable decision.[117] This Court, in Spouses
De la Cruz v. Joaquin,[118] explained why
forum shopping is disapproved of:

Forum shopping trifles with the courts, abuses

their processes, degrades the administration of
justice, and congests court dockets. Willful and
deliberate violation of the rule against it is a
ground for the summary dismissal of the case;
it may also constitute direct contempt of
court.[119]

It is undeniable that both LLDHC and GSIS are

guilty of forum shopping, for having gone
through several actions and proceedings from
the lowest court to this Court in the hopes that
they will obtain a decision favorable to them. In
all those actions, only one issue was in
contention: the ownership of the subject lots. In
the process, the parties degraded the
administration of justice, congested our court
dockets, and abused our judicial system.
Moreover, the simultaneous and successive
actions filed below have resulted in conflicting
decisions rendered by not only the trial courts
but also by different divisions of the Court of
Appeals.

The very purpose of the rule against forum

shopping was to stamp out the abominable
practice of trifling with the administration of
justice. [120] It is evident from the history of
this case that not only were the parties and the
courts vexed, but more importantly, justice was
delayed. As this Court held in the earlier case of
LLDHC against GMC: [The] insidious practice of
repeatedly bringing essentially the same action
albeit disguised in various nomenclatures
before different courts at different times is
forum shopping no less.[121]

Conclusion

Nonetheless, like we said, substantial justice

requires the resolution of this controversy on its
merits. It is the duty of this Court to put an end
to this long-delayed litigation and render a
decision, which will bind all parties with finality.

Although it is settled that the Lapu-Lapu RTC

Decision was not in any way nullified by the
Manila RTC Decision, it is this Courts duty to
resolve the legal implications of having two
conflicting, final, and executory decisions in
existence. In Collantes v. Court of Appeals,[122]
this Court, faced with the similar issue of
having two conflicting, final and executory
decisions before it, offered three options to solve
the dilemma: the first is for the parties to assert
their claims anew, the second is to determine
which judgment came first, and the third is to
determine which of the judgments had been
rendered by a court of last resort.[123]

In Collantes, this Court applied the first option

and resolved the conflicting issues anew.
However, resorting to the first solution in the
case at bar would entail disregarding not only
the final and executory decisions of the Lapu-
Lapu RTC and the Manila RTC, but also the
final and executory decisions of the Court of
Appeals and this Court. Moreover, it would
negate two decades worth of litigating. Thus, we
find it more equitable and practicable to apply
the second and third options consequently
maintaining the finality of one of the conflicting
judgments. The primary criterion under the
second option is the time when the decision was
rendered and became final and executory, such
that earlier decisions should prevail over the
current ones since final and executory decisions
vest rights in the winning party. In the third
solution, the main criterion is the determination
of which court or tribunal rendered the decision.
Decisions of this Court should be accorded
more respect than those made by the lower
courts.[124]

Applying these criteria to the case at bar, the

February 24, 1992 Decision of the Lapu-Lapu
RTC in Civil Case No. 2203-L was not only
promulgated first; it also attained finality on
January 28, 1995, before the Manila RTCs May
10, 1994 Decision in Civil Case No. R-82-3429
became final on May 30, 1997. It is especially
noteworthy that months after the Lapu-Lapu
RTC issued its writ of execution on December
17, 1996, the Manila RTC issued its own writ of
execution on August 1, 1997. To recall, the
Manila RTC writ was only satisfied first because
the Court of Appeals in CA-G.R. SP No. 44052
deemed it appropriate to issue a temporary
restraining order against the execution of the
Lapu-Lapu RTC Decision, pending the case
before it. Hence, the fact that the Manila RTC
Decision was implemented and executed first
does not negate the fact that the Lapu-Lapu
RTC Decision was not only rendered earlier, but
had also attained finality earlier. Furthermore,
while both judgments reached the Court of
Appeals, only Civil Case No. 2203-L was passed
upon on the merits by this Court. In G.R. No.
141407, this Court resolved LLDHCs petition
for review on certiorari seeking to annul the
Court of Appeals Decision in CA-G.R. SP No.
50650. This Court, in dismissing the petition,
upheld the validity of the Lapu-Lapu RTC
Decision and declared that the Manila RTC
Decision cannot bind GMC. That decision
became final and executory way back on March
10, 2003.

While this Court cannot blame the parties for

exhausting all available remedies to obtain a
favorable judgment, the issues involved in this
case should have been resolved upon the
finality of this Courts decision in G.R. No.
141407. As pronounced by this Court in
Villanueva v. Court of Appeals[125]:

The interest of the judicial system in preventing

relitigation of the same dispute recognizes that
judicial resources are finite and the number of
cases that can be heard by the court is limited.
Every dispute that is reheard means that
another will be delayed. In modern times when
court dockets are filled to overflowing, this
concern is of critical importance. x x x.[126]

In summary, this Court finds the execution of

the Lapu-Lapu RTC Decision in Civil Case No.
2203-L to be in order. We affirm the assailed
Orders of March 11, 2004 and May 7, 2004,
which reiterate, among others, the October 23,
1997 Order issued by the Lapu-Lapu RTC,
directing the Register of Deeds of Lapu-Lapu
City to cancel the certificates of title of LLDHC
and to issue new ones in GMCs name. Whatever
rights are due LLDHC from GSIS as a result of
the final judgment of the Manila RTC in Civil
Case No. R-82-3429, which we have previously
held to be binding between GSIS and LLDHC,
may be threshed out in an appropriate
proceeding. Such proceeding shall not further
delay the execution of the Lapu-Lapu RTC
Decision.

WHEREFORE, in view of the foregoing, the

petition in G.R. No. 167000 is DENIED and the
Decision dated November 25, 2004 and
Resolution dated January 20, 2005 of the
Twentieth Division of the Court of Appeals are
AFFIRMED. The petition in G.R. No. 169971 is
GRANTED and the Decision dated September
23, 2005 of the Special Nineteenth Division of
the Court of Appeals is hereby REVERSED AND
SET ASIDE.

SO ORDERED.

Reyes v Almanzor | GR No. L-49839 | 26

April 1991
G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES,

petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS,
JOSE ROÑO, in their capacities as appointed
and Acting Members of the CENTRAL BOARD
OF ASSESSMENT APPEALS; TERESITA H.
NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL
C. FLORES, in their capacities as appointed and
Acting Members of the BOARD OF
ASSESSMENT APPEALS of Manila; and
NICOLAS CATIIL in his capacity as City
Assessor of Manila, respondents.

Barcelona, Perlas, Joven & Academia Law

Offices for petitioners.

PARAS, J.:

This is a petition for review on certiorari to

reverse the June 10, 1977 decision of the
Central Board of Assessment Appeals1 in CBAA
Cases Nos. 72-79 entitled "J.B.L. Reyes,
Edmundo Reyes, et al. v. Board of Assessment
Appeals of Manila and City Assessor of Manila"
which affirmed the March 29, 1976 decision of
the Board of Tax Assessment Appeals2 in BTAA
Cases Nos. 614, 614-A-J, 615, 615-A, B, E,
"Jose Reyes, et al. v. City Assessor of Manila"
and "Edmundo Reyes and Milagros Reyes v.
City Assessor of Manila" upholding the
classification and assessments made by the
City Assessor of Manila.

The facts of the case are as follows:

Petitioners J.B.L. Reyes, Edmundo and

Milagros Reyes are owners of parcels of land
situated in Tondo and Sta. Cruz Districts, City
of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said
tenants were paying monthly rentals not
exceeding three hundred pesos (P300.00) in
July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359
prohibiting for one year from its effectivity, an
increase in monthly rentals of dwelling units or
of lands on which another's dwelling is located,
where such rentals do not exceed three hundred
pesos (P300.00) a month but allowing an
increase in rent by not more than 10%
thereafter. The said Act also suspended
paragraph (1) of Article 1673 of the Civil Code
for two years from its effectivity thereby
disallowing the ejectment of lessees upon the
expiration of the usual legal period of lease. On
October 12, 1972, Presidential Decree No. 20
amended R.A. No. 6359 by making absolute the
prohibition to increase monthly rentals below
P300.00 and by indefinitely suspending the
aforementioned provision of the Civil Code,
excepting leases with a definite period.
Consequently, the Reyeses, petitioners herein,
were precluded from raising the rentals and
from ejecting the tenants. In 1973, respondent
City Assessor of Manila re-classified and
reassessed the value of the subject properties
based on the schedule of market values duly
reviewed by the Secretary of Finance. The
revision, as expected, entailed an increase in
the corresponding tax rates prompting
petitioners to file a Memorandum of
Disagreement with the Board of Tax
Assessment Appeals. They averred that the
reassessments made were "excessive,
unwarranted, inequitable, confiscatory and
unconstitutional" considering that the taxes
imposed upon them greatly exceeded the
annual income derived from their properties.
They argued that the income approach should
have been used in determining the land values
instead of the comparable sales approach which
the City Assessor adopted (Rollo, pp. 9-10-A).
The Board of Tax Assessment Appeals, however,
considered the assessments valid, holding thus:

WHEREFORE, and considering that the

appellants have failed to submit concrete
evidence which could overcome the
presumptive regularity of the classification and
assessments appear to be in accordance with
the base schedule of market values and of the
base schedule of building unit values, as
approved by the Secretary of Finance, the cases
should be, as they are hereby, upheld.

SO ORDERED. (Decision of the Board of Tax

Assessment Appeals, Rollo, p. 22).

The Reyeses appealed to the Central Board of

Assessment Appeals.1âwphi1 They submitted,
among others, the summary of the yearly
rentals to show the income derived from the
properties. Respondent City Assessor, on the
other hand, submitted three (3) deeds of sale
showing the different market values of the real
property situated in the same vicinity where the
subject properties of petitioners are located. To
better appreciate the locational and physical
features of the land, the Board of Hearing
Commissioners conducted an ocular inspection
with the presence of two representatives of the
City Assessor prior to the healing of the case.
Neither the owners nor their authorized
representatives were present during the said
ocular inspection despite proper notices served
them. It was found that certain parcels of land
were below street level and were affected by the
tides (Rollo, pp. 24-25).

On June 10, 1977, the Central Board of

Assessment Appeals rendered its decision, the
dispositive portion of which reads:

WHEREFORE, the appealed decision insofar as

the valuation and assessment of the lots
covered by Tax Declaration Nos. (5835) PD-
5847, (5839), (5831) PD-5844 and PD-3824 is
affirmed.

For the lots covered by Tax Declaration Nos.

(1430) PD-1432, PD-1509, 146 and (1) PD-266,
the appealed Decision is modified by allowing a
20% reduction in their respective market values
and applying therein the assessment level of 30%
to arrive at the corresponding assessed value.
SO ORDERED. (Decision of the Central Board
of Assessment Appeals, Rollo, p. 27)

Petitioner's subsequent motion for

reconsideration was denied, hence, this petition.

The Reyeses assigned the following error:

THE HONORABLE BOARD ERRED IN

ADOPTING THE "COMPARABLE SALES
APPROACH" METHOD IN FIXING THE
ASSESSED VALUE OF APPELLANTS'
PROPERTIES.

The petition is impressed with merit.

The crux of the controversy is in the method

used in tax assessment of the properties in
question. Petitioners maintain that the "Income
Approach" method would have been more
realistic for in disregarding the effect of the
restrictions imposed by P.D. 20 on the market
value of the properties affected, respondent
Assessor of the City of Manila unlawfully and
unjustifiably set increased new assessed values
at levels so high and successive that the
resulting annual real estate taxes would
admittedly exceed the sum total of the yearly
rentals paid or payable by the dweller tenants
under P.D. 20. Hence, petitioners protested
against the levels of the values assigned to their
properties as revised and increased on the
ground that they were arbitrarily excessive,
unwarranted, inequitable, confiscatory and
unconstitutional (Rollo, p. 10-A).

On the other hand, while respondent Board of

Tax Assessment Appeals admits in its decision
that the income approach is used in
determining land values in some vicinities, it
maintains that when income is affected by some
sort of price control, the same is rejected in the
consideration and study of land values as in the
case of properties affected by the Rent Control
Law for they do not project the true market
value in the open market (Rollo, p. 21). Thus,
respondents opted instead for the "Comparable
Sales Approach" on the ground that the value
estimate of the properties predicated upon
prices paid in actual, market transactions
would be a uniform and a more credible
standards to use especially in case of mass
appraisal of properties (Ibid.). Otherwise stated,
public respondents would have this Court
completely ignore the effects of the restrictions
of P.D. No. 20 on the market value of properties
within its coverage. In any event, it is
unquestionable that both the "Comparable
Sales Approach" and the "Income Approach" are
generally acceptable methods of appraisal for
taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988
Edition). However, it is conceded that the
propriety of one as against the other would of
course depend on several factors. Hence, as
early as 1923 in the case of Army & Navy Club,
Manila v. Wenceslao Trinidad, G.R. No. 19297
(44 Phil. 383), it has been stressed that the
assessors, in finding the value of the property,
have to consider all the circumstances and
elements of value and must exercise a prudent
discretion in reaching conclusions.

Under Art. VIII, Sec. 17 (1) of the 1973

Constitution, then enforced, the rule of taxation
must not only be uniform, but must also be
equitable and progressive.

Uniformity has been defined as that principle by

which all taxable articles or kinds of property of
the same class shall be taxed at the same rate
(Churchill v. Concepcion, 34 Phil. 969 [1916]).

Notably in the 1935 Constitution, there was no

mention of the equitable or progressive aspects
of taxation required in the 1973 Charter
(Fernando "The Constitution of the Philippines",
p. 221, Second Edition). Thus, the need to
examine closely and determine the specific
mandate of the Constitution.

Taxation is said to be equitable when its burden

falls on those better able to pay. Taxation is
progressive when its rate goes up depending on
the resources of the person affected (Ibid.).

The power to tax "is an attribute of sovereignty".

In fact, it is the strongest of all the powers of
government. But for all its plenitude the power
to tax is not unconfined as there are restrictions.
Adversely effecting as it does property rights,
both the due process and equal protection
clauses of the Constitution may properly be
invoked to invalidate in appropriate cases a
revenue measure. If it were otherwise, there
would be truth to the 1903 dictum of Chief
Justice Marshall that "the power to tax involves
the power to destroy." The web or unreality
spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice
Holmes pen, thus: "The power to tax is not the
power to destroy while this Court sits. So it is in
the Philippines " (Sison, Jr. v. Ancheta, 130
SCRA 655 [1984]; Obillos, Jr. v. Commissioner
of Internal Revenue, 139 SCRA 439 [1985]).

In the same vein, the due process clause may

be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. An
obvious example is where it can be shown to
amount to confiscation of property. That would
be a clear abuse of power (Sison v. Ancheta,
supra).

The taxing power has the authority to make a

reasonable and natural classification for
purposes of taxation but the government's act
must not be prompted by a spirit of hostility, or
at the very least discrimination that finds no
support in reason. It suffices then that the laws
operate equally and uniformly on all persons
under similar circumstances or that all persons
must be treated in the same manner, the
conditions not being different both in the
privileges conferred and the liabilities imposed
(Ibid., p. 662).

Finally under the Real Property Tax Code (P.D.

464 as amended), it is declared that the first
Fundamental Principle to guide the appraisal
and assessment of real property for taxation
purposes is that the property must be
"appraised at its current and fair market value."

By no strength of the imagination can the

market value of properties covered by P.D. No.
20 be equated with the market value of
properties not so covered. The former has
naturally a much lesser market value in view of
the rental restrictions.

Ironically, in the case at bar, not even the

factors determinant of the assessed value of
subject properties under the "comparable sales
approach" were presented by the public
respondents, namely: (1) that the sale must
represent a bonafide arm's length transaction
between a willing seller and a willing buyer and
(2) the property must be comparable property
(Rollo, p. 27). Nothing can justify or support
their view as it is of judicial notice that for
properties covered by P.D. 20 especially during
the time in question, there were hardly any
willing buyers. As a general rule, there were no
takers so that there can be no reasonable basis
for the conclusion that these properties were
comparable with other residential properties
not burdened by P.D. 20. Neither can the given
circumstances be nonchalantly dismissed by
public respondents as imposed under
distressed conditions clearly implying that the
same were merely temporary in character. At
this point in time, the falsity of such premises
cannot be more convincingly demonstrated by
the fact that the law has existed for around
twenty (20) years with no end to it in sight.

Verily, taxes are the lifeblood of the government

and so should be collected without unnecessary
hindrance. However, such collection should be
made in accordance with law as any
arbitrariness will negate the very reason for
government itself It is therefore necessary to
reconcile the apparently conflicting interests of
the authorities and the taxpayers so that the
real purpose of taxations, which is the
promotion of the common good, may be
achieved (Commissioner of Internal Revenue v.
Algue Inc., et al., 158 SCRA 9 [1988]).
Consequently, it stands to reason that
petitioners who are burdened by the
government by its Rental Freezing Laws (then
R.A. No. 6359 and P.D. 20) under the principle
of social justice should not now be penalized by
the same government by the imposition of
excessive taxes petitioners can ill afford and
eventually result in the forfeiture of their
properties.

By the public respondents' own computation

the assessment by income approach would
amount to only P10.00 per sq. meter at the time
in question.

PREMISES CONSIDERED, (a) the petition is

GRANTED; (b) the assailed decisions of public
respondents are REVERSED and SET ASIDE;
and (e) the respondent Board of Assessment
Appeals of Manila and the City Assessor of
Manila are ordered to make a new assessment
by the income approach method to guarantee a
fairer and more realistic basis of computation
(Rollo, p. 71).

SO ORDERED.

Fernan, C.J., Narvasa, Melencio-Herrera,

Gutierrez, Jr., Cruz, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento, Griño-Aquino,
Medialdea, Regalado and Davide, Jr., JJ.,
concur.

Chamber of Real Estate Builder’s Association

(CREBA) v Romulo | GR No. 160756 | 09
March 2010

CHAMBER OF REAL G.R. No. 160756

ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:

March 9, 2010

x-------------------------------
------------------x
DECISION

CORONA, J.:

In this original petition for certiorari and

mandamus,[1] petitioner Chamber of Real
Estate and Builders Associations, Inc. is
questioning the constitutionality of Section 27
(E) of Republic Act (RA) 8424[2] and the revenue
regulations (RRs) issued by the Bureau of
Internal Revenue (BIR) to implement said
provision and those involving creditable
withholding taxes.[3]
Petitioner is an association of real estate
developers and builders in the Philippines. It
impleaded former Executive Secretary Alberto
Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of
Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition

of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax
(CWT) on sales of real properties classified as
ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on

domestic corporations and is implemented by
RR 9-98. Petitioner argues that the MCIT
violates the due process clause because it levies
income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J)

(as amended by RR 6-2001) and 2.58.2 of RR 2-
98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003,
all of which prescribe the rules and procedures
for the collection of CWT on the sale of real
properties categorized as ordinary assets.
Petitioner contends that these revenue
regulations are contrary to law for two reasons:
first, they ignore the different treatment by RA
8424 of ordinary assets and capital assets and
second, respondent Secretary of Finance has no
authority to collect CWT, much less, to base the
CWT on the gross selling price or fair market
value of the real properties classified as
ordinary assets.

Petitioner also asserts that the enumerated

provisions of the subject revenue regulations
violate the due process clause because, like the
MCIT, the government collects income tax even
when the net income has not yet been
determined. They contravene the equal
protection clause as well because the CWT is
being levied upon real estate enterprises but not
on other business enterprises, more
particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take
cognizance of the present case;
(2) whether or not the imposition of the MCIT on
domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on
income from sales of real properties classified
as ordinary assets under RRs 2-98, 6-2001 and
7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation,

beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income
when such MCIT is greater than the normal
corporate income tax imposed under Section
27(A).[4] If the regular income tax is higher than
the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal
tax shall be carried forward and credited
against the normal income tax for the three
immediately succeeding taxable years. Section
27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic

Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent

(2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby
imposed on a corporation taxable under this
Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than
the tax computed under Subsection (A) of this
Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax.

Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A)
of this Section shall be carried forward and
credited against the normal income tax for the
three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain
conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the
[MCIT] on any corporation which suffers losses
on account of prolonged labor dispute, or
because of force majeure, or because of
legitimate business reverses.

The Secretary of Finance is hereby authorized

to promulgate, upon recommendation of the
Commissioner, the necessary rules and
regulations that shall define the terms and
conditions under which he may suspend the
imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of

applying the [MCIT] provided under Subsection
(E) hereof, the term gross income shall mean
gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods
sold shall include all business expenses directly
incurred to produce the merchandise to bring
them to their present location and use.

For trading or merchandising concern, cost of

goods sold shall include the invoice cost of the
goods sold, plus import duties, freight in
transporting the goods to the place where the
goods are actually sold including insurance
while the goods are in transit.

For a manufacturing concern, cost of goods

manufactured and sold shall include all costs of
production of finished goods, such as raw
materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials
to the factory or warehouse.

In the case of taxpayers engaged in the sale of

service, gross income means gross receipts less
sales returns, allowances, discounts and cost of
services. Cost of services shall mean all direct
costs and expenses necessarily incurred to
provide the services required by the customers
and clients including (A) salaries and employee
benefits of personnel, consultants and
specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the
service such as depreciation or rental of
equipment used and cost of supplies: Provided,
however, that in the case of banks, cost of
services shall include interest expense.

On August 25, 1998, respondent Secretary of

Finance (Secretary), on the recommendation of
the Commissioner of Internal Revenue (CIR),
promulgated RR 9-98 implementing Section
27(E).[5] The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two

percent (2%) of the gross income as of the end
of the taxable year (whether calendar or fiscal
year, depending on the accounting period
employed) is hereby imposed upon any
domestic corporation beginning the fourth (4th)
taxable year immediately following the taxable
year in which such corporation commenced its
business operations. The MCIT shall be
imposed whenever such corporation has zero or
negative taxable income or whenever the
amount of minimum corporate income tax is
greater than the normal income tax due from
such corporation.

For purposes of these Regulations, the term,

normal income tax means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of
the Code xxx at 32% effective January 1, 2000
and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any

excess of the [MCIT] over the normal income tax
as computed under Sec. 27(A) of the Code shall
be carried forward on an annual basis and
credited against the normal income tax for the
three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent

Secretary, upon recommendation of respondent
CIR, promulgated RR 2-98 implementing
certain provisions of RA 8424 involving the
withholding of taxes.[6] Under Section 2.57.2(J)
of RR No. 2-98, income payments from the sale,
exchange or transfer of real property, other than
capital assets, by persons residing in the
Philippines and habitually engaged in the real
estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT]

and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of

consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer
of. Real property, other than capital assets, sold
by an individual, corporation, estate, trust,
trust fund or pension fund and the
seller/transferor is habitually engaged in the
real estate business in accordance with the
following schedule
Those which are exempt from a withholding tax
at source as prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five hundred thousand

pesos (P500,000.00) or less.

1.5%
With a selling price of more than five hundred
thousand pesos (P500,000.00) but not more
than two million pesos (P2,000,000.00).

3.0%

With selling price of more than two million

pesos (P2,000,000.00)

5.0%

xxx xxx xxx

Gross selling price shall mean the consideration

stated in the sales document or the fair market
value determined in accordance with Section 6
(E) of the Code, as amended, whichever is
higher. In an exchange, the fair market value of
the property received in exchange, as
determined in the Income Tax Regulations shall
be used.

Where the consideration or part thereof is

payable on installment, no withholding tax is
required to be made on the periodic installment
payments where the buyer is an individual not
engaged in trade or business. In such a case,
the applicable rate of tax based on the entire
consideration shall be withheld on the last
installment or installments to be paid to the
seller.

However, if the buyer is engaged in trade or

business, whether a corporation or otherwise,
the tax shall be deducted and withheld by the
buyer on every installment.

This provision was amended by RR 6-2001 on

July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT]
and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer
of real property classified as ordinary asset. - A
[CWT] based on the gross selling price/total
amount of consideration or the fair market
value determined in accordance with Section
6(E) of the Code, whichever is higher, paid to the
seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall
be imposed upon the withholding agent,/buyer,
in accordance with the following schedule:

Where the seller/transferor is exempt from

[CWT] in accordance with Sec. 2.57.5 of these
regulations.

Exempt

Upon the following values of real property,

where the seller/transferor is habitually
engaged in the real estate business.

With a selling price of Five Hundred Thousand

Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more
than Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00).
5.0%
xxx xxx xxx

Gross selling price shall remain the

consideration stated in the sales document or
the fair market value determined in accordance
with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair
market value of the property received in
exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or

business, whether a corporation or otherwise,
these rules shall apply:

(i) If the sale is a sale of property on the

installment plan (that is, payments in the year
of sale do not exceed 25% of the selling price),
the tax shall be deducted and withheld by the
buyer on every installment.

(ii) If, on the other hand, the sale is on a cash

basis or is a deferred-payment sale not on the
installment plan (that is, payments in the year
of sale exceed 25% of the selling price), the
buyer shall withhold the tax based on the gross
selling price or fair market value of the property,
whichever is higher, on the first installment.

In any case, no Certificate Authorizing

Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or
exchange of real property other than capital
asset has been fully paid. (Underlined
amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section

58(E) of RA 8424 provides that any sale, barter
or exchange subject to the CWT will not be
recorded by the Registry of Deeds until the CIR
has certified that such transfers and
conveyances have been reported and the taxes
thereof have been duly paid:[7]
Sec. 2.58.2. Registration with the Register of
Deeds. Deeds of conveyances of land or land
and building/improvement thereon arising
from sales, barters, or exchanges subject to the
creditable expanded withholding tax shall not
be recorded by the Register of Deeds unless the
[CIR] or his duly authorized representative has
certified that such transfers and conveyances
have been reported and the expanded
withholding tax, inclusive of the documentary
stamp tax, due thereon have been fully paid
xxxx.

On February 11, 2003, RR No. 7-2003[8] was

promulgated, providing for the guidelines in
determining whether a particular real property
is a capital or an ordinary asset for purposes of
imposing the MCIT, among others. The
pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or
other disposition of real property. -
Gains/Income derived from sale, exchange, or
other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether
the subject properties are classified as capital
assets or ordinary assets;

a. In the case of individual citizen

(including estates and trusts), resident aliens,
and non-resident aliens engaged in trade or
business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in

the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under
Sec. 2.57..2(J) of [RR 2-98], as amended, based
on the gross selling price or current fair market
value as determined in accordance with Section
6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax
imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable
income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building

classified as ordinary asset and other real
property (other than land and/or building
treated as capital asset), regardless of the
classification thereof, all of which are located in
the Philippines, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary
income tax under Sec. 27(A) of the Code. In lieu
of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT]
under Sec. 27(E) of the Code, whichever is
applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE
CONTROVERSY

Courts will not assume jurisdiction over a

constitutional question unless the following
requisites are satisfied: (1) there must be an
actual case calling for the exercise of judicial
review; (2) the question before the court must
be ripe for adjudication; (3) the person
challenging the validity of the act must have
standing to do so; (4) the question of
constitutionality must have been raised at the
earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of
the case.[9]
Respondents aver that the first three requisites
are absent in this case. According to them, there
is no actual case calling for the exercise of
judicial power and it is not yet ripe for
adjudication because

[petitioner] did not allege that CREBA, as a

corporate entity, or any of its members, has
been assessed by the BIR for the payment of
[MCIT] or [CWT] on sales of real property.
Neither did petitioner allege that its members
have shut down their businesses as a result of
the payment of the MCIT or CWT. Petitioner has
raised concerns in mere abstract and
hypothetical form without any actual, specific
and concrete instances cited that the assailed
law and revenue regulations have actually and
adversely affected it. Lacking empirical data on
which to base any conclusion, any discussion
on the constitutionality of the MCIT or CWT on
sales of real property is essentially an academic
exercise.

Perceived or alleged hardship to taxpayers alone

is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would
be no different from the giving of advisory
opinion that does not really settle legal
issues.[10]

An actual case or controversy involves a conflict

of legal rights or an assertion of opposite legal
claims which is susceptible of judicial
resolution as distinguished from a hypothetical
or abstract difference or dispute.[11] On the
other hand, a question is considered ripe for
adjudication when the act being challenged has
a direct adverse effect on the individual
challenging it.[12]

Contrary to respondents assertion, we do not

have to wait until petitioners members have
shut down their operations as a result of the
MCIT or CWT. The assailed provisions are
already being implemented. As we stated in
Didipio Earth-Savers Multi-Purpose
Association, Incorporated (DESAMA) v.
Gozun:[13]

By the mere enactment of the questioned law or

the approval of the challenged act, the dispute
is said to have ripened into a judicial
controversy even without any other overt act.
Indeed, even a singular violation of the
Constitution and/or the law is enough to
awaken judicial duty.[14]

If the assailed provisions are indeed

unconstitutional, there is no better time than
the present to settle such question once and for
all.

Respondents next argue that petitioner has no

legal standing to sue:

Petitioner is an association of some of the real

estate developers and builders in the
Philippines. Petitioners did not allege that [it]
itself is in the real estate business. It did not
allege any material interest or any wrong that it
may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys

personal and substantial interest in a case such
that it has sustained or will sustain direct
injury as a result of the governmental act being
challenged.[16] In Holy Spirit Homeowners
Association, Inc. v. Defensor,[17] we held that
the association had legal standing because its
members stood to be injured by the
enforcement of the assailed provisions:

Petitioner association has the legal standing to

institute the instant petition xxx. There is no
dispute that the individual members of
petitioner association are residents of the NGC.
As such they are covered and stand to be either
benefited or injured by the enforcement of the
IRR, particularly as regards the selection
process of beneficiaries and lot allocation to
qualified beneficiaries. Thus, petitioner
association may assail those provisions in the
IRR which it believes to be unfavorable to the
rights of its members. xxx Certainly, petitioner
and its members have sustained direct injury
arising from the enforcement of the IRR in that
they have been disqualified and eliminated from
the selection process.[18]

In any event, this Court has the discretion to

take cognizance of a suit which does not satisfy
the requirements of an actual case, ripeness or
legal standing when paramount public interest
is involved.[19] The questioned MCIT and CWT
affect not only petitioners but practically all
domestic corporate taxpayers in our country.
The transcendental importance of the issues
raised and their overreaching significance to
society make it proper for us to take cognizance
of this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new

concept introduced by RA 8424 to the
Philippine taxation system. It came about as a
result of the perceived inadequacy of the self-
assessment system in capturing the true
income of corporations.[21] It was devised as a
relatively simple and effective revenue-raising
instrument compared to the normal income tax
which is more difficult to control and enforce. It
is a means to ensure that everyone will make
some minimum contribution to the support of
the public sector. The congressional
deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not

unmindful of the practice of certain
corporations of reporting constantly a loss in
their operations to avoid the payment of taxes,
and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act
introduces for the first time a new concept
called the [MCIT] so as to minimize tax evasion,
tax avoidance, tax manipulation in the country
and for administrative convenience. This will go
a long way in ensuring that corporations will
pay their just share in supporting our public life
and our economic advancement.[22]

Domestic corporations owe their corporate

existence and their privilege to do business to
the government. They also benefit from the
efforts of the government to improve the
financial market and to ensure a favorable
business climate. It is therefore fair for the
government to require them to make a
reasonable contribution to the public expenses.

Congress intended to put a stop to the practice

of corporations which, while having large turn-
overs, report minimal or negative net income
resulting in minimal or zero income taxes year
in and year out, through under-declaration of
income or over-deduction of expenses otherwise
called tax shelters.[23]

Mr. Javier (E.) [This] is what the Finance Dept.

is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience
too, you have corporations which have been
losing year in and year out and paid no tax. So,
if the corporation has been losing for the past
five years to ten years, then that corporation
has no business to be in business. It is dead.
Why continue if you are losing year in and year
out? So, we have this provision to avoid this
type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business

is to earn a profit. Continued and repeated
losses after operations of a corporation or
consistent reports of minimal net income render
its financial statements and its tax payments
suspect. For sure, certain tax avoidance
schemes resorted to by corporations are allowed
in our jurisdiction. The MCIT serves to put a cap
on such tax shelters. As a tax on gross income,
it prevents tax evasion and minimizes tax
avoidance schemes achieved through
sophisticated and artful manipulations of
deductions and other stratagems. Since the tax
base was broader, the tax rate was lowered.
To further emphasize the corrective nature of
the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses

and the reality of the need to recoup initial
major capital expenditures, the imposition of
the MCIT commences only on the fourth taxable
year immediately following the year in which the
corporation commenced its operations.[25] This
grace period allows a new business to stabilize
first and make its ventures viable before it is
subjected to the MCIT.[26]

Second, the law allows the carrying forward of

any excess of the MCIT paid over the normal
income tax which shall be credited against the
normal income tax for the three immediately
succeeding years.[27]
Third, since certain businesses may be
incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend
the imposition of MCIT if a corporation suffers
losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]
Even before the legislature introduced the MCIT
to the Philippine taxation system, several other
countries already had their own system of
minimum corporate income taxation. Our
lawmakers noted that most developing
countries, particularly Latin American and
Asian countries, have the same form of
safeguards as we do. As pointed out during the
committee hearings:

[Mr. Medalla:] Note that most developing

countries where you have of course quite a bit
of room for underdeclaration of gross receipts
have this same form of safeguards.

In the case of Thailand, half a percent (0.5%),

theres a minimum of income tax of half a
percent (0.5%) of gross assessable income. In
Korea a 25% of taxable income before
deductions and exemptions. Of course the
different countries have different basis for that
minimum income tax.

The other thing youll notice is the

preponderance of Latin American countries that
employed this method. Okay, those are
additional Latin American countries.[29]

At present, the United States of America, Mexico,

Argentina, Tunisia, Panama and Hungary have
their own versions of the MCIT.[30]

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section

27(E) of RA 8424 is unconstitutional because it
is highly oppressive, arbitrary and confiscatory
which amounts to deprivation of property
without due process of law. It explains that
gross income as defined under said provision
only considers the cost of goods sold and other
direct expenses; other major expenditures,
such as administrative and interest expenses
which are equally necessary to produce gross
income, were not taken into account.[31] Thus,
pegging the tax base of the MCIT to a
corporations gross income is tantamount to a
confiscation of capital because gross income,
unlike net income, is not realized gain.[32]

We disagree.

Taxes are the lifeblood of the government.

Without taxes, the government can neither exist
nor endure. The exercise of taxing power derives
its source from the very existence of the State
whose social contract with its citizens obliges it
to promote public interest and the common
good.[33]

Taxation is an inherent attribute of

sovereignty.[34] It is a power that is purely
legislative.[35] Essentially, this means that in
the legislature primarily lies the discretion to
determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs
(place) of taxation.[36] It has the authority to
prescribe a certain tax at a specific rate for a
particular public purpose on persons or things
within its jurisdiction. In other words, the
legislature wields the power to define what tax
shall be imposed, why it should be imposed,
how much tax shall be imposed, against whom
(or what) it shall be imposed and where it shall
be imposed.

As a general rule, the power to tax is plenary

and unlimited in its range, acknowledging in its
very nature no limits, so that the principal
check against its abuse is to be found only in
the responsibility of the legislature (which
imposes the tax) to its constituency who are to
pay it.[37] Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like
any other statute, tax legislation carries a
presumption of constitutionality.

The constitutional safeguard of due process is

embodied in the fiat [no] person shall be
deprived of life, liberty or property without due
process of law. In Sison, Jr. v. Ancheta, et
al.,[38] we held that the due process clause may
properly be invoked to invalidate, in appropriate
cases, a revenue measure[39] when it amounts
to a confiscation of property.[40] But in the
same case, we also explained that we will not
strike down a revenue measure as
unconstitutional (for being violative of the due
process clause) on the mere allegation of
arbitrariness by the taxpayer.[41] There must
be a factual foundation to such an
unconstitutional taint.[42] This merely adheres
to the authoritative doctrine that, where the due
process clause is invoked, considering that it is
not a fixed rule but rather a broad standard,
there is a need for proof of such persuasive
character.[43]

Petitioner is correct in saying that income is

distinct from capital.[44] Income means all the
wealth which flows into the taxpayer other than
a mere return on capital. Capital is a fund or
property existing at one distinct point in time
while income denotes a flow of wealth during a
definite period of time.[45] Income is gain
derived and severed from capital.[46] For
income to be taxable, the following requisites
must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or
treaty from
taxation.[47]

Certainly, an income tax is arbitrary and

confiscatory if it taxes capital because capital is
not income. In other words, it is income, not
capital, which is subject to income tax. However,
the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is
arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost
of goods[48] and other direct expenses from
gross sales. Clearly, the capital is not being
taxed.

Furthermore, the MCIT is not an additional tax

imposition. It is imposed in lieu of the normal
net income tax, and only if the normal income
tax is suspiciously low. The MCIT merely
approximates the amount of net income tax due
from a corporation, pegging the rate at a very
much reduced 2% and uses as the base the
corporations gross income.

Besides, there is no legal objection to a broader

tax base or taxable income by eliminating all
deductible items and at the same time reducing
the applicable tax rate.[49]

Statutes taxing the gross "receipts," "earnings,"

or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally
held to be within the power of a state to impose;
or constitutional, unless it interferes with
interstate commerce or violates the requirement
as to uniformity of taxation.[50]
The United States has a similar alternative
minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader
tax base.[51] Since our income tax laws are of
American origin, interpretations by American
courts of our parallel tax laws have persuasive
effect on the interpretation of these laws.[52]
Although our MCIT is not exactly the same as
the AMT, the policy behind them and the
procedure of their implementation are
comparable. On the question of the AMTs
constitutionality, the United States Court of
Appeals for the Ninth Circuit stated in Okin v.
Commissioner:[53]

In enacting the minimum tax, Congress

attempted to remedy general taxpayer distrust
of the system growing from large numbers of
taxpayers with large incomes who were yet
paying no taxes.

xxx xxx xxx

We thus join a number of other courts in

upholding the constitutionality of the [AMT].
xxx [It] is a rational means of obtaining a broad-
based tax, and therefore is constitutional.[54]

The U.S. Court declared that the congressional

intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a
legitimate governmental end to which the AMT
bore a reasonable relation.[55]
American courts have also emphasized that
Congress has the power to condition, limit or
deny deductions from gross income in order to
arrive at the net that it chooses to tax.[56] This
is because deductions are a matter of legislative
grace.[57]

Absent any other valid objection, the

assignment of gross income, instead of net
income, as the tax base of the MCIT, taken with
the reduction of the tax rate from 32% to 2%, is
not constitutionally objectionable.
Moreover, petitioner does not cite any actual,
specific and concrete negative experiences of its
members nor does it present empirical data to
show that the implementation of the MCIT
resulted in the confiscation of their property.
In sum, petitioner failed to support, by any
factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court
cannot strike down a law as unconstitutional
simply because of its yokes.[58] Taxation is
necessarily burdensome because, by its nature,
it adversely affects property rights.[59] The
party alleging the laws unconstitutionality has
the burden to demonstrate the supposed
violations in understandable terms.[60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation

of property without due process of law because
the MCIT is being imposed and collected even
when there is actually a loss, or a zero or
negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be

imposed whenever such corporation has zero or
negative taxable income or whenever the
amount of [MCIT] is greater than the normal
income tax due from such corporation.
(Emphasis supplied)

RR 9-98, in declaring that MCIT should be

imposed whenever such corporation has zero or
negative taxable income, merely defines the
coverage of Section 27(E). This means that even
if a corporation incurs a net loss in its business
operations or reports zero income after
deducting its expenses, it is still subject to an
MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT
on gross income notwithstanding the amount of
the net income. But the law also states that the
MCIT is to be paid only if it is greater than the
normal net income. Obviously, it may well be
the case that the MCIT would be less than the
net income of the corporation which posts a zero
or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure

through which taxes (including income taxes)
are collected.[61] Under Section 57 of RA 8424,
the types of income subject to withholding tax
are divided into three categories: (a) withholding
of final tax on certain incomes; (b) withholding
of creditable tax at source and (c) tax-free
covenant bonds. Petitioner is concerned with
the second category (CWT) and maintains that
the revenue regulations on the collection of
CWT on sale of real estate categorized as
ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions

between capital and ordinary assets under RA
8424, contends that Sections 2.57.2(J) and
2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii)
of RR 7-2003 were promulgated with grave
abuse of discretion amounting to lack of
jurisdiction and patently in contravention of
law[62] because they ignore such distinctions.
Petitioners conclusion is based on the following
premises: (a) the revenue regulations use gross
selling price (GSP) or fair market value (FMV) of
the real estate as basis for determining the
income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the
collection of income tax on a per transaction
basis, i.e., upon consummation of the sale via
the CWT, contrary to RA 8424 which calls for
the payment of the net income at the end of the
taxable period.[63]
Petitioner theorizes that since RA 8424 treats
capital assets and ordinary assets differently,
respondents cannot disregard the distinctions
set by the legislators as regards the tax base,
modes of collection and payment of taxes on
income from the sale of capital and ordinary
assets.
Petitioners arguments have no merit.
AUTHORITY OF THE SECRETARY OF FINANCE
TO ORDER THE COLLECTION OF CWT ON
SALES OF REAL PROPERTY CONSIDERED AS
ORDINARY ASSETS

The Secretary of Finance is granted, under

Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations
for the effective enforcement of the provisions of
the law. Such authority is subject to the
limitation that the rules and regulations must
not override, but must remain consistent and in
harmony with, the law they seek to apply and
implement.[64] It is well-settled that an
administrative agency cannot amend an act of
Congress.[65]

We have long recognized that the method of

withholding tax at source is a procedure of
collecting income tax which is sanctioned by
our tax laws.[66] The withholding tax system
was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to
meet his probable income tax liability; second,
to ensure the collection of income tax which can
otherwise be lost or substantially reduced
through failure to file the corresponding returns
and third, to improve the governments cash
flow.[67] This results in administrative savings,
prompt and efficient collection of taxes,
prevention of delinquencies and reduction of
governmental effort to collect taxes through
more complicated means and remedies.[68]
Respondent Secretary has the authority to
require the withholding of a tax on items of
income payable to any person, national or
juridical, residing in the Philippines. Such
authority is derived from Section 57(B) of RA
8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source.
The [Secretary] may, upon the recommendation
of the [CIR], require the withholding of a tax on
the items of income payable to natural or
juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by
law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%)
thereof, which shall be credited against the
income tax liability of the taxpayer for the
taxable year.

The questioned provisions of RR 2-98, as

amended, are well within the authority given by
Section 57(B) to the Secretary, i.e., the
graduated rate of 1.5%-5% is between the 1%-
32% range; the withholding tax is imposed on
the income payable and the tax is creditable
against the income tax liability of the taxpayer
for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE

INCOME TAX OF INDIVIDUALS OR
CORPORATIONS ENGAGED IN THE REAL
ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended,

arbitrarily shifted the tax base of a real estate
business income tax from net income to GSP or
FMV of the property sold.
Petitioner is wrong.

The taxes withheld are in the nature of advance

tax payments by a taxpayer in order to
extinguish its possible tax obligation. [69] They
are installments on the annual tax which may
be due at the end of the taxable year.[70]
Under RR 2-98, the tax base of the income tax
from the sale of real property classified as
ordinary assets remains to be the entitys net
income imposed under Section 24 (resident
individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA
8424, i.e. gross income less allowable
deductions. The CWT is to be deducted from the
net income tax payable by the taxpayer at the
end of the taxable year.[71] Precisely, Section
4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the
tax base for the sale of real property classified
as ordinary assets remains to be the net taxable
income:

Section 4. Applicable taxes on sale, exchange or

other disposition of real property. -
Gains/Income derived from sale, exchange, or
other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes
imposed under the Code, depending on whether
the subject properties are classified as capital
assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including

estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in
the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the

Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec.
2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code,
whichever is higher, and consequently, to the
ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as

ordinary asset and other real property (other
than land and/or building treated as capital
asset), regardless of the classification thereof,
all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec.
2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under
Sec. 27(A) of the Code. In lieu of the ordinary
income tax, however, domestic corporations
may become subject to the [MCIT] under Sec.
27(E) of the same Code, whichever is applicable.
(Emphasis supplied)

Accordingly, at the end of the year, the

taxpayer/seller shall file its income tax return
and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If
the tax due is greater than the tax withheld,
then the taxpayer shall pay the difference. If, on
the other hand, the tax due is less than the tax
withheld, the taxpayer will be entitled to a
refund or tax credit. Undoubtedly, the taxpayer
is taxed on its net income.
The use of the GSP/FMV as basis to determine
the withholding taxes is evidently for purposes
of practicality and convenience. Obviously, the
withholding agent/buyer who is obligated to
withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as
its net income at the end of the taxable year.
Instead, said withholding agents knowledge and
privity are limited only to the particular
transaction in which he is a party. In such a
case, his basis can only be the GSP or FMV as
these are the only factors reasonably known or
knowable by him in connection with the
performance of his duties as a withholding
agent.

NO BLURRING OF DISTINCTIONS BETWEEN

ORDINARY ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income

based on the GSP or FMV of the real property
categorized as ordinary assets. On the other
hand, Section 27(D)(5) of RA 8424 imposes a
final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a
capital asset based on its GSP or FMV. This
final tax is also withheld at source.[72]
The differences between the two forms of
withholding tax, i.e., creditable and final, show
that ordinary assets are not treated in the same
manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows:

FWT
CWT
a) The amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from the
payee on the said income.

a) Taxes withheld on certain income payments

are intended to equal or at least approximate
the tax due of the payee on said income.
b)The liability for payment of the tax rests
primarily on the payor as a withholding agent.
b) Payee of income is required to report the
income and/or pay the difference between the
tax withheld and the tax due on the income. The
payee also has the right to ask for a refund if
the tax withheld is more than the tax due.
c) The payee is not required to file an income tax
return for the particular income.[73]

c) The income recipient is still required to file an

income tax return, as prescribed in Sec. 51 and
Sec. 52 of the NIRC, as amended.[74]

As previously stated, FWT is imposed on the

sale of capital assets. On the other hand, CWT
is imposed on the sale of ordinary assets. The
inherent and substantial differences between
FWT and CWT disprove petitioners contention
that ordinary assets are being lumped together
with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA
8424.

Petitioner insists that the levy, collection and

payment of CWT at the time of transaction are
contrary to the provisions of RA 8424 on the
manner and time of filing of the return, payment
and assessment of income tax involving
ordinary assets.[75]
The fact that the tax is withheld at source does
not automatically mean that it is treated exactly
the same way as capital gains. As
aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the
time of the transaction by withholding the tax
due from the income payable is the essence of
the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can

be subjected to withholding tax, whether final
or creditable. According to petitioner, the whole
of Section 57 governs the withholding of income
tax on passive income. The enumeration in
Section 57(A) refers to passive income being
subjected to FWT. It follows that Section 57(B)
on CWT should also be limited to passive
income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes.

Subject to rules and regulations, the [Secretary]
may promulgate, upon the recommendation of
the [CIR], requiring the filing of income tax
return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1),
24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B),
25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3),
27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b),
28(B)(5)(c); 33; and 282 of this Code on specified
items of income shall be withheld by payor-
corporation and/or person and paid in the same
manner and subject to the same conditions as
provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The

[Secretary] may, upon the recommendation of
the [CIR], require the withholding of a tax on the
items of income payable to natural or juridical
persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax
liability of the taxpayer for the taxable year.
(Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can

be imposed on certain kinds of income and
enumerates these as passive income. The BIR
defines passive income by stating what it is not:

if the income is generated in the active pursuit

and performance of the corporations primary
purposes, the same is not passive income[76]

It is income generated by the taxpayers assets.

These assets can be in the form of real
properties that return rental income, shares of
stock in a corporation that earn dividends or
interest income received from savings.

On the other hand, Section 57(B) provides that

the Secretary can require a CWT on income
payable to natural or juridical persons, residing
in the Philippines. There is no requirement that
this income be passive income. If that were the
intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct.

Section 57(A) refers to FWT while Section 57(B)
pertains to CWT. The former covers the kinds of
passive income enumerated therein and the
latter encompasses any income other than
those listed in 57(A). Since the law itself makes
distinctions, it is wrong to regard 57(A) and
57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as

amended, do not modify or deviate from the text
of Section 57(B). RR 2-98 merely implements
the law by specifying what income is subject to
CWT. It has been held that, where a statute
does not require any particular procedure to be
followed by an administrative agency, the
agency may adopt any reasonable method to
carry out its functions.[77] Similarly,
considering that the law uses the general term
income, the Secretary and CIR may specify the
kinds of income the rules will apply to based on
what is feasible. In addition, administrative
rules and regulations ordinarily deserve to be
given weight and respect by the courts[78] in
view of the rule-making authority given to those
who formulate them and their specific expertise
in their respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on

GSP/FMV of real estate classified as ordinary
assets deprives its members of their property
without due process of law because, in their line
of business, gain is never assured by mere
receipt of the selling price. As a result, the
government is collecting tax from net income
not yet gained or earned.
Again, it is stressed that the CWT is creditable
against the tax due from the seller of the
property at the end of the taxable year. The
seller will be able to claim a tax refund if its net
income is less than the taxes withheld. Nothing
is taken that is not due so there is no
confiscation of property repugnant to the
constitutional guarantee of due process. More
importantly, the due process requirement
applies to the power to tax.[79] The CWT does
not impose new taxes nor does it increase
taxes.[80] It relates entirely to the method and
time of payment.

Petitioner protests that the refund remedy does

not make the CWT less burdensome because
taxpayers have to wait years and may even
resort to litigation before they are granted a
refund.[81] This argument is misleading. The
practical problems encountered in claiming a
tax refund do not affect the constitutionality
and validity of the CWT as a method of
collecting the tax.
Petitioner complains that the amount withheld
would have otherwise been used by the
enterprise to pay labor wages, materials, cost of
money and other expenses which can then save
the entity from having to obtain loans entailing
considerable interest expense. Petitioner also
lists the expenses and pitfalls of the trade which
add to the burden of the realty industry: huge
investments and borrowings; long gestation
period; sudden and unpredictable interest rate
surges; continually spiraling
development/construction costs; heavy taxes
and prohibitive up-front regulatory fees from at
least 20 government agencies.[82]
Petitioners lamentations will not support its
attack on the constitutionality of the CWT.
Petitioners complaints are essentially matters of
policy best addressed to the executive and
legislative branches of the government. Besides,
the CWT is applied only on the amounts
actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-
installment basis.[83] Petitioners desire to
utilize for its operational and capital expenses
money earmarked for the payment of taxes may
be a practical business option but it is not a
fundamental right which can be demanded
from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations

are violative of the equal protection clause
because the CWT is being levied only on real
estate enterprises. Specifically, petitioner points
out that manufacturing enterprises are not
similarly imposed a CWT on their sales, even if
their manner of doing business is not much
different from that of a real estate enterprise.
Like a manufacturing concern, a real estate
business is involved in a continuous process of
production and it incurs costs and expenditures
on a regular basis. The only difference is that
goods produced by the real estate business are
house and lot units.[84]

Again, we disagree.

The equal protection clause under the

Constitution means that no person or class of
persons shall be deprived of the same protection
of laws which is enjoyed by other persons or
other classes in the same place and in like
circumstances.[85] Stated differently, all
persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the
equal protection of the laws is not violated by
legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on
substantial distinctions; (2) be germane to the
purpose of the law; (3) not be limited to existing
conditions only and (4) apply equally to all
members of the same class.[86]

The taxing power has the authority to make

reasonable classifications for purposes of
taxation.[87] Inequalities which result from a
singling out of one particular class for taxation,
or exemption, infringe no constitutional
limitation.[88] The real estate industry is, by
itself, a class and can be validly treated
differently from other business enterprises.

Petitioner, in insisting that its industry should

be treated similarly as manufacturing
enterprises, fails to realize that what
distinguishes the real estate business from
other manufacturing enterprises, for purposes
of the imposition of the CWT, is not their
production processes but the prices of their
goods sold and the number of transactions
involved. The income from the sale of a real
property is bigger and its frequency of
transaction limited, making it less cumbersome
for the parties to comply with the withholding
tax scheme.
On the other hand, each manufacturing
enterprise may have tens of thousands of
transactions with several thousand customers
every month involving both minimal and
substantial amounts. To require the customers
of manufacturing enterprises, at present, to
withhold the taxes on each of their transactions
with their tens or hundreds of suppliers may
result in an inefficient and unmanageable
system of taxation and may well defeat the
purpose of the withholding tax system.
Petitioner counters that there are other
businesses wherein expensive items are also
sold infrequently, e.g. heavy equipment, jewelry,
furniture, appliance and other capital goods yet
these are not similarly subjected to the CWT.[89]
As already discussed, the Secretary may adopt
any reasonable method to carry out its
functions.[90] Under Section 57(B), it may
choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will
also show that petitioners argument is not
accurate. The sales of manufacturers who have
clients within the top 5,000 corporations, as
specified by the BIR, are also subject to CWT for
their transactions with said 5,000
corporations.[91]

SECTION 2.58.2 OF RR NO. 2-98 MERELY

IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-

98, which provides that the Registry of Deeds
should not effect the regisration of any
document transferring real property unless a
certification is issued by the CIR that the
withholding tax has been paid. Petitioner
proffers hardly any reason to strike down this
rule except to rely on its contention that the
CWT is unconstitutional. We have ruled that it
is not. Furthermore, this provision uses almost
exactly the same wording as Section 58(E) of RA
8424 and is unquestionably in accordance with
it:
Sec. 58. Returns and Payment of Taxes
Withheld at Source.

(E) Registration with Register of Deeds. - No

registration of any document transferring real
property shall be effected by the Register of
Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer
has been reported, and the capital gains or
[CWT], if any, has been paid: xxxx any violation
of this provision by the Register of Deeds shall
be subject to the penalties imposed under
Section 269 of this Code. (Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once

quoted as saying [the] hardest thing in the world
to understand is the income tax.[92] When a
party questions the constitutionality of an
income tax measure, it has to contend not only
with Einsteins observation but also with the
vast and well-established jurisprudence in
support of the plenary powers of Congress to
impose taxes. Petitioner has miserably failed to
discharge its burden of convincing the Court
that the imposition of MCIT and CWT is
unconstitutional.
WHEREFORE, the petition is hereby
DISMISSED.

Costs against petitioner.

SO ORDERED.

Manila Race Horse Trainer’s Association v

De La Fuente | GR No. L-2947 | 11 January
1951

G.R. No. L-2947 January 11, 1951

MANILA RACE HORSE TRAINERS
ASSOCIATION, INC., and JUAN T. SORDAN,
plaintiffs-appellants,
vs.
MANUEL DE LA FUENTE, defendant-appellee.

Soriano, Garde and Cervania for appellants.

City Fiscal Eugenio Angeles and Assistant
Fiscal Arsenio Nañawa for appellee.

TUASON, J.:

This action was instituted for a declaratory

relief by the Manila Race Horses Trainers
Association, Inc., a non-stock corporation duly
organized and existing under and by virtue of
the laws of the Philippines, who allege that they
are owners of boarding stables for race horses
and that their rights as such are affected by
Ordinance No. 3065 of the City of Manila
approved on July 1, 1947.1 They made the
Mayor of Manila defendant and prayed that said
ordinance be declared invalid as violative of the
Philippine Constitution.

The case was submitted on the pleadings, and

the decision was that the ordinance in question
"is constitutional and valid and has been
enacted in accordance with the powers of the
Municipal Board granted by the Charter of the
City of Manila."

On appeal, the plaintiffs as appellants make

three assignments of error, the first two of
which are discussed jointly in their brief under
two separate topics.

First, it is maintained that the ordinance under

consideration is a tax on race horses as distinct
from boarding stables. It is argued that by
section 2 the basis of the license fees "is the
number of race horses kept or maintained in the
boarding stables to be paid by the maintainers
at the rate of P10.00 a year for each race horse;"
that "the fee is increased correspondingly P10
for each additional race horse maintained or fed
in the stable;" and that "by the same token, an
empty stable for race horse pays no license fee
at all."

The spirit, rather than the letter, of an

ordinance determines the construction thereof,
and the court looks less to its words and more
to the context, subject matter, consequence and
effect. Accordingly, what is within the spirit is
within the ordinance although it is not within
the letter thereof, while that which is in the
letter, although not within the spirit, is not
within the ordinance. (62 C. J. S., 845.) From
the context of Ordinance No. 3065, the intent to
tax or license stables and not horses is clearly
manifest. The tax is assessed not on the owners
of the horses but on the owners of the stables,
as counsel admit in their brief, although there
is nothing, of course, to stop stable owners from
shifting the tax to the horse owners in the form
of increased rents or fees, which is generally the
case.

It is also plain from the text of the whole

ordinance that the number of horses is used in
the assessment purely as a method of fixing an
equitable and practical distribution of the
burden imposed by the measure. Far from being
obnoxious, the method is fair and just. It is but
fair and just that for a boarding stable where
only one horse is maintained proportionately
less amount should be exacted than for a stable
where more horses are kept and from which
greater income is derived.

We do not share plaintiff's opinion, apropos the

second proposition, that the ordinance in
question is discriminatory and savors of class
legislation. In taxing only boarding stables for
race horses, we do not believe that the
ordinance, makes arbitrary classification. In the
case of Eastern Theatrical Co. Inc., vs. Alfonso,
46 Off. Gaz. Supp. to No. 11, p. 303,* it was said
there is equality and uniformity in taxation if all
articles or kinds of property of the same class
are taxed at the same rate. Thus, it was held in
that case, that "the fact that some places of
amusement are not taxed while others, such as
cinematographs, theaters, vaudeville
companies, theatrical shows, and boxing
exhibitions and other kinds of amusements or
places of amusement are taxed, is not argument
at all against the equality and uniformity of tax
imposition." Applying this criterion to the
present case, there would be discrimination if
some boarding stables of the same class used
for the same number of horses were not taxed
or were made to pay less or more than others.

From the viewpoint of economics and public

policy the taxing of boarding stables for race
horses to the exclusion of boarding stables for
horses dedicated to other purposes is not
indefensible. The owners of boarding stables for
race horses and, for that matter, the race horse
owners themselves, who in the scheme of
shifting may carry the taxation burden, are a
class by themselves and appropriately taxed
where owners of other kinds of horses are taxed
less or not at all, considering that equity in
taxation is generally conceived in terms of
ability to pay in relation to the benefits received
by the taxpayer and by the public from the
business or property taxed. Race horses are
devoted to gambling if legalized, their owners
derive fat income and the public hardly any
profit from horse racing, and this business
demands relatively heavy police supervision.
Taking everything into account, the
differentiation against which the plaintiffs
complain conforms to the practical dictates of
justice and equity and is not discrimatory
within the meaning of the Constitution.

One ground of attack in the court below on the

constitutionality of the ordinance — variance
between the title and the subject matter —
apparently has been abandoned. In its place a
new question is brought up on the appeal in the
third and last assignment of error. It is now
contended, for the first time, that "the
Municipal Board of Manila (is) without power to
enact ordinance taxing private stables for race
horses," and that the lower court erred in not so
declaring. This assignment of error has
reference to Class B or the second sub-
paragraph of section 1 of the ordinance.

Not having been raised in the pleading, this

question was properly ignored, not to say that
even it had been raised it would not have been
available as basis for a declaration of nullity of
the ordinance. The clause of the ordinance
taxing or licensing boarding stables for race
horses does not prejudice the plaintiffs in any
material way, and it is well settled that a person
who is not adversely affected by a licensing
ordinance may not attack its validity. Stated
differently, he may not complain that a licensing
ordinance is invalid as against a class other
than that to which he belongs. (62 C. J. S.830,
831.) By analogy, where a municipal ordinance
is valid in some of its parts and invalid as to
others and the valid parts are separable from
the invalid ones — in which latter case the valid
provisions stand as operative — the plaintiff
may contest the validity of the provisions that
injure his interest but not those that do not.

We are of the opinion that the trial court

committed no error and the judgment is
affirmed with costs against the plaintiff-
appellants.

Moran, C.J., Paras, Feria, Pablo, Bengzon,

Padilla, Montemayor, Reyes, Jugo and Bautista
Angelo, JJ., concur.

Casanovas v Hord | GR No. 3474 | 22 March

1907

G.R. No. 3473 March 22, 1907

J. CASANOVAS, plaintiff-appellant,
vs.
JNO. S. HORD, defendant-appellee.

F.G. Waite for appellant.

Attorney-General Araneta for appellee.

WILLARD, J.:
The plaintiff brought this action against the
defendant, the Collector of Internal Revenue, to
recover the sum of P9,600, paid by him under
protest as taxes on certain mining claims owned
by him in the Province of Ambos Camarines.
Judgment was rendered in the court below in
favor of the defendant, and from that judgment
the plaintiff appealed.

There is no dispute about the facts.

In January, 1897, the Spanish Government, in

accordance with the provisions of the royal
decree of the 14th of May, 1867, granted to the
plaintiff certain mines in the said Province of
Ambos Camarines, of which mines the plaintiff
is now the owner.

That there were valid perfected mining

concessions granted prior to the 11th of April,
1899, is conceded. They were so considered by
the Collector of Internal Revenue and were by
him said to fall within the provisions of section
134 of Act No. 1189, known as the Internal
Revenue Act. That section is as follows:

SEC. 134. On all valid perfected mining

concessions granted prior to April eleventh,
eighteen hundred and ninety-nine, there shall
be levied and collected on the after January first,
nineteen hundred and five, the following taxes:

2. (a) On each claim containing an area of

sixty thousand square meters, an annual tax of
one hundred pesos; (b) and at the same rate
proportionately on each claim containing an
area in excess of, or less than, sixty thousand
square meters.

3. On the gross output of each an ad valorem

tax equal to three per centum of the actual
market value of such output.

The defendant accordingly imposed upon these

properties the tax mentioned in section 134,
which tax, as has before been stated, plaintiff
paid under protest.
The only question in the case is whether this
section 134 is void or valid.

I. It is claimed by the plaintiff that it is void

because it comes within the provision of section
5 of the act of Congress of July 1, 19021 (32 U.S.
Stat. L., 691), which provides "that no law
impairing the obligation of contracts shall be
enacted." The royal decree of the 14th of May,
1867, provided, among other things, as follows:

ART. 76. On each pertenencia minera (mining

claim) of the area prescribed in the first
paragraph of article 13 (sixty thousand square
meters) there shall be paid annually a fixed tax
of forty escudos (about P20.00). The
pertenencia referred to in the second paragraph
of the same article, though of greater area than
the others (one hundred and fifty thousand
square meters), shall pay only twenty escudos
(about P10.00).

ART. 78. Pertenencia of iron mines and mines

of combustible minerals shall be exempt from
the annual tax for a period of thirty years from
the date of publication of this decree.

ART. 80. A further tax of three per centum on

the gross earnings shall be paid without
deduction of costs of any kind whatsoever. All
substances enumerated in section one shall be
exempt from said tax of three per centum for a
period of thirty years.

ART. 81. No other taxes than those herein

mentioned shall be imposed upon mining and
metallurgical industries.

The royal decree and regulation for its

enforcement provided that the deeds granted by
the Government should be in a particular form,
which form was inserted in the regulations. It
must be presumed that the deeds granted to the
plaintiff were made as provided by law, and, in
fact, one of such concessions was exhibited
during the argument in this court, and was
found to be in exact conformity with the form
prescribed by law. The deed is as follows:

Don Camilo Garcia de Polavieja, Marquez de

Polavieja, Teniente General de los Ejercitos
Nacionales, Caballero Gran Cruz de la Real y
Militar Orden de San Hermenegildo, de la Real
y distinguida de Isabel la Catolica, de la del
Merito Militar Roja, de la de la Corona de Italia,
Comendador de Carlos Tercero, Bennemerito de
la Patria en grado eminente, condecorado con
varias cruses de distincion por meritos de
guerra, Capitan General y Gobernador General
de Filipinas.

Whereas I have granted to Don Joaquin

Casanovas y Llovet and to Don Martin Buck the
concession of a gold mine entitled "Nueva
California Segunda" in the jurisdiction of
Paracale, Province of Ambos Camarines: Now,
therefore, in the name of His Majesty the King
(whom God preserve), and pursuant to the
provisions of article 37 of the royal decree of
May 14, 1867, regulating mining in these
Islands, I issue, this fifth day of November,
eighteen hundred and ninety-six, this title deed
to four pertenencias, comprising an area of two
hundred and forty thousand square meters, as
shown in the attached sketch map drafted by
the engineer Don Enrique Abella y Casariego,
and dated at Manila December sixteenth of the
said year, subject to the following general terms
and conditions:

1. That the mine shall be worked in

conformity with the rules in mining, the grantee
and his laborers to be governed by the police
rules established by existing regulations.

2. That the grantee shall be liable for all

damages to third parties that may be caused by
his operations.

3. That the grantee shall likewise indemnify

his neighbors for any damage they may suffer
by reason of water accumulated on his works,
if, upon being requested, he fail to drain the
same within the time indicated.

4. That he shall contribute for the drainage

of the adjacent mines and for the general
galleries for drainage or haulage in proportion
to the benefit he derives therefrom, whenever,
by authority of the Governor-General, such
works shall be opened for a group of
pertenencias or for the entire mining locality in
which the mine is situated.

5. That he shall commence work on the mine

immediately upon receipt of this concession
unless prevented by force majeure.

6. That he shall keep the mine in active

operation by employing at the rate of at least
four laborers for each pertenencia for at least
six months of each year.

7. That he shall strengthen the walls of the

mine within the time indicated whenever, by
reason of mismanagement of the work, it
threatens to cave in, unless he be prevented by
force majeure.

8. That he shall not render further profitable

development of the mine difficult or impossible
by avaricious operation.

9. That he shall not suspend the operation of

the mine with the intention of abandoning the
same without first informing the Governor of his
intention, in which case he must leave the mine
in a good state of timbering.

10. That he shall pay taxes on the mine and

its output as prescribed in the royal decree.

11. Finally, that he shall comply with all the

requirements contained in the royal decree and
in the regulations for concessions of the same
nature as the present.

Without special conditions.

Now, therefore, by virtue of this title deed, I
grant to Don Joaquin Casanovas y Llovet and to
Don Martin Buck the ownership of the said
mine for an unlimited period of time so long as
they shall comply with the foregoing terms and
conditions, to the end that they may develop the
same and make free use and disposition of the
output thereof, with the right to alienate the
said mine subject to the provisions of existing
laws, and to enjoy all the rights and benefits
conceded to such grantees by the royal decree
and by the mining regulations. And for the
prompt fulfillment and observance of the said
conditions, both on the part of the said grantees
and by all authorities, courts, corporations, and
private persons whom it may concern, I have
ordered this title deed to be issued — given
under my hand and the proper seal and
countersigned by the undersigned Director-
General of Civil Administration.

It seems very clear to us that this deed

constituted a contract between the Spanish
Government and the plaintiff, the obligation of
which contract was impaired by the enactment
of section 134 of the Internal Revenue Law
above cited, thereby infringing the provisions
above quoted from section 5 of the act of
Congress of July 1, 1902. This conclusion
seems necessarily to result from the decisions
of the Supreme Court of the United States in
similar cases. In the case of McGee vs. Mathis
(4 Wallace, 143), it appeared that the State of
Arkansas, by an act of the legislature of 1851,
provided for the sale of certain swamp lands
granted to it by the United States; for the issue
of transferable scrip receivable for any lands not
already taken up at the time of selection by the
holder; for contracts for the making of levees
and drains, and for the payment of contractors
in scrip and otherwise. In the fourteenth section
of this act it was provided that —

To encourage by all just means the progress and

completion of the reclaiming of such lands by
offering inducements to purchasers and
contractors to take up said lands, all said
swamp and overflowed lands shall be exempt
from taxation for the term of ten years or until
they shall be reclaimed.

In 1855 this section was repealed and provision

was made by law for the taxation of swamp and
overflowed lands, sold or to be sold, precisely as
other lands. McGee, before this appeal, had
become the owner by transfer from contractors
of a large amount of scrip issued under the Act
of 1851, and with this scrip, after the repeal,
took up and paid for many sections and parts
of sections of the granted lands. Taxes were
levied by the State on the lands so taken up by
McGee. The Supreme Court held that these
taxes could not be collected. The Court said at
page 156:

It seems quite clear that the Act of 1851

authorizing the issue of land scrip constituted a
contract between the State and the holders of
the land scrip issued under the act.

In the case of the Home of the Friendless vs.

Rouse (8 Wallace, 430), it appeared that on the
3d day of February, 1853, the legislature of
Missouri passed on act to incorporate the Home
of the Friendless in the city of St. Louis. Section
1 of the act provided that —

All property of said corporation shall be exempt

from taxation.

The court held that the State had no power

afterwards to pass laws providing for the levying
of taxes upon this institution. The Court said
among other things at page 438:

The validity of this contract is questioned at the

bar on the ground that the legislature had no
authority to grant away the power of taxation.
The answer to this position is, that the question
is no longer open for argument here, for it is
settled by the repeated adjudications of this
court, that a State may be contract based on a
consideration exempt the property of an
individual or corporation from taxation, either
for a specified period or permanently. And it is
equally well settled that the exemption is
presumed to be on sufficient consideration, and
binds the State if the charter containing it is
accepted.

In the case of The Asylum vs. The City of New

Orleans (105 U.S., 362), it appears that St.
Ariva's Asylum was incorporated by an act of
the legislature of Louisiana, approved April 29,
1853. The law incorporating it provided that it
should enjoy the same exemption from taxation
which was enjoyed by the Orphan Boys' Asylum
of New Orleans. The law relating to the last
named institution provided (page 364):

That, from and after the passage of this act, all

the property, real and personal, belonging to the
Orphan Boys' Asylum of New Orleans be, and
the same is hereby exempted from all taxation,
either by the State, parish, or city in which it is
situated, any law to the contrary
notwithstanding.

It was held that the State had no power by

subsequent legislation to impose taxes upon the
property of this institution.

That the doctrine announced in these cases is

still maintained in that court is apparent from
the case of Powers vs. The Detroit, Grand Haven
and Milwaukee Railway which was decided on
the 16th of April, 1906, and reported in 201 U.
S., 543. Section 9 of the act of the legislature of
Michigan, incorporating the railway company,
provided:

Said company shall, on or before the 1st day of

July, pay to the State treasurer, an annual tax
of one per cent on the capital stock of said
company, pain in, which tax shall be in lieu of
all other taxation.

The court said at page 556:

It has often been decided by this court, so often

that a citation on authorities in unnecessary,
that the legislature of a State may, in the
absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that
such contract can be enforced against the State
at the instance of the corporation.

The case at bar falls within the cases

hereinbefore cited. It is to be distinguished from
the case of the Metropolitan Street Railway
Company vs. The New York State Board of Tax
Commissioners (199 U.S., 1). In that case it was
provided by various acts of the legislature, that
the companies therein referred to, should pay
annually to the city of New York, a fixed amount
or percentage, varying from 2 to 8 per cent of
their gross earnings additional taxes was
sustained by the court. It was sustained on the
ground that the prior legislation did not
expressly say that the taxes thus provided for
should be in lieu of all other taxes. The court
said at page 37:

Applying these well-established rules to the

several contracts, it will be perceived that there
was no express relinquishment of the right of
taxation. The plaintiff in error must rely upon
some implication, and not upon any direct
stipulation. In each contract there was a grant
of privileges, but the grant was specifically or
privileges in respect to the construction,
operation and maintenance of the street
railroad. These were all that in terms were
granted. As consideration for this grant, the
grantees were to pay something, and such
payment is nowhere said to be in lieu of, or as
an equivalent or substitute of taxes. All that can
be extracted from the language used, was a
grant of privileges and a payment therefor.
Other words must be written into the contract
before there can be found any relinquishment
of the power of taxation.

But in the case at bar, there is found not only

the provisions for the payment of certain taxes
annually, but there is also found the provision
contained in article 81, above quoted, which
expressly declares that no other taxes shall be
imposed upon these mines.

The present case is to be distinguished also

from that class of cases of which Grands Lodge
vs. The City of New Orleans (166 U.S., 143) is a
type, and which includes Salt Company vs. East
Saginaw (13 Wall., 373) and Welch vs. Cook (97
U.S., 541). In these cases the exemption was a
mere bounty and did not form a part of any
contract.

The fact that this concession was made by the

Government of Spain, and not by the
Government of the United States, is not
important. (Trustees of Dartmouth College vs.
Woodward, 4 Wheaton, 518.)

Our conclusion is that the concessions granted

by the Government of Spain to the plaintiff,
constitute contracts between the parties; that
section 134 of the Internal Revenue Law impairs
the obligation of these contracts, and is
therefore void as to them.

II. We think that this section is also void

because in conflict with section 60 of the act of
Congress of July 1, 1902. This section is as
follows:

That nothing in this Act shall be construed to

effect the rights of any person, partnership, or
corporation, having a valid, perfected mining
concession granted prior to April eleventh,
eighteen hundred and ninety-nine, but all such
concessions shall be conducted under the
provisions of the law in force at the time they
were granted, subject at all times to
cancellation by reason of illegality in the
procedure by which they were obtained, or for
failure to comply with the conditions prescribed
as requisite to their retention in the laws under
which they were granted: Provided, That the
owner or owners of every such concession shall
cause the corners made by its boundaries to be
distinctly marked with permanent monuments
within six months after this act has been
promulgated in the Philippine Islands, and that
any concessions, the boundaries of which are
not so marked within this period shall be free
and open to explorations and purchase under
the provisions of this act.2

This section seems to indicate that concessions,

like those in question, can be canceled only by
reason of illegality in the procedure by which
they were obtained, or for failure to comply with
the conditions prescribed as requisite for their
retention in the laws under which they were
granted. There is nothing in the section which
indicates that they can be canceled for failure to
comply with the conditions prescribed by
subsequent legislation. In fact, the real
intention of the act seems to be that such
concession should be subject to the former
legislation and not to any subsequent
legislation. There is no claim in this case that
there was any illegality in the procedure by
which these concessions were obtained, nor is
there any claim that the plaintiff has not
complied with the conditions prescribed in the
said royal decree of 1867.

III. In view of the result at which we have

arrived, it is not necessary to consider the
further claim made by the plaintiff that the
taxes imposed by article 134 above quoted, are
in violation of the part of section 5 of the act of
July 1, 1902, which declares "that the rule of
taxation in said Islands shall be uniform."

The judgment of the court below is reversed,

and judgment is ordered in favor of the plaintiff
and against the defendant for P9,600, with
interest thereon, at 6 per cent, from the 21st
day of February, 1906, and the costs of the
Court of First Instance. No costs will be allowed
to either party in this court.

After the expiration of twenty days let judgment

be entered in accordance herewith and ten days
thereafter let the case be remanded to the court
from whence it came for proper action. So
ordered.
Arellano, C.J., Torres, Mapa, and Tracey, JJ.,
concur.
Johnson, J., dissents

CEPALCO v CIR | GR No. L-60126 | 25

September 1985

G.R. No. L-60126 September 25, 1985

CAGAYAN ELECTRIC POWER & LIGHT CO.,

INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and
COURT OF APPEALS, respondents.

Quasha, De Guzman Makalintal & Barot for

petitioner.

AQUINO, J.:

This is about the liability of petitioner Cagayan

Electric Power & Light Co., Inc. for income tax
amounting to P75,149.73 for the more than
seven-month period of the year 1969 in addition
to franchise tax.

The petitioner is the holder of a legislative

franchise, Republic Act No. 3247, under which
its payment of 3% tax on its gross earnings from
the sale of electric current is "in lieu of all taxes
and assessments of whatever authority upon
privileges, earnings, income, franchise, and
poles, wires, transformers, and insulators of the
grantee, from which taxes and assessments the
grantee is hereby expressly exempted" (Sec. 3).

On June 27, 1968, Republic Act No. 5431

amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not
specifically exempt under paragraph (c) (1) of
said section and section 27 of the Tax Code
notwithstanding the "provisions of existing
special or general laws to the contrary". Thus,
franchise companies were subjected to income
tax in addition to franchise tax.
However, in petitioner's case, its franchise was
amended by Republic Act No. 6020, effective
August 4, 1969, by authorizing the petitioner to
furnish electricity to the municipalities of
Villanueva and Jasaan, Misamis Oriental in
addition to Cagayan de Oro City and the
municipalities of Tagoloan and Opol. The
amendment reenacted the tax exemption in its
original charter or neutralized the modification
made by Republic Act No. 5431 more than a
year before.

By reason of the amendment to section 24 of the

Tax Code, the Commissioner of Internal
Revenue in a demand letter dated February 15,
1973 required the petitioner to pay deficiency
income taxes for 1968-to 1971. The petitioner
contested the assessments. The Commissioner
cancelled the assessments for 1970 and 1971
but insisted on those for 1968 and 1969.

The petitioner filed a petition for review with the

Tax Court, which on February 26, 1982 held the
petitioner liable only for the income tax for the
period from January 1 to August 3, 1969 or
before the passage of Republic Act No. 6020
which reiterated its tax exemption. The
petitioner appealed to this Court.

It contends that the Tax Court erred (1) in not

holding that the franchise tax paid by the
petitioner is a commutative tax which already
includes the income tax; (2) in holding that
Republic Act No. 5431 as amended, altered or
repealed petitioner's franchise; (3) in holding
that petitioner's franchise is a contract which
can be impaired by an implied repeal and (4) in
not holding that section 24(d) of the Tax Code
should be construed strictly against the
Government.

We hold that Congress could impair petitioner's

legislative franchise by making it liable for
income tax from which heretofore it was
exempted by virtue of the exemption provided
for in section 3 of its franchise.
The Constitution provides that a franchise is
subject to amendment, alteration or repeal by
the Congress when the public interest so
requires (Sec. 8, Art. XIV, 1935 Constitution;
Sec. 5, Art. XIV, 1973 Constitution),

Section 1 of petitioner's franchise, Republic Act

No. 3247, provides that it is subject to the
provisions of the Constitution and to the terms
and conditions established in Act No. 3636
whose section 12 provides that the franchise is
subject to amendment, alteration or repeal by
Congress.

Republic Act No. 5431, in amending section 24

of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted
therein and in section 27 of the Code, had the
effect of withdrawing petitioner's exemption
from income tax.

The Tax Court acted correctly in holding that

the exemption was restored by the subsequent
enactment on August 4, 1969 of Republic Act
No. 6020 which reenacted the said tax
exemption. Hence, the petitioner is liable only
for the income tax for the period from January
1 to August 3, 1969 when its tax exemption was
modified by Republic Act No. 5431.

It is relevant to note that franchise companies,

like the Philippine Long Distance Telephone
Company, have been paying income tax in
addition to the franchise tax.

However, it cannot be denied that the said 1969

assessment appears to be highly controversial.
The Commissioner at the outset was not certain
as to petitioner's income tax liability. It had
reason not to pay income tax because of the tax
exemption in its franchise.

For this reason, it should be liable only for tax

proper and should not be held liable for the
surcharge and interest. (Advertising Associates,
Inc. vs. Commissioner of Internal Revenue and
Court of Tax Appeals, G. R. No. 59758,
December 26, 1984,133 SCRA 765; Imus
Electric Co., Inc. vs. Commissioner of Internal
Revenue, 125 Phil. 1024; C.M. Hoskins & Co.,
Inc. vs. Commissioner of Internal Revenue, L-
28383, June 22, 1976, 71 SCRA 511.)

WHEREFORE, the judgment of the Tax Court is

affirmed with the modification that the
petitioner is liable only for the tax proper and
that it should not pay the delinquency penalties.
No costs.

SO ORDERED.

American Bible Society v City of Manila | GR

No. L-9637 | 30 April 1957

G.R. No. L-9637 April 30, 1957

AMERICAN BIBLE SOCIETY, plaintiff-appellant,

vs.
CITY OF MANILA, defendant-appellee.

City Fiscal Eugenio Angeles and Juan Nabong

for appellant.
Assistant City Fiscal Arsenio Nañawa for
appellee.

FELIX, J.:

Plaintiff-appellant is a foreign, non-stock, non-

profit, religious, missionary corporation duly
registered and doing business in the Philippines
through its Philippine agency established in
Manila in November, 1898, with its principal
office at 636 Isaac Peral in said City. The
defendant appellee is a municipal corporation
with powers that are to be exercised in
conformity with the provisions of Republic Act
No. 409, known as the Revised Charter of the
City of Manila.

In the course of its ministry, plaintiff's

Philippine agency has been distributing and
selling bibles and/or gospel portions thereof
(except during the Japanese occupation)
throughout the Philippines and translating the
same into several Philippine dialects. On May
29 1953, the acting City Treasurer of the City of
Manila informed plaintiff that it was conducting
the business of general merchandise since
November, 1945, without providing itself with
the necessary Mayor's permit and municipal
license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and
3364, and required plaintiff to secure, within
three days, the corresponding permit and
license fees, together with compromise covering
the period from the 4th quarter of 1945 to the
2nd quarter of 1953, in the total sum of
P5,821.45 (Annex A).

Plaintiff protested against this requirement, but

the City Treasurer demanded that plaintiff
deposit and pay under protest the sum of
P5,891.45, if suit was to be taken in court
regarding the same (Annex B). To avoid the
closing of its business as well as further fines
and penalties in the premises on October 24,
1953, plaintiff paid to the defendant under
protest the said permit and license fees in the
aforementioned amount, giving at the same
time notice to the City Treasurer that suit would
be taken in court to question the legality of the
ordinances under which, the said fees were
being collected (Annex C), which was done on
the same date by filing the complaint that gave
rise to this action. In its complaint plaintiff
prays that judgment be rendered declaring the
said Municipal Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and
3364 illegal and unconstitutional, and that the
defendant be ordered to refund to the plaintiff
the sum of P5,891.45 paid under protest,
together with legal interest thereon, and the
costs, plaintiff further praying for such other
relief and remedy as the court may deem just
equitable.

Defendant answered the complaint,

maintaining in turn that said ordinances were
enacted by the Municipal Board of the City of
Manila by virtue of the power granted to it by
section 2444, subsection (m-2) of the Revised
Administrative Code, superseded on June 18,
1949, by section 18, subsection (1) of Republic
Act No. 409, known as the Revised Charter of
the City of Manila, and praying that the
complaint be dismissed, with costs against
plaintiff. This answer was replied by the plaintiff
reiterating the unconstitutionality of the often-
repeated ordinances.

Before trial the parties submitted the following

stipulation of facts:

COME NOW the parties in the above-entitled

case, thru their undersigned attorneys and
respectfully submit the following stipulation of
facts:

1. That the plaintiff sold for the use of the

purchasers at its principal office at 636 Isaac
Peral, Manila, Bibles, New Testaments, bible
portions and bible concordance in English and
other foreign languages imported by it from the
United States as well as Bibles, New Testaments
and bible portions in the local dialects imported
and/or purchased locally; that from the fourth
quarter of 1945 to the first quarter of 1953
inclusive the sales made by the plaintiff were as
follows:

Quarter

Amount of Sales

4th quarter 1945

P1,244.21

1st quarter 1946

2,206.85

2nd quarter 1946

1,950.38

3rd quarter 1946

2,235.99

4th quarter 1946

3,256.04

1st quarter 1947

13,241.07

2nd quarter 1947

15,774.55

3rd quarter 1947

14,654.13

4th quarter 1947

12,590.94

1st quarter 1948

11,143.90

2nd quarter 1948

14,715.26

3rd quarter 1948

38,333.83

4th quarter 1948

16,179.90

1st quarter 1949

23,975.10

2nd quarter 1949

17,802.08

3rd quarter 1949

16,640.79

4th quarter 1949

15,961.38

1st quarter 1950

18,562.46

2nd quarter 1950

21,816.32

3rd quarter 1950

25,004.55

4th quarter 1950

45,287.92

1st quarter 1951

37,841.21

2nd quarter 1951

29,103.98

3rd quarter 1951

20,181.10

4th quarter 1951

22,968.91

1st quarter 1952

23,002.65

2nd quarter 1952

17,626.96
3rd quarter 1952

17,921.01

4th quarter 1952

24,180.72

1st quarter 1953

29,516.21

2. That the parties hereby reserve the right to

present evidence of other facts not herein
stipulated.

WHEREFORE, it is respectfully prayed that this

case be set for hearing so that the parties may
present further evidence on their behalf.
(Record on Appeal, pp. 15-16).

When the case was set for hearing, plaintiff

proved, among other things, that it has been in
existence in the Philippines since 1899, and
that its parent society is in New York, United
States of America; that its, contiguous real
properties located at Isaac Peral are exempt
from real estate taxes; and that it was never
required to pay any municipal license fee or tax
before the war, nor does the American Bible
Society in the United States pay any license fee
or sales tax for the sale of bible therein. Plaintiff
further tried to establish that it never made any
profit from the sale of its bibles, which are
disposed of for as low as one third of the cost,
and that in order to maintain its operating cost
it obtains substantial remittances from its New
York office and voluntary contributions and
gifts from certain churches, both in the United
States and in the Philippines, which are
interested in its missionary work. Regarding
plaintiff's contention of lack of profit in the sale
of bibles, defendant retorts that the admissions
of plaintiff-appellant's lone witness who testified
on cross-examination that bibles bearing the
price of 70 cents each from plaintiff-appellant's
New York office are sold here by plaintiff-
appellant at P1.30 each; those bearing the price
of $4.50 each are sold here at P10 each; those
bearing the price of $7 each are sold here at P15
each; and those bearing the price of $11 each
are sold here at P22 each, clearly show that
plaintiff's contention that it never makes any
profit from the sale of its bible, is evidently
untenable.

After hearing the Court rendered judgment, the

last part of which is as follows:

As may be seen from the repealed section (m-2)

of the Revised Administrative Code and the
repealing portions (o) of section 18 of Republic
Act No. 409, although they seemingly differ in
the way the legislative intent is expressed, yet
their meaning is practically the same for the
purpose of taxing the merchandise mentioned
in said legal provisions, and that the taxes to be
levied by said ordinances is in the nature of
percentage graduated taxes (Sec. 3 of
Ordinance No. 3000, as amended, and Sec. 1,
Group 2, of Ordinance No. 2529, as amended
by Ordinance No. 3364).

IN VIEW OF THE FOREGOING

CONSIDERATIONS, this Court is of the opinion
and so holds that this case should be dismissed,
as it is hereby dismissed, for lack of merits, with
costs against the plaintiff.

Not satisfied with this verdict plaintiff took up

the matter to the Court of Appeals which
certified the case to Us for the reason that the
errors assigned to the lower Court involved only
questions of law.

Appellant contends that the lower Court erred:

1. In holding that Ordinances Nos. 2529 and

3000, as respectively amended, are not
unconstitutional;

2. In holding that subsection m-2 of Section

2444 of the Revised Administrative Code under
which Ordinances Nos. 2592 and 3000 were
promulgated, was not repealed by Section 18 of
Republic Act No. 409;

3. In not holding that an ordinance providing for

taxes based on gross sales or receipts, in order
to be valid under the new Charter of the City of
Manila, must first be approved by the President
of the Philippines; and

4. In holding that, as the sales made by the

plaintiff-appellant have assumed commercial
proportions, it cannot escape from the
operation of said municipal ordinances under
the cloak of religious privilege.

The issues. — As may be seen from the

proceeding statement of the case, the issues
involved in the present controversy may be
reduced to the following: (1) whether or not the
ordinances of the City of Manila, Nos. 3000, as
amended, and 2529, 3028 and 3364, are
constitutional and valid; and (2) whether the
provisions of said ordinances are applicable or
not to the case at bar.

Section 1, subsection (7) of Article III of the

Constitution of the Republic of the Philippines,
provides that:

(7) No law shall be made respecting an

establishment of religion, or prohibiting the free
exercise thereof, and the free exercise and
enjoyment of religious profession and worship,
without discrimination or preference, shall
forever be allowed. No religion test shall be
required for the exercise of civil or political
rights.

Predicated on this constitutional mandate,

plaintiff-appellant contends that Ordinances
Nos. 2529 and 3000, as respectively amended,
are unconstitutional and illegal in so far as its
society is concerned, because they provide for
religious censorship and restrain the free
exercise and enjoyment of its religious
profession, to wit: the distribution and sale of
bibles and other religious literature to the
people of the Philippines.

Before entering into a discussion of the

constitutional aspect of the case, We shall first
consider the provisions of the questioned
ordinances in relation to their application to the
sale of bibles, etc. by appellant. The records,
show that by letter of May 29, 1953 (Annex A),
the City Treasurer required plaintiff to secure a
Mayor's permit in connection with the society's
alleged business of distributing and selling
bibles, etc. and to pay permit dues in the sum
of P35 for the period covered in this litigation,
plus the sum of P35 for compromise on account
of plaintiff's failure to secure the permit
required by Ordinance No. 3000 of the City of
Manila, as amended. This Ordinance is of
general application and not particularly
directed against institutions like the plaintiff,
and it does not contain any provisions whatever
prescribing religious censorship nor restraining
the free exercise and enjoyment of any religious
profession. Section 1 of Ordinance No. 3000
reads as follows:

SEC. 1. PERMITS NECESSARY. — It shall be

unlawful for any person or entity to conduct or
engage in any of the businesses, trades, or
occupations enumerated in Section 3 of this
Ordinance or other businesses, trades, or
occupations for which a permit is required for
the proper supervision and enforcement of
existing laws and ordinances governing the
sanitation, security, and welfare of the public
and the health of the employees engaged in the
business specified in said section 3 hereof,
WITHOUT FIRST HAVING OBTAINED A
PERMIT THEREFOR FROM THE MAYOR AND
THE NECESSARY LICENSE FROM THE CITY
TREASURER.

The business, trade or occupation of the

plaintiff involved in this case is not particularly
mentioned in Section 3 of the Ordinance, and
the record does not show that a permit is
required therefor under existing laws and
ordinances for the proper supervision and
enforcement of their provisions governing the
sanitation, security and welfare of the public
and the health of the employees engaged in the
business of the plaintiff. However, sections 3 of
Ordinance 3000 contains item No. 79, which
reads as follows:

79. All other businesses, trades or occupations

not
mentioned in this Ordinance, except those upon
which the
City is not empowered to license or to tax
P5.00

Therefore, the necessity of the permit is made to

depend upon the power of the City to license or
tax said business, trade or occupation.

As to the license fees that the Treasurer of the

City of Manila required the society to pay from
the 4th quarter of 1945 to the 1st quarter of
1953 in the sum of P5,821.45, including the
sum of P50 as compromise, Ordinance No. 2529,
as amended by Ordinances Nos. 2779, 2821
and 3028 prescribes the following:

SEC. 1. FEES. — Subject to the provisions of

section 578 of the Revised Ordinances of the
City of Manila, as amended, there shall be paid
to the City Treasurer for engaging in any of the
businesses or occupations below enumerated,
quarterly, license fees based on gross sales or
receipts realized during the preceding quarter in
accordance with the rates herein prescribed:
PROVIDED, HOWEVER, That a person engaged
in any businesses or occupation for the first
time shall pay the initial license fee based on
the probable gross sales or receipts for the first
quarter beginning from the date of the opening
of the business as indicated herein for the
corresponding business or occupation.

xxx xxx xxx

GROUP 2. — Retail dealers in new (not yet used)

merchandise, which dealers are not yet subject
to the payment of any municipal tax, such as (1)
retail dealers in general merchandise; (2) retail
dealers exclusively engaged in the sale of . . .
books, including stationery.

xxx xxx xxx

As may be seen, the license fees required to be

paid quarterly in Section 1 of said Ordinance No.
2529, as amended, are not imposed directly
upon any religious institution but upon those
engaged in any of the business or occupations
therein enumerated, such as retail "dealers in
general merchandise" which, it is alleged, cover
the business or occupation of selling bibles,
books, etc.

Chapter 60 of the Revised Administrative Code

which includes section 2444, subsection (m-2)
of said legal body, as amended by Act No. 3659,
approved on December 8, 1929, empowers the
Municipal Board of the City of Manila:

(M-2) To tax and fix the license fee on (a) dealers

in new automobiles or accessories or both, and
(b) retail dealers in new (not yet used)
merchandise, which dealers are not yet subject
to the payment of any municipal tax.

For the purpose of taxation, these retail dealers

shall be classified as (1) retail dealers in general
merchandise, and (2) retail dealers exclusively
engaged in the sale of (a) textiles . . . (e) books,
including stationery, paper and office
supplies, . . .: PROVIDED, HOWEVER, That the
combined total tax of any debtor or
manufacturer, or both, enumerated under
these subsections (m-1) and (m-2), whether
dealing in one or all of the articles mentioned
herein, SHALL NOT BE IN EXCESS OF FIVE
HUNDRED PESOS PER ANNUM.

and appellee's counsel maintains that City

Ordinances Nos. 2529 and 3000, as amended,
were enacted in virtue of the power that said Act
No. 3669 conferred upon the City of Manila.
Appellant, however, contends that said
ordinances are longer in force and effect as the
law under which they were promulgated has
been expressly repealed by Section 102 of
Republic Act No. 409 passed on June 18, 1949,
known as the Revised Manila Charter.

Passing upon this point the lower Court

categorically stated that Republic Act No. 409
expressly repealed the provisions of Chapter 60
of the Revised Administrative Code but in the
opinion of the trial Judge, although Section
2444 (m-2) of the former Manila Charter and
section 18 (o) of the new seemingly differ in the
way the legislative intent was expressed, yet
their meaning is practically the same for the
purpose of taxing the merchandise mentioned
in both legal provisions and, consequently,
Ordinances Nos. 2529 and 3000, as amended,
are to be considered as still in full force and
effect uninterruptedly up to the present.

Often the legislature, instead of simply

amending the pre-existing statute, will repeal
the old statute in its entirety and by the same
enactment re-enact all or certain portions of the
preexisting law. Of course, the problem created
by this sort of legislative action involves mainly
the effect of the repeal upon rights and liabilities
which accrued under the original statute. Are
those rights and liabilities destroyed or
preserved? The authorities are divided as to the
effect of simultaneous repeals and re-
enactments. Some adhere to the view that the
rights and liabilities accrued under the repealed
act are destroyed, since the statutes from which
they sprang are actually terminated, even
though for only a very short period of time.
Others, and they seem to be in the majority,
refuse to accept this view of the situation, and
consequently maintain that all rights an
liabilities which have accrued under the original
statute are preserved and may be enforced,
since the re-enactment neutralizes the repeal,
therefore, continuing the law in force without
interruption. (Crawford-Statutory Construction,
Sec. 322).
Appellant's counsel states that section 18 (o) of
Republic Act No, 409 introduces a new and
wider concept of taxation and is different from
the provisions of Section 2444(m-2) that the
former cannot be considered as a substantial
re-enactment of the provisions of the latter. We
have quoted above the provisions of section
2444(m-2) of the Revised Administrative Code
and We shall now copy hereunder the
provisions of Section 18, subdivision (o) of
Republic Act No. 409, which reads as follows:

(o) To tax and fix the license fee on dealers in

general merchandise, including importers and
indentors, except those dealers who may be
expressly subject to the payment of some other
municipal tax under the provisions of this
section.

Dealers in general merchandise shall be

classified as (a) wholesale dealers and (b) retail
dealers. For purposes of the tax on retail dealers,
general merchandise shall be classified into
four main classes: namely (1) luxury articles, (2)
semi-luxury articles, (3) essential commodities,
and (4) miscellaneous articles. A separate
license shall be prescribed for each class but
where commodities of different classes are sold
in the same establishment, it shall not be
compulsory for the owner to secure more than
one license if he pays the higher or highest rate
of tax prescribed by ordinance. Wholesale
dealers shall pay the license tax as such, as may
be provided by ordinance.

For purposes of this section, the term "General

merchandise" shall include poultry and
livestock, agricultural products, fish and other
allied products.

The only essential difference that We find

between these two provisions that may have any
bearing on the case at bar, is that, while
subsection (m-2) prescribes that the combined
total tax of any dealer or manufacturer, or both,
enumerated under subsections (m-1) and (m-2),
whether dealing in one or all of the articles
mentioned therein, shall not be in excess of
P500 per annum, the corresponding section 18,
subsection (o) of Republic Act No. 409, does not
contain any limitation as to the amount of tax
or license fee that the retail dealer has to pay
per annum. Hence, and in accordance with the
weight of the authorities above referred to that
maintain that "all rights and liabilities which
have accrued under the original statute are
preserved and may be enforced, since the
reenactment neutralizes the repeal, therefore
continuing the law in force without
interruption", We hold that the questioned
ordinances of the City of Manila are still in force
and effect.

Plaintiff, however, argues that the questioned

ordinances, to be valid, must first be approved
by the President of the Philippines as per
section 18, subsection (ii) of Republic Act No.
409, which reads as follows:

(ii) To tax, license and regulate any business,

trade or occupation being conducted within the
City of Manila, not otherwise enumerated in the
preceding subsections, including percentage
taxes based on gross sales or receipts, subject
to the approval of the PRESIDENT, except
amusement taxes.

but this requirement of the President's approval

was not contained in section 2444 of the former
Charter of the City of Manila under which
Ordinance No. 2529 was promulgated. Anyway,
as stated by appellee's counsel, the business of
"retail dealers in general merchandise" is
expressly enumerated in subsection (o), section
18 of Republic Act No. 409; hence, an ordinance
prescribing a municipal tax on said business
does not have to be approved by the President
to be effective, as it is not among those referred
to in said subsection (ii). Moreover, the
questioned ordinances are still in force, having
been promulgated by the Municipal Board of
the City of Manila under the authority granted
to it by law.
The question that now remains to be
determined is whether said ordinances are
inapplicable, invalid or unconstitutional if
applied to the alleged business of distribution
and sale of bibles to the people of the
Philippines by a religious corporation like the
American Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended

by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional
and illegal because it restrains the free exercise
and enjoyment of the religious profession and
worship of appellant.

Article III, section 1, clause (7) of the

Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession
and worship. "Religion has been spoken of as a
profession of faith to an active power that binds
and elevates man to its Creator" (Aglipay vs.
Ruiz, 64 Phil., 201).It has reference to one's
views of his relations to His Creator and to the
obligations they impose of reverence to His
being and character, and obedience to His Will
(Davis vs. Beason, 133 U.S., 342). The
constitutional guaranty of the free exercise and
enjoyment of religious profession and worship
carries with it the right to disseminate religious
information. Any restraints of such right can
only be justified like other restraints of freedom
of expression on the grounds that there is a
clear and present danger of any substantive evil
which the State has the right to prevent".
(Tañada and Fernando on the Constitution of
the Philippines, Vol. 1, 4th ed., p. 297). In the
case at bar the license fee herein involved is
imposed upon appellant for its distribution and
sale of bibles and other religious literature:

In the case of Murdock vs. Pennsylvania, it was

held that an ordinance requiring that a license
be obtained before a person could canvass or
solicit orders for goods, paintings, pictures,
wares or merchandise cannot be made to apply
to members of Jehovah's Witnesses who went
about from door to door distributing literature
and soliciting people to "purchase" certain
religious books and pamphlets, all published by
the Watch Tower Bible & Tract Society. The
"price" of the books was twenty-five cents each,
the "price" of the pamphlets five cents each. It
was shown that in making the solicitations
there was a request for additional "contribution"
of twenty-five cents each for the books and five
cents each for the pamphlets. Lesser sum were
accepted, however, and books were even
donated in case interested persons were
without funds.

On the above facts the Supreme Court held that

it could not be said that petitioners were
engaged in commercial rather than a religious
venture. Their activities could not be described
as embraced in the occupation of selling books
and pamphlets. Then the Court continued:

"We do not mean to say that religious groups

and the press are free from all financial burdens
of government. See Grosjean vs. American Press
Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56
S. Ct. 444. We have here something quite
different, for example, from a tax on the income
of one who engages in religious activities or a
tax on property used or employed in connection
with activities. It is one thing to impose a tax on
the income or property of a preacher. It is quite
another to exact a tax from him for the privilege
of delivering a sermon. The tax imposed by the
City of Jeannette is a flat license tax, payment
of which is a condition of the exercise of these
constitutional privileges. The power to tax the
exercise of a privilege is the power to control or
suppress its enjoyment. . . . Those who can tax
the exercise of this religious practice can make
its exercise so costly as to deprive it of the
resources necessary for its maintenance. Those
who can tax the privilege of engaging in this
form of missionary evangelism can close all its
doors to all those who do not have a full purse.
Spreading religious beliefs in this ancient and
honorable manner would thus be denied the
needy. . . .
It is contended however that the fact that the
license tax can suppress or control this activity
is unimportant if it does not do so. But that is
to disregard the nature of this tax. It is a license
tax — a flat tax imposed on the exercise of a
privilege granted by the Bill of Rights . . . The
power to impose a license tax on the exercise of
these freedom is indeed as potent as the power
of censorship which this Court has repeatedly
struck down. . . . It is not a nominal fee imposed
as a regulatory measure to defray the expenses
of policing the activities in question. It is in no
way apportioned. It is flat license tax levied and
collected as a condition to the pursuit of
activities whose enjoyment is guaranteed by the
constitutional liberties of press and religion and
inevitably tends to suppress their exercise. That
is almost uniformly recognized as the inherent
vice and evil of this flat license tax."

Nor could dissemination of religious

information be conditioned upon the approval
of an official or manager even if the town were
owned by a corporation as held in the case of
Marsh vs. State of Alabama (326 U.S. 501), or
by the United States itself as held in the case of
Tucker vs. Texas (326 U.S. 517). In the former
case the Supreme Court expressed the opinion
that the right to enjoy freedom of the press and
religion occupies a preferred position as against
the constitutional right of property owners.

"When we balance the constitutional rights of

owners of property against those of the people
to enjoy freedom of press and religion, as we
must here, we remain mindful of the fact that
the latter occupy a preferred position. . . . In our
view the circumstance that the property rights
to the premises where the deprivation of
property here involved, took place, were held by
others than the public, is not sufficient to justify
the State's permitting a corporation to govern a
community of citizens so as to restrict their
fundamental liberties and the enforcement of
such restraint by the application of a State
statute." (Tañada and Fernando on the
Constitution of the Philippines, Vol. 1, 4th ed.,
p. 304-306).

Section 27 of Commonwealth Act No. 466,

otherwise known as the National Internal
Revenue Code, provides:

SEC. 27. EXEMPTIONS FROM TAX ON

CORPORATIONS. — The following
organizations shall not be taxed under this Title
in respect to income received by them as such
—

(e) Corporations or associations organized and

operated exclusively for religious, charitable, . . .
or educational purposes, . . .: Provided, however,
That the income of whatever kind and character
from any of its properties, real or personal, or
from any activity conducted for profit,
regardless of the disposition made of such
income, shall be liable to the tax imposed under
this Code;

Appellant's counsel claims that the Collector of

Internal Revenue has exempted the plaintiff
from this tax and says that such exemption
clearly indicates that the act of distributing and
selling bibles, etc. is purely religious and does
not fall under the above legal provisions.

It may be true that in the case at bar the price

asked for the bibles and other religious
pamphlets was in some instances a little bit
higher than the actual cost of the same but this
cannot mean that appellant was engaged in the
business or occupation of selling said
"merchandise" for profit. For this reason We
believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be
applied to appellant, for in doing so it would
impair its free exercise and enjoyment of its
religious profession and worship as well as its
rights of dissemination of religious beliefs.

With respect to Ordinance No. 3000, as

amended, which requires the obtention the
Mayor's permit before any person can engage in
any of the businesses, trades or occupations
enumerated therein, We do not find that it
imposes any charge upon the enjoyment of a
right granted by the Constitution, nor tax the
exercise of religious practices. In the case of
Coleman vs. City of Griffin, 189 S.E. 427, this
point was elucidated as follows:

An ordinance by the City of Griffin, declaring

that the practice of distributing either by hand
or otherwise, circulars, handbooks, advertising,
or literature of any kind, whether said articles
are being delivered free, or whether same are
being sold within the city limits of the City of
Griffin, without first obtaining written
permission from the city manager of the City of
Griffin, shall be deemed a nuisance and
punishable as an offense against the City of
Griffin, does not deprive defendant of his
constitutional right of the free exercise and
enjoyment of religious profession and worship,
even though it prohibits him from introducing
and carrying out a scheme or purpose which he
sees fit to claim as a part of his religious system.

It seems clear, therefore, that Ordinance No.

3000 cannot be considered unconstitutional,
even if applied to plaintiff Society. But as
Ordinance No. 2529 of the City of Manila, as
amended, is not applicable to plaintiff-appellant
and defendant-appellee is powerless to license
or tax the business of plaintiff Society involved
herein for, as stated before, it would impair
plaintiff's right to the free exercise and
enjoyment of its religious profession and
worship, as well as its rights of dissemination of
religious beliefs, We find that Ordinance No.
3000, as amended is also inapplicable to said
business, trade or occupation of the plaintiff.

Wherefore, and on the strength of the foregoing

considerations, We hereby reverse the decision
appealed from, sentencing defendant return to
plaintiff the sum of P5,891.45 unduly collected
from it. Without pronouncement as to costs. It
is so ordered.
Bengzon, Padilla, Montemayor, Bautista Angelo,
Labrador, Concepcion and Endencia, JJ.,
concur.

ABRA Valley College v Aquino | GR No. L-

39086 | 15 June 1988

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by

PEDRO V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First
Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE,
Municipal Treasurer, Bangued, Abra; HEIRS OF
PATERNO MILLARE, respondents.

PARAS, J.:

This is a petition for review on certiorari of the

decision * of the defunct Court of First Instance
of Abra, Branch I, dated June 14, 1974,
rendered in Civil Case No. 656, entitled "Abra
Valley Junior College, Inc., represented by
Pedro V. Borgonia, plaintiff vs. Armin M.
Cariaga as Provincial Treasurer of Abra, Gaspar
V. Bosque as Municipal Treasurer of Bangued,
Abra and Paterno Millare, defendants," the
decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court

hereby declares:

That the distraint seizure and sale by the

Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against
the lot and building of the Abra Valley Junior
College, Inc., represented by Director Pedro
Borgonia located at Bangued, Abra, is valid;

That since the school is not exempt from paying

taxes, it should therefore pay all back taxes in
the amount of P5,140.31 and back taxes and
penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him
the sum of P60,000.00 before the trial, be
confiscated to apply for the payment of the back
taxes and for the redemption of the property in
question, if the amount is less than P6,000.00,
the remainder must be returned to the Director
of Pedro Borgonia, who represents the plaintiff
herein;

That the deposit of the Municipal Treasurer in

the amount of P6,000.00 also before the trial
must be returned to said Municipal Treasurer
of Bangued, Abra;

And finally the case is hereby ordered dismissed

with costs against the plaintiff.

SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and

institution of higher learning duly incorporated
with the Securities and Exchange Commission
in 1948, filed a complaint (Annex "1" of Answer
by the respondents Heirs of Paterno Millare;
Rollo, pp. 95-97) on July 10, 1972 in the court
a quo to annul and declare void the "Notice of
Seizure' and the "Notice of Sale" of its lot and
building located at Bangued, Abra, for non-
payment of real estate taxes and penalties
amounting to P5,140.31. Said "Notice of
Seizure" of the college lot and building covered
by Original Certificate of Title No. Q-83 duly
registered in the name of petitioner, plaintiff
below, on July 6, 1972, by respondents
Municipal Treasurer and Provincial Treasurer,
defendants below, was issued for the
satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon
the petitioner by the respondent treasurers on
July 8, 1972 for the sale at public auction of
said college lot and building, which sale was
held on the same date. Dr. Paterno Millare, then
Municipal Mayor of Bangued, Abra, offered the
highest bid of P6,000.00 which was duly
accepted. The certificate of sale was
correspondingly issued to him.
On August 10, 1972, the respondent Paterno
Millare (now deceased) filed through counstel a
motion to dismiss the complaint.

On August 23, 1972, the respondent Provincial

Treasurer and Municipal Treasurer, through
then Provincial Fiscal Loreto C. Roldan, filed
their answer (Annex "2" of Answer by the
respondents Heirs of Patemo Millare; Rollo, pp.
98-100) to the complaint. This was followed by
an amended answer (Annex "3," ibid, Rollo, pp.
101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno

Millare filed his answer (Annex "5," ibid; Rollo,
pp. 106-108).

On October 12, 1972, with the aforesaid sale of

the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of the
Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal
treasurers to deliver to the Clerk of Court the
proceeds of the auction sale. Hence, on
December 14, 1972, petitioner, through
Director Borgonia, deposited with the trial court
the sum of P6,000.00 evidenced by PNB Check
No. 904369.

On April 12, 1973, the parties entered into a

stipulation of facts adopted and embodied by
the trial court in its questioned decision. Said
Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels,

and to this Honorable Court respectfully enter
into the following agreed stipulation of facts:

1. That the personal circumstances of the

parties as stated in paragraph 1 of the
complaint is admitted; but the particular
person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually
holding the position of Provincial Treasurer of
the Province of Abra;

2. That the plaintiff Abra Valley Junior

College, Inc. is the owner of the lot and
buildings thereon located in Bangued, Abra
under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as

Municipal treasurer of Bangued, Abra caused to
be served upon the Abra Valley Junior College,
Inc. a Notice of Seizure on the property of said
school under Original Certificate of Title No. 0-
83 for the satisfaction of real property taxes
thereon, amounting to P5,140.31; the Notice of
Seizure being the one attached to the complaint
as Exhibit A;

4. That on June 8, 1972 the above properties

of the Abra Valley Junior College, Inc. was sold
at public auction for the satisfaction of the
unpaid real property taxes thereon and the
same was sold to defendant Paterno Millare who
offered the highest bid of P6,000.00 and a
Certificate of Sale in his favor was issued by the
defendant Municipal Treasurer.

5. That all other matters not particularly and

specially covered by this stipulation of facts will
be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the

Honorable Court to consider and admit this
stipulation of facts on the point agreed upon by
the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes

Typ AGRIPINO BRILLANTES
Attorney for Plaintiff

Sgd. Loreto Roldan

Typ LORETO ROLDAN
Provincial Fiscal
Counsel for Defendants
Provincial Treasurer of
Abra and the Municipal
Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre

Typ. DEMETRIO V. PRE
Attorney for Defendant
Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial

court among others, found the following: (a)
that the school is recognized by the government
and is offering Primary, High School and College
Courses, and has a school population of more
than one thousand students all in all; (b) that it
is located right in the heart of the town of
Bangued, a few meters from the plaza and
about 120 meters from the Court of First
Instance building; (c) that the elementary pupils
are housed in a two-storey building across the
street; (d) that the high school and college
students are housed in the main building; (e)
that the Director with his family is in the second
floor of the main building; and (f) that the
annual gross income of the school reaches more
than one hundred thousand pesos.

From all the foregoing, the only issue left for the
Court to determine and as agreed by the parties,
is whether or not the lot and building in
question are used exclusively for educational
purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A.

Solomon and his Assistant, Hon. Eustaquio Z.
Montero, filed a Memorandum for the
Government on March 25, 1974, and a
Supplemental Memorandum on May 7, 1974,
wherein they opined "that based on the evidence,
the laws applicable, court decisions and
jurisprudence, the school building and school
lot used for educational purposes of the Abra
Valley College, Inc., are exempted from the
payment of taxes." (Annexes "B," "B-1" of
Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because

of the use of the second floor by the Director of
petitioner school for residential purposes. He
thus ruled for the government and rendered the
assailed decision.

After having been granted by the trial court ten

(10) days from August 6, 1974 within which to
perfect its appeal (Per Order dated August 6,
1974; Annex "G" of Petition; Rollo, p. 57)
petitioner instead availed of the instant petition
for review on certiorari with prayer for
preliminary injunction before this Court, which
petition was filed on August 17, 1974 (Rollo,
p.2).

In the resolution dated August 16, 1974, this

Court resolved to give DUE COURSE to the
petition (Rollo, p. 58). Respondents were
required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of

error:

THE COURT A QUO ERRED IN SUSTAINING AS

VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR
EDUCATIONAL PURPOSES OF THE
PETITIONER.

II

THE COURT A QUO ERRED IN DECLARING

THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT USED
EXCLUSIVELY FOR EDUCATIONAL
PURPOSES MERELY BECAUSE THE COLLEGE
PRESIDENT RESIDES IN ONE ROOM OF THE
COLLEGE BUILDING.

III

THE COURT A QUO ERRED IN DECLARING

THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT EXEMPT FROM
PROPERTY TAXES AND IN ORDERING
PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.

IV

THE COURT A QUO ERRED IN ORDERING THE

CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS
PAYMENT OF THE P5,140.31 REALTY TAXES.
(See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper

interpretation of the phrase "used exclusively
for educational purposes."

Petitioner contends that the primary use of the

lot and building for educational purposes, and
not the incidental use thereof, determines and
exemption from property taxes under Section
22 (3), Article VI of the 1935 Constitution.
Hence, the seizure and sale of subject college lot
and building, which are contrary thereto as well
as to the provision of Commonwealth Act No.
470, otherwise known as the Assessment Law,
are without legal basis and therefore void.

On the other hand, private respondents

maintain that the college lot and building in
question which were subjected to seizure and
sale to answer for the unpaid tax are used: (1)
for the educational purposes of the college; (2)
as the permanent residence of the President
and Director thereof, Mr. Pedro V. Borgonia,
and his family including the in-laws and
grandchildren; and (3) for commercial purposes
because the ground floor of the college building
is being used and rented by a commercial
establishment, the Northern Marketing
Corporation (See photograph attached as Annex
"8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional

provision which finds application in the case at
bar is Section 22, paragraph 3, Article VI, of the
then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for
"Cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively
for religious, charitable or educational
purposes ...

Relative thereto, Section 54, paragraph c,

Commonwealth Act No. 470 as amended by
Republic Act No. 409, otherwise known as the
Assessment Law, provides:

The following are exempted from real property

tax under the Assessment Law:

xxx xxx xxx

(c) churches and parsonages or convents

appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious,
charitable, scientific or educational purposes.

xxx xxx xxx

In this regard petitioner argues that the primary

use of the school lot and building is the basic
and controlling guide, norm and standard to
determine tax exemption, and not the mere
incidental use thereof.

As early as 1916 in YMCA of Manila vs.

Collector of lnternal Revenue, 33 Phil. 217
[1916], this Court ruled that while it may be
true that the YMCA keeps a lodging and a
boarding house and maintains a restaurant for
its members, still these do not constitute
business in the ordinary acceptance of the word,
but an institution used exclusively for religious,
charitable and educational purposes, and as
such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v.

Provincial Board of Ilocos Norte, 51 Phil. 352
[1972], this Court included in the exemption a
vegetable garden in an adjacent lot and another
lot formerly used as a cemetery. It was clarified
that the term "used exclusively" considers
incidental use also. Thus, the exemption from
payment of land tax in favor of the convent
includes, not only the land actually occupied by
the building but also the adjacent garden
devoted to the incidental use of the parish priest.
The lot which is not used for commercial
purposes but serves solely as a sort of lodging
place, also qualifies for exemption because this
constitutes incidental use in religious functions.

The phrase "exclusively used for educational

purposes" was further clarified by this Court in
the cases of Herrera vs. Quezon City Board of
assessment Appeals, 3 SCRA 186 [1961] and
Commissioner of Internal Revenue vs. Bishop of
the Missionary District, 14 SCRA 991 [1965],
thus —

Moreover, the exemption in favor of property

used exclusively for charitable or educational
purposes is 'not limited to property actually
indispensable' therefor (Cooley on Taxation, Vol.
2, p. 1430), but extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of said purposes, such as in
the case of hospitals, "a school for training
nurses, a nurses' home, property use to provide
housing facilities for interns, resident doctors,
superintendents, and other members of the
hospital staff, and recreational facilities for
student nurses, interns, and residents' (84 CJS
6621), such as "Athletic fields" including "a firm
used for the inmates of the institution. (Cooley
on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use

of the property for purposes mentioned in the
Constitution (Apostolic Prefect v. City Treasurer
of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this

Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used
for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935
Philippine Constitution, reasonable emphasis
has always been made that exemption extends
to facilities which are incidental to and
reasonably necessary for the accomplishment of
the main purposes. Otherwise stated, the use of
the school building or lot for commercial
purposes is neither contemplated by law, nor by
jurisprudence. Thus, while the use of the
second floor of the main building in the case at
bar for residential purposes of the Director and
his family, may find justification under the
concept of incidental use, which is
complimentary to the main or primary
purpose—educational, the lease of the first floor
thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be
considered incidental to the purpose of
education.

It will be noted however that the aforementioned

lease appears to have been raised for the first
time in this Court. That the matter was not
taken up in the to court is really apparent in the
decision of respondent Judge. No mention
thereof was made in the stipulation of facts, not
even in the description of the school building by
the trial judge, both embodied in the decision
nor as one of the issues to resolve in order to
determine whether or not said properly may be
exempted from payment of real estate taxes
(Rollo, pp. 17-23). On the other hand, it is
noteworthy that such fact was not disputed
even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in

the lower court cannot be taken up for the first
time on appeal. Nonetheless, as an exception to
the rule, this Court has held that although a
factual issue is not squarely raised below, still
in the interest of substantial justice, this Court
is not prevented from considering a pivotal
factual matter. "The Supreme Court is clothed
with ample authority to review palpable errors
not assigned as such if it finds that their
consideration is necessary in arriving at a just
decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).

Under the 1935 Constitution, the trial court

correctly arrived at the conclusion that the
school building as well as the lot where it is built,
should be taxed, not because the second floor
of the same is being used by the Director and
his family for residential purposes, but because
the first floor thereof is being used for
commercial purposes. However, since only a
portion is used for purposes of commerce, it is
only fair that half of the assessed tax be
returned to the school involved.

PREMISES CONSIDERED, the decision of the

Court of First Instance of Abra, Branch I, is
hereby AFFIRMED subject to the modification
that half of the assessed tax be returned to the
petitioner.

SO ORDERED.

Yap, C.J., Melencio-Herrera, Padilla and

Sarmiento, JJ., concur.

Lung Center of the Philippines v Quezon City

and Posas | GR No. 144104 | 29 June 2004

[G.R. No. 144104. June 29, 2004]

LUNG CENTER OF THE PHILIPPINES,

petitioner, vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as
City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:

This is a petition for review on certiorari under

Rule 45 of the Rules of Court, as amended, of
the 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
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;

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

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 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, the same
should not only be exclusively used for
charitable purposes; it is required that such
property be used actually and directly for such
purposes.[37]

In light of the foregoing substantial changes in

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

Under the 1935 Constitution: Cemeteries,

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

Under the 1973 and 1987 Constitutions and

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

What is meant by actual, direct and exclusive

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

The petitioner failed to discharge its burden to

prove that the entirety of its real property is
actually, directly and exclusively used for
charitable purposes. While portions of the
hospital are used for the treatment of patients
and the dispensation of medical services to
them, whether paying or non-paying, other
portions thereof are being leased to private
individuals for their clinics and a canteen.
Further, a portion of the land is being leased to
a private individual for her business enterprise
under the business name Elliptical Orchids and
Garden Center. Indeed, the 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.

Davide, Jr., C.J., Puno, Panganiban,

Quisumbing, Sandoval-Gutierrez, Carpio,
Corona, Carpio-Morales, Azcuna, and Tinga,
JJ., concur.
Vitug, J., on official leave.
Ynares-Santiago, and Austria-Martinez, JJ., on
leave.

St Luke’s Medical Center v CIR | CTA Case

No. 7822 & 7823 | 18 February 2014

De La Salle v CIR | CTA Case EB No. 671 |

08 June 2011

ADMU v CIR | CTA Case No. 7246 & 7293 |

30 June 2011

Angeles Foundation v City of Angeles | GR

No. 189999 | 27 June 2012

ANGELES UNIVERSITY FOUNDATION,

Petitioner,

- versus -

CITY OF ANGELES, JULIET G.

QUINSAAT, in her capacity as
G.R. No. 189999

Present:

LEONARDO-DE CASTRO,J.,*
Acting Chairperson,
BERSAMIN,
VILLARAMA, JR.,
PEREZ,** and
PERLAS-BERNABE,*** JJ.
Treasurer of Angeles City and ENGR. DONATO
N. DIZON, in his capacity as Acting Angeles City
Building Official,
Respondents.

Promulgated:

June 27, 2012

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - -x
DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari
under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse
and set aside the Decision[1] dated July 28,
2009 and Resolution[2] dated October 12, 2009
of the Court of Appeals (CA) in CA-G.R. CV No.
90591. The CA reversed the Decision[3] dated
September 21, 2007 of the Regional Trial Court
of Angeles City, Branch 57 in Civil Case No.
12995 declaring petitioner exempt from the
payment of building permit and other fees and
ordering respondents to refund the same with
interest at the legal rate.
The factual antecedents:
Petitioner Angeles University Foundation (AUF)
is an educational institution established on May
25, 1962 and was converted into a non-stock,
non-profit education foundation under the
provisions of Republic Act (R.A.) No. 6055[4] on
December 4, 1975.
Sometime in August 2005, petitioner filed with
the Office of the City Building Official an
application for a building permit for the
construction of an 11-storey building of the
Angeles University Foundation Medical Center
in its main campus located at MacArthur
Highway, Angeles City, Pampanga. Said office
issued a Building Permit Fee Assessment in the
amount of P126,839.20. An Order of Payment
was also issued by the City Planning and
Development Office, Zoning Administration
Unit requiring petitioner to pay the sum of
P238,741.64 as Locational Clearance Fee.[5]
In separate letters dated November 15, 2005
addressed to respondents City Treasurer Juliet
G. Quinsaat and Acting City Building Official
Donato N. Dizon, petitioner claimed that it is
exempt from the payment of the building permit
and locational clearance fees, citing legal
opinions rendered by the Department of Justice
(DOJ). Petitioner also reminded the
respondents that they have previously issued
building permits acknowledging such
exemption from payment of building permit fees
on the construction of petitioners 4-storey AUF
Information Technology Center building and the
AUF Professional Schools building on July 27,
2000 and March 15, 2004, respectively.[6]
Respondent City Treasurer referred the matter
to the Bureau of Local Government Finance
(BLGF) of the Department of Finance, which in
turn endorsed the query to the DOJ. Then
Justice Secretary Raul M. Gonzalez, in his
letter-reply dated December 6, 2005, cited
previous issuances of his office (Opinion No.
157, s. 1981 and Opinion No. 147, s. 1982)
declaring petitioner to be exempt from the
payment of building permit fees. Under the 1st
Indorsement dated January 6, 2006, BLGF
reiterated the aforesaid opinion of the DOJ
stating further that xxx the Department of
Finance, thru this Bureau, has no authority to
review the resolution or the decision of the
DOJ.[7]
Petitioner wrote the respondents reiterating its
request to reverse the disputed assessments
and invoking the DOJ legal opinions which have
been affirmed by Secretary Gonzalez. Despite
petitioners plea, however, respondents refused
to issue the building permits for the
construction of the AUF Medical Center in the
main campus and renovation of a school
building located at Marisol Village. Petitioner
then appealed the matter to City Mayor Carmelo
F. Lazatin but no written response was received
by petitioner.[8]
Consequently, petitioner paid under protest[9]
the following:
Medical Center (new construction)

Building Permit and Electrical Fee

P 217,475.20
Locational Clearance Fee
283,741.64
Fire Code Fee
144,690.00

Total - P 645,906.84

School Building (renovation)

Building Permit and Electrical Fee

P 37,857.20
Locational Clearance Fee
6,000.57
Fire Code Fee
5,967.74

Total - P 49,825.51
Petitioner likewise paid the following sums as
required by the City Assessors Office:
Real Property Tax Basic Fee
P 86,531.10

SEF
43,274.54

Locational Clearance Fee

1,125.00

Total P130,930.64[10]

[GRAND TOTAL - P 826,662.99]

By reason of the above payments, petitioner was
issued the corresponding Building Permit,
Wiring Permit, Electrical Permit and Sanitary
Building Permit. On June 9, 2006, petitioner
formally requested the respondents to refund
the fees it paid under protest. Under letters
dated June 15, 2006 and August 7, 2006,
respondent City Treasurer denied the claim for
refund.[11]
On August 31, 2006, petitioner filed a
Complaint[12] before the trial court seeking the
refund of P826,662.99 plus interest at the rate
of 12% per annum, and also praying for the
award of attorneys fees in the amount of
P300,000.00 and litigation expenses.
In its Answer,[13] respondents asserted that the
claim of petitioner cannot be granted because
its structures are not among those mentioned
in Sec. 209 of the National Building Code as
exempted from the building permit fee.
Respondents argued that R.A. No. 6055 should
be considered repealed on the basis of Sec.
2104 of the National Building Code. Since the
disputed assessments are regulatory in nature,
they are not taxes from which petitioner is
exempt. As to the real property taxes imposed
on petitioners property located in Marisol
Village, respondents pointed out that said
premises will be used as a school dormitory
which cannot be considered as a use exclusively
for educational activities.
Petitioner countered that the subject building
permit are being collected on the basis of Art.
244 of the Implementing Rules and Regulations
of the Local Government Code, which
impositions are really taxes considering that
they are provided under the chapter on Local
Government Taxation in reference to the
revenue raising power of local government units
(LGUs). Moreover, petitioner contended that, as
held in Philippine Airlines, Inc. v. Edu,[14] fees
may be regarded as taxes depending on the
purpose of its exaction. In any case, petitioner
pointed out that the Local Government Code of
1991 provides in Sec. 193 that non-stock and
non-profit educational institutions like
petitioner retained the tax exemptions or
incentives which have been granted to them.
Under Sec. 8 of R.A. No. 6055 and applicable
jurisprudence and DOJ rulings, petitioner is
clearly exempt from the payment of building
permit fees.[15]
On September 21, 2007, the trial court
rendered judgment in favor of the petitioner and
against the respondents. The dispositive portion
of the trial courts decision[16] reads:
WHEREFORE, premises considered, judgment
is rendered as follows:
a. Plaintiff is exempt from the payment of
building permit and other fees Ordering the
Defendants to refund the total amount of Eight
Hundred Twenty Six Thousand Six Hundred
Sixty Two Pesos and 99/100 Centavos
(P826,662.99) plus legal interest thereon at the
rate of twelve percent (12%) per annum
commencing on the date of extra-judicial
demand or June 14, 2006, until the aforesaid
amount is fully paid.
b. Finding the Defendants liable for attorneys
fees in the amount of Seventy Thousand Pesos
(Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of
the suit.
SO ORDERED.[17]
Respondents appealed to the CA which reversed
the trial court, holding that while petitioner is a
tax-free entity, it is not exempt from the
payment of regulatory fees. The CA noted that
under R.A. No. 6055, petitioner was granted
exemption only from income tax derived from its
educational activities and real property used
exclusively for educational purposes.
Regardless of the repealing clause in the
National Building Code, the CA held that
petitioner is still not exempt because a building
permit cannot be considered as the other
charges mentioned in Sec. 8 of R.A. No. 6055
which refers to impositions in the nature of tax,
import duties, assessments and other
collections for revenue purposes, following the
ejusdem generisrule. The CA further stated that
petitioner has not shown that the fees collected
were excessive and more than the cost of
surveillance, inspection and regulation. And
while petitioner may be exempt from the
payment of real property tax, petitioner in this
case merely alleged that the subject property is
to be used actually, directly and exclusively for
educational purposes, declaring merely that
such premises is intended to house the sports
and other facilities of the university but by
reason of the occupancy of informal settlers on
the area, it cannot yet utilize the same for its
intended use. Thus, the CA concluded that
petitioner is not entitled to the refund of
building permit and related fees, as well as real
property tax it paid under protest.
Petitioner filed a motion for reconsideration
which was denied by the CA.
Hence, this petition raising the following
grounds:
THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR AND DECIDED A
QUESTION OF SUBSTANCE IN A WAY NOT IN
ACCORDANCE WITH LAW AND THE
APPLICABLE DECISIONS OF THE
HONORABLE COURT AND HAS DEPARTED
FROM THE ACCEPTED AND USUAL COURSE
OF JUDICIAL PROCEEDINGS NECESSITATING
THE HONORABLE COURTS EXERCISE OF ITS
POWER OF SUPERVISION CONSIDERING
THAT:
I. IN REVERSING THE TRIAL COURTS
DECISION DATED 21 SEPTEMBER 2007, THE
COURT OF APPEALS EFFECTIVELY
WITHDREW THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS BY VIRTUE OF
RA 6055 WHICH WITHDRAWAL IS BEYOND
THE AUTHORITY OF THE COURT OF APPEALS
TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS
IN FULL FORCE AND EFFECT. HENCE, THE
COURT OF APPEALS ERRED WHEN IT RULED
IN THE QUESTIONED DECISION THAT NON-
STOCK, NON-PROFIT EDUCATIONAL
FOUNDATIONS ARE NOT EXEMPT.
B. THE COURT OF APPEALS APPLICATION OF
THE PRINCIPLE OF EJUSDEM GENERIS IN
RULING IN THE QUESTIONED DECISION
THAT THE TERM OTHER CHARGES IMPOSED
BY THE GOVERNMENT UNDER SECTION 8 OF
RA 6055 DOES NOT INCLUDE BUILDING
PERMIT AND OTHER RELATED FEES AND/OR
CHARGES IS BASED ON ITS ERRONEOUS
AND UNWARRANTED ASSUMPTION THAT THE
TAXES, IMPORT DUTIES AND ASSESSMENTS
AS PART OF THE PRIVILEGE OF EXEMPTION
GRANTED TO NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS ARE LIMITED
TO COLLECTIONS FOR REVENUE PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING
PERMIT AND OTHER RELATED FEES AND/OR
CHARGES ARE NOT INCLUDED IN THE TERM
OTHER CHARGES IMPOSED BY THE
GOVERNMENT UNDER SECTION 8 OF RA
6055, ITS IMPOSITION IS GENERALLY A TAX
MEASURE AND THEREFORE, STILL
COVERED UNDER THE PRIVILEGE OF
EXEMPTION.
II. THE COURT OF APPEALS DENIAL OF
PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS
QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE
LAW AND JURISPRUDENCE.[18]
Petitioner stresses that the tax exemption
granted to educational stock corporations
which have converted into non-profit
foundations was broadened to include any
other charges imposed by the Government as
one of the incentives for such conversion. These
incentives necessarily included exemption from
payment of building permit and related fees as
otherwise there would have been no incentives
for educational foundations if the privilege were
only limited to exemption from taxation, which
is already provided under the Constitution.
Petitioner further contends that this Court has
consistently held in several cases that the
primary purpose of the exaction determines its
nature. Thus, a charge of a fixed sum which
bears no relation to the cost of inspection and
which is payable into the general revenue of the
state is a tax rather than an exercise of the
police power. The standard set by law in the
determination of the amount that may be
imposed as license fees is such that is
commensurate with the cost of regulation,
inspection and licensing. But in this case, the
amount representing the building permit and
related fees and/or charges is such an
exorbitant amount as to warrant a valid
imposition; such amount exceeds the probable
cost of regulation. Even with the alleged criteria
submitted by the respondents (e.g., character of
occupancy or use of building/structure, cost of
construction, floor area and height), and the
construction by petitioner of an 11-storey
building, the costs of inspection will not amount
to P645,906.84, presumably for the salary of
inspectors or employees, the expenses of
transportation for inspection and the
preparation and reproduction of documents.
Petitioner thus concludes that the disputed fees
are substantially and mainly for purposes of
revenue rather than regulation, so that even
these fees cannot be deemed charges mentioned
in Sec. 8 of R.A. No. 6055, they should properly
be treated as tax from which petitioner is
exempt.
In their Comment, respondents maintain that
petitioner is not exempt from the payment of
building permit and related fees since the only
exemptions provided in the National Building
Code are public buildings and traditional
indigenous family dwellings. Inclusio unius est
exclusio alterius. Because the law did not
include petitioners buildings from those
structures exempt from the payment of building
permit fee, it is therefore subject to the
regulatory fees imposed under the National
Building Code.
Respondents assert that the CA correctly
distinguished a building permit fee from those
other charges mentioned in Sec. 8 of R.A. No.
6055. As stated by petitioner itself, charges
refer to pecuniary liability, as rents, and fees
against persons or property. Respondents point
out that a building permit is classified under the
term fee. A fee is generally imposed to cover the
cost of regulation as activity or privilege and is
essentially derived from the exercise of police
power; on the other hand, impositions for
services rendered by the local government units
or for conveniences furnished, are referred to as
service charges.
Respondents also disagreed with petitioners
contention that the fees imposed and collected
are exorbitant and exceeded the probable
expenses of regulation. These fees are based on
computations and assessments made by the
responsible officials of the City Engineers Office
in accordance with the Schedule of Fees and
criteria provided in the National Building Code.
The bases of assessment cited by petitioner (e.g.
salary of employees, expenses of transportation
and preparation and reproduction of
documents) refer to charges and fees on
business and occupation under Sec. 147 of the
Local Government Code, which do not apply to
building permit fees. The parameters set by the
National Building Code can be considered as
complying with the reasonable cost of
regulation in the assessment and collection of
building permit fees. Respondents likewise
contend that the presumption of regularity in
the performance of official duty applies in this
case. Petitioner should have presented evidence
to prove its allegations that the amounts
collected are exorbitant or unreasonable.
For resolution are the following issues: (1)
whether petitioner is exempt from the payment
of building permit and related fees imposed
under the National Building Code; and (2)
whether the parcel of land owned by petitioner
which has been assessed for real property tax is
likewise exempt.
R.A. No. 6055 granted tax exemptions to
educational institutions like petitioner which
converted to non-stock, non-profit educational
foundations. Section 8 of said law provides:
SECTION 8. The Foundation shall be exempt
from the payment of all taxes, import duties,
assessments, and other charges imposed by the
Government onall income derived from or
property, real or personal, used exclusively for
the educational activities of the
Foundation.(Emphasis supplied.)
On February 19, 1977, Presidential Decree
(P.D.) No. 1096 was issued adopting the
National Building Code of the Philippines. The
said Code requires every person, firm or
corporation, including any agency or
instrumentality of the government to obtain a
building permit for any construction, alteration
or repair of any building or
structure.[19]Building permit refers to a
document issued by the Building Official x x x
to an owner/applicant to proceed with the
construction, installation, addition, alteration,
renovation, conversion, repair, moving,
demolition or other work activity of a specific
project/building/structure or portions thereof
after the accompanying principal plans,
specifications and other pertinent documents
with the duly notarized application are found
satisfactory and substantially conforming with
the National Building Code of the Philippines x
x x and its Implementing Rules and Regulations
(IRR).[20] Building permit fees refers to the
basic permit fee and other charges imposed
under the National Building Code.
Exempted from the payment of building permit
fees are: (1) public buildings and (2) traditional
indigenous family dwellings.[21] Not being
expressly included in the enumeration of
structures to which the building permit fees do
not apply, petitioners claim for exemption rests
solely on its interpretation of the term other
charges imposed by the National Government in
the tax exemption clause of R.A. No. 6055.
A charge is broadly defined as the price of, or
rate for, something, while the word fee pertains
to a charge fixed by law for services of public
officers or for use of a privilege under control of
government.[22] As used in the Local
Government Code of 1991 (R.A. No. 7160),
charges refers to pecuniary liability, as rents or
fees against persons or property, while fee
means a charge fixed by law or ordinance for the
regulation or inspection of a business or
activity.[23]
That charges in its ordinary meaning appears to
be a general term which could cover a specific
fee does not support petitioners position that
building permit fees are among those other
charges from which it was expressly exempted.
Note that the other charges mentioned in Sec. 8
of R.A. No. 6055 is qualified by the words
imposed by the Government on all x x x
property used exclusively for the educational
activities of the foundation. Building permit fees
are not impositions on property but on the
activity subject of government regulation. While
it may be argued that the fees relate to
particular properties, i.e., buildings and
structures, they are actually imposed on certain
activities the owner may conduct either to build
such structures or to repair, alter, renovate or
demolish the same. This is evident from the
following provisions of the National Building
Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State
to safeguard life, health, property, and public
welfare, consistent with theprinciples of sound
environmental management and control; and
tothis end, make it the purpose of this Code to
provide for allbuildings and structures, a
framework of minimum standards and
requirements to regulate and control their
location, site, design quality of materials,
construction, use, occupancy, and
maintenance.
Section 103. Scope and Application
(a) The provisions of this Code shall apply to the
design,location, sitting, construction, alteration,
repair,conversion, use, occupancy,
maintenance, moving, demolitionof, and
addition to public and private buildings
andstructures, except traditional indigenous
family dwellingsas defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any
agency orinstrumentality of the government
shall erect, construct, alter, repair, move,
convert or demolish any building or structure or
causethe same to be done without first
obtaining a building permittherefor from the
Building Official assigned in the place where
thesubject building is located or the building
work is to be done. (Italics supplied.)
That a building permit fee is a regulatory
imposition is highlighted by the fact that in
processing an application for a building permit,
the Building Official shall see to it that the
applicant satisfies and conforms with approved
standard requirements on zoning and land use,
lines and grades, structural design, sanitary
and sewerage, environmental health, electrical
and mechanical safety as well as with other
rules and regulations implementing the
National Building Code.[24] Thus, ancillary
permits such as electrical permit, sanitary
permit and zoning clearance must also be
secured and the corresponding fees paid before
a building permit may be issued. And as can be
gleaned from the implementing rules and
regulations of the National Building Code,
clearances from various government authorities
exercising and enforcing regulatory functions
affecting buildings/structures, like local
government units, may be further required
before a building permit may be issued.[25]
Since building permit fees are not charges on
property, they are not impositions from which
petitioner is exempt.
As to petitioners argument that the building
permit fees collected by respondents are in
reality taxes because the primary purpose is to
raise revenues for the local government unit,
the same does not hold water.
A charge of a fixed sum which bears no relation
at all to the cost of inspection and regulation
may be held to be a tax rather than an exercise
of the police power.[26] In this case, the
Secretary of Public Works and Highways who is
mandated to prescribe and fix the amount of
fees and other charges that the Building Official
shall collect in connection with the performance
of regulatory functions,[27] has promulgated
and issued the Implementing Rules and
Regulations[28] which provide for the bases of
assessment of such fees, as follows:
1. Character of occupancy or use of building
2. Cost of construction 10,000/sq.m
(A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)
3. Floor area
4. Height
Petitioner failed to demonstrate that the above
bases of assessment were arbitrarily
determined or unrelated to the activity being
regulated. Neither has petitioner adduced
evidence to show that the rates of building
permit fees imposed and collected by the
respondents were unreasonable or in excess of
the cost of regulation and inspection.
In Chevron Philippines, Inc. v. Bases
Conversion Development Authority,[29] this
Court explained:
In distinguishing tax and regulation as a form
of police power, the determining factor is the
purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it
will be deemed a tax even though the measure
results in some form of regulation. On the other
hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise
of the police power of the state, even though
incidentally, revenue is generated. Thus, in
Gerochi v. Department of Energy, the Court
stated:
The conservative and pivotal distinction
between these two (2) powers rests in the
purpose for which the charge is made. If
generation of revenue is the primary purpose
and regulation is merely incidental, the
imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is
incidentally raised does not make the
imposition a tax.[30] (Emphasis supplied.)
Concededly, in the case of building permit fees
imposed by the National Government under the
National Building Code, revenue is incidentally
generated for the benefit of local government
units. Thus:
Section 208. Fees
Every Building Official shall keep a permanent
record and accurate account of all fees and
other charges fixed and authorized by the
Secretary to be collected and received under
this Code.
Subject to existing budgetary, accounting and
auditing rules and regulations, the Building
Official is hereby authorized to retain not more
than twenty percent of his collection for the
operating expenses of his office.
The remaining eighty percent shall be deposited
with the provincial, city or municipal treasurer
and shall accrue to the General Fund of the
province, city or municipality concerned.
Petitioners reliance on Sec. 193 of the Local
Government Code of 1991 is likewise misplaced.
Said provision states:
SECTION 193. Withdrawal of Tax Exemption
Privileges. -- Unless otherwise provided in this
Code, tax exemptions or incentives granted to,
or presently enjoyed by all persons, whether
natural or juridical, including government-
owned or controlled corporations, except local
water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this
Code. (Emphasis supplied.)
Considering that exemption from payment of
regulatory fees was not among those incentives
granted to petitioner under R.A. No. 6055, there
is no such incentive that is retained under the
Local Government Code of 1991. Consequently,
no reversible error was committed by the CA in
ruling that petitioner is liable to pay the subject
building permit and related fees.
Now, on petitioners claim that it is exempted
from the payment of real property tax assessed
against its real property presently occupied by
informal settlers.
Section 28(3), Article VI of the 1987
Constitution provides:
xxxx
(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.
x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of
1991 implements the foregoing constitutional
provision by declaring that --
SECTION 234. Exemptions from Real Property
Tax. The following are exempted from payment
of the real property tax:
xxxx
(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;
x x x x (Emphasis supplied.)
In Lung Center of the Philippines v. Quezon
City,[31] this Court held that only portions of
the hospital actually, directly and exclusively
used for charitable purposes are exempt from
real property taxes, while those portions leased
to private entities and individuals are not
exempt from such taxes. We explained the
condition for the tax exemption privilege of
charitable and educational institutions, as
follows:
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. 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. The words dominant use or
principal use cannot be substituted for the
words used exclusively without doing violence
to the Constitutions and the law. Solely is
synonymous with exclusively.
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.[32] (Emphasis
and underscoring supplied.)
Petitioner failed to discharge its burden to prove
that its real property is actually, directly and
exclusively used for educational purposes.
While there is no allegation or proof that
petitioner leases the land to its present
occupants, still there is no compliance with the
constitutional and statutory requirement that
said real property is actually, directly and
exclusively used for educational purposes. The
respondents correctly assessed the land for real
property taxes for the taxable period during
which the land is not being devoted solely to
petitioners educational activities. Accordingly,
the CA did not err in ruling that petitioner is
likewise not entitled to a refund of the real
property tax it paid under protest.
WHEREFORE, the petition is DENIED. The
Decision dated July 28, 2009 and Resolution
dated October 12, 2009 of the Court of Appeals
in CA-G.R. CV No. 90591 are AFFIRMED.
No pronouncement as to costs.
SO ORDERED.

Chevron v Bases Conversion Development

Authority | GR No. 173863 | 15 September
2010

CHEVRON PHILIPPINES, INC. (Formerly

CALTEX PHILIPPINES, INC.),
Petitioner,

- versus -

G.R. No. 173863

Present:

CARPIO MORALES, J.,

Chairperson,
PERALTA,*
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

BASES CONVERSION DEVELOPMENT

AUTHORITY and CLARK DEVELOPMENT
CORPORATION,
Respondents.
Promulgated:

September 15, 2010

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:
This petition for review on certiorari assails the
Decision[1] dated November 30, 2005 of the
Court of Appeals (CA) in CA-G.R. SP No. 87117,
which affirmed the Resolution[2] dated August
2, 2004 and the Order[3] dated September 30,
2004 of the Office of the President in O.P. Case
No. 04-D-170.
The facts follow.
On June 28, 2002, the Board of Directors of
respondent Clark Development Corporation
(CDC) issued and approved Policy Guidelines on
the Movement of Petroleum Fuel to and from the
Clark Special Economic Zone (CSEZ)[4] which
provided, among others, for the following fees
and charges:
1. Accreditation Fee
xxxx
2. Annual Inspection Fee
xxxx
3. Royalty Fees
Suppliers delivering fuel from outside sources
shall be assessed the following royalty fees:
- Php0.50 per liter those delivering Coastal
petroleum fuel to CSEZ locators not sanctioned
by CDC
- Php1.00 per liter those bringing-in
petroleum fuel (except Jet A-1) from outside
sources
xxxx
4. Gate Pass Fee
x x x x[5]
The above policy guidelines were implemented
effective July 27, 2002. On October 1, 2002,
CDC sent a letter[6] to herein petitioner
Chevron Philippines, Inc. (formerly Caltex
Philippines, Inc.), a domestic corporation which
has been supplying fuel to Nanox Philippines, a
locator inside the CSEZ since 2001, informing
the petitioner that a royalty fee of P0.50 per liter
shall be assessed on its deliveries to Nanox
Philippines effective August 1, 2002. Thereafter,
on October 21, 2002 a Statement of Account[7]
was sent by CDC billing the petitioner for
royalty fees in the amount of P115,000.00 for
its fuel sales from Coastal depot to Nanox
Philippines from August 1-31 to September 3-
21, 2002.
Claiming that nothing in the law authorizes
CDC to impose royalty fees or any fees based on
a per unit measurement of any commodity sold
within the special economic zone, petitioner
sent a letter[8] dated October 30, 2002 to the
President and Chief Executive Officer of CDC,
Mr. Emmanuel Y. Angeles, to protest the
assessment for royalty fees. Petitioner
nevertheless paid the said fees under protest on
November 4, 2002.
On August 18, 2003, CDC again wrote a letter[9]
to petitioner regarding the latters unsettled
royalty fees covering the period of December
2002 to July 2003. Petitioner responded
through a letter[10] dated September 8, 2003
reiterating its continuing objection over the
assessed royalty fees and requested a refund of
the amount paid under protest on November 4,
2002. The letter also asked CDC to revoke the
imposition of such royalty fees. The request was
denied by CDC in a letter[11] dated September
29, 2003.
Petitioner elevated its protest before respondent
Bases Conversion Development Authority
(BCDA) arguing that the royalty fees imposed
had no reasonable relation to the probable
expenses of regulation and that the imposition
on a per unit measurement of fuel sales was for
a revenue generating purpose, thus, akin to a
tax. The protest was however denied by BCDA
in a letter[12] dated March 3, 2004.
Petitioner appealed to the Office of the President
which dismissed[13] the appeal for lack of merit
on August 2, 2004 and denied[14] petitioners
motion for reconsideration thereof on
September 30, 2004.
Aggrieved, petitioner elevated the case to the CA
which likewise dismissed[15] the appeal for lack
of merit on November 30, 2005 and denied[16]
the motion for reconsideration on July 26, 2006.
The CA held that in imposing the challenged
royalty fees, respondent CDC was exercising its
right to regulate the flow of fuel into CSEZ,
which is bolstered by the fact that it possesses
exclusive right to distribute fuel within CSEZ
pursuant to its Joint Venture Agreement
(JVA)[17] with Subic Bay Metropolitan
Authority (SBMA) and Coastal Subic Bay
Terminal, Inc. (CSBTI) dated April 11, 1996. The
appellate court also found that royalty fees were
assessed on fuel delivered, not on the sale, by
petitioner and that the basis of such imposition
was petitioners delivery receipts to Nanox
Philippines. The fact that revenue is incidentally
also obtained does not make the imposition a
tax as long as the primary purpose of such
imposition is regulation.[18]
Petitioner filed a motion for reconsideration but
the CA denied the same in its Resolution[19]
dated July 26, 2006.
Hence, this petition raising the following
grounds:

I. THE ISSUE RAISED BEFORE THE COURT A

QUO IS A QUESTION OF SUBSTANCE NOT
HERETOFORE DETERMINED BY THE
HONORABLE SUPREME COURT.

II. THE RULING OF THE COURT OF APPEALS

THAT THE CDC HAS THE POWER TO IMPOSE
THE QUESTIONED ROYALTY FEES IS
CONTRARY TO LAW.

III. THE COURT OF APPEALS WAS

MANIFESTLY MISTAKEN AND COMMITTED
GRAVE ABUSE OF DISCRETION AND A CLEAR
MISUNDERSTANDING OF FACTS WHEN IT
RULED CONTRARY TO THE EVIDENCE THAT:
(i) THE QUESTIONED ROYALTY FEE IS
PRIMARILY FOR REGULATION; AND (ii) ANY
REVENUE EARNED THEREFROM IS MERELY
INCIDENTAL TO THE PURPOSE OF
REGULATION.

IV. THE COURT OF APPEALS FAILED TO GIVE

DUE WEIGHT AND CONSIDERATION TO THE
EVIDENCE PRESENTED BY CPI SUCH AS THE
LETTERS COMING FROM RESPONDENT CDC
ITSELF PROVING THAT THE QUESTIONED
ROYALTY FEES ARE IMPOSED ON THE BASIS
OF FUEL SALES (NOT DELIVERY OF FUEL)
AND NOT FOR REGULATION BUT PURELY
FOR INCOME GENERATION, I.E. AS PRICE OR
CONSIDERATION FOR THE RIGHT TO
MARKET AND DISTRIBUTE FUEL INSIDE THE
CSEZ.[20]
Petitioner argues that CDC does not have any
power to impose royalty fees on sale of fuel
inside the CSEZ on the basis of purely income
generating functions and its exclusive right to
market and distribute goods inside the CSEZ.
Such imposition of royalty fees for revenue
generating purposes would amount to a tax,
which the respondents have no power to impose.
Petitioner stresses that the royalty fee imposed
by CDC is not regulatory in nature but a
revenue generating measure to increase its
profits and to further enhance its exclusive right
to market and distribute fuel in CSEZ.[21]
Petitioner would also like this Court to note that
the fees imposed, assuming arguendo they are
regulatory in nature, are unreasonable and are
grossly in excess of regulation costs. It adds
that the amount of the fees should be presumed
to be unreasonable and that the burden of
proving that the fees are not unreasonable lies
with the respondents.[22]
On the part of the respondents, they argue that
the purpose of the royalty fees is to regulate the
flow of fuel to and from the CSEZ. Such being
its main purpose, and revenue (if any) just an
incidental product, the imposition cannot be
considered a tax. It is their position that the
regulation is a valid exercise of police power
since it is aimed at promoting the general
welfare of the public. They claim that being the
administrator of the CSEZ, CDC is responsible
for the safe distribution of fuel products inside
the CSEZ.[23]
The petition has no merit.
In distinguishing tax and regulation as a form
of police power, the determining factor is the
purpose of the implemented measure. If the
purpose is primarily to raise revenue, then it
will be deemed a tax even though the measure
results in some form of regulation. On the other
hand, if the purpose is primarily to regulate,
then it is deemed a regulation and an exercise
of the police power of the state, even though
incidentally, revenue is generated. Thus, in
Gerochi v. Department of Energy,[24] the Court
stated:
The conservative and pivotal distinction
between these two (2) powers rests in the
purpose for which the charge is made. If
generation of revenue is the primary purpose
and regulation is merely incidental, the
imposition is a tax; but if regulation is the
primary purpose, the fact that revenue is
incidentally raised does not make the
imposition a tax.
In the case at bar, we hold that the subject
royalty fee was imposed primarily for regulatory
purposes, and not for the generation of income
or profits as petitioner claims. The Policy
Guidelines on the Movement of Petroleum Fuel
to and from the Clark Special Economic
Zone[25] provides:
DECLARATION OF POLICY

It is hereby declared the policy of CDC to

develop and maintain the Clark Special
Economic Zone (CSEZ) as a highly secured zone
free from threats of any kind, which could
possibly endanger the lives and properties of
locators, would-be investors, visitors, and
employees.
It is also declared the policy of CDC to operate
and manage the CSEZ as a separate customs
territory ensuring free flow or movement of
goods and capital within, into and exported out
of the CSEZ.[26] (Emphasis supplied.)
From the foregoing, it can be gleaned that the
Policy Guidelines was issued, first and foremost,
to ensure the safety, security, and good
condition of the petroleum fuel industry within
the CSEZ. The questioned royalty fees form part
of the regulatory framework to ensure free flow
or movement of petroleum fuel to and from the
CSEZ. The fact that respondents have the
exclusive right to distribute and market
petroleum products within CSEZ pursuant to
its JVA with SBMA and CSBTI does not
diminish the regulatory purpose of the royalty
fee for fuel products supplied by petitioner to its
client at the CSEZ.
As pointed out by the respondents in their
Comment, from the time the JVA took effect up
to the time CDC implemented its Policy
Guidelines on the Movement of Petroleum Fuel
to and from the CSEZ, suppliers/distributors
were allowed to bring in petroleum products
inside CSEZ without any charge at all. But this
arrangement clearly negates CDCs mandate
under the JVA as exclusive distributor of
CSBTIs fuel products within CSEZ and
respondents ownership of the Subic-Clark
Pipeline.[27] On this score, respondents were
justified in charging royalty fees on fuel
delivered by outside suppliers.
However, it was erroneous for petitioner to
argue that such exclusive right of respondent
CDC to market and distribute fuel inside CSEZ
is the sole basis of the royalty fees imposed
under the Policy Guidelines. Being the
administrator of CSEZ, the responsibility of
ensuring the safe, efficient and orderly
distribution of fuel products within the Zone
falls on CDC. Addressing specific concerns
demanded by the nature of goods or products
involved is encompassed in the range of services
which respondent CDC is expected to provide
under the law, in pursuance of its general power
of supervision and control over the movement of
all supplies and equipment into the CSEZ.
Section 2 of Executive Order No. 80[28] provides:

SEC. 2. Powers and Functions of the Clark

Development Corporation. The BCDA, as the
incorporator and holding company of its Clark
subsidiary, shall determine the powers and
functions of the CDC. Pursuant to Section 15 of
RA 7227, the CDC shall have the specific
powers of the Export Processing Zone Authority
as provided for in Section 4 of Presidential
Decree No. 66 (1972) as amended.
Among those specific powers granted to CDC
under Section 4 of Presidential Decree No. 66
are:
(a) To operate, administer and manage the
export processing zone established in the Port
of Mariveles, Bataan, and such other export
processing zones as may be established under
this Decree; to construct, acquire, own, lease,
operate and maintain infrastructure facilities,
factory building, warehouses, dams, reservoir,
water distribution, electric light and power
system, telecommunications and
transportation, or such other facilities and
services necessary or useful in the conduct of
commerce or in the attainment of the purposes
and objectives of this Decree;
xxxx
(g) To fix, assess and collect storage charges and
fees, including rentals for the lease, use or
occupancy of lands, buildings, structure,
warehouses, facilities and other properties
owned and administered by the Authority; and
to fix and collect the fees and charges for the
issuance of permits, licenses and the rendering
of services not enumerated herein, the
provisions of law to the contrary
notwithstanding;
(h) For the due and effective exercise of the
powers conferred by law and to the extend (sic)
[extent] requisite therefor, to exercise exclusive
jurisdiction and sole police authority over all
areas owned or administered by the Authority.
For this purpose, the Authority shall have
supervision and control over the bringing in or
taking out of the Zone, including the movement
therein, of all cargoes, wares, articles,
machineries, equipment, supplies or
merchandise of every type and description;
x x x x (Emphasis supplied.)
In relation to the regulatory purpose of the
imposed fees, this Court in Progressive
Development Corporation v. Quezon City,[29]
stated that x x x the imposition questioned
must relate to an occupation or activity that so
engages the public interest in health, morals,
safety and development as to require regulation
for the protection and promotion of such public
interest; the imposition must also bear a
reasonable relation to the probable expenses of
regulation, taking into account not only the
costs of direct regulation but also its incidental
consequences as well.
In the case at bar, there can be no doubt that
the oil industry is greatly imbued with public
interest as it vitally affects the general
welfare.[30] In addition, fuel is a highly
combustible product which, if left unchecked,
poses a serious threat to life and property. Also,
the reasonable relation between the royalty fees
imposed on a per liter basis and the regulation
sought to be attained is that the higher the
volume of fuel entering CSEZ, the greater the
extent and frequency of supervision and
inspection required to ensure safety, security,
and order within the Zone.
Respondents submit that increased
administrative costs were triggered by security
risks that have recently emerged, such as
terrorist strikes in airlines and
military/government facilities. Explaining the
regulatory feature of the charges imposed under
the Policy Guidelines, then BCDA President
Rufo Colayco in his letter dated March 3, 2004
addressed to petitioners Chief Corporate
Counsel, stressed:

The need for regulation is more evident in the

light of the 9/11 tragedy considering that what
is being moved from one location to another are
highly combustible fuel products that could
cause loss of lives and damage to properties,
hence, a set of guidelines was promulgated on
28 June 2002. It must be emphasized also that
greater security measure must be observed in
the CSEZ because of the presence of the airport
which is a vital public infrastructure.

We are therefore constrained to sustain the

imposition of the royalty fees on deliveries of
CPIs fuel products to Nanox Philippines.[31]
As to the issue of reasonableness of the amount
of the fees, we hold that no evidence was
adduced by the petitioner to show that the fees
imposed are unreasonable.
Administrative issuances have the force and
effect of law.[32] They benefit from the same
presumption of validity and constitutionality
enjoyed by statutes. These two precepts place a
heavy burden upon any party assailing
governmental regulations.[33] Petitioners plain
allegations are simply not enough to overcome
the presumption of validity and reasonableness
of the subject imposition.
WHEREFORE, the petition is DENIED for lack
of merit and the Decision of the Court of
Appeals dated November 30, 2005 in CA-G.R.
SP No. 87117 is hereby AFFIRMED.
With costs against the petitioner.
SO ORDERED.

Tolentino v Secretary of Finance | GR No.

115455 | 30 October 1995

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,

vs.
THE SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE,
respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner,

vs.
TEOFISTO T. GUINGONA, JR., as Executive
Secretary; ROBERTO DE OCAMPO, as
Secretary of Finance; LIWAYWAY VINZONS-
CHATO, as Commissioner of Internal Revenue;
and their AUTHORIZED AGENTS OR
REPRESENTATIVES, respondents.

G.R. No. 115543 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF

THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF
FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND
BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP

PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE
JOURNALISTS, INC.; JOSE L. PAVIA; and
OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as
Commissioner of Internal Revenue; HON.
TEOFISTO T. GUINGONA, JR., in his capacity
as Executive Secretary; and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of
Finance, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS

ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE, respondent.

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA,

CIRILO A. RIGOS, ERME CAMBA, EMILIO C.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM
TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON,
RAFAEL G. FERNANDO, RAOUL V. VICTORINO,
JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND
NATIONALISM, INC. ("MABINI"), FREEDOM
FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and
WIGBERTO TAÑADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE
SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and
THE COMMISSIONER OF CUSTOMS,
respondents.

G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and
COMMISSIONER OF INTERNAL REVENUE,
respondents.
G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES,

petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as
the Commissioner of Internal Revenue, HON.
TEOFISTO T. GUINGONA, JR., in his capacity
as Executive Secretary, and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of
Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS

ASSOCIATION, INC. and ASSOCIATION OF
PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the
Secretary of Finance; HON. LIWAYWAY V.
CHATO, as the Commissioner of Internal
Revenue; and HON. GUILLERMO PARAYNO,
JR., in his capacity as the Commissioner of
Customs, respondents.

RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of

our decision dismissing the petitions filed in
these cases for the declaration of
unconstitutionality of R.A. No. 7716, otherwise
known as the Expanded Value-Added Tax Law.
The motions, of which there are 10 in all, have
been filed by the several petitioners in these
cases, with the exception of the Philippine
Educational Publishers Association, Inc. and
the Association of Philippine Booksellers,
petitioners in G.R. No. 115931.

The Solicitor General, representing the

respondents, filed a consolidated comment, to
which the Philippine Airlines, Inc., petitioner in
G.R. No. 115852, and the Philippine Press
Institute, Inc., petitioner in G.R. No. 115544,
and Juan T. David, petitioner in G.R. No.
115525, each filed a reply. In turn the Solicitor
General filed on June 1, 1995 a rejoinder to the
PPI's reply.

On June 27, 1995 the matter was submitted for

resolution.

I. Power of the Senate to propose

amendments to revenue bills. Some of the
petitioners (Tolentino, Kilosbayan, Inc.,
Philippine Airlines (PAL), Roco, and Chamber of
Real Estate and Builders Association (CREBA))
reiterate previous claims made by them that R.A.
No. 7716 did not "originate exclusively" in the
House of Representatives as required by Art. VI,
§24 of the Constitution. Although they admit
that H. No. 11197 was filed in the House of
Representatives where it passed three readings
and that afterward it was sent to the Senate
where after first reading it was referred to the
Senate Ways and Means Committee, they
complain that the Senate did not pass it on
second and third readings. Instead what the
Senate did was to pass its own version (S. No.
1630) which it approved on May 24, 1994.
Petitioner Tolentino adds that what the Senate
committee should have done was to amend H.
No. 11197 by striking out the text of the bill and
substituting it with the text of S. No. 1630. That
way, it is said, "the bill remains a House bill and
the Senate version just becomes the text (only
the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only

instance in which the Senate proposed an
amendment to a House revenue bill by enacting
its own version of a revenue bill. On at least two
occasions during the Eighth Congress, the
Senate passed its own version of revenue bills,
which, in consolidation with House bills earlier
passed, became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE
OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN
YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL
EQUIPMENT) which was approved by the
President on April 10, 1992. This Act is actually
a consolidation of H. No. 34254, which was
approved by the House on January 29, 1992,
and S. No. 1920, which was approved by the
Senate on February 3, 1992.

R.A. No. 7549 (AN ACT GRANTING TAX

EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING
A MEDAL IN OLYMPIC GAMES) which was
approved by the President on May 22, 1992.
This Act is a consolidation of H. No. 22232,
which was approved by the House of
Representatives on August 2, 1989, and S. No.
807, which was approved by the Senate on
October 21, 1991.

On the other hand, the Ninth Congress passed

revenue laws which were also the result of the
consolidation of House and Senate bills. These
are the following, with indications of the dates
on which the laws were approved by the
President and dates the separate bills of the two
chambers of Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR

TAX EVASION, AMENDING FOR THIS
PURPOSE THE PERTINENT SECTIONS OF THE
NATIONAL INTERNAL REVENUE CODE
(December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER

OF INTERNAL REVENUE TO REQUIRE THE
PAYMENT OF THE VALUE-ADDED TAX EVERY
MONTH AND TO ALLOW LOCAL
GOVERNMENT UNITS TO SHARE IN VAT
REVENUE, AMENDING FOR THIS PURPOSE
CERTAIN SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28,
1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER

OF INTERNAL REVENUE TO PRESCRIBE THE
PLACE FOR PAYMENT OF INTERNAL
REVENUE TAXES BY LARGE TAXPAYERS,
AMENDING FOR THIS PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED (February 24,
1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR

ANY OF ITS POLITICAL SUBDIVISIONS,
INSTRUMENTALITIES OR AGENCIES
INCLUDING GOVERNMENT-OWNED OR
CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-
ADDED TAX DUE AT THE RATE OF THREE
PERCENT (3%) ON GROSS PAYMENT FOR THE
PURCHASE OF GOODS AND SIX PERCENT (6%)
ON GROSS RECEIPTS FOR SERVICES
RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED
OR CONTROLLED CORPORATIONS TO
DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL
GOVERNMENT, AND FOR OTHER PURPOSES
(November 9, 1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE

STRUCTURE AND ADMINISTRATION OF THE
DOCUMENTARY STAMP TAX, AMENDING FOR
THE PURPOSE CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER
PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

AN ACT IMPOSING A TAX ON THE SALE,

BARTER OR EXCHANGE OF SHARES OF
STOCK LISTED AND TRADED THROUGH THE
LOCAL STOCK EXCHANGE OR THROUGH
INITIAL PUBLIC OFFERING, AMENDING FOR
THE PURPOSE THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, BY
INSERTING A NEW SECTION AND REPEALING
CERTAIN SUBSECTIONS THEREOF (May 5,
1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the

only instance in which the Senate, in the
exercise of its power to propose amendments to
bills required to originate in the House, passed
its own version of a House revenue measure. It
is noteworthy that, in the particular case of S.
No. 1630, petitioners Tolentino and Roco, as
members of the Senate, voted to approve it on
second and third readings.

On the other hand, amendment by substitution,

in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has
not shown what substantial difference it would
make if, as the Senate actually did in this case,
a separate bill like S. No. 1630 is instead
enacted as a substitute measure, "taking into
Consideration . . . H.B. 11197."

Indeed, so far as pertinent, the Rules of the

Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the

original amendment shall be considered.

No amendment by substitution shall be

entertained unless the text thereof is submitted
in writing.

Any of said amendments may be withdrawn

before a vote is taken thereon.

§69. No amendment which seeks the inclusion

of a legislative provision foreign to the subject
matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be

amended by substituting it with another which
covers a subject distinct from that proposed in
the original bill or resolution. (emphasis added).

Nor is there merit in petitioners' contention that,

with regard to revenue bills, the Philippine
Senate possesses less power than the U.S.
Senate because of textual differences between
constitutional provisions giving them the power
to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

All Bills for raising Revenue shall originate in

the House of Representatives; but the Senate
may propose or concur with amendments as on
other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills

authorizing increase of the public debt, bills of
local application, and private bills shall
originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments.

The addition of the word "exclusively" in the

Philippine Constitution and the decision to drop
the phrase "as on other Bills" in the American
version, according to petitioners, shows the
intention of the framers of our Constitution to
restrict the Senate's power to propose
amendments to revenue bills. Petitioner
Tolentino contends that the word "exclusively"
was inserted to modify "originate" and "the
words 'as in any other bills' (sic) were eliminated
so as to show that these bills were not to be like
other bills but must be treated as a special
kind."

The history of this provision does not support

this contention. The supposed indicia of
constitutional intent are nothing but the relics
of an unsuccessful attempt to limit the power of
the Senate. It will be recalled that the 1935
Constitution originally provided for a
unicameral National Assembly. When it was
decided in 1939 to change to a bicameral
legislature, it became necessary to provide for
the procedure for lawmaking by the Senate and
the House of Representatives. The work of
proposing amendments to the Constitution was
done by the National Assembly, acting as a
constituent assembly, some of whose members,
jealous of preserving the Assembly's lawmaking
powers, sought to curtail the powers of the
proposed Senate. Accordingly they proposed the
following provision:

All bills appropriating public funds, revenue or

tariff bills, bills of local application, and private
bills shall originate exclusively in the Assembly,
but the Senate may propose or concur with
amendments. In case of disapproval by the
Senate of any such bills, the Assembly may
repass the same by a two-thirds vote of all its
members, and thereupon, the bill so repassed
shall be deemed enacted and may be submitted
to the President for corresponding action. In the
event that the Senate should fail to finally act
on any such bills, the Assembly may, after
thirty days from the opening of the next regular
session of the same legislative term, reapprove
the same with a vote of two-thirds of all the
members of the Assembly. And upon such
reapproval, the bill shall be deemed enacted
and may be submitted to the President for
corresponding action.

The special committee on the revision of laws of

the Second National Assembly vetoed the
proposal. It deleted everything after the first
sentence. As rewritten, the proposal was
approved by the National Assembly and
embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR
CONSTITUTION 65-66 (1950)). The proposed
amendment was submitted to the people and
ratified by them in the elections held on June
18, 1940.

This is the history of Art. VI, §18 (2) of the 1935

Constitution, from which Art. VI, §24 of the
present Constitution was derived. It explains
why the word "exclusively" was added to the
American text from which the framers of the
Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied.
Considering the defeat of the proposal, the
power of the Senate to propose amendments
must be understood to be full, plenary and
complete "as on other Bills." Thus, because
revenue bills are required to originate
exclusively in the House of Representatives, the
Senate cannot enact revenue measures of its
own without such bills. After a revenue bill is
passed and sent over to it by the House,
however, the Senate certainly can pass its own
version on the same subject matter. This follows
from the coequality of the two chambers of
Congress.

That this is also the understanding of book

authors of the scope of the Senate's power to
concur is clear from the following commentaries:

The power of the Senate to propose or concur

with amendments is apparently without
restriction. It would seem that by virtue of this
power, the Senate can practically re-write a bill
required to come from the House and leave only
a trace of the original bill. For example, a
general revenue bill passed by the lower house
of the United States Congress contained
provisions for the imposition of an inheritance
tax . This was changed by the Senate into a
corporation tax. The amending authority of the
Senate was declared by the United States
Supreme Court to be sufficiently broad to
enable it to make the alteration. [Flint v. Stone
Tracy Company, 220 U.S. 107, 55 L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW

OF THE PHILIPPINES 247 (1961))

The above-mentioned bills are supposed to be

initiated by the House of Representatives
because it is more numerous in membership
and therefore also more representative of the
people. Moreover, its members are presumed to
be more familiar with the needs of the country
in regard to the enactment of the legislation
involved.

The Senate is, however, allowed much leeway in

the exercise of its power to propose or concur
with amendments to the bills initiated by the
House of Representatives. Thus, in one case, a
bill introduced in the U.S. House of
Representatives was changed by the Senate to
make a proposed inheritance tax a corporation
tax. It is also accepted practice for the Senate to
introduce what is known as an amendment by
substitution, which may entirely replace the bill
initiated in the House of Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145

(1993)).

In sum, while Art. VI, §24 provides that all

appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of
local application, and private bills must
"originate exclusively in the House of
Representatives," it also adds, "but the Senate
may propose or concur with amendments." In
the exercise of this power, the Senate may
propose an entirely new bill as a substitute
measure. As petitioner Tolentino states in a
high school text, a committee to which a bill is
referred may do any of the following:

(1) to endorse the bill without changes; (2) to

make changes in the bill omitting or adding
sections or altering its language; (3) to make
and endorse an entirely new bill as a substitute,
in which case it will be known as a committee
bill; or (4) to make no report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE

PHILIPPINES 258 (1950))

To except from this procedure the amendment

of bills which are required to originate in the
House by prescribing that the number of the
House bill and its other parts up to the enacting
clause must be preserved although the text of
the Senate amendment may be incorporated in
place of the original body of the bill is to insist
on a mere technicality. At any rate there is no
rule prescribing this form. S. No. 1630, as a
substitute measure, is therefore as much an
amendment of H. No. 11197 as any which the
Senate could have made.

II. S. No. 1630 a mere amendment of H. No.

11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and
distinct bill. Hence their repeated references to
its certification that it was passed by the Senate
"in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No.
11197," implying that there is something
substantially different between the reference to
S. No. 1129 and the reference to H. No. 11197.
From this premise, they conclude that R.A. No.
7716 originated both in the House and in the
Senate and that it is the product of two "half-
baked bills because neither H. No. 11197 nor S.
No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the

provisions of S. No. 1630, clearly appear to be
mere amendments of the corresponding
provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197
and S. No. 1630 attached as Supplement A to
the basic petition of petitioner Tolentino, while
showing differences between the two bills, at the
same time indicates that the provisions of the
Senate bill were precisely intended to be
amendments to the House bill.

Without H. No. 11197, the Senate could not

have enacted S. No. 1630. Because the Senate
bill was a mere amendment of the House bill, H.
No. 11197 in its original form did not have to
pass the Senate on second and three readings.
It was enough that after it was passed on first
reading it was referred to the Senate Committee
on Ways and Means. Neither was it required
that S. No. 1630 be passed by the House of
Representatives before the two bills could be
referred to the Conference Committee.

There is legislative precedent for what was done

in the case of H. No. 11197 and S. No. 1630.
When the House bill and Senate bill, which
became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a
conference committee, the question was raised
whether the two bills could be the subject of
such conference, considering that the bill from
one house had not been passed by the other and
vice versa. As Congressman Duran put the
question:

MR. DURAN. Therefore, I raise this question

of order as to procedure: If a House bill is
passed by the House but not passed by the
Senate, and a Senate bill of a similar nature is
passed in the Senate but never passed in the
House, can the two bills be the subject of a
conference, and can a law be enacted from these
two bills? I understand that the Senate bill in
this particular instance does not refer to
investments in government securities, whereas
the bill in the House, which was introduced by
the Speaker, covers two subject matters: not
only investigation of deposits in banks but also
investigation of investments in government
securities. Now, since the two bills differ in their
subject matter, I believe that no law can be
enacted.

Ruling on the point of order raised, the chair

(Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference

committee is in order. It is precisely in cases like
this where a conference should be had. If the
House bill had been approved by the Senate,
there would have been no need of a conference;
but precisely because the Senate passed
another bill on the same subject matter, the
conference committee had to be created, and we
are now considering the report of that
committee.

(2 CONG. REC. NO. 13, July 27, 1955, pp.

3841-42 (emphasis added))

III. The President's certification. The fallacy in

thinking that H. No. 11197 and S. No. 1630 are
distinct and unrelated measures also accounts
for the petitioners' (Kilosbayan's and PAL's)
contention that because the President
separately certified to the need for the
immediate enactment of these measures, his
certification was ineffectual and void. The
certification had to be made of the version of the
same revenue bill which at the moment was
being considered. Otherwise, to follow
petitioners' theory, it would be necessary for the
President to certify as many bills as are
presented in a house of Congress even though
the bills are merely versions of the bill he has
already certified. It is enough that he certifies
the bill which, at the time he makes the
certification, is under consideration. Since on
March 22, 1994 the Senate was considering S.
No. 1630, it was that bill which had to be
certified. For that matter on June 1, 1993 the
President had earlier certified H. No. 9210 for
immediate enactment because it was the one
which at that time was being considered by the
House. This bill was later substituted, together
with other bills, by H. No. 11197.

As to what Presidential certification can

accomplish, we have already explained in the
main decision that the phrase "except when the
President certifies to the necessity of its
immediate enactment, etc." in Art. VI, §26 (2)
qualifies not only the requirement that "printed
copies [of a bill] in its final form [must be]
distributed to the members three days before its
passage" but also the requirement that before a
bill can become a law it must have passed "three
readings on separate days." There is not only
textual support for such construction but
historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution

originally provided:

(2) No bill shall be passed by either House

unless it shall have been printed and copies
thereof in its final form furnished its Members
at least three calendar days prior to its passage,
except when the President shall have certified
to the necessity of its immediate enactment.
Upon the last reading of a bill, no amendment
thereof shall be allowed and the question upon
its passage shall be taken immediately
thereafter, and the yeas and nays entered on
the Journal.

When the 1973 Constitution was adopted, it

was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has

passed three readings on separate days, and
printed copies thereof in its final form have been
distributed to the Members three days before its
passage, except when the Prime Minister
certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no
amendment thereto shall be allowed, and the
vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in the
Journal.

This provision of the 1973 document, with

slight modification, was adopted in Art. VI, §26
(2) of the present Constitution, thus:

(2) No bill passed by either House shall

become a law unless it has passed three
readings on separate days, and printed copies
thereof in its final form have been distributed to
its Members three days before its passage,
except when the President certifies to the
necessity of its immediate enactment to meet a
public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays
entered in the Journal.

The exception is based on the prudential

consideration that if in all cases three readings
on separate days are required and a bill has to
be printed in final form before it can be passed,
the need for a law may be rendered academic by
the occurrence of the very emergency or public
calamity which it is meant to address.
Petitioners further contend that a "growing
budget deficit" is not an emergency, especially
in a country like the Philippines where budget
deficit is a chronic condition. Even if this were
the case, an enormous budget deficit does not
make the need for R.A. No. 7716 any less urgent
or the situation calling for its enactment any
less an emergency.

Apparently, the members of the Senate

(including some of the petitioners in these cases)
believed that there was an urgent need for
consideration of S. No. 1630, because they
responded to the call of the President by voting
on the bill on second and third readings on the
same day. While the judicial department is not
bound by the Senate's acceptance of the
President's certification, the respect due
coequal departments of the government in
matters committed to them by the Constitution
and the absence of a clear showing of grave
abuse of discretion caution a stay of the judicial
hand.

At any rate, we are satisfied that S. No. 1630

received thorough consideration in the Senate
where it was discussed for six days. Only its
distribution in advance in its final printed form
was actually dispensed with by holding the
voting on second and third readings on the
same day (March 24, 1994). Otherwise,
sufficient time between the submission of the
bill on February 8, 1994 on second reading and
its approval on March 24, 1994 elapsed before
it was finally voted on by the Senate on third
reading.

The purpose for which three readings on

separate days is required is said to be two-fold:
(1) to inform the members of Congress of what
they must vote on and (2) to give them notice
that a measure is progressing through the
enacting process, thus enabling them and
others interested in the measure to prepare
their positions with reference to it. (1 J. G.
SUTHERLAND, STATUTES AND STATUTORY
CONSTRUCTION §10.04, p. 282 (1972)). These
purposes were substantially achieved in the
case of R.A. No. 7716.

IV. Power of Conference Committee. It is

contended (principally by Kilosbayan, Inc. and
the Movement of Attorneys for Brotherhood,
Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full
public disclosure and the people's right to know
(Art. II, §28 and Art. III, §7) the Conference
Committee met for two days in executive
session with only the conferees present.

As pointed out in our main decision, even in the

United States it was customary to hold such
sessions with only the conferees and their staffs
in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions.
Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing
open hearings for conference committees.

It is nevertheless claimed that in the United

States, before the adoption of the rule in 1975,
at least staff members were present. These were
staff members of the Senators and
Congressmen, however, who may be presumed
to be their confidential men, not stenographers
as in this case who on the last two days of the
conference were excluded. There is no showing
that the conferees themselves did not take notes
of their proceedings so as to give petitioner
Kilosbayan basis for claiming that even in secret
diplomatic negotiations involving state interests,
conferees keep notes of their meetings. Above
all, the public's right to know was fully served
because the Conference Committee in this case
submitted a report showing the changes made
on the differing versions of the House and the
Senate.

Petitioners cite the rules of both houses which

provide that conference committee reports must
contain "a detailed, sufficiently explicit
statement of the changes in or other
amendments." These changes are shown in the
bill attached to the Conference Committee
Report. The members of both houses could thus
ascertain what changes had been made in the
original bills without the need of a statement
detailing the changes.

The same question now presented was raised

when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the
Conference Committee. Congressman Bengzon
raised a point of order. He said:

MR. BENGZON. My point of order is that it

is out of order to consider the report of the
conference committee regarding House Bill No.
2557 by reason of the provision of Section 11,
Article XII, of the Rules of this House which
provides specifically that the conference report
must be accompanied by a detailed statement
of the effects of the amendment on the bill of the
House. This conference committee report is not
accompanied by that detailed statement, Mr.
Speaker. Therefore it is out of order to consider
it.

Petitioner Tolentino, then the Majority Floor

Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just

like to say a few words in connection with the
point of order raised by the gentleman from
Pangasinan.

There is no question about the provision of the

Rule cited by the gentleman from Pangasinan,
but this provision applies to those cases where
only portions of the bill have been amended. In
this case before us an entire bill is presented;
therefore, it can be easily seen from the reading
of the bill what the provisions are. Besides, this
procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr.

Speaker, we have to look into the reason for the
provisions of the Rules, and the reason for the
requirement in the provision cited by the
gentleman from Pangasinan is when there are
only certain words or phrases inserted in or
deleted from the provisions of the bill included
in the conference report, and we cannot
understand what those words and phrases
mean and their relation to the bill. In that case,
it is necessary to make a detailed statement on
how those words and phrases will affect the bill
as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is
not necessary. So when the reason for the Rule
does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis

added))

Congressman Tolentino was sustained by the

chair. The record shows that when the ruling
was appealed, it was upheld by viva voce and
when a division of the House was called, it was
sustained by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a

conference committee to insert new provisions
as long as these are germane to the subject of
the conference. As this Court held in Philippine
Judges Association v. Prado, 227 SCRA 703
(1993), in an opinion written by then Justice
Cruz, the jurisdiction of the conference
committee is not limited to resolving differences
between the Senate and the House. It may
propose an entirely new provision. What is
important is that its report is subsequently
approved by the respective houses of Congress.
This Court ruled that it would not entertain
allegations that, because new provisions had
been added by the conference committee, there
was thereby a violation of the constitutional
injunction that "upon the last reading of a bill,
no amendment thereto shall be allowed."

Applying these principles, we shall decline to

look into the petitioners' charges that an
amendment was made upon the last reading of
the bill that eventually became R.A. No. 7354
and that copies thereof in its final form were not
distributed among the members of each House.
Both the enrolled bill and the legislative
journals certify that the measure was duly
enacted i.e., in accordance with Article VI, Sec.
26 (2) of the Constitution. We are bound by
such official assurances from a coordinate
department of the government, to which we owe,
at the very least, a becoming courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description

of conference committees in the Philippines in a
1979 study:

Conference committees may be of two types:

free or instructed. These committees may be
given instructions by their parent bodies or they
may be left without instructions. Normally the
conference committees are without instructions,
and this is why they are often critically referred
to as "the little legislatures." Once bills have
been sent to them, the conferees have almost
unlimited authority to change the clauses of the
bills and in fact sometimes introduce new
measures that were not in the original
legislation. No minutes are kept, and members'
activities on conference committees are difficult
to determine. One congressman known for his
idealism put it this way: "I killed a bill on export
incentives for my interest group [copra] in the
conference committee but I could not have done
so anywhere else." The conference committee
submits a report to both houses, and usually it
is accepted. If the report is not accepted, then
the committee is discharged and new members
are appointed.

(R. Jackson, Committees in the Philippine

Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE ANALYSIS
163 (J. D. LEES AND M. SHAW, eds.)).

In citing this study, we pass no judgment on the

methods of conference committees. We cite it
only to say that conference committees here are
no different from their counterparts in the
United States whose vast powers we noted in
Philippine Judges Association v. Prado, supra.
At all events, under Art. VI, §16(3) each house
has the power "to determine the rules of its
proceedings," including those of its committees.
Any meaningful change in the method and
procedures of Congress or its committees must
therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197.

PAL maintains that R.A. No. 7716 violates Art.
VI, §26 (1) of the Constitution which provides
that "Every bill passed by Congress shall
embrace only one subject which shall be
expressed in the title thereof." PAL contends
that the amendment of its franchise by the
withdrawal of its exemption from the VAT is not
expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a

franchise tax of 2% on its gross revenue "in lieu
of all other taxes, duties, royalties, registration,
license and other fees and charges of any kind,
nature, or description, imposed, levied,
established, assessed or collected by any
municipal, city, provincial or national authority
or government agency, now or in the future."

PAL was exempted from the payment of the VAT

along with other entities by §103 of the National
Internal Revenue Code, which provides as
follows:

§103. Exempt transactions. — The

following shall be exempt from the value-added
tax:

xxx xxx xxx

(q) Transactions which are exempt under

special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain

exemptions, including that granted to PAL, by
amending §103, as follows:
§103. Exempt transactions. — The
following shall be exempt from the value-added
tax:

xxx xxx xxx

(q) Transactions which are exempt under

special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491,
1590. . . .

The amendment of §103 is expressed in the title

of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-

ADDED TAX (VAT) SYSTEM, WIDENING ITS
TAX BASE AND ENHANCING ITS
ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED,
AND FOR OTHER PURPOSES.

By stating that R.A. No. 7716 seeks to

"[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND
FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED AND FOR OTHER PURPOSES,"
Congress thereby clearly expresses its intention
to amend any provision of the NIRC which
stands in the way of accomplishing the purpose
of the law.

PAL asserts that the amendment of its franchise

must be reflected in the title of the law by
specific reference to P.D. No. 1590. It is
unnecessary to do this in order to comply with
the constitutional requirement, since it is
already stated in the title that the law seeks to
amend the pertinent provisions of the NIRC,
among which is §103(q), in order to widen the
base of the VAT. Actually, it is the bill which
becomes a law that is required to express in its
title the subject of legislation. The titles of H. No.
11197 and S. No. 1630 in fact specifically
referred to §103 of the NIRC as among the
provisions sought to be amended. We are
satisfied that sufficient notice had been given of
the pendency of these bills in Congress before
they were enacted into what is now R.A.
No. 7716.

In Philippine Judges Association v. Prado,

supra, a similar argument as that now made by
PAL was rejected. R.A. No. 7354 is entitled AN
ACT CREATING THE PHILIPPINE POSTAL
CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES,
PROVIDING FOR REGULATION OF THE
INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a
provision repealing all franking privileges. It
was contended that the withdrawal of franking
privileges was not expressed in the title of the
law. In holding that there was sufficient
description of the subject of the law in its title,
including the repeal of franking privileges, this
Court held:

To require every end and means necessary for

the accomplishment of the general objectives of
the statute to be expressed in its title would not
only be unreasonable but would actually render
legislation impossible. [Cooley, Constitutional
Limitations, 8th Ed., p. 297] As has been
correctly explained:

The details of a legislative act need not be

specifically stated in its title, but matter
germane to the subject as expressed in the title,
and adopted to the accomplishment of the
object in view, may properly be included in the
act. Thus, it is proper to create in the same act
the machinery by which the act is to be enforced,
to prescribe the penalties for its infraction, and
to remove obstacles in the way of its execution.
If such matters are properly connected with the
subject as expressed in the title, it is
unnecessary that they should also have special
mention in the title. (Southern Pac. Co. v.
Bartine, 170 Fed. 725)
(227 SCRA at 707-708)

VI. Claims of press freedom and religious

liberty. We have held that, as a general
proposition, the press is not exempt from the
taxing power of the State and that what the
constitutional guarantee of free press prohibits
are laws which single out the press or target a
group belonging to the press for special
treatment or which in any way discriminate
against the press on the basis of the content of
the publication, and R.A. No. 7716 is none of
these.

Now it is contended by the PPI that by removing

the exemption of the press from the VAT while
maintaining those granted to others, the law
discriminates against the press. At any rate, it
is averred, "even nondiscriminatory taxation of
constitutionally guaranteed freedom is
unconstitutional."

With respect to the first contention, it would

suffice to say that since the law granted the
press a privilege, the law could take back the
privilege anytime without offense to the
Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the
exercise of its sovereign prerogative.

Indeed, in withdrawing the exemption, the law

merely subjects the press to the same tax
burden to which other businesses have long ago
been subject. It is thus different from the tax
involved in the cases invoked by the PPI. The
license tax in Grosjean v. American Press Co.,
297 U.S. 233, 80 L. Ed. 660 (1936) was found
to be discriminatory because it was laid on the
gross advertising receipts only of newspapers
whose weekly circulation was over 20,000, with
the result that the tax applied only to 13 out of
124 publishers in Louisiana. These large papers
were critical of Senator Huey Long who
controlled the state legislature which enacted
the license tax. The censorial motivation for the
law was thus evident.
On the other hand, in Minneapolis Star &
Tribune Co. v. Minnesota Comm'r of Revenue,
460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax
was found to be discriminatory because
although it could have been made liable for the
sales tax or, in lieu thereof, for the use tax on
the privilege of using, storing or consuming
tangible goods, the press was not. Instead, the
press was exempted from both taxes. It was,
however, later made to pay a special use tax on
the cost of paper and ink which made these
items "the only items subject to the use tax that
were component of goods to be sold at retail."
The U.S. Supreme Court held that the
differential treatment of the press "suggests
that the goal of regulation is not related to
suppression of expression, and such goal is
presumptively unconstitutional." It would
therefore appear that even a law that favors the
press is constitutionally suspect. (See the
dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions

previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by
R.A. No. 7716. Other exemptions from the VAT,
such as those previously granted to PAL,
petroleum concessionaires, enterprises
registered with the Export Processing Zone
Authority, and many more are likewise totally
withdrawn, in addition to exemptions which are
partially withdrawn, in an effort to broaden the
base of the tax.

The PPI says that the discriminatory treatment

of the press is highlighted by the fact that
transactions, which are profit oriented,
continue to enjoy exemption under R.A. No.
7716. An enumeration of some of these
transactions will suffice to show that by and
large this is not so and that the exemptions are
granted for a purpose. As the Solicitor General
says, such exemptions are granted, in some
cases, to encourage agricultural production and,
in other cases, for the personal benefit of the
end-user rather than for profit. The exempt
transactions are:

(a) Goods for consumption or use which are

in their original state (agricultural, marine and
forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings,
fish, prawn livestock and poultry feeds) and
goods or services to enhance agriculture
(milling of palay, corn, sugar cane and raw
sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or

use (household and personal effects of citizens
returning to the Philippines) or for professional
use, like professional instruments and
implements, by persons coming to the
Philippines to settle here.

(c) Goods subject to excise tax such as

petroleum products or to be used for
manufacture of petroleum products subject to
excise tax and services subject to percentage
tax.

(d) Educational services, medical, dental,

hospital and veterinary services, and services
rendered under employer-employee
relationship.

(e) Works of art and similar creations sold by

the artist himself.

(f) Transactions exempted under special laws,

or international agreements.

(g) Export-sales by persons not VAT-

registered.

(h) Goods or services with gross annual sale

or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the

Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter
that the law does not discriminate against the
press because "even nondiscriminatory taxation
on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this
assertion the following statement in Murdock v.
Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292
(1943):

The fact that the ordinance is

"nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is
not so restricted. A license tax certainly does
not acquire constitutional validity because it
classifies the privileges protected by the First
Amendment along with the wares and
merchandise of hucksters and peddlers and
treats them all alike. Such equality in treatment
does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in
preferred position.

The Court was speaking in that case of a license

tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is
unconstitutional because it lays a prior
restraint on the exercise of its right. Hence,
although its application to others, such those
selling goods, is valid, its application to the
press or to religious groups, such as the
Jehovah's Witnesses, in connection with the
latter's sale of religious books and pamphlets, is
unconstitutional. As the U.S. Supreme Court
put it, "it is one thing to impose a tax on income
or property of a preacher. It is quite another
thing to exact a tax on him for delivering a
sermon."

A similar ruling was made by this Court in

American Bible Society v. City of Manila, 101
Phil. 386 (1957) which invalidated a city
ordinance requiring a business license fee on
those engaged in the sale of general
merchandise. It was held that the tax could not
be imposed on the sale of bibles by the
American Bible Society without restraining the
free exercise of its right to propagate.
The VAT is, however, different. It is not a license
tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed
on the sale, barter, lease or exchange of goods
or properties or the sale or exchange of services
and the lease of properties purely for revenue
purposes. To subject the press to its payment is
not to burden the exercise of its right any more
than to make the press pay income tax or
subject it to general regulation is not to violate
its freedom under the Constitution.

Additionally, the Philippine Bible Society, Inc.

claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the
cost of printing copies which are given free to
those who cannot afford to pay so that to tax
the sales would be to increase the price, while
reducing the volume of sale. Granting that to be
the case, the resulting burden on the exercise of
religious freedom is so incidental as to make it
difficult to differentiate it from any other
economic imposition that might make the right
to disseminate religious doctrines costly.
Otherwise, to follow the petitioner's argument,
to increase the tax on the sale of vestments
would be to lay an impermissible burden on the
right of the preacher to make a sermon.

On the other hand the registration fee of

P1,000.00 imposed by §107 of the NIRC, as
amended by §7 of R.A. No. 7716, although fixed
in amount, is really just to pay for the expenses
of registration and enforcement of provisions
such as those relating to accounting in §108 of
the NIRC. That the PBS distributes free bibles
and therefore is not liable to pay the VAT does
not excuse it from the payment of this fee
because it also sells some copies. At any rate
whether the PBS is liable for the VAT must be
decided in concrete cases, in the event it is
assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal

protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1)
impairs the obligations of contracts, (2)
classifies transactions as covered or exempt
without reasonable basis and (3) violates the
rule that taxes should be uniform and equitable
and that Congress shall "evolve a progressive
system of taxation."

With respect to the first contention, it is claimed

that the application of the tax to existing
contracts of the sale of real property by
installment or on deferred payment basis would
result in substantial increases in the monthly
amortizations to be paid because of the 10%
VAT. The additional amount, it is pointed out,
is something that the buyer did not anticipate
at the time he entered into the contract.

The short answer to this is the one given by this

Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs,
but none of them show that a lawful tax on a
new subject, or an increased tax on an old one,
interferes with a contract or impairs its
obligation, within the meaning of the
Constitution. Even though such taxation may
affect particular contracts, as it may increase
the debt of one person and lessen the security
of another, or may impose additional burdens
upon one class and release the burdens of
another, still the tax must be paid unless
prohibited by the Constitution, nor can it be
said that it impairs the obligation of any existing
contract in its true legal sense." (La Insular v.
Machuca Go-Tauco and Nubla Co-Siong, 39
Phil. 567, 574 (1919)). Indeed not only existing
laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order."
(Philippine-American Life Ins. Co. v. Auditor
General, 22 SCRA 135, 147 (1968)) Contracts
must be understood as having been made in
reference to the possible exercise of the rightful
authority of the government and no obligation
of contract can extend to the defeat of that
authority. (Norman v. Baltimore and Ohio R.R.,
79 L. Ed. 885 (1935)).
It is next pointed out that while §4 of R.A. No.
7716 exempts such transactions as the sale of
agricultural products, food items, petroleum,
and medical and veterinary services, it grants
no exemption on the sale of real property which
is equally essential. The sale of real property for
socialized and low-cost housing is exempted
from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle
class, who are equally homeless, should
likewise be exempted.

The sale of food items, petroleum, medical and

veterinary services, etc., which are essential
goods and services was already exempt under
§103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in
error in claiming that R.A. No. 7716 granted
exemption to these transactions, while
subjecting those of petitioner to the payment of
the VAT. Moreover, there is a difference between
the "homeless poor" and the "homeless less
poor" in the example given by petitioner,
because the second group or middle class can
afford to rent houses in the meantime that they
cannot yet buy their own homes. The two social
classes are thus differently situated in life. "It is
inherent in the power to tax that the State be
free to select the subjects of taxation, and it has
been repeatedly held that 'inequalities which
result from a singling out of one particular class
for taxation, or exemption infringe no
constitutional limitation.'" (Lutz v. Araneta, 98
Phil. 148, 153 (1955). Accord, City of Baguio v.
De Leon, 134 Phil. 912 (1968); Sison, Jr. v.
Ancheta, 130 SCRA 654, 663 (1984); Kapatiran
ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already

noted, that R.A. No. 7716 also violates Art. VI,
§28(1) which provides that "The rule of taxation
shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that
all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing
power has the authority to make reasonable
and natural classifications for purposes of
taxation. To satisfy this requirement it is
enough that the statute or ordinance applies
equally to all persons, forms and corporations
placed in similar situation. (City of Baguio v. De
Leon, supra; Sison, Jr. v. Ancheta, supra)

Indeed, the VAT was already provided in E.O.

No. 273 long before R.A. No. 7716 was enacted.
R.A. No. 7716 merely expands the base of the
tax. The validity of the original VAT Law was
questioned in Kapatiran ng Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA
383 (1988) on grounds similar to those made in
these cases, namely, that the law was
"oppressive, discriminatory, unjust and
regressive in violation of Art. VI, §28(1) of the
Constitution." (At 382) Rejecting the challenge
to the law, this Court held:

As the Court sees it, EO 273 satisfies all the

requirements of a valid tax. It is uniform. . . .

The sales tax adopted in EO 273 is applied

similarly on all goods and services sold to the
public, which are not exempt, at the constant
rate of 0% or 10%.

The disputed sales tax is also equitable. It is

imposed only on sales of goods or services by
persons engaged in business with an aggregate
gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently
exempt from its application. Likewise exempt
from the tax are sales of farm and marine
products, so that the costs of basic food and
other necessities, spared as they are from the
incidence of the VAT, are expected to be
relatively lower and within the reach of the
general public.

(At 382-383)
The CREBA claims that the VAT is regressive. A
similar claim is made by the Cooperative Union
of the Philippines, Inc. (CUP), while petitioner
Juan T. David argues that the law contravenes
the mandate of Congress to provide for a
progressive system of taxation because the law
imposes a flat rate of 10% and thus places the
tax burden on all taxpayers without regard to
their ability to pay.

The Constitution does not really prohibit the

imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that
Congress shall "evolve a progressive system of
taxation." The constitutional provision has been
interpreted to mean simply that "direct taxes
are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized." (E.
FERNANDO, THE CONSTITUTION OF THE
PHILIPPINES 221 (Second ed. (1977)). Indeed,
the mandate to Congress is not to prescribe, but
to evolve, a progressive tax system. Otherwise,
sales taxes, which perhaps are the oldest form
of indirect taxes, would have been prohibited
with the proclamation of Art. VIII, §17(1) of the
1973 Constitution from which the present Art.
VI, §28(1) was taken. Sales taxes are also
regressive.

Resort to indirect taxes should be minimized

but not avoided entirely because it is difficult, if
not impossible, to avoid them by imposing such
taxes according to the taxpayers' ability to pay.
In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing
for zero rating of certain transactions (R.A. No.
7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A.
No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic

and essential goods and services are exempted
from the VAT:

(a) Goods for consumption or use which are

in their original state (agricultural, marine and
forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings,
fish, prawn livestock and poultry feeds) and
goods or services to enhance agriculture
(milling of palay, corn sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients
used for the manufacture of feeds).

(b) Goods used for personal consumption or

use (household and personal effects of citizens
returning to the Philippines) and or professional
use, like professional instruments and
implements, by persons coming to the
Philippines to settle here.

(c) Goods subject to excise tax such as

petroleum products or to be used for
manufacture of petroleum products subject to
excise tax and services subject to percentage
tax.

(d) Educational services, medical, dental,

hospital and veterinary services, and services
rendered under employer-employee
relationship.

(e) Works of art and similar creations sold by

the artist himself.

(f) Transactions exempted under special laws,

or international agreements.

(g) Export-sales by persons not VAT-

registered.

(h) Goods or services with gross annual sale

or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the

Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are

subject to the VAT are those which involve
goods and services which are used or availed of
mainly by higher income groups. These include
real properties held primarily for sale to
customers or for lease in the ordinary course of
trade or business, the right or privilege to use
patent, copyright, and other similar property or
right, the right or privilege to use industrial,
commercial or scientific equipment, motion
picture films, tapes and discs, radio, television,
satellite transmission and cable television time,
hotels, restaurants and similar places,
securities, lending investments, taxicabs, utility
cars for rent, tourist buses, and other common
carriers, services of franchise grantees of
telephone and telegraph.

The problem with CREBA's petition is that it

presents broad claims of constitutional
violations by tendering issues not at retail but
at wholesale and in the abstract. There is no
fully developed record which can impart to
adjudication the impact of actuality. There is no
factual foundation to show in the concrete the
application of the law to actual contracts and
exemplify its effect on property rights. For the
fact is that petitioner's members have not even
been assessed the VAT. Petitioner's case is not
made concrete by a series of hypothetical
questions asked which are no different from
those dealt with in advisory opinions.

The difficulty confronting petitioner is thus

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

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await

the development of a concrete case. It may be
that postponement of adjudication would result
in a multiplicity of suits. This need not be the
case, however. Enforcement of the law may give
rise to such a case. A test case, provided it is an
actual case and not an abstract or hypothetical
one, may thus be presented.

Nor is hardship to taxpayers alone an adequate

justification for adjudicating abstract issues.
Otherwise, adjudication would be no different
from the giving of advisory opinion that does not
really settle legal issues.

We are told that it is our duty under Art. VIII,

§1, ¶2 to decide whenever a claim is made that
"there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the
government." This duty can only arise if an
actual case or controversy is before us. Under
Art . VIII, §5 our jurisdiction is defined in terms
of "cases" and all that Art. VIII, §1, ¶2 can
plausibly mean is that in the exercise of that
jurisdiction we have the judicial power to
determine questions of grave abuse of
discretion by any branch or instrumentality of
the government.

Put in another way, what is granted in Art. VIII,

§1, ¶2 is "judicial power," which is "the power of
a court to hear and decide cases pending
between parties who have the right to sue and
be sued in the courts of law and equity" (Lamb
v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive
power. This power cannot be directly
appropriated until it is apportioned among
several courts either by the Constitution, as in
the case of Art. VIII, §5, or by statute, as in the
case of the Judiciary Act of 1948 (R.A. No. 296)
and the Judiciary Reorganization Act of 1980
(B.P. Blg. 129). The power thus apportioned
constitutes the court's "jurisdiction," defined as
"the power conferred by law upon a court or
judge to take cognizance of a case, to the
exclusion of all others." (United States v. Arceo,
6 Phil. 29 (1906)) Without an actual case
coming within its jurisdiction, this Court
cannot inquire into any allegation of grave
abuse of discretion by the other departments of
the government.

VIII. Alleged violation of policy towards

cooperatives. On the other hand, the
Cooperative Union of the Philippines (CUP),
after briefly surveying the course of legislation,
argues that it was to adopt a definite policy of
granting tax exemption to cooperatives that the
present Constitution embodies provisions on
cooperatives. To subject cooperatives to the VAT
would therefore be to infringe a constitutional
policy. Petitioner claims that in 1973, P.D. No.
175 was promulgated exempting cooperatives
from the payment of income taxes and sales
taxes but in 1984, because of the crisis which
menaced the national economy, this exemption
was withdrawn by P.D. No. 1955; that in 1986,
P.D. No. 2008 again granted cooperatives
exemption from income and sales taxes until
December 31, 1991, but, in the same year, E.O.
No. 93 revoked the exemption; and that finally
in 1987 the framers of the Constitution
"repudiated the previous actions of the
government adverse to the interests of the
cooperatives, that is, the repeated revocation of
the tax exemption to cooperatives and instead
upheld the policy of strengthening the
cooperatives by way of the grant of tax
exemptions," by providing the following in Art.
XII:

§1. The goals of the national economy are a

more equitable distribution of opportunities,
income, and wealth; a sustained increase in the
amount of goods and services produced by the
nation for the benefit of the people; and an
expanding productivity as the key to raising the
quality of life for all, especially the
underprivileged.

The State shall promote industrialization and

full employment based on sound agricultural
development and agrarian reform, through
industries that make full and efficient use of
human and natural resources, and which are
competitive in both domestic and foreign
markets. However, the State shall protect
Filipino enterprises against unfair foreign
competition and trade practices.

In the pursuit of these goals, all sectors of the

economy and all regions of the country shall be
given optimum opportunity to develop. Private
enterprises, including corporations,
cooperatives, and similar collective
organizations, shall be encouraged to broaden
the base of their ownership.

§15. The Congress shall create an agency to

promote the viability and growth of cooperatives
as instruments for social justice and economic
development.

Petitioner's contention has no merit. In the first

place, it is not true that P.D. No. 1955 singled
out cooperatives by withdrawing their
exemption from income and sales taxes under
P.D. No. 175, §5. What P.D. No. 1955, §1 did
was to withdraw the exemptions and
preferential treatments theretofore granted to
private business enterprises in general, in view
of the economic crisis which then beset the
nation. It is true that after P.D. No. 2008, §2
had restored the tax exemptions of cooperatives
in 1986, the exemption was again repealed by
E.O. No. 93, §1, but then again cooperatives
were not the only ones whose exemptions were
withdrawn. The withdrawal of tax incentives
applied to all, including government and private
entities. In the second place, the Constitution
does not really require that cooperatives be
granted tax exemptions in order to promote
their growth and viability. Hence, there is no
basis for petitioner's assertion that the
government's policy toward cooperatives had
been one of vacillation, as far as the grant of tax
privileges was concerned, and that it was to put
an end to this indecision that the constitutional
provisions cited were adopted. Perhaps as a
matter of policy cooperatives should be granted
tax exemptions, but that is left to the discretion
of Congress. If Congress does not grant
exemption and there is no discrimination to
cooperatives, no violation of any constitutional
policy can be charged.

Indeed, petitioner's theory amounts to saying

that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary
to the Constitution under which only the
following are exempt from taxation: charitable
institutions, churches and parsonages, by
reason of Art. VI, §28 (3), and non-stock, non-
profit educational institutions by reason of Art.
XIV, §4 (3).

CUP's further ground for seeking the

invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law
because electric cooperatives are exempted
from the VAT. The classification between
electric and other cooperatives (farmers
cooperatives, producers cooperatives,
marketing cooperatives, etc.) apparently rests
on a congressional determination that there is
greater need to provide cheaper electric power
to as many people as possible, especially those
living in the rural areas, than there is to provide
them with other necessities in life. We cannot
say that such classification is unreasonable.

We have carefully read the various arguments

raised against the constitutional validity of R.A.
No. 7716. We have in fact taken the
extraordinary step of enjoining its enforcement
pending resolution of these cases. We have now
come to the conclusion that the law suffers from
none of the infirmities attributed to it by
petitioners and that its enactment by the other
branches of the government does not constitute
a grave abuse of discretion. Any question as to
its necessity, desirability or expediency must be
addressed to Congress as the body which is
electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the
ultimate guardians of the liberties and welfare
of the people in quite as great a degree as are
the courts." (Missouri, Kansas & Texas Ry. Co.
v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973
(1904)). It is not right, as petitioner in G.R. No.
115543 does in arguing that we should enforce
the public accountability of legislators, that
those who took part in passing the law in
question by voting for it in Congress should
later thrust to the courts the burden of
reviewing measures in the flush of enactment.
This Court does not sit as a third branch of the
legislature, much less exercise a veto power
over legislation.

WHEREFORE, the motions for reconsideration

are denied with finality and the temporary
restraining order previously issued is hereby
lifted.

SO ORDERED.

Garcia v Executive Secretary | GR NO.

101273 | 03 July 1992

G.R. No. 101273 July 3, 1992

CONGRESSMAN ENRIQUE T. GARCIA (Second

District of Bataan), petitioner,
vs.
THE EXECUTIVE SECRETARY, THE
COMMISSIONER OF CUSTOMS, THE
NATIONAL ECONOMIC AND DEVELOPMENT
AUTHORITY, THE TARIFF COMMISSION, THE
SECRETARY OF FINANCE, and THE ENERGY
REGULATORY BOARD, respondents.

FELICIANO, J.:

On 27 November 1990, the President issued

Executive Order No. 438 which imposed, in
addition to any other duties, taxes and charges
imposed by law on all articles imported into the
Philippines, an additional duty of five percent
(5%) ad valorem. This additional duty was
imposed across the board on all imported
articles, including crude oil and other oil
products imported into the Philippines. This
additional duty was subsequently increased
from five percent (5%) ad valorem to nine
percent (9%) ad valorem by the promulgation of
Executive Order No. 443, dated 3 January 1991.

On 24 July 1991, the Department of Finance

requested the Tariff Commission to initiate the
process required by the Tariff and Customs
Code for the imposition of a specific levy on
crude oil and other petroleum products, covered
by HS Heading Nos. 27.09, 27.10 and 27.11 of
Section 104 of the Tariff and Customs Code as
amended. Accordingly, the Tariff Commission,
following the procedure set forth in Section 401
of the Tariff and Customs Code, scheduled a
public hearing to give interested parties an
opportunity to be heard and to present evidence
in support of their respective positions.

Meantime, Executive Order No. 475 was issued

by the President, on 15 August 1991 reducing
the rate of additional duty on all imported
articles from nine percent (9%) to five percent
(5%) ad valorem, except in the cases of crude oil
and other oil products which continued to be
subject to the additional duty of nine percent
(9%) ad valorem.

Upon completion of the public hearings, the

Tariff Commission submitted to the President a
"Report on Special Duty on Crude Oil and Oil
Products" dated 16 August 1991, for
consideration and appropriate action. Seven (7)
days later, the President issued Executive Order
No. 478, dated 23 August 1991, which levied (in
addition to the aforementioned additional duty
of nine percent (9%) ad valorem and all other
existing ad valorem duties) a special duty of
P0.95 per liter or P151.05 per barrel of imported
crude oil and P1.00 per liter of imported oil
products.

In the present Petition for Certiorari, Prohibition

and Mandamus, petitioner assails the validity of
Executive Orders Nos. 475 and 478. He argues
that Executive Orders Nos. 475 and 478 are
violative of Section 24, Article VI of the 1987
Constitution which provides as follows:
Sec. 24: All appropriation, revenue or tariff
bills, bills authorizing increase of the public
debt, bills of local application, and private bills
shall originate exclusively in the House of
Representatives, but the Senate may propose or
concur with amendments.

He contends that since the Constitution vests

the authority to enact revenue bills in Congress,
the President may not assume such power by
issuing Executive Orders Nos. 475 and 478
which are in the nature of revenue-generating
measures.

Petitioner further argues that Executive Orders

No. 475 and 478 contravene Section 401 of the
Tariff and Customs Code, which Section
authorizes the President, according to petitioner,
to increase, reduce or remove tariff duties or to
impose additional duties only when necessary
to protect local industries or products but not
for the purpose of raising additional revenue for
the government.

Thus, petitioner questions first the

constitutionality and second the legality of
Executive Orders Nos. 475 and 478, and asks
us to restrain the implementation of those
Executive Orders. We will examine these
questions in that order.

Before doing so, however, the Court notes that

the recent promulgation of Executive Order No.
507 did not render the instant Petition moot
and academic. Executive Order No. 517 which
is dated 30 April 1992 provides as follows:

Sec. 1. Lifting of the Additional Duty. — The

additional duty in the nature of ad valorem
imposed on all imported articles prescribed by
the provisions of Executive Order No. 443, as
amended, is hereby lifted; Provided, however,
that the selected articles covered by HS Heading
Nos. 27.09 and 27.10 of Section 104 of the Tariff
and Customs Code, as amended, subject of
Annex "A" hereof, shall continue to be subject
to the additional duty of nine (9%) percent ad
valorem.

Under the above quoted provision, crude oil and

other oil products continue to be subject to the
additional duty of nine percent (9%) ad valorem
under Executive Order No. 475 and to the
special duty of P0.95 per liter of imported crude
oil and P1.00 per liter of imported oil products
under Executive Order No. 478.

Turning first to the question of constitutionality,

under Section 24, Article VI of the Constitution,
the enactment of appropriation, revenue and
tariff bills, like all other bills is, of course, within
the province of the Legislative rather than the
Executive Department. It does not follow,
however, that therefore Executive Orders Nos.
475 and 478, assuming they may be
characterized as revenue measures, are
prohibited to the President, that they must be
enacted instead by the Congress of the
Philippines. Section 28(2) of Article VI of the
Constitution provides as follows:

(2) The Congress may, by law, authorize the

President to fix within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government. (Emphasis supplied)

There is thus explicit constitutional permission

1 to Congress to authorize the President
"subject to such limitations and restrictions is
[Congress] may impose" to fix "within specific
limits" "tariff rates . . . and other duties or
imposts . . ."

The relevant congressional statute is the Tariff

and Customs Code of the Philippines, and
Sections 104 and 401, the pertinent provisions
thereof. These are the provisions which the
President explicitly invoked in promulgating
Executive Orders Nos. 475 and 478. Section
104 of the Tariff and Customs Code provides in
relevant part:

Sec. 104. All tariff sections, chapters, headings

and subheadings and the rates of import duty
under Section 104 of Presidential Decree No. 34
and all subsequent amendments issued under
Executive Orders and Presidential Decrees are
hereby adopted and form part of this Code.

There shall be levied, collected, and paid upon

all imported articles the rates of duty indicated
in the Section under this section except as
otherwise specifically provided for in this Code:
Provided, that, the maximum rate shall not
exceed one hundred per cent ad valorem.

The rates of duty herein provided or

subsequently fixed pursuant to Section Four
Hundred One of this Code shall be subject to
periodic investigation by the Tariff Commission
and may be revised by the President upon
recommendation of the National Economic and
Development Authority.

xxx xxx xxx

(Emphasis supplied)

Section 401 of the same Code needs to be

quoted in full:

Sec. 401. Flexible Clause. —

a. In the interest of national economy,

general welfare and/or national security, and
subject to the limitations herein prescribed, the
President, upon recommendation of the
National Economic and Development Authority
(hereinafter referred to as NEDA), is hereby
empowered: (1) to increase, reduce or remove
existing protective rates of import duty
(including any necessary change in
classification). The existing rates may be
increased or decreased but in no case shall the
reduced rate of import duty be lower than the
basic rate of ten (10) per cent ad valorem, nor
shall the increased rate of import duty be higher
than a maximum of one hundred (100) per cent
ad valorem; (2) to establish import quota or to
ban imports of any commodity, as may be
necessary; and (3) to impose an additional duty
on all imports not exceeding ten (10) per cent ad
valorem, whenever necessary; Provided, That
upon periodic investigations by the Tariff
Commission and recommendation of the NEDA,
the President may cause a gradual reduction of
protection levels granted in Section One
hundred and four of this Code, including those
subsequently granted pursuant to this section.

b. Before any recommendation is submitted

to the President by the NEDA pursuant to the
provisions of this section, except in the
imposition of an additional duty not exceeding
ten (10) per cent ad valorem, the Commission
shall conduct an investigation in the course of
which they shall hold public hearings wherein
interested parties shall be afforded reasonable
opportunity to be present, produce evidence
and to be heard. The Commission shall also
hear the views and recommendations of any
government office, agency or instrumentality
concerned. The Commission shall submit their
findings and recommendations to the NEDA
within thirty (30) days after the termination of
the public hearings.

c. The power of the President to increase or

decrease rates of import duty within the limits
fixed in subsection "a" shall include the
authority to modify the form of duty. In
modifying the form of duty, the corresponding
ad valorem or specific equivalents of the duty
with respect to imports from the principal
competing foreign country for the most recent
representative period shall be used as bases.

d. The Commissioner of Customs shall

regularly furnish the Commission a copy of all
customs import entries as filed in the Bureau of
Customs. The Commission or its duly
authorized representatives shall have access to,
and the right to copy all liquidated customs
import entries and other documents appended
thereto as finally filed in the Commission on
Audit.

e. The NEDA shall promulgate rules and

regulations necessary to carry out the
provisions of this section.

f. Any Order issued by the President

pursuant to the provisions of this section shall
take effect thirty (30) days after promulgation,
except in the imposition of additional duty not
exceeding ten (10) per cent ad valorem which
shall take effect at the discretion of the
President. (Emphasis supplied)

Petitioner, however, seeks to avoid the thrust of

the delegated authorizations found in Sections
104 and 401 of the Tariff and Customs Code, by
contending that the President is authorized to
act under the Tariff and Customs Code only "to
protect local industries and products for the
sake of the national economy, general welfare
and/or national security." 2 He goes on to claim
that:

E.O. Nos. 478 and 475 having nothing to do

whatsoever with the protection of local
industries and products for the sake of national
economy, general welfare and/or national
security. On the contrary, they work in reverse,
especially as to crude oil, an essential product
which we do not have to protect, since we
produce only minimal quantities and have to
import the rest of what we need.

These Executive Orders are avowedly solely to

enable the government to raise government
finances, contrary to Sections 24 and 28 (2) of
Article VI of the Constitution, as well as to
Section 401 of the Tariff and Customs Code. 3
(Emphasis in the original)

The Court is not persuaded. In the first place,

there is nothing in the language of either
Section 104 or of 401 of the Tariff and Customs
Code that suggest such a sharp and absolute
limitation of authority. The entire contention of
petitioner is anchored on just two (2) words, one
found in Section 401 (a)(1): "existing protective
rates of import duty," and the second in the
proviso found at the end of Section 401 (a):
"protection levels granted in Section 104 of this
Code . . . . " We believe that the words
"protective" and ''protection" are simply not
enough to support the very broad and
encompassing limitation which petitioner seeks
to rest on those two (2) words.

In the second place, petitioner's singular theory

collides with a very practical fact of which this
Court may take judicial notice — that the
Bureau of Customs which administers the Tariff
and Customs Code, is one of the two (2)
principal traditional generators or producers of
governmental revenue, the other being the
Bureau of Internal Revenue. (There is a third
agency, non-traditional in character, that
generates lower but still comparable levels of
revenue for the government — The Philippine
Amusement and Games Corporation [PAGCOR].)

In the third place, customs duties which are

assessed at the prescribed tariff rates are very
much like taxes which are frequently imposed
for both revenue-raising and for regulatory
purposes. 4 Thus, it has been held that
"customs duties" is "the name given to taxes on
the importation and exportation of commodities,
the tariff or tax assessed upon merchandise
imported from, or exported to, a foreign
country." 5 The levying of customs duties on
imported goods may have in some measure the
effect of protecting local industries — where
such local industries actually exist and are
producing comparable goods. Simultaneously,
however, the very same customs duties
inevitably have the effect of producing
governmental revenues. Customs duties like
internal revenue taxes are rarely, if ever,
designed to achieve one policy objective only.
Most commonly, customs duties, which
constitute taxes in the sense of exactions the
proceeds of which become public funds 6 —
have either or both the generation of revenue
and the regulation of economic or social activity
as their moving purposes and frequently, it is
very difficult to say which, in a particular
instance, is the dominant or principal objective.
In the instant case, since the Philippines in fact
produces ten (10) to fifteen percent (15%) of the
crude oil consumed here, the imposition of
increased tariff rates and a special duty on
imported crude oil and imported oil products
may be seen to have some "protective" impact
upon indigenous oil production. For the
effective, price of imported crude oil and oil
products is increased. At the same time, it
cannot be gainsaid that substantial revenues
for the government are raised by the imposition
of such increased tariff rates or special duty.

In the fourth place, petitioner's concept which

he urges us to build into our constitutional and
customs law, is a stiflingly narrow one. Section
401 of the Tariff and Customs Code establishes
general standards with which the exercise of the
authority delegated by that provision to the
President must be consistent: that authority
must be exercised in "the interest of national
economy, general welfare and/or national
security." Petitioner, however, insists that the
"protection of local industries" is the only
permissible objective that can be secured by the
exercise of that delegated authority, and that
therefore "protection of local industries" is the
sum total or the alpha and the omega of "the
national economy, general welfare and/or
national security." We find it extremely difficult
to take seriously such a confined and closed
view of the legislative standards and policies
summed up in Section 401. We believe, for
instance, that the protection of consumers, who
after all constitute the very great bulk of our
population, is at the very least as important a
dimension of "the national economy, general
welfare and national security" as the protection
of local industries. And so customs duties may
be reduced or even removed precisely for the
purpose of protecting consumers from the high
prices and shoddy quality and inefficient service
that tariff-protected and subsidized local
manufacturers may otherwise impose upon the
community.

It seems also important to note that tariff rates

are commonly established and the
corresponding customs duties levied and
collected upon articles and goods which are not
found at all and not produced in the Philippines.
The Tariff and Customs Code is replete with
such articles and commodities: among the more
interesting examples are ivory (Chapter 5, 5.10);
castoreum or musk taken from the beaver
(Chapter 5, 5.14); Olives (Chapter 7, Notes);
truffles or European fungi growing under the
soil on tree roots (Chapter 7, Notes); dates
(Chapter 8, 8.01); figs (Chapter 8, 8.03); caviar
(Chapter 16, 16.01); aircraft (Chapter 88, 88.0l);
special diagnostic instruments and apparatus
for human medicine and surgery (Chapter 90,
Notes); X-ray generators; X-ray tubes;
X-ray screens, etc. (Chapter 90, 90.20); etc. In
such cases, customs duties may be seen to be
imposed either for revenue purposes purely or
perhaps, in certain cases, to discourage any
importation of the items involved. In either case,
it is clear that customs duties are levied and
imposed entirely apart from whether or not
there are any competing local industries to
protect.

Accordingly, we believe and so hold that

Executive Orders Nos. 475 and 478 which may
be conceded to be substantially moved by the
desire to generate additional public revenues,
are not, for that reason alone, either
constitutionally flawed, or legally infirm under
Section 401 of the Tariff and Customs Code.
Petitioner has not successfully overcome the
presumptions of constitutionality and legality to
which those Executive Orders are entitled. 7

The conclusion we have reached above renders

it unnecessary to deal with petitioner's
additional contention that, should Executive
Orders Nos. 475 and 478 be declared
unconstitutional and illegal, there should be a
roll back of prices of petroleum products
equivalent to the "resulting excess money not be
needed to adequately maintain the Oil Price
Stabilization Fund (OPSF)." 8

WHEREFORE, premises considered, the

Petition for Certiorari, Prohibition and
Mandamus is hereby DISMISSED for lack of
merit. Costs against petitioner.

SO ORDERED.

Narvasa, C.J., Gutierrez, Jr., Cruz, Paras,

Padilla, Bidin, Griño-Aquino, Medialdea,
Regalado, Davide, Jr., Romero, Nocon and
Bellosilo, JJ., concur.

Osmeña v Orbos | GR No. 99886 | 31 March

1993

G.R. No. 99886 March 31, 1993

JOHN H. OSMEÑA, petitioner,

vs.
OSCAR ORBOS, in his capacity as Executive
Secretary; JESUS ESTANISLAO, in his capacity
as Secretary of Finance; WENCESLAO DELA
PAZ, in his capacity as Head of the Office of
Energy Affairs; REX V. TANTIONGCO, and the
ENERGY REGULATORY BOARD, respondents.

Nachura & Sarmiento for petitioner.

The Solicitor General for public respondents.

NARVASA, C.J.:

The petitioner seeks the corrective, 1 prohibitive

and coercive remedies provided by Rule 65 of
the Rules of Court, 2 upon the following posited
grounds, viz.: 3

1) the invalidity of the "TRUST ACCOUNT" in

the books of account of the Ministry of Energy
(now, the Office of Energy Affairs), created
pursuant to § 8, paragraph 1, of P.D. No. 1956,
as amended, "said creation of a trust fund being
contrary to Section 29 (3), Article VI of the . .
Constitution; 4

2) the unconstitutionality of § 8, paragraph 1

(c) of P.D. No. 1956, as amended by Executive
Order No. 137, for "being an undue and invalid
delegation of legislative power . . to the Energy
Regulatory Board;" 5

3) the illegality of the reimbursements to oil

companies, paid out of the Oil Price
Stabilization Fund, 6 because it contravenes §
8, paragraph 2 (2) of
P. D. 1956, as amended; and

4) the consequent nullity of the Order dated

December 10, 1990 and the necessity of a
rollback of the pump prices and petroleum
products to the levels prevailing prior to the said
Order.

It will be recalled that on October 10, 1984,

President Ferdinand Marcos issued P.D. 1956
creating a Special Account in the General Fund,
designated as the Oil Price Stabilization Fund
(OPSF). The OPSF was designed to reimburse oil
companies for cost increases in crude oil and
imported petroleum products resulting from
exchange rate adjustments and from increases
in the world market prices of crude oil.

Subsequently, the OPSF was reclassified into a

"trust liability account," in virtue of E.O. 1024,
7 and ordered released from the National
Treasury to the Ministry of Energy. The same
Executive Order also authorized the investment
of the fund in government securities, with the
earnings from such placements accruing to the
fund.

President Corazon C. Aquino, amended P.D.

1956. She promulgated Executive Order No.
137 on February 27, 1987, expanding the
grounds for reimbursement to oil companies for
possible cost underrecovery incurred as a result
of the reduction of domestic prices of petroleum
products, the amount of the underrecovery
being left for determination by the Ministry of
Finance.

Now, the petition alleges that the status of the

OPSF as of March 31, 1991 showed a "Terminal
Fund Balance deficit" of some P12.877 billion;
8 that to abate the worsening deficit, "the
Energy Regulatory Board . . issued an Order on
December 10, 1990, approving the increase in
pump prices of petroleum products," and at the
rate of recoupment, the OPSF deficit should
have been fully covered in a span of six (6)
months, but this notwithstanding, the
respondents — Oscar Orbos, in his capacity as
Executive Secretary; Jesus Estanislao, in his
capacity as Secretary of Finance; Wenceslao de
la Paz, in his capacity as Head of the Office of
Energy Affairs; Chairman Rex V. Tantiongco
and the Energy Regulatory Board — "are poised
to accept, process and pay claims not
authorized under P.D. 1956." 9

The petition further avers that the creation of

the trust fund violates §
29(3), Article VI of the Constitution, reading as
follows:

(3) All money collected on any tax levied for a

special purpose shall be treated as a special
fund and paid out for such purposes only. If the
purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if
any, shall be transferred to the general funds of
the Government.

The petitioner argues that "the monies collected

pursuant to . . P.D. 1956, as amended, must be
treated as a 'SPECIAL FUND,' not as a 'trust
account' or a 'trust fund,' and that "if a special
tax is collected for a specific purpose, the
revenue generated therefrom shall 'be treated as
a special fund' to be used only for the purpose
indicated, and not channeled to another
government objective." 10 Petitioner further
points out that since "a 'special fund' consists
of monies collected through the taxing power of
a State, such amounts belong to the State,
although the use thereof is limited to the special
purpose/objective for which it was created." 11

He also contends that the "delegation of

legislative authority" to the ERB violates § 28 (2).
Article VI of the Constitution, viz.:

(2) The Congress may, by law, authorize the

President to fix, within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government;

and, inasmuch as the delegation relates to the

exercise of the power of taxation, "the limits,
limitations and restrictions must be
quantitative, that is, the law must not only
specify how to tax, who (shall) be taxed (and)
what the tax is for, but also impose a specific
limit on how much to tax." 12

The petitioner does not suggest that a "trust

account" is illegal per se, but maintains that the
monies collected, which form part of the OPSF,
should be maintained in a special account of
the general fund for the reason that the
Constitution so provides, and because they are,
supposedly, taxes levied for a special purpose.
He assumes that the Fund is formed from a tax
undoubtedly because a portion thereof is taken
from collections of ad valorem taxes and the
increases thereon.

It thus appears that the challenge posed by the

petitioner is premised primarily on the view that
the powers granted to the ERB under P.D. 1956,
as amended, partake of the nature of the
taxation power of the State. The Solicitor
General observes that the "argument rests on
the assumption that the OPSF is a form of
revenue measure drawing from a special tax to
be expended for a special purpose." 13 The
petitioner's perceptions are, in the Court's view,
not quite correct.

To address this critical misgiving in the position

of the petitioner on these issues, the Court
recalls its holding in Valmonte v. Energy
Regulatory Board, et al. 14 —

The foregoing arguments suggest the presence

of misconceptions about the nature and
functions of the OPSF. The OPSF is a "Trust
Account" which was established "for the
purpose of minimizing the frequent price
changes brought about by exchange rate
adjustment and/or changes in world market
prices of crude oil and imported petroleum
products." 15 Under P.D. No. 1956, as amended
by Executive Order No. 137 dated 27 February
1987, this Trust Account may be funded from
any of the following sources:

a) Any increase in the tax collection from ad

valorem tax or customs duty imposed on
petroleum products subject to tax under this
Decree arising from exchange rate adjustment,
as may be determined by the Minister of
Finance in consultation with the Board of
Energy;

b) Any increase in the tax collection as a

result of the lifting of tax exemptions of
government corporations, as may be
determined by the Minister of Finance in
consultation with the Board of Energy:

c) Any additional amount to be imposed on

petroleum products to augment the resources
of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring
payment of persons or companies engaged in
the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in

case the actual peso costs paid by oil companies
in the importation of crude oil and petroleum
products is less than the peso costs computed
using the reference foreign exchange rate as
fixed by the Board of Energy.

xxx xxx xxx

The fact that the world market prices of oil,

measured by the spot market in Rotterdam,
vary from day to day is of judicial notice. Freight
rates for hauling crude oil and petroleum
products from sources of supply to the
Philippines may also vary from time to time. The
exchange rate of the peso vis-a-vis the U.S.
dollar and other convertible foreign currencies
also changes from day to day. These
fluctuations in world market prices and in
tanker rates and foreign exchange rates would
in a completely free market translate into
corresponding adjustments in domestic prices
of oil and petroleum products with sympathetic
frequency. But domestic prices which vary from
day to day or even only from week to week would
result in a chaotic market with unpredictable
effects upon the country's economy in general.
The OPSF was established precisely to protect
local consumers from the adverse consequences
that such frequent oil price adjustments may
have upon the economy. Thus, the OPSF serves
as a pocket, as it were, into which a portion of
the purchase price of oil and petroleum
products paid by consumers as well as some tax
revenues are inputted and from which amounts
are drawn from time to time to reimburse oil
companies, when appropriate situations arise,
for increases in, as well as underrecovery of,
costs of crude importation. The OPSF is thus a
buffer mechanism through which the domestic
consumer prices of oil and petroleum products
are stabilized, instead of fluctuating every so
often, and oil companies are allowed to recover
those portions of their costs which they would
not otherwise recover given the level of domestic
prices existing at any given time. To the extent
that some tax revenues are also put into it, the
OPSF is in effect a device through which the
domestic prices of petroleum products are
subsidized in part. It appears to the Court that
the establishment and maintenance of the
OPSF is well within that pervasive and non-
waivable power and responsibility of the
government to secure the physical and
economic survival and well-being of the
community, that comprehensive sovereign
authority we designate as the police power of
the State. The stabilization, and subsidy of
domestic prices of petroleum products and fuel
oil — clearly critical in importance considering,
among other things, the continuing high level of
dependence of the country on imported crude
oil — are appropriately regarded as public
purposes.

Also of relevance is this Court's ruling in

relation to the sugar stabilization fund the
nature of which is not far different from the
OPSF. In Gaston v. Republic Planters Bank, 16
this Court upheld the legality of the sugar
stabilization fees and explained their nature
and character, viz.:

The stabilization fees collected are in the nature

of a tax, which is within the power of the State
to impose for the promotion of the sugar
industry (Lutz v. Araneta, 98 Phil. 148). . . . The
tax collected is not in a pure exercise of the
taxing power. It is levied with a regulatory
purpose, to provide a means for the stabilization
of the sugar industry. The levy is primarily in
the exercise of the police power of the State
(Lutz v. Araneta, supra).

xxx xxx xxx

The stabilization fees in question are levied by

the State upon sugar millers, planters and
producers for a special purpose — that of
"financing the growth and development of the
sugar industry and all its components,
stabilization of the domestic market including
the foreign market." The fact that the State has
taken possession of moneys pursuant to law is
sufficient to constitute them state funds, even
though they are held for a special purpose
(Lawrence v. American Surety Co. 263 Mich.
586, 249 ALR 535, cited in 42 Am Jur Sec. 2, p.
718). Having been levied for a special purpose,
the revenues collected are to be treated as a
special fund, to be, in the language of the
statute, "administered in trust" for the purpose
intended. Once the purpose has been fulfilled or
abandoned, the balance if any, is to be
transferred to the general funds of the
Government. That is the essence of the trust
intended (SEE 1987 Constitution, Article VI,
Sec. 29(3), lifted from the 1935 Constitution,
Article VI, Sec. 23(1). 17

The character of the Stabilization Fund as a

special kind of fund is emphasized by the fact
that the funds are deposited in the Philippine
National Bank and not in the Philippine
Treasury, moneys from which may be paid out
only in pursuance of an appropriation made by
law (1987) Constitution, Article VI, Sec. 29 (3),
lifted from the 1935 Constitution, Article VI, Sec.
23(1). (Emphasis supplied).

Hence, it seems clear that while the funds

collected may be referred to as taxes, they are
exacted in the exercise of the police power of the
State. Moreover, that the OPSF is a special fund
is plain from the special treatment given it by
E.O. 137. It is segregated from the general fund;
and while it is placed in what the law refers to
as a "trust liability account," the fund
nonetheless remains subject to the scrutiny
and review of the COA. The Court is satisfied
that these measures comply with the
constitutional description of a "special fund."
Indeed, the practice is not without precedent.

With regard to the alleged undue delegation of

legislative power, the Court finds that the
provision conferring the authority upon the
ERB to impose additional amounts on
petroleum products provides a sufficient
standard by which the authority must be
exercised. In addition to the general policy of the
law to protect the local consumer by stabilizing
and subsidizing domestic pump rates, § 8(c) of
P.D. 1956 18 expressly authorizes the ERB to
impose additional amounts to augment the
resources of the Fund.

What petitioner would wish is the fixing of some

definite, quantitative restriction, or "a specific
limit on how much to tax." 19 The Court is cited
to this requirement by the petitioner on the
premise that what is involved here is the power
of taxation; but as already discussed, this is not
the case. What is here involved is not so much
the power of taxation as police power. Although
the provision authorizing the ERB to impose
additional amounts could be construed to refer
to the power of taxation, it cannot be overlooked
that the overriding consideration is to enable
the delegate to act with expediency in carrying
out the objectives of the law which are
embraced by the police power of the State.

The interplay and constant fluctuation of the

various factors involved in the determination of
the price of oil and petroleum products, and the
frequently shifting need to either augment or
exhaust the Fund, do not conveniently permit
the setting of fixed or rigid parameters in the
law as proposed by the petitioner. To do so
would render the ERB unable to respond
effectively so as to mitigate or avoid the
undesirable consequences of such fluidity. As
such, the standard as it is expressed, suffices
to guide the delegate in the exercise of the
delegated power, taking account of the
circumstances under which it is to be exercised.

For a valid delegation of power, it is essential

that the law delegating the power must be (1)
complete in itself, that is it must set forth the
policy to be executed by the delegate and (2) it
must fix a standard — limits of which
are sufficiently determinate or determinable —
to which the delegate must conform. 20

. . . As pointed out in Edu v. Ericta: "To avoid

the taint of unlawful delegation, there must be
a standard, which implies at the very least that
the legislature itself determines matters of
principle and lays down fundamental policy.
Otherwise, the charge of complete abdication
may be hard to repel. A standard thus defines
legislative policy, marks its limits, maps out its
boundaries and specifies the public agency to
apply it. It indicates the circumstances under
which the legislative command is to be effected.
It is the criterion by which the legislative
purpose may be carried out. Thereafter, the
executive or administrative office designated
may in pursuance of the above guidelines
promulgate supplemental rules and regulations.
The standard may either be express or implied.
If the former, the non-delegation objection is
easily met. The standard though does not have
to be spelled out specifically. It could be implied
from the policy and purpose of the act
considered as a whole. 21

It would seem that from the above-quoted ruling,

the petition for prohibition should fail.

The standard, as the Court has already stated,

may even be implied. In that light, there can be
no ground upon which to sustain the petition,
inasmuch as the challenged law sets forth a
determinable standard which guides the
exercise of the power granted to the ERB. By the
same token, the proper exercise of the delegated
power may be tested with ease. It seems obvious
that what the law intended was to permit the
additional imposts for as long as there exists a
need to protect the general public and the
petroleum industry from the adverse
consequences of pump rate fluctuations.
"Where the standards set up for the guidance of
an administrative officer and the action taken
are in fact recorded in the orders of such officer,
so that Congress, the courts and the public are
assured that the orders in the judgment of such
officer conform to the legislative standard, there
is no failure in the performance of the legislative
functions." 22

This Court thus finds no serious impediment to

sustaining the validity of the legislation; the
express purpose for which the imposts are
permitted and the general objectives and
purposes of the fund are readily discernible,
and they constitute a sufficient standard upon
which the delegation of power may be justified.

In relation to the third question — respecting

the illegality of the reimbursements to oil
companies, paid out of the Oil Price
Stabilization Fund, because allegedly in
contravention of § 8, paragraph 2 (2) of P.D.
1956, amended 23 — the Court finds for the
petitioner.

The petition assails the payment of certain

items or accounts in favor of the petroleum
companies (i.e., inventory losses, financing
charges, fuel oil sales to the National Power
Corporation, etc.) because not authorized by
law. Petitioner contends that "these claims are
not embraced in the enumeration in § 8 of P.D.
1956 . . since none of them was incurred 'as a
result of the reduction of domestic prices of
petroleum products,'" 24 and since these items
are reimbursements for which the OPSF should
not have responded, the amount of the P12.877
billion deficit "should be reduced by P5,277.2
million." 25 It is argued "that under the
principle of ejusdem generis . . . the term 'other
factors' (as used in § 8 of P.D. 1956) . . can only
include such 'other factors' which necessarily
result in the reduction of domestic prices of
petroleum products." 26

The Solicitor General, for his part, contends

that "(t)o place said (term) within the restrictive
confines of the rule of ejusdem generis would
reduce (E.O. 137) to a meaningless provision."

This Court, in Caltex Philippines, Inc. v. The

Honorable Commissioner on Audit, et al., 27
passed upon the application of ejusdem generis
to paragraph 2 of § 8 of P.D. 1956, viz.:

The rule of ejusdem generis states that "[w]here

words follow an enumeration of persons or
things, by words of a particular and specific
meaning, such general words are not to be
construed in their widest extent, but are held to
be as applying only to persons or things of the
same kind or class as those specifically
mentioned." 28 A reading of subparagraphs (i)
and (ii) easily discloses that they do not have a
common characteristic. The first relates to price
reduction as directed by the Board of Energy
while the second refers to reduction in internal
ad valorem taxes. Therefore, subparagraph (iii)
cannot be limited by the enumeration in these
subparagraphs. What should be considered for
purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of
paragraph (2) of the Section which explicitly
allows the cost underrecovery only if such were
incurred as a result of the reduction of domestic
prices of petroleum products.

The Court thus holds, that the reimbursement

of financing charges is not authorized by
paragraph 2 of § 8 of P.D. 1956, for the reason
that they were not incurred as a result of the
reduction of domestic prices of petroleum
products. Under the same provision, however,
the payment of inventory losses is upheld as
valid, being clearly a result of domestic price
reduction, when oil companies incur a cost
underrecovery for yet unsold stocks of oil in
inventory acquired at a higher price.

Reimbursement for cost underrecovery from the

sales of oil to the National Power Corporation is
equally permissible, not as coming within the
provisions of P.D. 1956, but in virtue of other
laws and regulations as held in Caltex 29 and
which have been pointed to by the Solicitor
General. At any rate, doubts about the propriety
of such reimbursements have been dispelled by
the enactment of R.A. 6952, establishing the
Petroleum Price Standby Fund, § 2 of which
specifically authorizes the reimbursement of
"cost underrecovery incurred as a result of fuel
oil sales to the National Power Corporation."

Anent the overpayment refunds mentioned by

the petitioner, no substantive discussion has
been presented to show how this is prohibited
by P.D. 1956. Nor has the Solicitor General
taken any effort to defend the propriety of this
refund. In fine, neither of the parties, beyond
the mere mention of overpayment refunds, has
at all bothered to discuss the arguments for or
against the legality of the so-called overpayment
refunds. To be sure, the absence of any
argument for or against the validity of the
refund cannot result in its disallowance by the
Court. Unless the impropriety or illegality of the
overpayment refund has been clearly and
specifically shown, there can be no basis upon
which to nullify the same.

Finally, the Court finds no necessity to rule on

the remaining issue, the same having been
rendered moot and academic. As of date hereof,
the pump rates of gasoline have been reduced
to levels below even those prayed for in the
petition.

WHEREFORE, the petition is GRANTED insofar

as it prays for the nullification of the
reimbursement of financing charges, paid
pursuant to E.O. 137, and DISMISSED in all
other respects.

SO ORDERED.

Cruz, Feliciano, Padilla, Bidin, Griño-Aquino,

Regalado, Davide, Jr., Romero, Nocon, Bellosillo,
Melo, Campos, Jr., and Quiason, JJ., concur.

Gutierrez, Jr., J., is on leave.

Republic Bank v CTA | GR No. 62554-55 |

02 September 1992

SECOND DIVISION

[G.R. Nos. 62554-55. September 2, 1992.]

REPUBLIC BANK, Petitioner, v. COURT OF TAX

APPEALS AND THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.

Asisteo S. San Agustin for Petitioner.

SYLLABUS

1. TAXATION; DOUBLE TAXATION

DEFINED; NOT PRESENT WHEN ONE IS A
PENALTY AND THE OTHER IS A TAX; CASE AT
BAR. — The wisdom of this is not the province
of the Court. It is clear from the statutes then
in force that there was no double taxation
involved — one was a penalty and the other was
a tax. At any rate, We have upheld the validity
of double taxation. (Double taxation: when the
same person is taxed by the same jurisdiction
for the same purpose. [San Miguel Brewery, Inc.
v. City of Cebu 43 SCRA 275, 280]) The payment
of 1/10 of 1% for incurring reserve deficiencies
(Section 106, Central Bank Act) is a penalty as
the primary purpose involved is regulation,
while the payment of 1% for the same violation
(Second Paragraph, Section 249, NIRC) is a tax
for the generation of revenue which is the
primary purpose in this instance. Petitioner
should not complain that it is being asked to
pay twice for incurring reserve deficiencies. It
can always avoid this predicament by not
having reserve deficiencies. Petitioner’s case is
covered by two special laws — one a banking
law and the other, a tax law. These two laws
should receive such construction as to make
them harmonize with each other and with the
other body of pre-existing laws. (Commissioner
of Customs v. Esso Standard Eastern, Inc., 66
SCRA 113, 120)

2. ID.; RESERVE DEFICIENCY TAX;

QUESTION ON THE COMPUTATION MUST BE
RAISED AT THE EARLIEST STAGE. — Corollary
issue raised by petitioner bank, is the question
on how the respondent Commissioner
computed reserve deficiency taxes considering
that Sec. 249, NIRC, speaks of computation of
what it calls penalty on a per month basis while
the Central Bank Act provides for the
computation of the penalty on a per day basis.
It claims that respondent Commissioner never
informed them of the details of these
assessments, considering the same involve
complex and tedious computations. It is too late
in the day for petitioner to raise this matter for
Us to resolve. The grounds alleged by the
petitioner in its motion for reconsideration of
the Commissioner’s assessments are the very
same grounds raised in these petitions.
Petitioner did not ask the Commissioner to
explain how it arrived in computing these
reserve deficiency taxes. Neither did petitioner
raise this question before the Court of Tax
Appeals.

3. ID.; ID.; LETTER OF INSTRUCTION NO.

1330; CONDONATION OF PENALTIES AND
OTHER SANCTIONS; COVERAGE; NOT
APPLICABLE IN CASE AT BAR. — petitioner
bank in its brief mentions that in Letter of
Instruction No. 1330 issued by President
Marcos on June 6, 1983, the Central Bank was
ordered to assist petitioner by way of full
condonation of all penalties and other sanctions
of whatever kind, nature and description, as of
the date they become due, on its legal reserve
deficiencies. Consequently, petitioner insists
that it is now exempted from what it claims are
the penalties imposed by the second paragraph
of Section 249, NIRC. A careful study of said LOI
reveals that it was issued with respect to
petitioner bank’s (thereafter renamed Republic
Planters Bank) role in the government’s sugar
production and procurement program as the
financial arm of the sugar industry when the
Philippine Sugar Commission (PHILSUCOM),
created by virtue of P.D. 388 1974), bought the
petitioner bank from the Roman family. The
petition at bar involves the assessments for the
years 1969 and 1970. This LOI definitely does
not cover the years 1969 and 1970 as it was
issued only on June 6, 1983 and covers the
period when PHILSUCOM bought the then
ailing Republic Bank from the Roman family
and renamed it the Philippine Planters Bank to
be used as its financial conduit for the sugar
industry. Therefore, even on the thesis that the
payment made (Second paragraph, Section 249,
NIRC) is a penalty, this "penalty" for 1969 and
1970 can not be condoned as said LOI does not
cover it.

DECISION

NOCON, J.:

Petitioner Republic Bank appeals the decision

of public respondent Court of Tax Appeals dated
September 30, 1982 dismissing its Petition for
Review, thereby affirming public respondent
Commissioner of Internal Revenue’s
assessment for petitioner’s reserve deficiency
taxes inclusive of 25% surcharge for the taxable
years 1969 and 1970 in the amounts of
P1,325,768.82 and P1,953,132.67, respectively.

The antecedent facts as briefly summarized by

the Solicitor General are as
follows:jgc:chanrobles.com.ph

"On 14 September 1971, respondent

Commissioner assessed petitioner the amount
of P1,060,615.06, plus 25% surcharge in the
amount of P265,153.76, or a total of
P1,325,768.82, as 1% monthly bank reserve
deficiency tax for taxable year 1969.chanrobles
lawlibrary : rednad

"In a letter dated 6 October 1971, petitioner

requested reconsideration of the assessment
which respondent Commissioner denied in a
letter dated 26 February 1973.

"On 5 April 1973, respondent Commissioner

assessed petitioner the amount of
P1,562,506.14, plus 25% surcharge in the
amount of P390,626.53, or a total of
P1,953,132.67, as 1% monthly bank reserve
deficiency tax for taxable year 1970.

"In a letter dated 16 May 1973, petitioner

requested reconsideration of the assessment
which respondent Commissioner denied in a
letter dated 6 May 1974.

"Petitioner contends that Section 249 of the Tax

Code is no longer enforceable, because Section
126 of Act 1459, which was allegedly the basis
for the imposition of the 1% reserve deficiency
tax, was repealed by Section 90 of Republic Act
337, the General Banking Act, and by Sections
100 and 101 of Republic Act 265.

"On 28 March 1973, petitioner filed a petition

for review with the Tax Court, docketed as C.T.A.
Case No. 2506, contesting the assessment for
the taxable year 1969. On 3 July 1974, a similar
petition, docketed as C.T.A. Case No. 2618. was
filed contesting the assessment for the taxable
year 1970.

"The cases, involving similar issues, were

consolidated. After hearing, the Tax Court
rendered a decision dated 30 September 1982
dismissing the petitions for review and
upholding the validity of the assessments.

"Still not satisfied, petitioner filed this petition

for review." 1

Petitioner urges that the issue to be resolved in

this petition is:jgc:chanrobles.com.ph

"WHETHER SECTION 249 OF THE TAX CODE

WHICH PROVIDES THAT ‘THERE SHALL BE
COLLECTED UPON THE AMOUNT OF
RESERVE DEFICIENCIES INCURRED BY THE
BANK . . . AS PROVIDED IN SECTION ONE
HUNDRED TWENTY-SIX OF ACT NUMBERED
ONE THOUSAND FOUR HUNDRED AND FIFTY-
NINE (THE CORPORATION LAW) . . . ONE PER
CENTUM PER MONTH’ HAS BEEN RENDERED
INOPERATIVE BY THE REPEAL OF THE
AFORESAID REFERRED PROVISION, I.E.,
SECTION ONE HUNDRED TWENTY-SIX OF
THE CORPORATION LAW." 2

The second paragraph of Section 249 of the Tax

Code of 1970 (C.A. No. 466 as amended by Rep.
Act No. 6110) invoked by the respondent
Commissioner in making the assessments
provides that:jgc:chanrobles.com.ph

"There shall be collected upon the amount of

reserve deficiencies incurred by the bank, and
for the period of their duration, as provided in
section one hundred twenty-six of Act
Numbered one thousand four hundred and
fifty-nine, as amended by Act Numbered three
thousand six hundred and ten, one per centum
per month." chanrobles virtual lawlibrary

which paragraph was based on Sec. 26 of R.A.

337, the General Banking Act, and Sections 100,
101, and 106 of R.A. 265, the Central Bank Act,
all providing for the reserve requirements on
banking operations, while Section 126 of Act No.
1459 (The Corporation Law), as amended by Art.
3610, reads:jgc:chanrobles.com.ph

"SEC. 126. Whenever the reserve as

defined in the last preceding section of any
commercial banking corporation shall be below
the amount required in that section such
commercial banking corporation shall not
diminish the amount of such reserve by making
any new loans or discounts, or declare any
dividend out of its profits until the required
proportion between the aggregate amount of its
deposits and its reserve has been restored.
Reserve deficiencies shall be penalized at the
rate of one per centum per month upon the
amount of the deficiencies and for the periods
of their duration in accordance with the
regulation to be issued by the Bank
Commissioner. The penalty assessed shall be
collected by the Collector of Internal Revenue in
accordance with the rules, regulations and
procedure to be determined by him. In the case
of any commercial banking corporation whose
reserve is continuously deficient for a period of
thirty days, the business of such corporation
may be wound up by the Bank Commissioner
in accordance with section sixteen hundred and
thirty-nine of Act numbered twenty-seven
hundred and eleven, as amended, known as the
Administrative Code" 3

According to petitioner, Section 126 has been

expressly repealed by Section 90 of the General
Banking Act (R.A. No. 337), to wit:chanrobles
law library : red

"Sec. 90. Sections one hundred seventy-five to

one hundred eighty-three and one hundred
ninety-nine to two hundred seventeen of the
Code of Commerce, as amended, section one
hundred three to one hundred forty-six and one
hundred seventy-one to one hundred ninety of
Act Numbered fourteen hundred and fifty-nine,
as amended; Acts Numbered Thirty-one
hundred and fifty-four and Thirty-five hundred
and twenty, and all laws or parts thereof,
including those parts of special charters of the
Philippine National Bank and other banking
institutions in the Philippines which are
inconsistent herewith, are hereby repealed.

Both petitioner and public respondent agree

that:jgc:chanrobles.com.ph

". . . The requirement on the maintenance of

bank reserves, previously found in Section 126
of Act 1459 (The Corporation Law), remained
prescribed, after its repeal, in —

a. Sec. 26, RA 337 4 — subjecting the deposit

liabilities of commercial banks including the
Philippine National Bank to the reserve
requirements and other conditions prescribed
by the Monetary Board in accordance with the
authority granted to 1t under the Central Bank
Act.

b. Sec. 100, RA 265 5 — requiring banks to

maintain reserves against their deposit
liabilities;

c. Sec. 101, RA 265 6 — authorizing the

Monetary Board to prescribe and to modify the
minimum reserved ratios applicable to each
class of peso deposits;
d. Sec. 106, RA 265 7 — imposing a penalty
of 1/10 of 1% for violation of the Banking Law."
8

As petitioner Republic sees it, Section 249 of the

Tax Code (CA 466) can no longer be enforced as
the basis for which the tax is to be computed
under Section 126, Act. 1459, is no longer in
force. The Central Bank Act (R.A. 265),
specifically Sections 100, 101, 105 and 106, by
providing for a whole new set of rules in regard
to reserve requirements and reserve deficiencies
of banks clearly show that it was the legislative
intent to remove the regulation of the operations
of banks under the ambit of the Corporation
Law (Art. 1459) and to place them under the
purview of Central Bank Act (R.A. No. 265) and
the General Banking Act (R.A. 337).

Public respondents disagree and state that

Section 249 of the then Tax Code (CA 466) is
deemed to have ipso facto incorporated by
reference the new legislations on bank reserves
after the repeal of Section 126, Act. 1459.

Petitioner Republic argues then that in case of

a reserve deficiency, the violating bank would
be liable at the same time for a tax of 1% a
month (Second paragraph, Section 249, NIRC)
payable to the Bureau of Internal Revenue as
well as a penalty of 1/10 of 1% a day (Section
106, Central Bank Act) payable to the Central
Bank. They argue that:jgc:chanrobles.com.ph

"As we examine the second paragraph of Section

249 of the Tax Code, we find nothing therein
which says that such imposition is a tax rather
than a penalty. It merely states that ‘there shall
be collected . . . as provided in Section one
hundred twenty six of Act Numbered one
thousand four hundred and fifty-nine . . . one
per centum per month.’ On the contrary, the
provision referred to (Section 126 of Act 1459)
states that ‘. . . reserve deficiencies shall be
penalized at the rate of one per centum per
month . . . the penalty assessed shall be
collected by the Collector of Internal Revenue’.
It would be wrong, therefore, to say that the
imposition in Section 249 of the Tax Code is a
tax, not a penalty, because taken in the context
of the referred statute, it is really a penalty.
Such imposition was provided in the Tax Code
and payable to the Collector of Internal Revenue
simply because at that time there was yet no
Central Bank Act and General Banking Act nor
a Monetary Board of Central Bank to regulate
the operation of banks." 9

After a careful consideration of the facts of the

case and the pertinent laws involved, We vote to
deny the petition.chanrobles.com:cralaw:red

Firstly, we would like to state that We find

unfortunate petitioner’s act of quoting out
context the questioned provision in the Tax
Code. Petitioner alleged that the second
paragraph of Section 249 of the Tax Code
"merely states" that there "shall be collected . . .
as provided in Section one hundred twenty one
of Act numbered one thousand four hundred
and fifty nine . . . one per centum per
month."cralaw virtua1aw library

If petitioner had been candid and honest

enough, it would have stated under what title
and chapter of the Tax Code the second
paragraph of Section 249 falls. As it then stood,
the law stated:chanrob1es virtual 1aw library

x x x

TITLE VIII — MISCELLANEOUS TAXES

"Sec. 249. Tax on Banks . . .

"There shall be collected upon the amount of

reserve deficiencies incurred by the bank, and
for the period of their duration, as provided in
section one hundred twenty-six of Act
numbered one thousand four hundred and
fifty-nine, as amended by Act Numbered Three
thousand six hundred and ten, one per centum
per month, . . . (As amended by Rep. Act No.
6110)" 10

Clearly, the law states a tax is to be collected.

As the law stood during the years the petitioner

was assessed for taxes on reserve deficiencies
(1969 & 1970), petitioner had to pay twice —
the first, a penalty, to the Central Bank by
virtue of Section 106 for violation of Secs. 100
and 101. all of the Central Bank Act and the
second, a tax, to the Bureau of Internal Revenue
for incurring a reserve deficiency.

As correctly analyzed by the petitioner and

public respondents, the new legislations on
bank reserves merely provided the basis for
computation of the reserve deficiency of
petitioner bank.

Petitioner submits that it was not the legislative

intention that banks with reserve deficiencies
would pay twice as the Tax Code (CA 466, as
amended by P.D. 69) enacted on January 1,
1973 did not contain said questioned provision.

While petitioner might have a point, the wisdom

of this legislation is not the province of the
Court. 11 It is clear from the statutes then in
force that there was no double taxation involved
— one was a penalty and the other was a tax.
At any rate, We have upheld the validity of
double taxation. 12 The payment of 1/10 of 1%
for incurring reserve deficiencies (Section 106,
Central Bank Act) is a penalty as the primary
purpose involved is regulation, 13 while the
payment of 1% for the same violation (Second
Paragraph, Section 249, NIRC) is a tax for the
generation of revenue which is the primary
purpose in this instance. 14 Petitioner should
not complain that it is being asked to pay twice
for incurring reserve deficiencies. It can always
avoid this predicament by not having reserve
deficiencies. Petitioner’s case is covered by two
special laws — one a banking law and the other,
a tax law. These two laws should receive such
construction as to make them harmonize with
each other and with the other body of pre-
existing laws. 15

Dura lex sed lex!

II

Corollary to this issue raised by petitioner bank,

is the question on how the respondent
Commissioner computed reserve deficiency
taxes considering that Sec. 249, NIRC, speaks
of computation of what it calls penalty on a per
month basis while the Central Bank Act
provides for the computation of the penalty on
a per day basis. It claims that respondent
Commissioner never informed them of the
details of these assessments, considering the
same involve complex and tedious
computations.

It is too late in the day for petitioner to raise this

matter for Us to resolve.16 The grounds alleged
by the petitioner in its motion for
reconsideration of the Commissioner’s
assessments are the very same grounds raised
in these petitions. Petitioner did not ask the
Commissioner to explain how it arrived in
computing these reserve deficiency taxes.
Neither did petitioner raise this question before
the Court of Tax Appeals.

Be that as it may, respondent Commissioner

explained in compliance with Our Resolution of
December 17, 1984, that:chanrobles.com :
virtual law library

"3. The reserve deficiency tax amounting to

P1,325,768.82 and P1,953,132.67, including
surcharge, was computed on the basis of the
monthly averages of reserve deficiencies using
figures on daily reserve deficiencies as
appearing in DSE Form No. 1 duly
accomplished by the bank, required to be filed
regularly with the Department of Supervision
and Examination of the Central Bank . . ." 17
Thus, what the respondent commissioner did
was just to add up all the daily reserve
deficiencies — as stated by petitioner itself in
DSE Form No. 1 which it submitted to the
Central Bank — for one month, divide such
total by the number of banking days in a month
to get the average monthly reserve deficiency.
For example, for January, 1970, the total daily
average of reserve deficiencies being
P175,228.031.73, the monthly average was
obtained by dividing said figure by 21 banking
days to get P8,344,196.75. The tax rate applied
was 1% to get the reserve deficiency tax of
P83,441.97. 18 Obviously, the respondent
commissioner could not apply the tax rate of 1%
on the daily reserve deficiency as the law
(Second paragraph, Sec. 249, NIRC) calls only
for a monthly computation. Mathematically,
this is the right procedure in obtaining the
monthly average of the daily reserve deficiencies.

As can be, seen, even if petitioner had validly

raised said issue, the respondent Commissioner
merely followed the law to the letter.

III

Lastly, petitioner bank in its brief mentions that

in Letter of Instruction No. 1330 issued by
President Marcos on June 6, 1983, 19 the
Central Bank was ordered to assist petitioner by
way of full condonation of all penalties and
other sanctions of whatever kind, nature and
description, as of the date they become due, on
its legal reserve deficiencies. Consequently,
petitioner insists that it is now exempted from
what it claims are the penalties imposed by the
second paragraph of Section 249, NIRC.

A careful study of said LOI reveals that it was

issued with respect to petitioner bank’s
(thereafter renamed Republic Planters Bank)
role in the government’s sugar production and
procurement program as the financial arm of
the sugar industry when the Philippine Sugar
Commission (PHILSUCOM), created by virtue of
P.D. 388 1974), bought the petitioner bank from
the Roman family.

The LOI itself states that:chanrob1es virtual

1aw library

x x x

"WHEREAS, IN PURSUIT OF THE

GOVERNMENT’S SUGAR PRODUCTION AND
PROCUREMENT PROGRAM, REPUBLIC
PLANTERS BANK INCURRED OVERDRAFTS IN
ITS CLEARING ACCOUNT WITH THE CENTRAL
BANK IN VIEW OF THE LATTER’S INABILITY
TO EFFECT SUBSTANTIAL REGULAR LOAN
RELEASES THRU ITS REDISCOUNTING
WINDOW DUE TO CERTAIN CONSTRAINTS ON
DOMESTIC CEILINGS RESULTING IN THE
DEPOSIT RESERVE DEFICIENCIES AND
CORRESPONDING IMPOSITION OF
PENALTIES FOR RESERVE DEFICIENCIES;

"WHEREAS, CONSIDERING THE MAGNITUDE

OF THE AMOUNT OF THE RESERVE
PENALTIES WHICH MAY AFFECT ITS
VIABILITY AND IN ORDER TO RATIONALIZE
THE SITUATION, IT IS IMPERATIVE THAT
REPUBLIC PLANTERS BANK BE GIVEN
APPROPRIATE RELIEF FROM ITS PRESENT
PREDICAMENT BROUGHT ABOUT PRIMARILY
BY THE IMPLEMENTATION OF THE
GOVERNMENT’S SUGAR PRODUCTION AND
PROCUREMENT PROGRAM AND NOT BY
REASON OF ANY MISMANAGEMENT OR
UNSOUND BANKING PRACTICE ON THE
OPERATION OF THE BANK." 20

The petition at bar involves the assessments for

the years 1969 and 1970. This LOI definitely
does not cover the years 1969 and 1970 as it
was issued only on June 6, 1983 and covers the
period when PHILSUCOM bought the then
ailing Republic Bank from the Roman family
and renamed it the Philippine Planters Bank to
be used as its financial conduit for the sugar
industry. Therefore, even on the thesis that the
payment made (Second paragraph, Section 249,
NIRC) is a penalty, this "penalty" for 1969 and
1970 can not be condoned as said LOI does not
cover it.chanrobles law library : red

WHEREFORE, premises considered, the

petition is denied with costs against petitioner.

SO ORDERED.

Narvasa, C.J., Padilla and Regalado, JJ., concur.

Melo, J., took no part.

CIR v Toda, Jr | GR No. 147188 | 14

September 2004

[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

Decision[1] of the Court of Appeals of 31
January 2001 in CA-G.R. SP No. 57799
affirming the 3 January 2000 Decision[2] 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 Insurance
Corporation (CIC) in the amount of
P79,099,999.22 for the year 1989, and ordered
the cancellation and setting aside of the
assessment issued by Commissioner of Internal
Revenue Liwayway Vinzons-Chato on 9
January 1995.

The case at bar stemmed from a Notice of

Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax
arising from an alleged simulated sale of a 16-
storey commercial building known as Cibeles
Building, situated on two parcels of land on
Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P.

Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the
Cibeles Building and the two parcels of land on
which the building stands for an amount of not
less than P90 million.[4]

On 30 August 1989, Toda purportedly sold the

property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the
same day to Royal Match Inc. (RMI) for P200
million. These two transactions were evidenced
by Deeds of Absolute Sale notarized on the same
day by the same notary public.[5]

For the sale of the property to RMI, Altonaga

paid capital gains tax in the amount of P10
million.[6]

On 16 April 1990, CIC filed its corporate annual

income tax return[7] for the year 1989,
declaring, among other things, its gain from the
sale of real property in the amount of
P75,728.021. After crediting withholding taxes
of P254,497.00, it paid P26,341,207[8] for its
net taxable income of P75,987,725.

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] Three and a half years later, or on
16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal

Revenue (BIR) sent an assessment notice[10]
and demand letter to the CIC for deficiency
income tax for the year 1989 in the amount of
P79,099,999.22.

The new CIC asked for a reconsideration,

asserting that the assessment should be
directed against the old CIC, and not against
the new CIC, which 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 tax
liabilities for the fiscal years 1987-1989.[11]

On 27 January 1995, the Estate of Benigno P.

Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza
Bautista, received a Notice of Assessment[12]
dated 9 January 1995 from the Commissioner
of Internal Revenue for deficiency income tax for
the year 1989 in the amount of P79,099,999.22,
computed as follows:

Income Tax 1989

Net Income per return P75,987,725.00

Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation

Tax Due thereof at 35% P 61,595,703.75

Less: Payment already made

1. Per return P26,595,704.00

2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
TOTAL AMT. DUE & COLLECTIBLE P
79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]

In the letter dated 19 October 1995,[14] the

Commissioner dismissed the protest, stating
that a fraudulent scheme was deliberately
perpetuated by the CIC wholly owned and
controlled by Toda by covering up the 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
building thereon to an individual capital gains,
thus evading the higher corporate income tax
rate of 35%.

On 15 February 1996, the Estate filed a petition

for review[15] with the CTA 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 Answer[16] 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 decision[18] 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 governments 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 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 denied[20] the motion for
reconsideration, prompting the Commissioner
to file a petition for review[21] 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 balance[26] as
other inv. Cibeles Bldg. Also, as of 31 July 1989,
another P40 million was debited and reflected
in RMIs trial balance as other inv. Cibeles Bldg.
This would show that the real buyer of the
properties was RMI, and not the intermediary
Altonaga.

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 isnt 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. Altonagas 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.

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

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 1986[35] (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 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 CICs deficiency income tax for
the year 1989 by invoking the separate
corporate personality of CIC, since its obligation
arose from Todas 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.

Quisumbing, Ynares-Santiago, Carpio, and

Azcuna, JJ., concur.

CIR v Pascor Realty Development Corp | GR

No. 128315 | 29 June 1999

[G.R. No. 128315. June 29, 1999]

COMMISSIONER OF INTERNAL REVENUE,

petitioner, vs. PASCOR REALTY AND
DEVELOPMENT CORPORATION, ROGELIO A.
DIO and VIRGINIA S. DIO, respondents.
DECISION
PANGANIBAN, J.:

An assessment contains not only a computation

of tax liabilities, but also a demand for payment
within a prescribed period. It also signals the
time when penalties and interests begin to
accrue against the taxpayer. To enable the
taxpayer to determine his remedies thereon,
due process requires that it must be served on
and received by the taxpayer. Accordingly, an
affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer
and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that
can be questioned before the Court of Tax
Appeals.

Statement of the Case

Before this Court is a Petition for Review on

Certiorari under Rule 45 of the Rules of Court
praying for the nullification of the October 30,
1996 Decision[1] of the Court of Appeals[2] in
CA-GR SP No. 40853, which effectively affirmed
the January 25, 1996 Resolution[3] of the Court
of Tax Appeals[4] in CTA Case No. 5271. The
CTA disposed as follows:

WHEREFORE, finding [the herein petitioners]

Motion to Dismiss as UNMERITORIOUS, the
same is hereby DENIED. [The CIR] is hereby
given a period of thirty (30) days from receipt
hereof to file her answer.

Petitioner also seeks to nullify the February 13,

1997 Resolution[5] of the Court of Appeals
denying reconsideration.

The Facts

As found by the Court of Appeals, the

undisputed facts of the case are as follows:

It appears that by virtue of Letter of Authority

No. 001198, then BIR Commissioner Jose U.
Ong authorized Revenue Officers Thomas T.
Que, Sonia T. Estorco and Emmanuel M.
Savellano to examine the books of accounts and
other accounting records of Pascor Realty and
Development Corporation. (PRDC) for the years
ending 1986, 1987 and 1988. The said
examination resulted in a recommendation for
the issuance of an assessment in the amounts
of P7,498,434.65 and P3,015,236.35 for the
years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner of

Internal Revenue filed a criminal complaint
before the Department of Justice against the
PRDC, its President Rogelio A. Dio, and its
Treasurer Virginia S. Dio, alleging evasion of
taxes in the total amount of P10,513,671.00.
Private respondents PRDC, et. al. filed an
Urgent Request for
Reconsideration/Reinvestigation disputing the
tax assessment and tax liability.

On March 23, 1995, private respondents

received a subpoena from the DOJ in
connection with the criminal complaint filed by
the Commissioner of Internal Revenue (BIR)
against them.

In a letter dated May 17, 1995, the CIR denied

the urgent request for
reconsideration/reinvestigation of the private
respondents on the ground that no formal
assessment has as yet been issued by the
Commissioner.

Private respondents then elevated the Decision

of the CIR dated May 17, 1995 to the Court of
Tax Appeals on a petition for review docketed as
CTA Case No. 5271 on July 21, 1995. On
September 6, 1995, the CIR filed a Motion to
Dismiss the petition on the ground that the CTA
has no jurisdiction over the subject matter of
the petition, as there was no formal assessment
issued against the petitioners. The CTA denied
the said motion to dismiss in a Resolution dated
January 25, 1996 and ordered the CIR to file an
answer within thirty (30) days from receipt of
said resolution. The CIR received the resolution
on January 31, 1996 but did not file an answer
nor did she move to reconsider the resolution.

Instead, the CIR filed this petition on June 7,

1996, alleging as grounds that:
Respondent Court of Tax Appeals acted with
grave abuse of discretion and without
jurisdiction in considering the affidavit/report
of the revenue officer and the indorsement of
said report to the secretary of justice as
assessment which may be appealed to the Court
of Tax Appeals;

Respondent Court of Tax Appeals acted with

grave abuse of discretion in considering the
denial by petitioner of private respondents
Motion for Reconsideration as [a] final decision
which may be appealed to the Court of Tax
Appeals.

In denying the motion to dismiss filed by the

CIR, the Court of Tax Appeals stated:

We agree with petitioners contentions, that the

criminal complaint for tax evasion is the
assessment issued, and that the letter denial of
May 17, 1995 is the decision properly
appealable to [u]s. Respondents ground of
denial, therefore, that there was no formal
assessment issued, is untenable.

It is the Courts honest belief, that the criminal

case for tax evasion is already an assessment.
The complaint, more particularly, the Joint
Affidavit of Revenue Examiners Lagmay and
Savellano attached thereto, contains the details
of the assessment like the kind and amount of
tax due, and the period covered.

Petitioners are right, in claiming that the

provisions of Republic Act No. 1125, relating to
exclusive appellate jurisdiction of this Court, do
not, make any mention of formal assessment.
The law merely states, that this Court has
exclusive appellate jurisdiction over decisions of
the Commissioner of Internal Revenue on
disputed assessments, and other matters
arising under the National Internal Revenue
Code, other law or part administered by the
Bureau of Internal Revenue Code.
As far as this Court is concerned, the amount
and kind of tax due, and the period covered, are
sufficient details needed for an assessment.
These details are more than complete,
compared to the following definitions of the
term as quoted hereunder. Thus:

Assessment is laying a tax. Johnson City v.

Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163
Tenn. 332. (Words and Phrases, Permanent
Edition, Vol. 4, p. 446)

The word assessment when used in connection

with taxation, may have more than one meaning.
The ultimate purpose of an assessment to such
a connection is to ascertain the amount that
each taxpayer is to pay. More commonly, the
word assessment means the official valuation of
a taxpayers property for purpose of taxation.
State v. New York, N.H. and H.R. Co. 22 A. 765,
768, 60 Conn. 326, 325. (Ibid. p. 445)

From the above, it can be gleaned that an

assessment simply states how much tax is due
from a taxpayer. Thus, based on these
definitions, the details of the tax as given in the
Joint Affidavit of respondents examiners, which
was attached to the tax evasion complaint, more
than suffice to qualify as an assessment.
Therefore, this assessment having been
disputed by petitioners, and there being a
denial of their letter disputing such assessment,
this Court unquestionably acquired jurisdiction
over the instant petition for review.[6]

As earlier observed, the Court of Appeals

sustained the CTA and dismissed the petition.

Hence, this recourse to this Court.[7]

Ruling of the Court of Appeals

The Court of Appeals held that the tax court

committed no grave abuse of discretion in
ruling that the Criminal Complaint for tax
evasion filed by the Commissioner of Internal
Revenue with the Department of Justice
constituted an assessment of the tax due, and
that the said assessment could be the subject
of a protest. By definition, an assessment is
simply the statement of the details and the
amount of tax due from a taxpayer. Based on
this definition, the details of the tax contained
in the BIR examiners Joint Affidavit,[8] which
was attached to the criminal Complaint,
constituted an assessment. Since the assailed
Order of the CTA was merely interlocutory and
devoid of grave abuse of discretion, a petition for
certiorari did not lie.

Issues

Petitioners submit for the consideration of this

Court the following issues:

(1) Whether or not the criminal complaint for

tax evasion can be construed as an assessment.

(2) Whether or not an assessment is necessary

before criminal charges for tax evasion may be
instituted.

(3) Whether or not the CTA can take cognizance

of the case in the absence of an assessment.[9]

In the main, the Court will resolve whether the

revenue officers Affidavit-Report, which was
attached to the criminal Complaint filed with
the Department of Justice, constituted an
assessment that could be questioned before the
Court of Tax Appeals.

The Courts Ruling

The petition is meritorious.

Main Issue: Assessment

Petitioner argues that the filing of the criminal

complaint with the Department of Justice
cannot in any way be construed as a formal
assessment of private respondents tax liabilities.
This position is based on Section 205 of the
National Internal Revenue Code[10] (NIRC),
which provides that remedies for the collection
of deficient taxes may be by either civil or
criminal action. Likewise, petitioner cites
Section 223(a) of the same Code, which states
that in case of failure to file a return, the tax
may be assessed or a proceeding in court may
be begun without assessment.

Respondents, on the other hand, maintain that

an assessment is not an action or proceeding
for the collection of taxes, but merely a notice
that the amount stated therein is due as tax and
that the taxpayer is required to pay the same.
Thus, qualifying as an assessment was the BIR
examiners Joint Affidavit, which contained the
details of the supposed taxes due from
respondent for taxable years ending 1987 and
1988, and which was attached to the tax
evasion Complaint filed with the DOJ.
Consequently, the denial by the BIR of private
respondents request for reinvestigation of the
disputed assessment is properly appealable to
the CTA.

We agree with petitioner. Neither the NIRC nor

the revenue regulations governing the protest of
assessments[11] provide a specific definition or
form of an assessment. However, the NIRC
defines the specific functions and effects of an
assessment. To consider the affidavit attached
to the Complaint as a proper assessment is to
subvert the nature of an assessment and to set
a bad precedent that will prejudice innocent
taxpayers.

True, as pointed out by the private respondents,

an assessment informs the taxpayer that he or
she has tax liabilities. But not all documents
coming from the BIR containing a computation
of the tax liability can be deemed assessments.

To start with, an assessment must be sent to

and received by a taxpayer, and must demand
payment of the taxes described therein within a
specific period. Thus, the NIRC imposes a 25
percent penalty, in addition to the tax due, in
case the taxpayer fails to pay the deficiency tax
within the time prescribed for its payment in the
notice of assessment. Likewise, an interest of 20
percent per annum, or such higher rate as may
be prescribed by rules and regulations, is to be
collected from the date prescribed for its
payment until the full payment.[12]

The issuance of an assessment is vital in

determining the period of limitation regarding
its proper issuance and the period within which
to protest it. Section 203[13]of the NIRC
provides that internal revenue taxes must be
assessed within three years from the last day
within which to file the return. Section 222,[14]
on the other hand, specifies a period of ten
years in case a fraudulent return with intent to
evade was submitted or in case of failure to file
a return. Also, Section 228[15] of the same law
states that said assessment may be protested
only within thirty days from receipt thereof.
Necessarily, the taxpayer must be certain that
a specific document constitutes an assessment.
Otherwise, confusion would arise regarding the
period within which to make an assessment or
to protest the same, or whether interest and
penalty may accrue thereon.

It should also be stressed that the said

document is a notice duly sent to the taxpayer.
Indeed, an assessment is deemed made only
when the collector of internal revenue releases,
mails or sends such notice to the taxpayer.[16]

In the present case, the revenue officers

Affidavit merely contained a computation of
respondents tax liability. It did not state a
demand or a period for payment. Worse, it was
addressed to the justice secretary, not to the
taxpayers.

Respondents maintain that an assessment, in

relation to taxation, is simply understood to
mean:

A notice to the effect that the amount therein

stated is due as tax and a demand for payment
thereof.[17]
Fixes the liability of the taxpayer and ascertains
the facts and furnishes the data for the proper
presentation of tax rolls.[18]

Even these definitions fail to advance private

respondents case. That the BIR examiners Joint
Affidavit attached to the Criminal Complaint
contained some details of the tax liabilities of
private respondents does not ipso facto make it
an assessment. The purpose of the Joint
Affidavit was merely to support and
substantiate the Criminal Complaint for tax
evasion. Clearly, it was not meant to be a notice
of the tax due and a demand to the private
respondents for payment thereof.

The fact that the Complaint itself was

specifically directed and sent to the Department
of Justice and not to private respondents shows
that the intent of the commissioner was to file a
criminal complaint for tax evasion, not to issue
an assessment. Although the revenue officers
recommended the issuance of an assessment,
the commissioner opted instead to file a
criminal case for tax evasion. What private
respondents received was a notice from the DOJ
that a criminal case for tax evasion had been
filed against them, not a notice that the Bureau
of Internal Revenue had made an assessment.

In addition, what private respondents sent to

the commissioner was a motion for a
reconsideration of the tax evasion charges filed,
not of an assessment, as shown thus:

This is to request for reconsideration of the tax

evasion charges against my client, PASCOR
Realty and Development Corporation and for
the same to be referred to the Appellate Division
in order to give my client the opportunity of a
fair and objective hearing[19]

Additional Issues: Assessment Not Necessary

Before Filing of Criminal Complaint
Private respondents maintain that the filing of a
criminal complaint must be preceded by an
assessment. This is incorrect, because Section
222 of the NIRC specifically states that in cases
where a false or fraudulent return is submitted
or in cases of failure to file a return such as this
case, proceedings in court may be commenced
without an assessment. Furthermore, Section
205 of the same Code clearly mandates that the
civil and criminal aspects of the case may be
pursued simultaneously. In Ungab v. Cusi,[20]
petitioner therein sought the dismissal of the
criminal Complaints for being premature, since
his protest to the CTA had not yet been resolved.
The Court held that such protests could not
stop or suspend the criminal action which was
independent of the resolution of the protest in
the CTA. This was because the commissioner of
internal revenue had, in such tax evasion cases,
discretion on whether to issue an assessment
or to file a criminal case against the taxpayer or
to do both.

Private respondents insist that Section 222

should be read in relation to Section 255 of the
NIRC,[21] which penalizes failure to file a return.
They add that a tax assessment should precede
a criminal indictment. We disagree. To reiterate,
said Section 222 states that an assessment is
not necessary before a criminal charge can be
filed. This is the general rule. Private
respondents failed to show that they are entitled
to an exception. Moreover, the criminal charge
need only be supported by a prima facie
showing of failure to file a required return. This
fact need not be proven by an assessment.

The issuance of an assessment must be

distinguished from the filing of a complaint.
Before an assessment is issued, there is, by
practice, a pre-assessment notice sent to the
taxpayer. The taxpayer is then given a chance
to submit position papers and documents to
prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment
signed by him or her is then sent to the taxpayer
informing the latter specifically and clearly that
an assessment has been made against him or
her. In contrast, the criminal charge need not
go through all these. The criminal charge is filed
directly with the DOJ. Thereafter, the taxpayer
is notified that a criminal case had been filed
against him, not that the commissioner has
issued an assessment. It must be stressed that
a criminal complaint is instituted not to
demand payment, but to penalize the taxpayer
for violation of the Tax Code.

WHEREFORE, the petition is hereby GRANTED.

The assailed Decision is REVERSED and SET
ASIDE. CTA Case No. 5271 is likewise
DISMISSED. No costs.

SO ORDERED.

CIR v Raul Gonzales | GR No. 177279 | 13

October 2010

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

- versus -
G.R. No. 177279

Present:

CARPIO MORALES, J.,

Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of Justice,

L. M. CAMUS ENGINEERING CORPORATION
(represented by LUIS M. CAMUS and LINO D.
MENDOZA),
Respondents.

Promulgated:

October 13, 2010

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

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under

Rule 45 of the 1997 Rules of Civil Procedure, as
amended, assailing the Decision[1] dated
October 31, 2006 and Resolution[2] dated
March 6, 2007 of the Court of Appeals (CA) in
CA-G.R. SP No. 93387 which affirmed the
Resolution[3] dated December 13, 2005 of
respondent Secretary of Justice in I.S. No.
2003-774 for violation of Sections 254 and 255
of the National Internal Revenue Code of 1997
(NIRC).
The facts as culled from the records:
Pursuant to Letter of Authority (LA) No.
00009361 dated August 25, 2000 issued by
then Commissioner of Internal Revenue
(petitioner) Dakila B. Fonacier, Revenue Officers
Remedios C. Advincula, Jr., Simplicio V.
Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio
Agustin T. Zamora supervised by Section Chief
Sixto C. Dy, Jr. of the Tax Fraud Division (TFD),
National Office, conducted a fraud investigation
for all internal revenue taxes to
ascertain/determine the tax liabilities of
respondent L. M. Camus Engineering
Corporation (LMCEC) for the taxable years 1997,
1998 and 1999.[4] The audit and investigation
against LMCEC was precipitated by the
information provided by an informer that
LMCEC had substantial underdeclared income
for the said period. For failure to comply with
the subpoena duces tecum issued in connection
with the tax fraud investigation, a criminal
complaint was instituted by the Bureau of
Internal Revenue (BIR) against LMCEC on
January 19, 2001 for violation of Section 266 of
the NIRC (I.S. No. 00-956 of the Office of the
City Prosecutor of Quezon City).[5]
Based on data obtained from an informer and
various clients of LMCEC,[6] it was discovered
that LMCEC filed fraudulent tax returns with
substantial underdeclarations of taxable
income for the years 1997, 1998 and 1999.
Petitioner thus assessed the company of total
deficiency taxes amounting to P430,958,005.90
(income tax - P318,606,380.19 and value-added
tax [VAT] - P112,351,625.71) covering the said
period. The Preliminary Assessment Notice
(PAN) was received by LMCEC on February 22,
2001.[7]
LMCECs alleged underdeclared income was
summarized by petitioner as follows:

Year
Income
Per ITR
Income
Per Investigation
Undeclared
Income
Percentage of
Underdeclaration
1997
96,638,540.00
283,412,140.84
186,733,600.84
193.30%
1998
86,793,913.00
236,863,236.81
150,069,323.81
172.90%
1999
88,287,792.00
251,507,903.13
163,220,111.13
184.90%[8]
In view of the above findings, assessment
notices together with a formal letter of demand
dated August 7, 2002 were sent to LMCEC
through personal service on October 1, 2002.[9]
Since the company and its representatives
refused to receive the said notices and demand
letter, the revenue officers resorted to
constructive service[10] in accordance with
Section 3, Revenue Regulations (RR) No. 12-
99[11].
On May 21, 2003, petitioner, through then
Commissioner Guillermo L. Parayno, Jr.,
referred to the Secretary of Justice for
preliminary investigation its complaint against
LMCEC, Luis M. Camus and Lino D. Mendoza,
the latter two were sued in their capacities as
President and Comptroller, respectively. The
case was docketed as I.S. No. 2003-774. In the
Joint Affidavit executed by the revenue officers
who conducted the tax fraud investigation, it
was alleged that despite the receipt of the final
assessment notice and formal demand letter on
October 1, 2002, LMCEC failed and refused to
pay the deficiency tax assessment in the total
amount of P630,164,631.61, inclusive of
increments, which had become final and
executory as a result of the said taxpayers
failure to file a protest thereon within the thirty
(30)-day reglementary period.[12]
Camus and Mendoza filed a Joint Counter-
Affidavit contending that LMCEC cannot be
held liable whatsoever for the alleged tax
deficiency which had become due and
demandable. Considering that the complaint
and its annexes all showed that the suit is a
simple civil action for collection and not a tax
evasion case, the Department of Justice (DOJ)
is not the proper forum for BIRs complaint.
They also assail as invalid the assessment
notices which bear no serial numbers and
should be shown to have been validly served by
an Affidavit of Constructive Service executed
and sworn to by the revenue officers who served
the same. As stated in LMCECs letter-protest
dated December 12, 2002 addressed to Revenue
District Officer (RDO) Clavelina S. Nacar of RD
No. 40, Cubao, Quezon City, the company had
already undergone a series of routine
examinations for the years 1997, 1998 and
1999; under the NIRC, only one examination of
the books of accounts is allowed per taxable
year.[13]
LMCEC further averred that it had availed of the
Bureaus Tax Amnesty Programs (Economic
Recovery Assistance Payment [ERAP] Program
and the Voluntary Assessment Program [VAP])
for 1998 and 1999; for 1997, its tax liability was
terminated and closed under Letter of
Termination[14] dated June 1, 1999 issued by
petitioner and signed by the Chief of the
Assessment Division.[15] LMCEC claimed it
made payments of income tax, VAT and
expanded withholding tax (EWT), as follows:

TAXABLE
YEAR

AMOUNT OF TAXES
PAID
1997
Termination Letter Under Letter of Authority No.
174600 Dated November 4, 1998
EWT - P 6,000.00
VAT - 540,605.02
IT - 3,000.00
1998
ERAP Program pursuant
to RR #2-99
WC - 38,404.55
VAT - 61,635.40
1999
VAP Program pursuant
to RR #8-2001
IT - 878,495.28
VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped

from further taking any action against it and its
corporate officers concerning the taxable years
1997 to 1999. With the grant of immunity from
audit from the companys availment of ERAP
and VAP, which have a feature of a tax amnesty,
the element of fraud is negated the moment the
Bureau accepts the offer of compromise or
payment of taxes by the taxpayer. The act of the
revenue officers in finding justification under
Section 6(B) of the NIRC (Best Evidence
Obtainable) is misplaced and unavailing
because they were not able to open the books of
the company for the second time, after the
routine examination, issuance of termination
letter and the availment of ERAP and VAP.
LMCEC thus maintained that unless there is a
prior determination of fraud supported by
documents not yet incorporated in the docket of
the case, petitioner cannot just issue LAs
without first terminating those previously
issued. It emphasized the fact that the BIR
officers who filed and signed the Affidavit-
Complaint in this case were the same ones who
appeared as complainants in an earlier case
filed against Camus for his alleged failure to
obey summons in violation of Section 5
punishable under Section 266 of the NIRC of
1997 (I.S. No. 00-956 of the Office of the City
Prosecutor of Quezon City). After preliminary
investigation, said case was dismissed for lack
of probable cause in a Resolution issued by the
Investigating Prosecutor on May 2, 2001.[17]
LMCEC further asserted that it filed on April 20,
2001 a protest on the PAN issued by petitioner
for having no basis in fact and law. However,
until now the said protest remains unresolved.
As to the alleged informant who purportedly
supplied the confidential information, LMCEC
believes that such person is fictitious and his
true identity and personality could not be
produced. Hence, this case is another form of
harassment against the company as what had
been found by the Office of the City Prosecutor
of Quezon City in I.S. No. 00-956. Said case and
the present case both have something to do with
the audit/examination of LMCEC for taxable
years 1997, 1998 and 1999 pursuant to LA No.
00009361.[18]
In the Joint Reply-Affidavit executed by the
Bureaus revenue officers, petitioner disagreed
with the contention of LMCEC that the
complaint filed is not criminal in nature,
pointing out that LMCEC and its officers Camus
and Mendoza were being charged for the
criminal offenses defined and penalized under
Sections 254 (Attempt to Evade or Defeat Tax)
and 255 (Willful Failure to Pay Tax) of the NIRC.
This finds support in Section 205 of the same
Code which provides for administrative
(distraint, levy, fine, forfeiture, lien, etc.) and
judicial (criminal or civil action) remedies in
order to enforce collection of taxes. Both
remedies may be pursued either independently
or simultaneously. In this case, the BIR decided
to simultaneously pursue both remedies and
thus aside from this criminal action, the Bureau
also initiated administrative proceedings
against LMCEC.[19]
On the lack of control number in the
assessment notice, petitioner explained that
such is a mere office requirement in the
Assessment Service for the purpose of internal
control and monitoring; hence, the
unnumbered assessment notices should not be
interpreted as irregular or anomalous.
Petitioner stressed that LMCEC already lost its
right to file a protest letter after the lapse of the
thirty (30)-day reglementary period. LMCECs
protest-letter dated December 12, 2002 to RDO
Clavelina S. Nacar, RD No. 40, Cubao, Quezon
City was actually filed only on December 16,
2002, which was disregarded by the petitioner
for being filed out of time. Even assuming for
the sake of argument that the assessment
notices were invalid, petitioner contended that
such could not affect the present criminal
action,[20] citing the ruling in the landmark
case of Ungab v. Cusi, Jr.[21]
As to the Letter of Termination signed by Ruth
Vivian G. Gandia of the Assessment Division,
Revenue Region No. 7, Quezon City, petitioner
pointed out that LMCEC failed to mention that
the undated Certification issued by RDO Pablo
C. Cabreros, Jr. of RD No. 40, Cubao, Quezon
City stated that the report of the 1997 Internal
Revenue taxes of LMCEC had already been
submitted for review and approval of higher
authorities. LMCEC also cannot claim as
excuse from the reopening of its books of
accounts the previous investigations and
examinations. Under Section 235 (a), an
exception was provided in the rule on once a
year audit examination in case of fraud,
irregularity or mistakes, as determined by the
Commissioner. Petitioner explained that the
distinction between a Regular Audit
Examination and Tax Fraud Audit Examination
lies in the fact that the former is conducted by
the district offices of the Bureaus Regional
Offices, the authority emanating from the
Regional Director, while the latter is conducted
by the TFD of the National Office only when
instances of fraud had been determined by the
petitioner.[22]
Petitioner further asserted that LMCECs claim
that it was granted immunity from audit when
it availed of the VAP and ERAP programs is
misleading. LMCEC failed to state that its
availment of ERAP under RR No. 2-99 is not a
grant of absolute immunity from audit and
investigation, aside from the fact that said
program was only for income tax and did not
cover VAT and withholding tax for the taxable
year 1998. As for LMCECS availment of VAP in
1999 under RR No. 8-2001 dated August 1,
2001 as amended by RR No. 10-2001 dated
September 3, 2001, the company failed to state
that it covers only income tax and VAT, and did
not include withholding tax. However, LMCEC
is not actually entitled to the benefits of VAP
under Section 1 (1.1 and 1.2) of RR No. 10-2001.
As to the principle of estoppel invoked by
LMCEC, estoppel clearly does not lie against the
BIR as this involved the exercise of an inherent
power by the government to collect taxes.[23]
Petitioner also pointed out that LMCECs
assertion correlating this case with I.S. No. 00-
956 is misleading because said case involves
another violation and offense (Sections 5 and
266 of the NIRC). Said case was filed by
petitioner due to the failure of LMCEC to submit
or present its books of accounts and other
accounting records for examination despite the
issuance of subpoena duces tecum against
Camus in his capacity as President of LMCEC.
While indeed a Resolution was issued by Asst.
City Prosecutor Titus C. Borlas on May 2, 2001
dismissing the complaint, the same is still on
appeal and pending resolution by the DOJ. The
determination of probable cause in said case is
confined to the issue of whether there was
already a violation of the NIRC by Camus in not
complying with the subpoena duces tecum
issued by the BIR.[24]
Petitioner contended that precisely the reason
for the issuance to the TFD of LA No. 00009361
by the Commissioner is because the latter
agreed with the findings of the investigating
revenue officers that fraud exists in this case.
In the conduct of their investigation, the
revenue officers observed the proper procedure
under Revenue Memorandum Order (RMO) No.
49-2000 wherein it is required that before the
issuance of a Letter of Authority against a
particular taxpayer, a preliminary investigation
should first be conducted to determine if a
prima facie case for tax fraud exists. As to the
allegedly unresolved protest filed on April 20,
2001 by LMCEC over the PAN, this has been
disregarded by the Bureau for being pro forma
and having been filed beyond the 15-day
reglementary period. A subsequent letter dated
April 20, 2001 was filed with the TFD and
signed by a certain Juan Ventigan. However,
this was disregarded and considered a mere
scrap of paper since the said signatory had not
shown any prior authorization to represent
LMCEC. Even assuming said protest letter was
validly filed on behalf of the company, the
issuance of a Formal Demand Letter and
Assessment Notice through constructive service
on October 1, 2002 is deemed an implied denial
of the said protest. Lastly, the details regarding
the informer being confidential, such
information is entitled to some degree of
protection, including the identity of the
informant against LMCEC.[25]
In their Joint Rejoinder-Affidavit,[26] Camus
and Mendoza reiterated their argument that the
identity of the alleged informant is crucial to
determine if he/she is qualified under Section
282 of the NIRC. Moreover, there was no
assessment that has already become final, the
validity of its issuance and service has been put
in issue being anomalous, irregular and
oppressive. It is contended that for criminal
prosecution to proceed before assessment,
there must be a prima facie showing of a willful
attempt to evade taxes. As to LMCECs
availment of the VAP and ERAP programs, the
certificate of immunity from audit issued to it
by the BIR is plain and simple, but petitioner is
now saying it has the right to renege with
impunity from its undertaking. Though
petitioner deems LMCEC not qualified to avail
of the benefits of VAP, it must be noted that if it
is true that at the time the petitioner filed I.S.
No. 00-956 sometime in January 2001 it had
already in its custody that Confidential
Information No. 29-2000 dated July 7, 2000,
these revenue officers could have rightly filed
the instant case and would not resort to filing
said criminal complaint for refusal to comply
with a subpoena duces tecum.
On September 22, 2003, the Chief State
Prosecutor issued a Resolution[27] finding no
sufficient evidence to establish probable cause
against respondents LMCEC, Camus and
Mendoza. It was held that since the payments
were made by LMCEC under ERAP and VAP
pursuant to the provisions of RR Nos. 2-99 and
8-2001 which were offered to taxpayers by the
BIR itself, the latter is now in estoppel to insist
on the criminal prosecution of the respondent
taxpayer. The voluntary payments made
thereunder are in the nature of a tax amnesty.
The unnumbered assessment notices were
found highly irregular and thus their validity is
suspect; if the amounts indicated therein were
collected, it is uncertain how these will be
accounted for and if it would go to the coffers of
the government or elsewhere. On the required
prior determination of fraud, the Chief State
Prosecutor declared that the Office of the City
Prosecutor in I.S. No. 00-956 has already
squarely ruled that (1) there was no prior
determination of fraud, (2) there was
indiscriminate issuance of LAs, and (3) the
complaint was more of harassment. In view of
such findings, any ensuing LA is thus defective
and allowing the collection on the assailed
assessment notices would already be in the
context of a fishing expedition or witch-hunting.
Consequently, there is nothing to speak of
regarding the finality of assessment notices in
the aggregate amount of P630,164,631.61.
Petitioner filed a motion for reconsideration
which was denied by the Chief State
Prosecutor.[28]
Petitioner appealed to respondent Secretary of
Justice but the latter denied its petition for
review under Resolution dated December 13,
2005.[29]
The Secretary of Justice found that petitioners
claim that there is yet no finality as to LMCECs
payment of its 1997 taxes since the audit report
was still pending review by higher authorities,
is unsubstantiated and misplaced. It was noted
that the Termination Letter issued by the
Commissioner on June 1, 1999 is explicit that
the matter is considered closed. As for taxable
year 1998, respondent Secretary stated that the
record shows that LMCEC paid VAT and
withholding tax in the amount of P61,635.40
and P38,404.55, respectively. This eventually
gave rise to the issuance of a certificate of
immunity from audit for 1998 by the Office of
the Commissioner of Internal Revenue. For
taxable year 1999, respondent Secretary found
that pursuant to earlier LA No. 38633 dated
July 4, 2000, LMCECs 1999 tax liabilities were
still pending investigation for which reason
LMCEC assailed the subsequent issuance of LA
No. 00009361 dated August 25, 2000 calling for
a similar investigation of its alleged 1999 tax
deficiencies when no final determination has yet
been arrived on the earlier LA No. 38633.[30]
On the allegation of fraud, respondent Secretary
ruled that petitioner failed to establish the
existence of the following circumstances
indicating fraud in the settlement of LMCECs
tax liabilities: (1) there must be intentional and
substantial understatement of tax liability by
the taxpayer; (2) there must be intentional and
substantial overstatement of deductions or
exemptions; and (3) recurrence of the foregoing
circumstances. First, petitioner miserably failed
to explain why the assessment notices were
unnumbered; second, the claim that the tax
fraud investigation was precipitated by an
alleged informant has not been corroborated
nor was it clearly established, hence there is no
other conclusion but that the Bureau engaged
in a fishing expedition; and furthermore,
petitioners course of action is contrary to
Section 235 of the NIRC allowing only once in a
given taxable year such examination and
inspection of the taxpayers books of accounts
and other accounting records. There was no
convincing proof presented by petitioner to
show that the case of LMCEC falls under the
exceptions provided in Section 235. Respondent
Secretary duly considered the issuance of
Certificate of Immunity from Audit and Letter of
Termination dated June 1, 1999 issued to
LMCEC.[31]
Anent the earlier case filed against the same
taxpayer (I.S. No. 00-956), the Secretary of
Justice found petitioner to have engaged in
forum shopping in view of the fact that while
there is still pending an appeal from the
Resolution of the City Prosecutor of Quezon City
in said case, petitioner hurriedly filed the
instant case, which not only involved the same
parties but also similar substantial issues (the
joint complaint-affidavit also alleged the
issuance of LA No. 00009361 dated August 25,
2000). Clearly, the evidence of litis pendentia is
present. Finally, respondent Secretary noted
that if indeed LMCEC committed fraud in the
settlement of its tax liabilities, then at the
outset, it should have been discovered by the
agents of petitioner, and consequently
petitioner should not have issued the Letter of
Termination and the Certificate of Immunity
From Audit. Petitioner thus should have been
more circumspect in the issuance of said
documents.[32]
Its motion for reconsideration having been
denied, petitioner challenged the ruling of
respondent Secretary via a certiorari petition in
the CA.
On October 31, 2006, the CA rendered the
assailed decision[33] denying the petition and
concurred with the findings and conclusions of
respondent Secretary. Petitioners motion for
reconsideration was likewise denied by the
appellate court.[34] It appears that entry of
judgment was issued by the CA stating that its
October 31, 2006 Decision attained finality on
March 25, 2007.[35] However, the said entry of
judgment was set aside upon manifestation by
the petitioner that it has filed a petition for
review before this Court subsequent to its
receipt of the Resolution dated March 6, 2007
denying petitioners motion for reconsideration
on March 20, 2007.[36]
The petition is anchored on the following
grounds:
I.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of
Justice who gravely abused his discretion by
dismissing the complaint based on grounds
which are not even elements of the offenses
charged.
II.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of
Justice who gravely abused his discretion by
dismissing petitioners evidence, contrary to law.
III.
The Honorable Court of Appeals erroneously
sustained the findings of the Secretary of
Justice who gravely abused his discretion by
inquiring into the validity of a Final Assessment
Notice which has become final, executory and
demandable pursuant to Section 228 of the Tax
Code of 1997 for failure of private respondent to
file a protest against the same.[37]
The core issue to be resolved is whether LMCEC
and its corporate officers may be prosecuted for
violation of Sections 254 (Attempt to Evade or
Defeat Tax) and 255 (Willful Failure to Supply
Correct and Accurate Information and Pay Tax).
Petitioner filed the criminal complaint against
the private respondents for violation of the
following provisions of the NIRC, as amended:
SEC. 254. Attempt to Evade or Defeat Tax. Any
person who willfully attempts in any manner to
evade or defeat any tax imposed under this
Code or the payment thereof shall, in addition
to other penalties provided by law, upon
conviction thereof, be punished by a fine of not
less than Thirty thousand pesos (P30,000) but
not more than One hundred thousand pesos
(P100,000) and suffer imprisonment of not less
than two (2) years but not more than four (4)
years: Provided, That the conviction or acquittal
obtained under this Section shall not be a bar
to the filing of a civil suit for the collection of
taxes.
SEC. 255. Failure to File Return, Supply
Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess
Taxes Withheld on Compensation. Any person
required under this Code or by rules and
regulations promulgated thereunder to pay any
tax, make a return, keep any record, or supply
any correct and accurate information, who
willfully fails to pay such tax, make such return,
keep such record, or supply such correct and
accurate information, or withhold or remit taxes
withheld, or refund excess taxes withheld on
compensations at the time or times required by
law or rules and regulations shall, in addition
to other penalties provided by law, upon
conviction thereof, be punished by a fine of not
less than Ten thousand pesos (P10,000) and
suffer imprisonment of not less than one (1)
year but not more than ten (10) years.

x x x x (Emphasis supplied.)
Respondent Secretary concurred with the Chief
State Prosecutors conclusion that there is
insufficient evidence to establish probable
cause to charge private respondents under the
above provisions, based on the following
findings: (1) the tax deficiencies of LMCEC for
taxable years 1997, 1998 and 1999 have all
been settled or terminated, as in fact LMCEC
was issued a Certificate of Immunity and Letter
of Termination, and availed of the ERAP and
VAP programs; (2) there was no prior
determination of the existence of fraud; (3) the
assessment notices are unnumbered, hence
irregular and suspect; (4) the books of accounts
and other accounting records may be subject to
audit examination only once in a given taxable
year and there is no proof that the case falls
under the exceptions provided in Section 235 of
the NIRC; and (5) petitioner committed forum
shopping when it filed the instant case even as
the earlier criminal complaint (I.S. No. 00-956)
dismissed by the City Prosecutor of Quezon City
was still pending appeal.
Petitioner argues that with the finality of the
assessment due to failure of the private
respondents to challenge the same in
accordance with Section 228 of the NIRC,
respondent Secretary has no jurisdiction and
authority to inquire into its validity. Respondent
taxpayer is thereby allowed to do indirectly
what it cannot do directly to raise a collateral
attack on the assessment when even a direct
challenge of the same is legally barred. The
rationale for dismissing the complaint on the
ground of lack of control number in the
assessment notice likewise betrays a lack of
awareness of tax laws and jurisprudence, such
circumstance not being an element of the
offense. Worse, the final, conclusive and
undisputable evidence detailing a crime under
our taxation laws is swept under the rug so
easily on mere conspiracy theories imputed on
persons who are not even the subject of the
complaint.
We grant the petition.
There is no dispute that prior to the filing of the
complaint with the DOJ, the report on the tax
fraud investigation conducted on LMCEC
disclosed that it made substantial
underdeclarations in its income tax returns for
1997, 1998 and 1999. Pursuant to RR No. 12-
99,[38] a PAN was sent to and received by
LMCEC on February 22, 2001 wherein it was
notified of the proposed assessment of
deficiency taxes amounting to P430,958,005.90
(income tax - P318,606,380.19 and VAT -
P112,351,625.71) covering taxable years 1997,
1998 and 1999.[39] In response to said PAN,
LMCEC sent a letter-protest to the TFD, which
denied the same on April 12, 2001 for lack of
legal and factual basis and also for having been
filed beyond the 15-day reglementary period.[40]
As mentioned in the PAN, the revenue officers
were not given the opportunity to examine
LMCECs books of accounts and other
accounting records because its officers failed to
comply with the subpoena duces tecum earlier
issued, to verify its alleged underdeclarations of
income reported by the Bureaus informant
under Section 282 of the NIRC. Hence, a
criminal complaint was filed by the Bureau
against private respondents for violation of
Section 266 which provides:
SEC. 266. Failure to Obey Summons. Any
person who, being duly summoned to appear to
testify, or to appear and produce books of
accounts, records, memoranda, or other papers,
or to furnish information as required under the
pertinent provisions of this Code, neglects to
appear or to produce such books of accounts,
records, memoranda, or other papers, or to
furnish such information, shall, upon
conviction, be punished by a fine of not less
than Five thousand pesos (P5,000) but not more
than Ten thousand pesos (P10,000) and suffer
imprisonment of not less than one (1) year but
not more than two (2) years.
It is clear that I.S. No. 00-956 involves a
separate offense and hence litis pendentia is not
present considering that the outcome of I.S. No.
00-956 is not determinative of the issue as to
whether probable cause exists to charge the
private respondents with the crimes of attempt
to evade or defeat tax and willful failure to
supply correct and accurate information and
pay tax defined and penalized under Sections
254 and 255, respectively. For the crime of tax
evasion in particular, compliance by the
taxpayer with such subpoena, if any had been
issued, is irrelevant. As we held in Ungab v.
Cusi, Jr.,[41] [t]he crime is complete when the
[taxpayer] has x x x knowingly and willfully filed
[a] fraudulent [return] with intent to evade and
defeat x x x the tax. Thus, respondent Secretary
erred in holding that petitioner committed
forum shopping when it filed the present
criminal complaint during the pendency of its
appeal from the City Prosecutors dismissal of
I.S. No. 00-956 involving the act of disobedience
to the summons in the course of the preliminary
investigation on LMCECs correct tax liabilities
for taxable years 1997, 1998 and 1999.
In the Details of Discrepancies attached as
Annex B of the PAN,[42] private respondents
were already notified that inasmuch as the
revenue officers were not given the opportunity
to examine LMCECs books of accounts,
accounting records and other documents, said
revenue officers gathered information from
third parties. Such procedure is authorized
under Section 5 of the NIRC, which provides:
SEC. 5. Power of the Commissioner to Obtain
Information, and to Summon, Examine, and
Take Testimony of Persons. In ascertaining the
correctness of any return, or in making a return
when none has been made, or in determining
the liability of any person for any internal
revenue tax, or in collecting any such liability,
or in evaluating tax compliance, the
Commissioner is authorized:
(A) To examine any book, paper, record or other
data which may be relevant or material to such
inquiry;
(B) To obtain on a regular basis from any person
other than the person whose internal revenue
tax liability is subject to audit or investigation,
or from any office or officer of the national and
local governments, government agencies and
instrumentalities, including the Bangko Sentral
ng Pilipinas and government-owned or -
controlled corporations, any information such
as, but not limited to, costs and volume of
production, receipts or sales and gross incomes
of taxpayers, and the names, addresses, and
financial statements of corporations, mutual
fund companies, insurance companies, regional
operating headquarters of multinational
companies, joint accounts, associations, joint
ventures or consortia and registered
partnerships, and their members;
(C) To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person having
possession, custody, or care of the books of
accounts and other accounting records
containing entries relating to the business of
the person liable for tax, or any other person, to
appear before the Commissioner or his duly
authorized representative at a time and place
specified in the summons and to produce such
books, papers, records, or other data, and to
give testimony;
(D) To take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry; x x x
x x x x (Emphasis supplied.)
Private respondents assertions regarding the
qualifications of the informer of the Bureau
deserve scant consideration. We have held that
the lack of consent of the taxpayer under
investigation does not imply that the BIR
obtained the information from third parties
illegally or that the information received is false
or malicious. Nor does the lack of consent
preclude the BIR from assessing deficiency
taxes on the taxpayer based on the
documents.[43] In the same vein, herein private
respondents cannot be allowed to escape
criminal prosecution under Sections 254 and
255 of the NIRC by mere imputation of a
fictitious or disqualified informant under
Section 282 simply because other than
disclosure of the official registry number of the
third party informer, the Bureau insisted on
maintaining the confidentiality of the identity
and personal circumstances of said informer.
Subsequently, petitioner sent to LMCEC by
constructive service allowed under Section 3 of
RR No. 12-99, assessment notice and formal
demand informing the said taxpayer of the law
and the facts on which the assessment is made,
as required by Section 228 of the NIRC.
Respondent Secretary, however, fully concurred
with private respondents contention that the
assessment notices were invalid for being
unnumbered and the tax liabilities therein
stated have already been settled and/or
terminated.
We do not agree.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a
[t]axpayer who fails to respond to a Pre-
Assessment Notice (PAN) within the prescribed
period of time, or whose reply to the PAN was
found to be without merit. The Notice of
Assessment shall inform the [t]axpayer of this
fact, and that the report of investigation
submitted by the Revenue Officer conducting
the audit shall be given due course.
The formal letter of demand calling for payment
of the taxpayers deficiency tax or taxes shall
state the fact, the law, rules and regulations or
jurisprudence on which the assessment is
based, otherwise the formal letter of demand
and the notice of assessment shall be void.[44]
As it is, the formality of a control number in the
assessment notice is not a requirement for its
validity but rather the contents thereof which
should inform the taxpayer of the declaration of
deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of
assessment shall be void if the former failed to
state the fact, the law, rules and regulations or
jurisprudence on which the assessment is
based, which is a mandatory requirement under
Section 228 of the NIRC.
Section 228 of the NIRC provides that the
taxpayer shall be informed in writing of the law
and the facts on which the assessment is made.
Otherwise, the assessment is void. To
implement the provisions of Section 228 of the
NIRC, RR No. 12-99 was enacted. Section 3.1.4
of the revenue regulation reads:
3.1.4. Formal Letter of Demand and
Assessment Notice. The formal letter of demand
and assessment notice shall be issued by the
Commissioner or his duly authorized
representative. The letter of demand calling for
payment of the taxpayers deficiency tax or taxes
shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the formal
letter of demand and assessment notice shall be
void. The same shall be sent to the taxpayer
only by registered mail or by personal delivery.
x x x.[45] (Emphasis supplied.)
The Formal Letter of Demand dated August 7,
2002 contains not only a detailed computation
of LMCECs tax deficiencies but also details of
the specified discrepancies, explaining the legal
and factual bases of the assessment. It also
reiterated that in the absence of accounting
records and other documents necessary for the
proper determination of the companys internal
revenue tax liabilities, the investigating revenue
officers resorted to the Best Evidence
Obtainable as provided in Section 6(B) of the
NIRC (third party information) and in
accordance with the procedure laid down in
RMC No. 23-2000 dated November 27, 2000.
Annex A of the Formal Letter of Demand thus
stated:
Thus, to verify the validity of the information
previously provided by the informant, the
assigned revenue officers resorted to third party
information. Pursuant to Section 5(B) of the
NIRC of 1997, access letters requesting for
information and the submission of certain
documents (i.e., Certificate of Income Tax
Withheld at Source and/or Alphabetical List
showing the income payments made to L.M.
Camus Engineering Corporation for the taxable
years 1997 to 1999) were sent to the various
clients of the subject corporation, including but
not limited to the following:
1. Ayala Land Inc.
2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation
From the documents gathered and the data
obtained therein, the substantial
underdeclaration as defined under Section
248(B) of the NIRC of 1997 by your corporation
of its income had been confirmed. x x x x[46]
(Emphasis supplied.)
In the same letter, Assistant Commissioner
Percival T. Salazar informed private
respondents that the estimated tax liabilities
arising from LMCECs underdeclaration
amounted to P186,773,600.84 in 1997,
P150,069,323.81 in 1998 and P163,220,111.13
in 1999. These figures confirmed that the non-
declaration by LMCEC for the taxable years
1997, 1998 and 1999 of an amount exceeding
30% income[47] declared in its return is
considered a substantial underdeclaration of
income, which constituted prima facie evidence
of false or fraudulent return under Section
248(B)[48] of the NIRC, as amended.[49]
On the alleged settlement of the assessed tax
deficiencies by private respondents, respondent
Secretary found the latters claim as meritorious
on the basis of the Certificate of Immunity From
Audit issued on December 6, 1999 pursuant to
RR No. 2-99 and Letter of Termination dated
June 1, 1999 issued by Revenue Region No. 7
Chief of Assessment Division Ruth Vivian G.
Gandia. Petitioner, however, clarified that the
certificate of immunity from audit covered only
income tax for the year 1997 and does not
include VAT and withholding taxes, while the
Letter of Termination involved tax liabilities for
taxable year 1997 (EWT, VAT and income taxes)
but which was submitted for review of higher
authorities as per the Certification of RD No. 40
District Officer Pablo C. Cabreros, Jr.[50] For
1999, private respondents supposedly availed
of the VAP pursuant to RR No. 8-2001.
RR No. 2-99 issued on February 7, 1999
explained in its Policy Statement that
considering the scarcity of financial and human
resources as well as the time constraints within
which the Bureau has to clean the Bureaus
backlog of unaudited tax returns in order to
keep updated and be focused with the most
current accounts in preparation for the full
implementation of a computerized tax
administration, the said revenue regulation was
issued providing for last priority in audit and
investigation of tax returns to accomplish the
said objective without, however, compromising
the revenue collection that would have been
generated from audit and enforcement activities.
The program named as Economic Recovery
Assistance Payment (ERAP) Program granted
immunity from audit and investigation of
income tax, VAT and percentage tax returns for
1998. It expressly excluded withholding tax
returns (whether for income, VAT, or percentage
tax purposes). Since such immunity from audit
and investigation does not preclude the
collection of revenues generated from audit and
enforcement activities, it follows that the
Bureau is likewise not barred from collecting
any tax deficiency discovered as a result of tax
fraud investigations. Respondent Secretarys
opinion that RR No. 2-99 contains the feature
of a tax amnesty is thus misplaced.
Tax amnesty is a general pardon to taxpayers
who want to start a clean tax slate. It also gives
the government a chance to collect uncollected
tax from tax evaders without having to go
through the tedious process of a tax case.[51]
Even assuming arguendo that the issuance of
RR No. 2-99 is in the nature of tax amnesty, it
bears noting that a tax amnesty, much like a
tax exemption, is never favored nor presumed
in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be
construed strictly against the taxpayer and
liberally in favor of the taxing authority.[52]
For the same reason, the availment by LMCEC
of VAP under RR No. 8-2001 as amended by RR
No. 10-2001, through payment supposedly
made in October 29, 2001 before the said
program ended on October 31, 2001, did not
amount to settlement of its assessed tax
deficiencies for the period 1997 to 1999, nor
immunity from prosecution for filing fraudulent
return and attempt to evade or defeat tax. As
correctly asserted by petitioner, from the
express terms of the aforesaid revenue
regulations, LMCEC is not qualified to avail of
the VAP granting taxpayers the privilege of last
priority in the audit and investigation of all
internal revenue taxes for the taxable year 2000
and all prior years under certain conditions,
considering that first, it was issued a PAN on
February 19, 2001, and second, it was the
subject of investigation as a result of verified
information filed by a Tax Informer under
Section 282 of the NIRC duly recorded in the
BIR Official Registry as Confidential
Information (CI) No. 29-2000[53] even prior to
the issuance of the PAN.
Section 1 of RR No. 8-2001 provides:
SECTION 1. COVERAGE. x x x
Any person, natural or juridical, including
estates and trusts, liable to pay any of the
above-cited internal revenue taxes for the above
specified period/s who, due to inadvertence or
otherwise, erroneously paid his internal
revenue tax liabilities or failed to file tax
return/pay taxes may avail of the Voluntary
Assessment Program (VAP), except those falling
under any of the following instances:
1.1 Those covered by a Preliminary Assessment
Notice (PAN), Final Assessment Notice (FAN), or
Collection Letter issued on or before July 31,
2001; or
1.2 Persons under investigation as a result of
verified information filed by a Tax Informer
under Section 282 of the Tax Code of 1997, duly
processed and recorded in the BIR Official
Registry Book on or before July 31, 2001;
1.3 Tax fraud cases already filed and pending in
courts for adjudication; and
x x x x (Emphasis supplied.)
Moreover, private respondents cannot invoke
LMCECs availment of VAP to foreclose any
subsequent audit of its account books and
other accounting records in view of the strong
finding of underdeclaration in LMCECs
payment of correct income tax liability by more
than 30% as supported by the written report of
the TFD detailing the facts and the law on which
such finding is based, pursuant to the tax fraud
investigation authorized by petitioner under LA
No. 00009361. This conclusion finds support in
Section 2 of RR No. 8-2001 as amended by RR
No. 10-2001 provides:
SEC. 2. TAXPAYERS BENEFIT FROM
AVAILMENT OF THE VAP. A taxpayer who has
availed of the VAP shall not be audited except
upon authorization and approval of the
Commissioner of Internal Revenue when there
is strong evidence or finding of understatement
in the payment of taxpayers correct tax liability
by more than thirty percent (30%) as supported
by a written report of the appropriate office
detailing the facts and the law on which such
finding is based: Provided, however, that any
VAP payment should be allowed as tax credit
against the deficiency tax due, if any, in case
the concerned taxpayer has been subjected to
tax audit.
xxxx
Given the explicit conditions for the grant of
immunity from audit under RR No. 2-99, RR No.
8-2001 and RR No. 10-2001, we hold that
respondent Secretary gravely erred in declaring
that petitioner is now estopped from assessing
any tax deficiency against LMCEC after
issuance of the aforementioned documents of
immunity from audit/investigation and
settlement of tax liabilities. It is axiomatic that
the State can never be in estoppel, and this is
particularly true in matters involving taxation.
The errors of certain administrative officers
should never be allowed to jeopardize the
governments financial position.[54]
Respondent Secretarys other ground for
assailing the course of action taken by
petitioner in proceeding with the audit and
investigation of LMCEC -- the alleged violation
of the general rule in Section 235 of the NIRC
allowing the examination and inspection of
taxpayers books of accounts and other
accounting records only once in a taxable year
-- is likewise untenable. As correctly pointed out
by petitioner, the discovery of substantial
underdeclarations of income by LMCEC for
taxable years 1997, 1998 and 1999 upon
verified information provided by an informer
under Section 282 of the NIRC, as well as the
necessity of obtaining information from third
parties to ascertain the correctness of the
return filed or evaluation of tax compliance in
collecting taxes (as a result of the disobedience
to the summons issued by the Bureau against
the private respondents), are circumstances
warranting exception from the general rule in
Section 235.[55]
As already stated, the substantial
underdeclared income in the returns filed by
LMCEC for 1997, 1998 and 1999 in amounts
equivalent to more than 30% (the computation
in the final assessment notice showed
underdeclarations of almost 200%) constitutes
prima facie evidence of fraudulent return under
Section 248(B) of the NIRC. Prior to the
issuance of the preliminary and final notices of
assessment, the revenue officers conducted a
preliminary investigation on the information
and documents showing substantial
understatement of LMCECs tax liabilities which
were provided by the Informer, following the
procedure under RMO No. 15-95.[56] Based on
the prima facie finding of the existence of fraud,
petitioner issued LA No. 00009361 for the TFD
to conduct a formal fraud investigation of
LMCEC.[57] Consequently, respondent
Secretarys ruling that the filing of criminal
complaint for violation of Sections 254 and 255
of the NIRC cannot prosper because of lack of
prior determination of the existence of fraud, is
bereft of factual basis and contradicted by the
evidence on record.
Tax assessments by tax examiners are
presumed correct and made in good faith, and
all presumptions are in favor of the correctness
of a tax assessment unless proven
otherwise.[58] We have held that a taxpayers
failure to file a petition for review with the Court
of Tax Appeals within the statutory period
rendered the disputed assessment final,
executory and demandable, thereby precluding
it from interposing the defenses of legality or
validity of the assessment and prescription of
the Governments right to assess.[59] Indeed,
any objection against the assessment should
have been pursued following the avenue paved
in Section 229 (now Section 228) of the NIRC on
protests on assessments of internal revenue
taxes.[60]
Records bear out that the assessment notice
and Formal Letter of Demand dated August 7,
2002 were duly served on LMCEC on October 1,
2002. Private respondents did not file a motion
for reconsideration of the said assessment
notice and formal demand; neither did they
appeal to the Court of Tax Appeals. Section 228
of the NIRC[61] provides the remedy to dispute
a tax assessment within a certain period of time.
It states that an assessment may be protested
by filing a request for reconsideration or
reinvestigation within 30 days from receipt of
the assessment by the taxpayer. No such
administrative protest was filed by private
respondents seeking reconsideration of the
August 7, 2002 assessment notice and formal
letter of demand. Private respondents cannot
belatedly assail the said assessment, which
they allowed to lapse into finality, by raising
issues as to its validity and correctness during
the preliminary investigation after the BIR has
referred the matter for prosecution under
Sections 254 and 255 of the NIRC.
As we held in Marcos II v. Court of Appeals[62]:
It is not the Department of Justice which is the
government agency tasked to determine the
amount of taxes due upon the subject estate,
but the Bureau of Internal Revenue, whose
determinations and assessments are presumed
correct and made in good faith. The taxpayer
has the duty of proving otherwise. In the
absence of proof of any irregularities in the
performance of official duties, an assessment
will not be disturbed. Even an assessment
based on estimates is prima facie valid and
lawful where it does not appear to have been
arrived at arbitrarily or capriciously. The
burden of proof is upon the complaining party
to show clearly that the assessment is
erroneous. Failure to present proof of error in
the assessment will justify the judicial
affirmance of said assessment. x x x.

Moreover, these objections to the assessments

should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code,
with the Bureau of Internal Revenue and the
Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari,
under the pretext of grave abuse of discretion.
The course of action taken by the petitioner
reflects his disregard or even repugnance of the
established institutions for governance in the
scheme of a well-ordered society. The subject
tax assessments having become final, executory
and enforceable, the same can no longer be
contested by means of a disguised protest. In
the main, Certiorari may not be used as a
substitute for a lost appeal or remedy. This
judicial policy becomes more pronounced in
view of the absence of sufficient attack against
the actuations of government. (Emphasis
supplied.)

The determination of probable cause is part of

the discretion granted to the investigating
prosecutor and ultimately, the Secretary of
Justice. However, this Court and the CA
possess the power to review findings of
prosecutors in preliminary investigations.
Although policy considerations call for the
widest latitude of deference to the prosecutors
findings, courts should never shirk from
exercising their power, when the circumstances
warrant, to determine whether the prosecutors
findings are supported by the facts, or by the
law. In so doing, courts do not act as
prosecutors but as organs of the judiciary,
exercising their mandate under the
Constitution, relevant statutes, and remedial
rules to settle cases and controversies.[63]
Clearly, the power of the Secretary of Justice to
review does not preclude this Court and the CA
from intervening and exercising our own powers
of review with respect to the DOJs findings,
such as in the exceptional case in which grave
abuse of discretion is committed, as when a
clear sufficiency or insufficiency of evidence to
support a finding of probable cause is
ignored.[64]
WHEREFORE, the petition is GRANTED. The
Decision dated October 31, 2006 and
Resolution dated March 6, 2007 of the Court of
Appeals in CA-G.R. SP No. 93387 are hereby
REVERSED and SET ASIDE. The Secretary of
Justice is hereby DIRECTED to order the Chief
State Prosecutor to file before the Regional Trial
Court of Quezon City, National Capital Judicial
Region, the corresponding Information against
L. M. Camus Engineering Corporation,
represented by its President Luis M. Camus and
Comptroller Lino D. Mendoza, for Violation of
Sections 254 and 255 of the National Internal
Revenue Code of 1997.
No costs.
SO ORDERED.

Ungab v Cusi | GR No. L-41919-24 | 30 June

1980

G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,

vs.
HON. VICENTE N. CUSI, JR., in his capacity as
Judge of the Court of First Instance, Branch 1,
16TH Judicial District, Davao City, THE
COMMISSIONER OF INTERNAL REVENUE,
and JESUS N. ACEBES, in his capacity as State
Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with

preliminary injunction and restraining order to
annul and set aside the informations filed in
Criminal Case Nos. 1960, 1961, 1962, 1963,
1964, and 1965 of the Court of First Instance of
Davao, all entitled: "People of the Philippines,
plaintiff, versus Quirico Ungab, accused;" and
to restrain the respondent Judge from further
proceeding with the hearing and trial of the said
cases.

It is not disputed that sometime in July, 1974,

BIR Examiner Ben Garcia examined the income
tax returns filed by the herein petitioner,
Quirico P. Ungab, for the calendar year ending
December 31, 1973. In the course of his
examination, he discovered that the petitioner
failed to report his income derived from sales of
banana saplings. As a result, the BIR District
Revenue Officer at Davao City sent a "Notice of
Taxpayer" to the petitioner informing him that
there is due from him (petitioner) the amount of
P104,980.81, representing income, business
tax and forest charges for the year 1973 and
inviting petitioner to an informal conference
where the petitioner, duly assisted by counsel,
may present his objections to the findings of the
BIR Examiner. 1 Upon receipt of the notice, the
petitioner wrote the BIR District Revenue
Officer protesting the assessment, claiming that
he was only a dealer or agent on commission
basis in the banana sapling business and that
his income, as reported in his income tax
returns for the said year, was accurately stated.
BIR Examiner Ben Garcia, however, was fully
convinced that the petitioner had filed a
fraudulent income tax return so that he
submitted a "Fraud Referral Report," to the Tax
Fraud Unit of the Bureau of Internal Revenue.
After examining the records of the case, the
Special Investigation Division of the Bureau of
Internal Revenue found sufficient proof that the
herein petitioner is guilty of tax evasion for the
taxable year 1973 and recommended his
prosecution: têñ.£îhqwâ£

(1) For having filed a false or fraudulent

income tax return for 1973 with intent to evade
his just taxes due the government under
Section 45 in relation to Section 72 of the
National Internal Revenue Code;

(2) For failure to pay a fixed annual tax of

P50.00 a year in 1973 and 1974, or a total of
unpaid fixed taxes of P100.00 plus penalties of
175.00 or a total of P175.00, in accordance with
Section 183 of the National Internal Revenue
Code;

(3) For failure to pay the 7% percentage tax,

as a producer of banana poles or saplings, on
the total sales of P129,580.35 to the Davao
Fruit Corporation, depriving thereby the
government of its due revenue in the amount of
P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the

Prosecution Division, dated December 12, 1974,
the Commissioner of Internal Revenue approved
the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who

had been designated to assist all Provincial and
City Fiscals throughout the Philippines in the
investigation and prosecution, if the evidence
warrants, of all violations of the National
Internal Revenue Code, as amended, and other
related laws, in Administrative Order No. 116
dated December 5, 1974, and to whom the case
was assigned, conducted a preliminary
investigation of the case, and finding probable
cause, filed six (6) informations against the
petitioner with the Court of First Instance of
Davao City, to wit: têñ.£îhqwâ£

(1) Criminal Case No. 1960 — Violation of Sec.

45, in relation to Sec. 72 of the National
Internal-Revenue Code, for filing a fraudulent
income tax return for the calendar year ending
December 31, 1973; 4

(2) Criminal Case No. 1961 — Violation of Sec.

182 (a), in relation to Secs. 178, 186, and 208
of the National Internal Revenue Code, for
engaging in business as producer of saplings,
from January, 1973 to December, 1973,
without first paying the annual fixed or privilege
tax thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec.

183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to
render a true and complete return on the gross
quarterly sales, receipts and earnings in his
business as producer of banana saplings and to
pay the percentage tax due thereon, for the
quarter ending December 31, 1973; 6

(4) Criminal Case No. 1963 — Violation of Sec.

183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to
render a true and complete return on the gross
quarterly sales receipts and earnings in his
business as producer of saplings, and to pay the
percentage tax due thereon, for the quarter
ending on March 31, 1973; 7

(5) Criminal Case No. 1964 — Violation of Sec.

183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to
render a true and complete return on the gross
quarterly sales, receipts and earnings in his
business as producer of banana saplings for the
quarter ending on June 30, 1973, and to pay
the percentage tax due thereon; 8

(6) Criminal Case No. 1965 — Violation of Sec.

183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to
render a true and complete return on the gross
quarterly sales, receipts and earnings as
producer of banana saplings, for the quarter
ending on September 30, 1973, and to pay the
percentage tax due thereon. 9

On September 16, 1975, the petitioner filed a

motion to quash the informations upon the
grounds that: (1) the informations are null and
void for want of authority on the part of the
State Prosecutor to initiate and prosecute the
said cases; and (2) the trial court has no
jurisdiction to take cognizance of the above-
entitled cases in view of his pending protest
against the assessment made by the BIR
Examiner. 10 However, the trial court denied
the motion on October 22, 1975. 11 Whereupon,
the petitioner filed the instant recourse. As
prayed for, a temporary restraining order was
issued by the Court, ordering the respondent
Judge from further proceeding with the trial
and hearing of Criminal Case Nos. 1960, 1961,
1962, 1963, 1964, and 1965 of the Court of
First Instance of Davao, all entitled: "People of
the Philippines, plaintiff, versus Quirico Ungab,
accused."

The petitioner seeks the annulment of the

informations filed against him on the ground
that the respondent State Prosecutor is
allegedly without authority to do so. The
petitioner argues that while the respondent
State Prosecutor may initiate the investigation
of and prosecute crimes and violations of penal
laws when duly authorized, certain requisites,
enumerated by this Court in its decision in the
case of Estrella vs. Orendain, 12 should be
observed before such authority may be
exercised; otherwise, the provisions of the
Charter of Davao City on the functions and
powers of the City Fiscal will be meaningless
because according to said charter he has charge
of the prosecution of all crimes committed
within his jurisdiction; and since "appropriate
circumstances are not extant to warrant the
intervention of the State Prosecution to initiate
the investigation, sign the informations and
prosecute these cases, said informations are
null and void." The ruling adverted to by the
petitioner reads, as follows: têñ.£îhqwâ£

In view of all the foregoing considerations, it is

the ruling of this Court that under Sections
1679 and 1686 of the Revised Administrative
Code, in any instance where a provincial or city
fiscal fails, refuses or is unable, for any reason,
to investigate or prosecute a case and, in the
opinion of the Secretary of Justice it is advisable
in the public interest to take a different course
of action, the Secretary of Justice may either
appoint as acting provincial or city fiscal to
handle the investigation or prosecution
exclusively and only of such case, any
practicing attorney or some competent officer of
the Department of Justice or office of any city or
provincial fiscal, with complete authority to act
therein in all respects as if he were the
provincial or city fiscal himself, or appoint any
lawyer in the government service, temporarily to
assist such city of provincial fiscal in the
discharge of his duties, with the same complete
authority to act independently of and for such
city or provincial fiscal provided that no such
appointment may be made without first hearing
the fiscal concerned and never after the
corresponding information has already been
filed with the court by the corresponding city or
provincial fiscal without the conformity of the
latter, except when it can be patently shown to
the court having cognizance of the case that
said fiscal is intent on prejudicing the interests
of justice. The same sphere of authority is true
with the prosecutor directed and authorized
under Section 3 of Republic Act 3783, as
amended and/or inserted by Republic Act 5184.
The observation in Salcedo vs. Liwag, supra,
regarding the nature of the power of the
Secretary of Justice over fiscals as being purely
over administrative matters only was not really
necessary, as indicated in the above relation of
the facts and discussion of the legal issues of
said case, for the resolution thereof. In any
event, to any extent that the opinion therein
may be inconsistent herewith the same is
hereby modified.

The contention is without merit. Contrary to the

petitioner's claim, the rule therein established
had not been violated. The respondent State
Prosecutor, although believing that he can
proceed independently of the City Fiscal in the
investigation and prosecution of these cases,
first sought permission from the City Fiscal of
Davao City before he started the preliminary
investigation of these cases, and the City Fiscal,
after being shown Administrative Order No. 116,
dated December 5, 1974, designating the said
State Prosecutor to assist all Provincial and City
fiscals throughout the Philippines in the
investigation and prosecution of all violations of
the National Internal Revenue Code, as
amended, and other related laws, graciously
allowed the respondent State Prosecutor to
conduct the investigation of said cases, and in
fact, said investigation was conducted in the
office of the City Fiscal. 13

The petitioner also claims that the filing of the

informations was precipitate and premature
since the Commissioner of Internal Revenue
has not yet resolved his protests against the
assessment of the Revenue District Officer; and
that he was denied recourse to the Court of Tax
Appeals.

The contention is without merit. What is

involved here is not the collection of taxes where
the assessment of the Commissioner of Internal
Revenue may be reviewed by the Court of Tax
Appeals, but a criminal prosecution for
violations of the National Internal Revenue Code
which is within the cognizance of courts of first
instance. While there can be no civil action to
enforce collection before the assessment
procedures provided in the Code have been
followed, there is no requirement for the precise
computation and assessment of the tax before
there can be a criminal prosecution under the
Code. têñ.£îhqwâ£
The contention is made, and is here rejected,
that an assessment of the deficiency tax due is
necessary before the taxpayer can be
prosecuted criminally for the charges preferred.
The crime is complete when the violator has, as
in this case, knowingly and willfully filed
fraudulent returns with intent to evade and
defeat a part or all of the tax. 14

An assessment of a deficiency is not necessary

to a criminal prosecution for willful attempt to
defeat and evade the income tax. A crime is
complete when the violator has knowingly and
willfuly filed a fraudulent return with intent to
evade and defeat the tax. The perpetration of the
crime is grounded upon knowledge on the part
of the taxpayer that he has made an inaccurate
return, and the government's failure to discover
the error and promptly to assess has no
connections with the commission of the crime.
15

Besides, it has been ruled that a petition for

reconsideration of an assessment may affect the
suspension of the prescriptive period for the
collection of taxes, but not the prescriptive
period of a criminal action for violation of law.
16 Obviously, the protest of the petitioner
against the assessment of the District Revenue
Officer cannot stop his prosecution for violation
of the National Internal Revenue Code.
Accordingly, the respondent Judge did not
abuse his discretion in denying the motion to
quash filed by the petitioner.

WHEREFORE, the petition should be, as it is

hereby dismissed. The temporary restraining
order heretofore issued is hereby set aside. With
costs against the petitioner.

SO ORDERED.

Barredo (Chairman), Aquino, Abad Santos and

De Castro, JJ., concur.1äwphï1.ñët

Yutivo & Sons Hardware, Co. v CTA | GR No.

L-13203 | 28 January 1961
G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY,

petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF
INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for

petitioner.
Office of the Solicitor General for respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the

Court of Tax Appeals ordering petitioner to pay
to respondent Collector of Internal Revenue the
sum of P1,266,176.73 as sales tax deficiency for
the third quarter of 1947 to the fourth quarter
of 1950; inclusive, plus 75% surcharge thereon,
equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence

adduced by both parties, it appears that
petitioner Yutivo Sons Hardware Co. (hereafter
referred to as Yutivo) is a domestic corporation,
organized under the laws of the Philippines,
with principal office at 404 Dasmariñas St.,
Manila. Incorporated in 1916, it was engaged,
prior to the last world war, in the importation
and sale of hardware supplies and equipment.
After the liberation, it resumed its business and
until June of 1946 bought a number of cars and
trucks from General Motors Overseas
Corporation (hereafter referred to as GM for
short), an American corporation licensed to do
business in the Philippines. As importer, GM
paid sales tax prescribed by sections 184, 185
and 186 of the Tax Code on the basis of its
selling price to Yutivo. Said tax being collected
only once on original sales, Yutivo paid no
further sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc.

(hereafter referred to as SM) was organized to
engage in the business of selling cars, trucks
and spare parts. Its original authorized capital
stock was P1,000,000 divided into 10,000
shares with a par value of P100 each.

At the time of its incorporation 2,500 shares

worth P250,000 appear to have been
subscribed into equal proportions by Yu Khe
Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh,
and Washington Sycip. The first three named
subscribers are brothers, being sons of Yu
Tiong Yee, one of Yutivo's founders. The latter
two are respectively sons of Yu Tiong Sin and
Albino Sycip, who are among the founders of
Yutivo.

After the incorporation of SM and until the

withdrawal of GM from the Philippines in the
middle of 1947, the cars and tracks purchased
by Yutivo from GM were sold by Yutivo to SM
which, in turn, sold them to the public in the
Visayas and Mindanao.

When GM decided to withdraw from the

Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed
Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous
arrangement of selling exclusively to SM. In the
same way that GM used to pay sales taxes
based on its sales to Yutivo, the latter, as
importer, paid sales tax prescribed on the basis
of its selling price to SM, and since such sales
tax, as already stated, is collected only once on
original sales, SM paid no sales tax on its sales
to the public.

On November 7, 1950, after several months of

investigation by revenue officers started in July,
1948, the Collector of Internal Revenue made
an assessment upon Yutivo and demanded
from the latter P1,804,769.85 as deficiency
sales tax plus surcharge covering the period
from the third quarter of 1947 to the fourth
quarter of 1949; or from July 1, 1947 to
December 31, 1949, claiming that the taxable
sales were the retail sales by SM to the public
and not the sales at wholesale made by, Yutivo
to the latter inasmuch as SM and Yutivo were
one and the same corporation, the former being
the subsidiary of the latter.

The assessment was disputed by the petitioner,

and a reinvestigation of the case having been
made by the agents of the Bureau of Internal
Revenue, the respondent Collector in his letter
dated November 15, 1952 countermanded his
demand for sales tax deficiency on the ground
that "after several investigations conducted into
the matter no sufficient evidence could be
gathered to sustain the assessment of this
Office based on the theory that Southern Motors
is a mere instrumentality or subsidiary of
Yutivo." The withdrawal was subject, however,
to the general power of review by the now
defunct Board of Tax Appeals. The Secretary of
Finance to whom the papers relative to the case
were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to
the respondent Collector for reinvestigation.

After another investigation, the respondent

Collector, in a letter to petitioner dated
December 16, 1954, redetermined that the
aforementioned tax assessment was lawfully
due the government and in addition assessed
deficiency sales tax due from petitioner for the
four quarters of 1950; the respondents' last
demand was in the total sum of P2,215,809.27
detailed as follows:

Deficiency Sales Tax

75% Surcharge

Total Amount Due

Assessment (First) of November 7, 1950 for

deficiency sales Tax for the period from 3rd Qrtr
1947 to 4th Qrtr 1949 inclusive

P1,031,296.60

P773,473.45
P1,804,769.05

Additional Assessment for period from 1st to

4th Qrtr 1950, inclusive

234,880.13

176,160.09

411,040.22

Total amount demanded per letter of December

16, 1954

P1,266,176.73

P949,632.54

P2,215,809.27

This second assessment was contested by the

petitioner Yutivo before the Court of Tax
Appeals, alleging that there is no valid ground
to disregard the corporate personality of SM and
to hold that it is an adjunct of petitioner Yutivo;
(2) that assuming the separate personality of
SM may be disregarded, the sales tax already
paid by Yutivo should first be deducted from the
selling price of SM in computing the sales tax
due on each vehicle; and (3) that the surcharge
has been erroneously imposed by respondent.
Finding against Yutivo and sustaining the
respondent Collector's theory that there was no
legitimate or bona fide purpose in the
organization of SM — the apparent objective of
its organization being to evade the payment of
taxes — and that it was owned (or the majority
of the stocks thereof are owned) and controlled
by Yutivo and is a mere subsidiary, branch,
adjunct, conduit, instrumentality or alter ego of
the latter, the Court of Tax Appeals — with
Judge Roman Umali not taking part —
disregarded its separate corporate existence
and on April 27, 1957, rendered the decision
now complained of. Of the two Judges who
signed the decision, one voted for the
modification of the computation of the sales tax
as determined by the respondent Collector in
his decision so as to give allowance for the
reduction of the tax already paid (resulting in
the reduction of the assessment to P820,509.91
exclusive of surcharges), while the other voted
for affirmance. The dispositive part of the
decision, however, affirmed the assessment
made by the Collector. Reconsideration of this
decision having been denied, Yutivo brought the
case to this Court thru the present petition for
review.

It is an elementary and fundamental principle

of corporation law that a corporation is an entity
separate and distinct from its stockholders and
from other corporation petitions to which it may
be connected. However, "when the notion of
legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime,"
the law will regard the corporation as an
association of persons, or in the case of two
corporations merge them into one. (Koppel
[Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I
Fletcher Cyclopedia of Corporation, Perm Ed.,
pp. 135 136; United States vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255
per Sanborn, J.) Another rule is that, when the
corporation is the "mere alter ego or business
conduit of a person, it may be disregarded."
(Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the

present case, we are inclined to rule that the
Court of Tax Appeals was not justified in finding
that SM was organized for no other purpose
than to defraud the Government of its lawful
revenues. In the first place, this corporation was
organized in June, 1946 when it could not have
caused Yutivo any tax savings. From that date
up to June 30, 1947, or a period of more than
one year, GM was the importer of the cars and
trucks sold to Yutivo, which, in turn resold
them to SM. During that period, it is not
disputed that GM as importer, was the one
solely liable for sales taxes. Neither Yutivo or SM
was subject to the sales taxes on their sales of
cars and trucks. The sales tax liability of Yutivo
did not arise until July 1, 1947 when it became
the importer and simply continued its practice
of selling to SM. The decision, therefore, of the
Tax Court that SM was organized purposely as
a tax evasion device runs counter to the fact
that there was no tax to evade.

Making the observation from a newspaper

clipping (Exh. "T") that "as early as 1945 it was
known that GM was preparing to leave the
Philippines and terminate its business of
importing vehicles," the court below speculated
that Yutivo anticipated the withdrawal of GM
from business in the Philippines in June, 1947.
This observation, which was made only in the
resolution on the motion for reconsideration,
however, finds no basis in the record. On the
other hand, GM had been an importer of cars in
the Philippines even before the war and had but
recently resumed its operation in the
Philippines in 1946 under an ambitious plan to
expand its operation by establishing an
assembly plant here, so that it could not have
been expected to make so drastic a turnabout
of not merely abandoning the assembly plant
project but also totally ceasing to do business
as an importer. Moreover, the newspaper
clipping, Exh. "T", was published on March 24,
1947, and clipping, merely reported a rumored
plan that GM would abandon the assembly
plant project in the Philippines. There was no
mention of the cessation of business by GM
which must not be confused with the
abandonment of the assembly plant project.
Even as respect the assembly plant, the
newspaper clipping was quite explicit in saying
that the Acting Manager refused to confirm that
rumor as late as March 24, 1947, almost a year
after SM was organized.

At this juncture, it should be stated that the

intention to minimize taxes, when used in the
context of fraud, must be proved to exist by
clear and convincing evidence amounting to
more than mere preponderance, and cannot be
justified by a mere speculation. This is because
fraud is never lightly to be presumed. (Vitelli &
Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55
F (2d) 786; Budd vs. Commr., 43 F (2d) 509;
Maryland Casualty Co. vs. Palmette Coal Co.,
40 F (2d) 374; Schoonfield Bros., Inc. vs.
Commr., 38 BTA 943; Charles Heiss vs. Commr
36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749;
Maddas vs. Commr., 114 F. (2d) 548; Moore vs.
Commr., 37 BTA 378; National City Bank of
New York vs. Commr., 98 (2d) 93; Richard vs.
Commr., 15 BTA 316; Rea Gane vs. Commr., 19
BTA 518). (See also Balter, Fraud Under Federal
Law, pp. 301-302, citing numerous authorities:
Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud
is never imputed and the courts never sustain
findings of fraud upon circumstances which, at
the most, create only suspicion. (Haygood
Lumber & Mining Co. vs. Commr., 178 F (2d)
769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it

operated, under circumstance that belied any
intention to evade sales taxes. "Tax evasion" is
a term that connotes fraud thru the use of
pretenses and forbidden devices to lessen or
defeat taxes. The transactions between Yutivo
and SM, however, have always been in the open,
embodied in private and public documents,
constantly subject to inspection by the tax
authorities. As a matter of fact, after Yutivo
became the importer of GM cars and trucks for
Visayas and Mindanao, it merely continued the
method of distribution that it had initiated long
before GM withdrew from the Philippines.

On the other hand, if tax saving was the only

justification for the organization of SM, such
justification certainly ceased with the passage
of Republic Act No. 594 on February 16, 1951,
governing payment of advance sales tax by the
importer based on the landed cost of the
imported article, increased by mark-ups of 25%,
50%, and 100%, depending on whether the
imported article is taxed under sections 186,
185 and 184, respectively, of the Tax Code.
Under Republic Act No. 594, the amount at
which the article is sold is immaterial to the
amount of the sales tax. And yet after the
passage of that Act, SM continued to exist up to
the present and operates as it did many years
past in the promotion and pursuit of the
business purposes for which it was organized.

In the third place, sections 184 to 186 of the

said Code provides that the sales tax shall be
collected "once only on every original sale,
barter, exchange . . , to be paid by the
manufacturer, producer or importer." The use
of the word "original" and the express provision
that the tax was collectible "once only" evidently
has made the provisions susceptible of different
interpretations. In this connection, it should be
stated that a taxpayer has the legal right to
decrease the amount of what otherwise would
be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall.
496, 506; Gregory vs. Helvering 293 U.S. 465,
469; Commr. vs. Tower, 327 U.S. 280; Lawton
vs. Commr 194 F (2d) 380). Any legal means by
the taxpayer to reduce taxes are all right Benry
vs. Commr. 25 T. Cl. 78). A man may, therefore,
perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not
incur fraud thereby even if the act is thereafter
found to be insufficient. Thus in the case of
Court Holding Co. vs. Commr. 2 T. Cl. 531, it
was held that though an incorrect position in
law had been taken by the corporation there
was no suppression of the facts, and a fraud
penalty was not justified.

The evidence for the Collector, in our opinion,

falls short of the standard of clear and
convincing proof of fraud. As a matter of fact,
the respondent Collector himself showed a great
deal of doubt or hesitancy as to the existence of
fraud. He even doubted the validity of his first
assessment dated November 7, 1959. It must be
remembered that the fraud which respondent
Collector imputed to Yutivo must be related to
its filing of sales tax returns of less taxes than
were legally due. The allegation of fraud,
however, cannot be sustained without the
showing that Yutivo, in filing said returns, did
so fully knowing that the taxes called for therein
called for therein were less than what were
legally due. Considering that respondent
Collector himself with the aid of his legal staff,
and after some two years of investigation and
duty of investigation and study concluded in
1952 that Yutivo's sales tax returns were
correct — only to reverse himself after another
two years — it would seem harsh and unfair for
him to say in 1954 that Yutivo fully knew in
October 1947 that its sales tax returns were
inaccurate.

On this point, one other consideration would

show that the intent to save taxes could not
have existed in the minds of the organizers of
SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is
usually billed separately as such in the sales
invoice. As pointed out by petitioner Yutivo, had
not SM handled the retail, the additional tax
that would have been payable by it, could have
been easily passed off to the consumer,
especially since the period covered by the
assessment was a "seller's market" due to the
post-war scarcity up to late 1948, and the
imposition of controls in the late 1949.

It is true that the arrastre charges constitute

expenses of Yutivo and its non-inclusion in the
selling price by Yutivo cost the Government
P4.00 per vehicle, but said non-inclusion was
explained to have been due to an inadvertent
accounting omission, and could hardly be
considered as proof of willful channelling and
fraudulent evasion of sales tax. Mere
understatement of tax in itself does not prove
fraud. (James Nicholson, 32 BTA 377, affirmed
90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21)
The amount involved, moreover, is extremely
small inducement for Yutivo to go thru all the
trouble of organizing SM. Besides, the non-
inclusion of these small arrastre charges in the
sales tax returns of Yutivo is clearly shown in
the records of Yutivo, which is uncharacteristic
of fraud (See Insular Lumber Co. vs. Collector,
G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the
court below that SM was actually owned and
controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as
service repair shops. It is not disputed that the
petitioner, which is engaged principally in
hardware supplies and equipment, is
completely controlled by the Yutivo, Young or
Yu family. The founders of the corporation are
closely related to each other either by blood or
affinity, and most of its stockholders are
members of the Yu (Yutivo or Young) family. It
is, likewise, admitted that SM was organized by
the leading stockholders of Yutivo headed by Yu
Khe Thai. At the time of its incorporation 2,500
shares worth P250,000.00 appear to have been
subscribed in five equal proportions by Yu Khe
Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh
and Washington Sycip. The first three named
subscribers are brothers, being the sons of Yu
Tien Yee, one of Yutivo's founders. Yu Eng Poh
and Washington Sycip are respectively sons of
Yu Tiong Sing and Alberto Sycip who are co-
founders of Yutivo. According to the Articles of
Incorporation of the said subscriptions, the
amount of P62,500 was paid by the aforenamed
subscribers, but actually the said sum was
advanced by Yutivo. The additional
subscriptions to the capital stock of SM and
subsequent transfers thereof were paid by
Yutivo itself. The payments were made, however,
without any transfer of funds from Yutivo to SM.
Yutivo simply charged the accounts of the
subscribers for the amount allegedly advanced
by Yutivo in payment of the shares. Whether a
charge was to be made against the accounts of
the subscribers or said subscribers were to
subscribe shares appears to constitute a
unilateral act on the part of Yutivo, there being
no showing that the former initiated the
subscription.

The transactions were made solely by and

between SM and Yutivo. In effect, it was Yutivo
who undertook the subscription of shares,
employing the persons named or "charged" with
corresponding account as nominal stockholders.
Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe
Siong and Yu Eng Poh were manifestly aware of
these subscriptions, but considering that they
were the principal officers and constituted the
majority of the Board of Directors of both Yutivo
and SM, their subscriptions could readily or
easily be that of Yutivo's Moreover, these
persons were related to death other as brothers
or first cousins. There was every reason for
them to agree in order to protect their common
interest in Yutivo and SM.

The issued capital stock of SM was increased by

additional subscriptions made by various
person's but except Ng Sam Bak and David
Sycip, "payments" thereof were effected by
merely debiting 'or charging the accounts of
said stockholders and crediting the
corresponding amounts in favor of SM, without
actually transferring cash from Yutivo. Again, in
this instance, the "payments" were Yutivo, by
effected by the mere unilateral act of Yutivo a
accounts of the virtue of its control over the
individual persons charged, would necessarily
exercise preferential rights and control directly
or indirectly, over the shares, it being the party
which really undertook to pay or underwrite
payment thereof.

The shareholders in SM are mere nominal

stockholders holding the shares for and in
behalf of Yutivo, so even conceding that the
original subscribers were stockholders bona
fide Yutivo was at all times in control of the
majority of the stock of SM and that the latter
was a mere subsidiary of the former.

True, petitioner and other recorded

stockholders transferred their shareholdings,
but the transfers were made to their immediate
relatives, either to their respective spouses and
children or sometimes brothers or sisters.
Yutivo's shares in SM were transferred to
immediate relatives of persons who constituted
its controlling stockholders, directors and
officers. Despite these purported changes in
stock ownership in both corporations, the
Board of Directors and officers of both
corporations remained unchanged and Messrs.
Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu
Eng Poll (all of the Yu or Young family)
continued to constitute the majority in both
boards. All these, as observed by the Court of
Tax Appeals, merely serve to corroborate the
fact that there was a common ownership and
interest in the two corporations.

SM is under the management and control of

Yutivo by virtue of a management contract
entered into between the two parties. In fact, the
controlling majority of the Board of Directors of
Yutivo is also the controlling majority of the
Board of Directors of SM. At the same time the
principal officers of both corporations are
identical. In addition both corporations have a
common comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo's president, Yu
Khe Thai. There is therefore no doubt that by
virtue of such control, the business, financial
and management policies of both corporations
could be directed towards common ends.

Another aspect relative to Yutivo's control over

SM operations relates to its cash transactions.
All cash assets of SM were handled by Yutivo
and all cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of
cash by SM including its branches were
transmitted or transferred immediately and
directly to Yutivo in Manila upon receipt thereof.
Likewise, all expenses, purchases or other
obligations incurred by SM are referred to
Yutivo which in turn prepares the
corresponding disbursement vouchers and
payments in relation there, the payment being
made out of the cash deposits of SM with Yutivo,
if any, or in the absence thereof which occurs
generally, a corresponding charge is made
against the account of SM in Yutivo's books.
The payments for and charges against SM are
made by Yutivo as a matter of course and
without need of any further request, the latter
would advance all such cash requirements for
the benefit of SM. Any and all payments and
cash vouchers are made on Yutivo stationery
and made under authority of Yutivo's corporate
officers, without any copy thereof being
furnished to SM. All detailed records such as
cash disbursements, such as expenses,
purchases, etc. for the account of SM, are kept
by Yutivo and SM merely keeps a summary
record thereof on the basis of information
received from Yutivo.

All the above plainly show that cash or funds of

SM, including those of its branches which are
directly remitted to Yutivo, are placed in the
custody and control of Yutivo, resources and
subject to withdrawal only by Yutivo. SM's
being under Yutivo's control, the former's
operations and existence became dependent
upon the latter.

Consideration of various other circumstances,

especially when taken together, indicates that
Yutivo treated SM merely as its department or
adjunct. For one thing, the accounting system
maintained by Yutivo shows that it maintained
a high degree of control over SM accounts. All
transactions between Yutivo and SM are
recorded and effected by mere debit or credit
entries against the reciprocal account
maintained in their respective books of
accounts and indicate the dependency of SM as
branch upon Yutivo.

Apart from the accounting system, other facts

corroborate or independently show that SM is a
branch or department of Yutivo. Even the
branches of SM in Bacolod, Iloilo, Cebu, and
Davao treat Yutivo — Manila as their "Head
Office" or "Home Office" as shown by their
letters of remittances or other correspondences.
These correspondences were actually received
by Yutivo and the reference to Yutivo as the
head or home office is obvious from the fact that
all cash collections of the SM's branches are
remitted directly to Yutivo. Added to this fact, is
that SM may freely use forms or stationery of
Yutivo

The fact that SM is a mere department or

adjunct of Yutivo is made more patent by the
fact that arrastre conveying, and charges paid
for the "operation of receiving, loading or
unloading" of imported cars and trucks on piers
and wharves, were charged against SM.
Overtime charges for the unloading of cars and
trucks as requested by Yutivo and incurred as
part of its acquisition cost thereof, were likewise
charged against and treated as expenses of SM.
If Yutivo were the importer, these arrastre and
overtime charges were Yutivo's expenses in
importing goods and not SM's. But since those
charges were made against SM, it plainly
appears that Yutivo had sole authority to
allocate its expenses even as against SM in the
sense that the latter is a mere adjunct, branch
or department of the former.

Proceeding to another aspect of the relation of

the parties, the management fees due from SM
to Yutivo were taken up as expenses of SM and
credited to the account of Yutivo. If it were to be
assumed that the two organizations are
separate juridical entities, the corresponding
receipts or receivables should have been treated
as income on the part of Yutivo. But such
management fees were recorded as "Reserve for
Bonus" and were therefore a liability reserve
and not an income account. This reserve for
bonus were subsequently distributed directly to
and credited in favor of the employees and
directors of Yutivo, thereby clearly showing that
the management fees were paid directly to
Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not

wholly, the business of SM and actually
extended all the credit to the latter not only in
the form of starting capital but also in the form
of credits extended for the cars and vehicles
allegedly sold by Yutivo to SM as well as
advances or loans for the expenses of the latter
when the capital had been exhausted. Thus, the
increases in the capital stock were made in
advances or "Guarantee" payments by Yutivo
and credited in favor of SM. The funds of SM
were all merged in the cash fund of Yutivo. At
all times Yutivo thru officers and directors
common to it and SM, exercised full control over
the cash funds, policies, expenditures and
obligations of the latter.

Southern Motors being but a mere

instrumentality, or adjunct of Yutivo, the Court
of Tax Appeals correctly disregarded the
technical defense of separate corporate entity in
order to arrive at the true tax liability of Yutivo.

Petitioner contends that the respondent

Collector had lost his right or authority to issue
the disputed assessment by reason of
prescription. The contention, in our opinion,
cannot be sustained. It will be noted that the
first assessment was made on November 7,
1950 for deficiency sales tax from 1947 to 1949.
The corresponding returns filed by petitioner
covering the said period was made at the
earliest on October 1, as regards the third
quarter of 1947, so that it cannot be claimed
that the assessment was not made within the
five-year period prescribed in section 331 of the
Tax Code invoked by petitioner. The assessment,
it is admitted, was withdrawn by the Collector
on insufficiency of evidence, but November 15,
1952 due to insufficiency of evidence, but the
withdrawal was made subject to the approval of
the Secretary of Finance and the Board of Tax
Appeals, pursuant to the provisions of section 9
of Executive Order No. 401-A, series of 1951.
The decision of the previous assessment of
November 7, Collector countermanding the as
1950 was forwarded to the Board of Tax Appeals
through the Secretary of Finance but that
official, apparently disagreeing with the
decision, sent it back for re-investigation.
Consequently, the assessment of November 7,
1950 cannot be considered to have been finally
withdrawn. That the assessment was
subsequently reiterated in the decision of
respondent Collector on December 16, 1954 did
not alter the fact that it was made seasonably.
In this connection, it would appear that a
warrant of distraint and levy had been issued
on March 28, 1951 in relation with this case
and by virtue thereof the properties of Yutivo
were placed under constructive distraint. Said
warrant and constructive distraint have not
been lifted up to the present, which shows that
the assessment of November 7, 1950 has always
been valid and subsisting.

Anent the deficiency sale tax for 1950,

considering that the assessment thereof was
made on December 16, 1954, the same was
assessed well within the prescribed five-year
period.

Petitioner argues that the original assessment

of November 7, 1950 did not extend the
prescriptive period on assessment. The
argument is untenable, for, as already seen, the
assessment was never finally withdrawn, since
it was not approved by the Secretary of Finance
or of the Board of Tax Appeals. The authority of
the Secretary to act upon the assessment
cannot be questioned, for he is expressly
granted such authority under section 9 of
Executive Order No. 401-And under section 79
(c) of the Revised Administrative Code, he has
"direct control, direction and supervision over
all bureaus and offices under his jurisdiction
and may, any provision of existing law to the
contrary not withstanding, repeal or modify the
decision of the chief of said Bureaus or offices
when advisable in public interest."

It should here also be stated that the

assessment in question was consistently
protested by petitioner, making several requests
for reinvestigation thereof. Under the
circumstances, petitioner may be considered to
have waived the defense of prescription.

"Estoppel has been employed to prevent the

application of the statute of limitations against
the government in certain instances in which
the taxpayer has taken some affirmative action
to prevent the collection of the tax within the
statutory period. It is generally held that a
taxpayer is estopped to repudiate waivers of the
statute of limitations upon which the
government relied. The cases frequently involve
dissolved corporations. If no waiver has been
given, the cases usually show come conduct
directed to a postponement of collection, such,
for example, as some variety of request to apply
an overassessment. The taxpayer has
'benefited' and 'is not in a position to contest'
his tax liability. A definite representation of
implied authority may be involved, and in many
cases the taxpayer has received the 'benefit' of
being saved from the inconvenience, if not
hardship of immediate collection. "

Conceivably even in these cases a fully informed

Commissioner may err to the sorrow of the
revenues, but generally speaking, the cases
present a strong combination of equities against
the taxpayer, and few will seriously quarrel with
their application of the doctrine of estoppel."
(Mertens Law of Federal Income Taxation, Vol.
10-A, pp. 159-160.)

It is also claimed that section 9 of Executive

Order No. 401-A, series of 1951 — es involving
an original assessment of more than P5,000 —
refers only to compromises and refunds of taxes,
but not to total withdrawal of the assessment.
The contention is without merit. A careful
examination of the provisions of both sections 8
and 9 of Executive Order No. 401-A, series of
1951, reveals the procedure prescribed therein
is intended as a check or control upon the
powers of the Collector of Internal Revenue in
respect to assessment and refunds of taxes. If it
be conceded that a decision of the Collector of
Internal Revenue on partial remission of taxes
is subject to review by the Secretary of Finance
and the Board of Tax Appeals, then with more
reason should the power of the Collector to
withdraw totally an assessment be subject to
such review.
We find merit, however, in petitioner's
contention that the Court of Tax Appeals erred
in the imposition of the 5% fraud surcharge. As
already shown in the early part of this decision,
no element of fraud is present.

Pursuant to Section 183 of the National Internal

Revenue Code the 50% surcharge should be
added to the deficiency sales tax "in case a false
or fraudulent return is willfully made."
Although the sales made by SM are in
substance by Yutivo this does not necessarily
establish fraud nor the willful filing of a false or
fraudulent return.

The case of Court Holding Co. v. Commissioner

of Internal Revenue (August 9, 1943, 2 TC 531,
541-549) is in point. The petitioner Court
Holding Co. was a corporation consisting of only
two stockholders, to wit: Minnie Miller and her
husband Louis Miller. The only assets of third
husband and wife corporation consisted of an
apartment building which had been acquired
for a very low price at a judicial sale. Louis
Miller, the husband, who directed the
company's business, verbally agreed to sell this
property to Abe C. Fine and Margaret Fine,
husband and wife, for the sum of $54,000.00,
payable in various installments. He received
$1,000.00 as down payment. The sale of this
property for the price mentioned would have
netted the corporation a handsome profit on
which a large corporate income tax would have
to be paid. On the afternoon of February 23,
1940, when the Millers and the Fines got
together for the execution of the document of
sale, the Millers announced that their attorney
had called their attention to the large corporate
tax which would have to be paid if the sale was
made by the corporation itself. So instead of
proceeding with the sale as planned, the Millers
approved a resolution to declare a dividend to
themselves "payable in the assets of the
corporation, in complete liquidation and
surrender of all the outstanding corporate
stock." The building, which as above stated was
the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn
sold it to Mr. and Mrs. Fine for exactly the same
price and under the same terms as had been
previously agreed upon between the corporation
and the Fines.

The return filed by the Court Holding Co. with

the respondent Commissioner of Internal
Revenue reported no taxable gain as having
been received from the sale of its assets. The
Millers, of course, reported a long term capital
gain on the exchange of their corporate stock
with the corporate property. The Commissioner
of Internal Revenue contended that the
liquidating dividend to stockholders had no
purpose other than that of tax avoidance and
that, therefore, the sale by the Millers to the
Fines of the corporation's property was in
substance a sale by the corporation itself, for
which the corporation is subject to the taxable
profit thereon. In requiring the corporation to
pay the taxable profit on account of the sale, the
Commissioner of Internal Revenue, imposed a
surcharge of 25% for delinquency, plus an
additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale

by the Millers was for no other purpose than to
avoid the tax and was, in substance, a sale by
the Court Holding Co., and that, therefore, the
said corporation should be liable for the
assessed taxable profit thereon. The Court of
Tax Appeals also sustained the Commissioner
of Internal Revenue on the delinquency penalty
of 25%. However, the Court of Tax Appeals
disapproved the fraud penalties, holding that
an attempt to avoid a tax does not necessarily
establish fraud; that it is a settled principle that
a taxpayer may diminish his tax liability by
means which the law permits; that if the
petitioner, the Court Holding Co., was of the
opinion that the method by which it attempted
to effect the sale in question was legally
sufficient to avoid the imposition of a tax upon
it, its adoption of that methods not subject to
censure; and that in taking a position with
respect to a question of law, the substance of
which was disclosed by the statement indorsed
on it return, it may not be said that that position
was taken fraudulently. We quote in full the
pertinent portion of the decision of the Court of
Tax Appeals: .

". . . The respondent's answer alleges that the

petitioner's failure to report as income the
taxable profit on the real estate sale was
fraudulent and with intent to evade the tax. The
petitioner filed a reply denying fraud and
averring that the loss reported on its return was
correct to the best of its knowledge and belief.
We think the respondent has not sustained the
burden of proving a fraudulent intent. We have
concluded that the sale of the petitioner's
property was in substance a sale by the
petitioner, and that the liquidating dividend to
stockholders had no purpose other than that of
tax avoidance. But the attempt to avoid tax does
not necessarily establish fraud. It is a settled
principle that a taxpayer may diminish his
liability by any means which the law permits.
United States v. Isham, 17 Wall. 496; Gregory v.
Helvering, supra; Chrisholm v. Commissioner,
79 Fed. (2d) 14. If the petitioner here was of the
opinion that the method by which it attempted
to effect the sale in question was legally
sufficient to avoid the imposition of tax upon it,
its adoption of that method is not subject to
censure. Petitioner took a position with respect
to a question of law, the substance of which was
disclosed by the statement endorsed on its
return. We can not say, under the record before
us, that that position was taken fraudulently.
The determination of the fraud penalties is
reversed."

When GM was the importer and Yutivo, the

wholesaler, of the cars and trucks, the sales tax
was paid only once and on the original sales by
the former and neither the latter nor SM paid
taxes on their subsequent sales. Yutivo might
have, therefore, honestly believed that the
payment by it, as importer, of the sales tax was
enough as in the case of GM Consequently, in
filing its return on the basis of its sales to SM
and not on those by the latter to the public, it
cannot be said that Yutivo deliberately made a
false return for the purpose of defrauding the
government of its revenues which will justify the
imposition of the surcharge penalty.

We likewise find meritorious the contention that

the Tax Court erred in computing the alleged
deficiency sales tax on the selling price of SM
without previously deducting therefrom the
sales tax due thereon. The sales tax provisions
(sees. 184.186, Tax Code) impose a tax on
original sales measured by "gross selling price"
or "gross value in money". These terms, as
interpreted by the respondent Collector, do not
include the amount of the sales tax, if invoiced
separately. Thus, General Circular No. 431 of
the Bureau of Internal Revenue dated July 29,
1939, which implements sections 184.186 of
the Tax Code provides: "

. . .'Gross selling price' or gross value in money'

of the articles sold, bartered, exchanged,
transferred as the term is used in the aforecited
sections (sections 184, 185 and 186) of the
National Internal Revenue Code, is the total
amount of money or its equivalent which the
purchaser pays to the vendor to receive or get
the goods. However, if a manufacturer,
producer, or importer, in fixing the gross selling
price of an article sold by him has included an
amount intended to cover the sales tax in the
gross selling price of the articles, the sales tax
shall be based on the gross selling price less the
amount intended to cover the tax, if the same is
billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau

reads:

Amount intended to cover the tax must be billed

as a separate em so as not to pay a tax on the
tax. — On sales made after he third quarter of
1939, the amount intended to cover the sales
tax must be billed to the purchaser as separate
items in the, invoices in order that the reduction
thereof from the gross ailing price may be
allowed in the computation of the merchants'
percentage tax on the sales. Unless billed to the
purchaser as a separate item in the invoice, the
amounts intended to cover the sales tax shall
be considered as part of the gross selling price
of the articles sold, and deductions thereof will
not be allowed, (Cited in Dalupan, Nat. Int. Rev.
Code, Annotated, Vol. II, pp. 52-53.)

Yutivo complied with the above circulars on its

sales to SM, and as separately billed, the sales
taxes did not form part of the "gross selling
price" as the measure of the tax. Since Yutivo
had previously billed the sales tax separately in
its sales invoices to SM General Circulars Nos.
431 and 440 should be deemed to have been
complied. Respondent Collector's method of
computation, as opined by Judge Nable in the
decision complained of —

. . . is unfair, because . . .(it is) practically

imposing tax on a tax already paid. Besides, the
adoption of the procedure would in certain
cases elevate the bracket under which the tax is
based. The late payment is already penalized,
thru the imposition of surcharges, by adopting
the theory of the Collector, we will be creating
an additional penalty not contemplated by law."

If the taxes based on the sales of SM are

computed in accordance with Gen. Circulars
Nos. 431 and 440 the total deficiency sales
taxes, exclusive of the 25% and 50% surcharges
for late payment and for fraud, would amount
only to P820,549.91 as shown in the following
computation:

Rates of Sales Tax

Gross Sales of Vehicles Exclusive of Sales Tax

Sales Taxes Due and Computed under Gen. Cir

Nos. 431 & 400

Total Gross Selling Price Charged to the Public

5%
P11,912,219.57

P595,610.98

P12,507,83055

7%

909,559.50

63,669.16

973,228.66

10%

2,618,695.28

261,869.53

2,880,564.81

15%

3,602,397.65

540,359.65

4,142,757.30

20%

267,150.50

53,430.10

320,580.60

30%

837,146.97

251,114.09

1,088,291.06
50%

74,244.30

37,122.16

111,366.46

75%

8,000.00

6,000.00

14,000.00

TOTAL

P20,220,413.77

P1,809,205.67

P22,038,619.44

Less Taxes Paid by Yutivo

988,655.76

Deficiency Tax still due

P820,549.91

This is the exact amount which, according to

Presiding Judge Nable of the Court of Tax
Appeals, Yutivo would pay, exclusive of the
surcharges.

Petitioner finally contends that the Court of Tax

Appeals erred or acted in excess of its
jurisdiction in promulgating judgment for the
affirmance of the decision of respondent
Collector by less than the statutory requirement
of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125,
creating the Court of Tax Appeals, provides that
"Any two judges of the Court of Tax Appeals
shall constitute a quorum, and the concurrence
of two judges shall be necessary to promulgate
decision thereof. . . . " It is on record that the
present case was heard by two judges of the
lower court. And while Judge Nable expressed
his opinion on the issue of whether or not the
amount of the sales tax should be excluded
from the gross selling price in computing the
deficiency sales tax due from the petitioner, the
opinion, apparently, is merely an expression of
his general or "private sentiment" on the
particular issue, for he concurred the
dispositive part of the decision. At any rate,
assuming that there is no valid decision for lack
of concurrence of two judges, the case was
submitted for decision of the court below on
March 28, 1957 and under section 13 of
Republic Act 1125, cases brought before said
court hall be decided within 30 days after
submission thereof. "If no decision is rendered
by the Court within thirty days from the date a
case is submitted for decision, the party
adversely affected by said ruling, order or
decision, may file with said Court a notice of his
intention to appeal to the Supreme Court, and
if no decision has as yet been rendered by the
Court, the aggrieved party may file directly with
the Supreme Court an appeal from said ruling,
order or decision, notwithstanding the foregoing
provisions of this section." The case having been
brought before us on appeal, the question
raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of

the Court of Tax Appeals under review is hereby
modified in that petitioner shall be ordered to
pay to respondent the sum of P820,549.91, plus
25% surcharge thereon for late payment.

So ordered without costs.

Bengzon, Labrador, Concepcion, Reyes, J.B.L.,

Barrera and Paredes, JJ., concur.
Padilla, J., took no part.

People v Tan | GR No. 144707 | 13 July

2004
[G.R. No. 144707. July 13, 2004]

PEOPLE OF THE PHILIPPINES, petitioner, vs.

LUCIO C. TAN, FORTUNE TOBACCO
CORPORATION, ANTONIO P. ABAYA, HARRY C.
TAN, CARMEN KHAO TAN, FLORENCIO C.
SANTOS, SALVADOR F. MISON, ROXAS CHUA,
MARIANO TANENGLIAN and JUANITA TAN LEE
(c/o Fortune Tobacco Corporation, Parang,
Marikina City).
TOWNSMAN COMMERCIAL, INC., WILLIAM YU,
LETICIA LIM, GLORIA LOPEZ, ROBERT
TANTAMPO, JOSE TIU, FELIPE LOY, LUIS SEE
(c/o 4th Floor, Allied Bank Center, Ayala
Avenue, Makati City)
LANDMARK SALES AND MARKETING INC.,
ROLANDO CHUA, HONORINA TAN, MILLIE
TANTAMCO, HENRY WECHEE, JESUS LIM,
TEODORO TAN, ANTONIO APOSTOL,
DOMINGO TENG (c/o 4th Floor, Allied Bank
Center, Ayala Avenue, Makati City)
CRIMSON CROKER DISTRIBUTORS, INC.,
CANDELARIO LI, TEODORO TAN, ERLINDA
CRUZ, CARLOS TUMPALAN, LARRY JOHN SY,
ERNESTO ONG, WILFREDO MACROHON (4th
Floor, Allied Bank Center, Ayala Avenue, Makati
City)
DAGUPAN COMBINED COMMODITIES, INC.,
NEMESIO TAN, QUINTIN CALALEJA, YOLANDA
MANALILI, CARLOS CHAN, ROMEO TAN,
JOHN UY, VICENTE CO (4th Floor, Allied Bank
Center, Ayala Avenue, Makati City)
FIRST UNION TRADING CORPORATION,
HENRY CHOA, LOPE LIM GUAN, EMILIO TAN,
FELIPE TAN SHE CHUAN, ANDRES CO (4th
Floor, Allied Bank Center, Ayala Avenue, Makati
City)
CARLSBURG & SONS, INC., FELIPE KEE,
HENRY GO CO, NARCISO GO, ADOLFO LIM,
MAXIMO TAN, CO SHU, DANIEL YAO (c/o 112
Aguirre Street, Legaspi Village, Makati City)
OMAR ALI DISTRIBUTORS, INC., GABRIEL
QUIENTELLA, NELSON TE, EMILIO GO,
EDWIN LEE, CESAR LEDESMA, JR., JAO
CHEP SENG (c/o 112 Aguirre Street, Legaspi
Village, Makati City
ORIEL & CO., INC., FRANCISCO J. ORIEL, JR.,
BENJAMIN T. HONG, PHILIP P. JAO, JOSE P.
YU and EDISON M. QUE (c/o 112 Aguirre Street,
Legaspi Village, Makati City)
MT. MATUTUM MARKETING CORPORATION,
ANTONIO TIU, FELIPE LOY, ROSARIO LESTOR,
WILFREDO ONG, ROLANDO CHUA,
BONIFACIO CHUA, GO CHING CHUAN (4th
Floor, Becogan Bldg., 112 Aguirre Street,
Legaspi Village, Makati City), respondents.
DECISION
AZCUNA, J.:

This is a petition for review on certiorari under

Rule 45 of the Rules of Court which seeks to set
aside the Decision[1] of the Court of Appeals
dated August 29, 2000 in C.A.-G.R. SP No.
56077, which dismissed petitioners appeal from
the Orders of the Regional Trial Court of
Marikina City, Branch 273 (RTC-Marikina)
dated August 25, 1999[2] and October 13,
1999[3] in SCA Case No. 95-340-MK. RTC-
Marikina dismissed the petition for certiorari
filed by the Department of Justice Panel of State
Prosecutors, for being filed out of time.

The petition for certiorari before the RTC sought

to annul and set aside (a) the Order dated
March 22, 1999[4] of the Metropolitan Trial
Court, Branch 75, Marikina City (MeTC),
dismissing the criminal informations filed by
the DOJ Panel against herein respondents; and
(b) the Order dated May 17, 1999[5] of said
MeTC denying the DOJ Panels Motion for
Reconsideration.

ANTECEDENT FACTS

On September 7, 1993, the Commissioner of

Internal Revenue filed a Complaint with the
Department of Justice (DOJ), charging Fortune
Tobacco Corporation (hereafter Fortune), its
corporate officers, nine (9) other corporations
and their respective corporate officers, with
fraudulent tax evasion for supposed non-
payment of the correct ad valorem, income and
value-added taxes for the year 1992.
The complaint was docketed as I.S. No. 93-508
and referred to the DOJ Task Force on Revenue
Cases.

The next day, on September 8, 1993, the DOJ

Task Force, through a designated panel of
prosecutors (DOJ Panel) issued a Subpoena
directing respondents to submit their counter-
affidavits not later than September 20, 1993.

On October 15, 1993, Fortune filed a Verified

Motion to Dismiss; Alternatively Motion to
Suspend.[6]

At the scheduled preliminary investigation on

October 15, 1993, the DOJ Panel denied the
motion to dismiss and treated the same as
respondents counter-affidavits.

On October 26, 1993, Commissioner Liwayway

Vinzons-Chato filed with the DOJ, the 2nd
Criminal Complaint against respondents,
alleging the same acts of tax evasion, this time
for taxable year 1991. The same was docketed
as I.S. No. 93-584.

On December 21, 1993, the BIR Commissioner

filed the 3rd Criminal Complaint against
respondents, this time with the Office of the City
Prosecutor of Quezon City, alleging tax evasion
for taxable year 1990. The complaint was
docketed as I.S. No. 93-17942.

On January 4, 1994, respondents filed a

Petition for Certiorari and Prohibition with the
Regional Trial Court of Quezon City (RTC-
Quezon City), Branch 88, with prayer for
preliminary injunction, which was docketed as
Civil Case No. Q-94-18790.

On January 25, 1994, RTC-Quezon City

granted respondents prayer and issued a writ of
preliminary injunction, enjoining the conduct of
further proceedings before the DOJ Panel in I.S.
No. 93-508.
On January 26, 1994 and January 28, 1994,
respondents filed two Supplemental Petitions
before RTC-Quezon City, also seeking to stay
the preliminary investigations of the two other
complaints before the DOJ Panel and the
Quezon City Prosecutors Office, respectively.

On February 14, 1994, RTC-Quezon City issued

an Order granting respondents supplemental
petitions, thereby also enjoining the preliminary
investigations in the two other complaints, I.S.
No. 93-584 and I.S. No. 93-17942.

Thus, preliminary investigations for the

following three complaints were enjoined:

I.S. No. 93-508 DOJ Task Force Taxable Year

1992

I.S. No. 93-584 DOJ Task Force Taxable Year

1991

I.S. No. 93-17942 Quezon City Prosecutors

Office Taxable Year 1990

G.R. No. 119322

Subsequently,[7] the Commissioner of Internal

Revenue filed a Petition for Review before this
Court, docketed as G.R. No. 119322.

In a Decision dated June 4, 1996,[8] this

Court[9] pronounced:

xxx

The trial court and the Court of Appeals

maintained that at that stage of the preliminary
investigation, where the complaint and the
accompanying affidavits and supporting
documents did not show any violation of the Tax
Code providing penal sanctions, the
prosecutors should have dismissed the
complaint outright because of total lack of
evidence, instead of requiring private
respondents to submit their counter affidavits
under Section 3(b) of Rule 112.
We believe that the trial court in issuing its
questioned orders, which are interlocutory in
nature, committed no grave abuse of discretion
amounting to lack of jurisdiction. There are
factual and legal bases for the assailed orders.
On the other hand, the burden is upon the
petitioners to demonstrate that the questioned
orders constitute a whimsical and capricious
exercise of judgment, which they have not. For
certiorari will not be issued to cure errors in
proceedings or correct erroneous conclusions of
law or fact. As long as a court acts within its
jurisdiction, any alleged errors committed in the
exercise of its jurisdiction will amount to
nothing more than errors of judgment which are
reviewable by timely appeal and not by a special
civil action of certiorari. Consequently, the
Regional Trial Court acted correctly and
judiciously, and as demanded by the facts and
the law, in issuing the orders granting the writs
of preliminary injunction, in denying petitioners
motion to dismiss and in admitting the
supplemental petitions. What petitioners
should have done was to file an answer to the
petition filed in the trial court, proceed to the
hearing and appeal the decision of the court if
adverse to them.

WHEREFORE, the instant petition is hereby

DISMISSED.

SO ORDERED.

On a subsequent motion for reconsideration,

however, this Court En Banc issued a
Resolution[10] dated February 6, 1997, thus:

The Court further Resolved to DENY the motion

for reconsideration of the decision dated 4 June
1996, the basic issues raised therein having
already been passed upon in said decision and
there being no substantial arguments to
support said motion.

However, in order to avoid undue delay in the

disposition of Civil Case No. Q-94-18790 and
the preliminary investigation of the complaints
against private respondents, the Court Resolved
to:

1. REMAND Civil Case No. Q-94-18790 to the

Regional Trial Court, Branch 88, Quezon City;

2. SET ASIDE the orders of the panel of

prosecutors declaring private respondents
Motion to Dismiss, Alternatively, Motion to
Suspend as private respondents counter-
affidavits, and denying their motions to require
petitioner Commissioner of Internal Revenue to
submit documents and to inhibit the members
of the panel of prosecutors;

3. DIRECT the Secretary of Justice to designate

as early as possible, a new panel of prosecutors
to investigate the complaints against private
respondents;

4. ORDER the new panel of prosecutors

designated by the Secretary of Justice to grant
private respondents motion for the submission
by petitioner Commissioner of Internal Revenue
to private respondents, thru their counsel of
record, of the documents supporting the
complaints, and to give private respondents
reasonable time to examine the documents and
to submit their counter-affidavits;

5. ORDER the preliminary investigation to

proceed with all reasonable dispatch; and

6. DIRECT respondent Judge Tirso Velasco to

dismiss Civil Case No. Q-94-18790 on the
ground that it has become moot in light of the
foregoing dispositions.[11] (Emphasis ours)

FACTS SUBSEQUENT TO THE G.R. NO.

119322 RESOLUTION

In compliance with this Courts resolution, a

New Panel (New DOJ Panel) of prosecutors was
created.[12] The BIR was directed to furnish
respondents the documents supporting the
complaints and to give respondents time to
examine the same and, thereafter, for
respondents to submit their counter-affidavits.

On March 20, 1998, the BIR submitted a

Manifestation/ Compliance, submitting the
required documents with the explanation that it
did not produce the other documents (i.e. the
Daily Manufacturers Sworn Statements of other
cigarette companies) because to do so would be
inappropriate as the same do not, in any
manner, bear any relevance to the preliminary
investigation proceedings against Fortune.[13]

On April 13, 1998, respondents filed a Counter-

Manifestation With Motion to produce allegedly
lacking or missing documents.

The BIR filed a Comment/Manifestation,

reiterating its stand.

Respondents then filed a Motion to Resolve its

Motion to Dismiss previously filed with the Old
DOJ Panel, prior to the Decision and Resolution
in G.R. No. 119322.

Subsequently, on July 24, 1998, the New DOJ

Panel ruled that: 1) There was substantial
compliance by the BIR with the order to produce
documents; 2) on the basis of the evidence
submitted by the BIR, the panel finds sufficient
ground to proceed with the preliminary
investigation of the cases; and 3) in view of the
foregoing findings, the respondents were
directed to file their counter-affidavits within 15
days from receipt of the order.

Instead of filing counter-affidavits, the

respondents filed a Supplement[14] to its
previous Verified Motion to Dismiss;
Alternatively Motion to Suspend. Thus, the 15-
day period to file counter-affidavits was deemed
by the New DOJ Panel to have lapsed, hence,
the case was submitted for resolution.

Respondents, thereafter, filed, with the New

DOJ Panel, motions to suspend the ongoing
preliminary investigation, on the ground that
the BIR Legal Service Appellate Division has
given due course to Fortunes request for
reconsideration/protest of the deficiency tax
assessment on Fortunes 1992 tax liabilities.

On November 19, 1998, the New DOJ Panel

issued its Resolution[15] stating that as to the
Urgent Motion to Suspend, the same is denied
since the preliminary investigation was not on
the issue of the correctness of the computation
of Fortunes tax liabilities and assessment but
the determination of whether the acts
complained of violate certain provisions of the
Tax Code.[16]

The New DOJ Panel resolved the main

complaints in favor of the BIR. It found
reasonable ground to believe that respondents
were probably guilty thereof and should be held
for trial.

PROCEEDINGS BEFORE THE MeTC

On December 1, 1998, Informations[17] for nine

(9) counts of tax evasion (Taxable Years 1990,
1991 and 1992) were filed by the New DOJ
Panel with the Metropolitan Trial Court (MeTC),
Marikina City, Branch 75, docketed as Criminal
Cases Nos. 98-38181 to 98-38189. The
indictments were signed and certified by the
New DOJ Panel of state prosecutors.[18]

Said Informations read, as follows:

INFORMATION

The undersigned State Prosecutors of the

department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA,

President and General Manager; HARRY C. TAN,
CARMEN KHAO TAN and FLORENCIO C.
SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS
CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA
TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate
officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA

LIM, Treasurer; GLORIA LOPEZ, Corporate
Secretary; ROBERT TANTAMCO, JOSE TIU and
FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a
dummy corporation of FTC;

c) ROLANDO CHUA, President; HONORINA TAN,

Treasurer; MILLIE TANTAMCO, Corporate
Secretary; HENRY WEECHEE, JESUS LIM,
TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate
officers of LANDMARK SALES and MARKETING,
INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President;

TEODORO TAN, Treasurer; ERLINDA CRUZ,
Corporate Secretary; CARLOS TUMPALAN,
LARRY JOHN SY, ERNESTO ONG and
WOLFREDO MACROHON, Directors, all being
corporate officers of CRIMSON CROKER
DISTRIBUTORS, INC., a dummy corporation of
FTC;

e) NEMESIO TAN, President/Director; QUINTIN

CALLEJA, Treasurer; YOLANDA MANALILI,
Corporate Secretary; CARLOS CHAN, ROMEO
TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN
COMBINED COMMODITIES, INC., a dummy
corporation of FTC;

f) ANTONIO TIU, Director/President; FELIPE

LOY, Treasurer; ROSARIO LESTOR, Corporate
Secretary; WILFREDO ONG, ROLANDO CHUA,
BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT.
MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM

GUAN, Director/Treasurer; EMILIO TAN,
Director/Corporate Secretary; FELIPE TAN SHE
CHUAN and ANDRES CO, Directors, all
corporate officers of FIRST UNION TRADING
CORPORATION, a dummy corporation of FTC;

h) FELIPE KEE, Director/President; HENRY GO

CO, Treasurer; NARCISO GO; Secretary;
ADOLFO LIM, MAXIMO TAN, CO SHU, and
DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a
dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE;

Director/Treasurer; EMILIO GO,
Director/Corporate Secretary; EDWIN LEE,
CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR
ALI DISTRIBUTORS, INC., a dummy
corporation of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T.

HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and
CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section

130[b]), in relation to Section 253 (now Section
254) and Section 252[b] (now Section 253[b])
and Section 255 (now Section 256), of the
National Internal Revenue Code (NIRC), as
amended, committed as follows:

That during the taxable year 1991, in Marikina

City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-
named accused, as the respective officers of
Fortune Tobacco Corporation (FTC) and its nine
(9) dummy corporations, conspiring with, and
mutually helping each other, with willful intent
to evade and defeat payment of the tax due the
government, did then and there, unlawfully,
feloniously, file with the Bureau of Internal
Revenue (BIR) a false and fraudulent ad valorem
tax returns for the taxable year 1991, by then
and there purposely and maliciously creating,
organizing and incorporating the said dummy
corporations and employing individual ghost
buyers to effect/perpetrate fictitious and
simulated sales of FTCs cigarette products at a
price higher than that of the wholesale price
registered with the BIR, thereby facilitating the
commission of tax evasion by willfully
suppressing the true and accurate sales of FTC
and as a consequence of which the FTC,
through the above-named accused,
fraudulently declared and filed with the BIR for
ad valorem tax purposes gross sales of
P10,879,999,950.00 and paid only the ad
valorem tax in the amount of
P4,457,692,647.05 instead of the true
aggregate ad valorem tax of P7,154,036,171.00
if the true and accurate gross sales subject to
ad valorem tax is declared, thereby defrauding
and causing damage and prejudice to the
government in undeclared ad valorem taxes in
the amount of P6,370,111,575.34 inclusive of
increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November

19, 1998.

INFORMATION

The undersigned State Prosecutors of the

department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA,

President and General Manager; HARRY C. TAN,
CARMEN KHAO TAN and FLORENCIO C.
SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS
CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA
TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate
officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA

LIM, Treasurer; GLORIA LOPEZ, Corporate
Secretary; ROBERT TANTAMCO, JOSE TIU and
FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a
dummy corporation of FTC;

c) ROLANDO CHUA, President; HONORINA TAN,

Treasurer; MILLIE TANTAMCO, Corporate
Secretary; HENRY WEECHEE, JESUS LIM,
TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate
officers of LANDMARK SALES and MARKETING,
INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President;

TEODORO TAN, Treasurer; ERLINDA CRUZ,
Corporate Secretary; CARLOS TUMPALAN,
LARRY JOHN SY, ERNESTO ONG and
WOLFREDO MACROHON, Directors, all being
corporate officers of CRIMSON CROKER
DISTRIBUTORS, INC., a dummy corporation of
FTC;

e) NEMESIO TAN, President/Director; QUINTIN

CALLEJA, Treasurer; YOLANDA MANALILI,
Corporate Secretary; CARLOS CHAN, ROMEO
TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN
COMBINED COMMODITIES, INC., a dummy
corporation of FTC;

f) ANTONIO TIU, Director/President; FELIPE

LOY, Treasurer; ROSARIO LESTOR, Corporate
Secretary; WILFREDO ONG, ROLANDO CHUA,
BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT.
MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM

GUAN, Director/Treasurer; EMILIO TAN,
Director/Corporate Secretary; FELIPE TAN SHE
CHUAN and ANDRES CO, Directors, all
corporate officers of FIRST UNION TRADING
CORPORATION, a dummy corporation of FTC;

h) FELIPE KEE, Director/President; HENRY GO

CO, Treasurer; NARCISO GO; Secretary;
ADOLFO LIM, MAXIMO TAN, CO SHU, and
DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a
dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE;

Director/Treasurer; EMILIO GO,
Director/Corporate Secretary; EDWIN LEE,
CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR
ALI DISTRIBUTORS, INC., a dummy
corporation of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T.

HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and
CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section

130[b]), in relation to Section 253 (now Section
254) and Section 252[b] (now Section 253[b])
and Section 255 (now Section 256), of the
National Internal Revenue Code (NIRC), as
amended, committed as follows:

That during the taxable year 1990, in Marikina

City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-
named accused, as the respective officers of
Fortune Tobacco Corporation (FTC) and its nine
(9) dummy corporations, conspiring with, and
mutually helping each other, with willful intent
to evade and defeat payment of the tax due the
government, did then and there, unlawfully,
feloniously, file with the Bureau of Internal
Revenue (BIR) a false and fraudulent ad valorem
tax returns for the taxable year 1990, by then
and there purposely and maliciously creating,
organizing and incorporating the said dummy
corporations and employing individual ghost
buyers to effect/perpetrate fictitious and
simulated sales of FTCs cigarette products at a
price higher than that of the wholesale price
registered with the BIR, thereby facilitating the
commission of tax evasion by willfully
suppressing the true and accurate sales of FTC
and as a consequence of which the FTC,
through the above-named accused,
fraudulently declared and filed with the BIR for
ad valorem tax purposes gross sales of
P10,581,522,160.00 and paid only the ad
valorem tax in the amount of
P3,806,272,068.75 instead of the true
aggregate ad valorem tax of P6,574,331,124.35
if the true and accurate gross sales subject to
ad valorem tax is declared, thereby defrauding
and causing damage and prejudice to the
government in undeclared ad valorem taxes in
the amount of P7,508,360,188.31 inclusive of
increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November

19, 1998.

INFORMATION

The undersigned State Prosecutors of the

department of Justice, hereby accuse:

a) LUCIO TAN, Chairman; ANTONIO P. ABAYA,

President and General Manager; HARRY C. TAN,
CARMEN KHAO TAN and FLORENCIO C.
SANTOS, Directors; CHUNG POE KEE,
Director/Executive Vice-President; ROXAS
CHUA, Vice-President/Finance; MARIANO
TANENGLIAN, Director/Treasurer; JUANITA
TAN LEE, Corporate Secretary; and DAVID R.
CORTEZ, External Auditor, all being corporate
officers of FORTUNE TOBACCO CORPORATION
(FTC);

b) WILLIAM YU, Director/President; LETICIA

LIM, Treasurer; GLORIA LOPEZ, Corporate
Secretary; ROBERT TANTAMCO, JOSE TIU and
FELIPE LOY, Directors, all being corporate
officers of TOWNSMAN COMMERCIAL, INC., a
dummy corporation of FTC;

c) ROLANDO CHUA, President; HONORINA TAN,

Treasurer; MILLIE TANTAMCO, Corporate
Secretary; HENRY WEECHEE, JESUS LIM,
TEODORO TAN, ANTONIO APOSTOL, and
DOMINGO TENG, Directors, all being corporate
officers of LANDMARK SALES and MARKETING,
INC., a dummy corporation of FTC;

d) CANDELARIA LI, Director/President;

TEODORO TAN, Treasurer; ERLINDA CRUZ,
Corporate Secretary; CARLOS TUMPALAN,
LARRY JOHN SY, ERNESTO ONG and
WOLFREDO MACROHON, Directors, all being
corporate officers of CRIMSON CROKER
DISTRIBUTORS, INC., a dummy corporation of
FTC;

e) NEMESIO TAN, President/Director; QUINTIN

CALLEJA, Treasurer; YOLANDA MANALILI,
Corporate Secretary; CARLOS CHAN, ROMEO
TAN, JOHN UY, and VICENTE CO, Directors; all
being corporate officers of DAGUPAN
COMBINED COMMODITIES, INC., a dummy
corporation of FTC;

f) ANTONIO TIU, Director/President; FELIPE

LOY, Treasurer; ROSARIO LESTOR, Corporate
Secretary; WILFREDO ONG, ROLANDO CHUA,
BONIFACIO CHUA, and GO CHING CHUAN,
Directors; all being corporate officers of MT.
MATUTUM MARKETING CORPORATION, a
dummy corporation of FTC;

g) HENRY CHAO, Director/President; LOPE LIM

GUAN, Director/Treasurer; EMILIO TAN,
Director/Corporate Secretary; FELIPE TAN SHE
CHUAN and ANDRES CO, Directors, all
corporate officers of FIRST UNION TRADING
CORPORATION, a dummy corporation of FTC;

h) FELIPE KEE, Director/President; HENRY GO

CO, Treasurer; NARCISO GO; Secretary;
ADOLFO LIM, MAXIMO TAN, CO SHU, and
DANIEL YAO, Directors; all being corporate
officers of CARLSBERG and SONS, INC., a
dummy corporation of FTC;

i) GABRIEL QUINTELA, President; NELSON TE;

Director/Treasurer; EMILIO GO,
Director/Corporate Secretary; EDWIN LEE,
CESAR LEDESMA, JR., and JAO CHENG SENG,
Directors; all being corporate officers of OMAR
ALI DISTRIBUTORS, INC., a dummy
corporation of FTC;

j) FRANCISCO J, ORIEL, JR., BENJAMIN T.

HONG, PHILIP P. JAO, JOSE P. YU and EDISON
M. QUE, all corporate directors of ORIEL and
CO., INC., a dummy corporation of FTC.

for violation of Section 127[b] (now Section

130[b]), in relation to Section 253 (now Section
254) and Section 252[b] (now Section 253[b])
and Section 255 (now Section 256), of the
National Internal Revenue Code (NIRC), as
amended, committed as follows:

That during the taxable year 1992, in Marikina

City, Metro Manila, Philippines, and within the
jurisdiction of this Honorable Court, the above-
named accused, as the respective officers of
Fortune Tobacco Corporation (FTC) and its nine
(9) dummy corporations, conspiring with, and
mutually helping each other, with willful intent
to evade and defeat payment of the tax due the
government, did then and there, unlawfully,
feloniously, file with the Bureau of Internal
Revenue (BIR) a false and fraudulent ad valorem
tax returns for the taxable year 1992, by then
and there purposely and maliciously creating,
organizing and incorporating the said dummy
corporations and employing individual ghost
buyers to effect/perpetrate fictitious and
simulated sales of FTCs cigarette products at a
price higher than that of the wholesale price
registered with the BIR, thereby facilitating the
commission of tax evasion by willfully
suppressing the true and accurate sales of FTC
and as a consequence of which the FTC,
through the above-named accused,
fraudulently declared and filed with the BIR for
ad valorem tax purposes gross sales of
P11,736,658,580.00 and paid only the ad
valorem tax in the amount of
P4,805,254,523.00 instead of the true
aggregate ad valorem tax of P7,725,832,581.75
if the true and accurate gross sales subject to
ad valorem tax is declared, thereby defrauding
and causing damage and prejudice to the
government in undeclared ad valorem taxes in
the amount of P5,792,479,816.24 inclusive of
increments.

CONTRARY TO LAW.

Manila for Marikina City, Philippines, November

19, 1998.

On December 3, 1998, respondents filed an

Urgent Opposition to Issuance of Warrants of
Arrest.[19] They insist that: (1) Neither law nor
evidence justified the filing of the
Informations;[20] (2) there was before the New
DOJ Panel thousands of documents submitted
by the Commissioner of Internal Revenue which
negated unequivocally the factual basis of the
BIR complaint;[21] (3) there was no evidence of
probable cause before the court;[22] (4) the New
DOJ Panel should, have acted first on their
Motion to Dismiss dated October 14, 1993 and
supplemented on July 28, 1998, before
proceeding with the preliminary
investigation.[23]

In addition, respondents argued that the filing

of the Informations was without the approval of
the Commissioner of Internal Revenue, a fatal
defect, per Section 220, of the National Internal
Revenue Code of 1997.[24]

On December 10, 1998, the New DOJ Panel

countered by filing a Manifestation with Motion
for the Immediate Issuance of Warrants of
Arrest.

On December 18, 1998, a Manifestation and

Motion[25] was filed before the MeTC by
officers[26] of the Litigation and Prosecution
Division of the BIR, verified by then incumbent
BIR Commissioner Beethoven L. Rualo, praying
for the withdrawal of the Informations, stating:

The legal officers of the Bureau of Internal

Revenue, particularly the Chief, Litigation &
Prosecution Division and the Assistant Chief for
Prosecution, conducted a reevaluation of the
criminal action subject of the cases under
consideration on the basis of a recommendation
contained in the memorandum report dated
November 11, 1998 of a panel of hearing officers
of the Appellate Division duly approved by the
Commissioner of Internal Revenue in
connection with the administrative hearing of
the protested assessment issued by the Bureau
of Internal Revenue against Fortune Tobacco
Corporation for taxable year 1992, certified true
copy of the memorandum report is attached as
Annex A and is an integral part of this
manifestation and motion.

The aforesaid recommendation states:

1. x x x x x x x x x

2. That the Litigation and Prosecution Division,

Legal Service, this Bureau, be directed to
conduct a thorough study whether there is still
wisdom of proceeding with the criminal
complaint.

As a result, the aforementioned officials of the

Bureau have recommended the
deinstitutionalization or withdrawal of the
criminal complaint filed by then Commissioner
Liwayway Vinzons-Chato, a certified true copy
of the memorandum recommendation is
attached hereto as Annex B and is an integral
part of this Manifestation and Motion.

This memorandum recommendation has been

approved by the Commissioner of Internal
Revenue.

On January 15, 1999, MeTC Presiding Judge

Alex E. Ruiz ordered the filing of parties
memoranda.

On March 22, 1999, Judge Ruiz issued an

Order[27] dismissing the criminal cases. Citing
the provisions of Section 220 of the Tax Reform
Act of 1997, Republic Act No. 8424, the trial
court ruled:
The Court agrees with the Bureau of Internal
Revenue that in view of the aforecited Section of
the Tax Reform Act of 1997, a substantive law
and the fact that it is evident that the
Commissioner of Internal Revenue has not
approved the filing of the instant cases, this
Court, thus, has no other recourse but to obey
the law and dismiss the cases at bar.

xxx

According to the Memorandum dated February

11, 1999 filed by the Bureau of Internal
Revenue in connection with its Manifestation
and Motion, the Bureau of Internal Revenue in
fact conducted several hearings on the tax
liability of the accused relative to the protest
filed by Fortune Tobacco Corporation regarding
its tax liabilities connected with the filing of the
instant cases against Lucio C. Tan et al., and
that thereafter the Bureau of Internal Revenue
found no fraud committed by the Fortune
Tobacco Corporation and, that, therefore, there
is no legal justification to further pursue the
three tax evasion cases against Lucio C. Tan, et
al.

This finding of non-fraud was approved by the

Commissioner of Internal Revenue.

Again, in view of the Bureau of Internal

Revenues finding that Fortune Tobacco
Corporation has not committed any tax
violation relative to these cases now before this
Court by the panel of state prosecutors, this
Court, xxx has, therefore, no other recourse but
to dismiss these cases also for lack of probable
cause as found by the Bureau of Internal
Revenue itself.[28]

On April 7, 1999, one day before the lapse of the

15-day period to file a Motion for
Reconsideration, the New DOJ Panel filed its
Motion for Reconsideration.

On May 17, 1999,[29] the motion for

reconsideration was denied by the MeTC. A copy
of the order denying reconsideration was
received by the New DOJ Panel on MAY 18,
1999.

PROCEEDINGS BEFORE THE RTC

On July 14, 1999, the New Panel filed a Petition

for Certiorari before the Regional Trial Court of
Marikina City, Branch 273 (RTC-Marikina),
seeking to nullify the MeTC Orders dated March
22, 1999 and May 17, 1999, alleging grave
abuse of discretion on the part of the court a
quo.

On August 25, 1999, RTC-Marikina Presiding

Judge Olga Palanca Enriquez dismissed the
petition, for being filed out of time, thus:

After examining the petition, the Court finds

that the petition was filed eleven (11) days late,
in violation of Section 4, Rule 65 of the 1997
Rules of Criminal Procedure, as amended by the
resolution of the Supreme Court En Banc dated
July 21, 1998, Bar Matter No. 803, which
provides as follows:

xxx

The Panel of Prosecutors of the Department of

Justice (DOJ Panel) admittedly received a copy
of the assailed Order dated March 22, 1999 on
March 24, 1999 and filed a Motion for
Reconsideration on April 7, 1999. Thus, a
period of fourteen (14) days had elapsed.

According to Section 4 of Rule 65, as amended,

this period of fourteen (14) days should be
deducted from the total period of sixty (60) days
prescribed therein. Hence, the DOJ Panel had
the remaining period of forty-six (46) days
within which to file the petition for certiorari.
The DOJ Panel received a copy of the Order
dated May 17, 1999 which denied its Motion for
Reconsideration on May 18, 1999. It had until
July 3, 1999 within which to file the petition for
certiorari, and not July 17, 1999, as it claims.
Apparently, the DOJ Panel overlooked the
aforequoted amendment to Section 4 of Rule 65,
thus arriving at the wrong premise that it had
the total period of sixty (60) days from notice of
denial of the motion for reconsideration, and
not the remaining period only, within which to
file the petition for certiorari.

It was only on July 14, 1999, eleven days after

the lapse of its last day within which to file the
petition for certiorari that the DOJ Panel filed
the present petition.

Clearly, therefore, the present petition was filed

eleven (11) days late.

WHEREFORE, the instant petition for certiorari

is hereby DENIED DUE COURSE and is thus
DISMISSED.

SO ORDERED.

On August 27, 1999, the New Panel filed a

Motion for Reconsideration. On September 2,
1999, a Supplement to the Motion for
Reconsideration was also filed.

Respondents filed their Comment to the Motion

for Reconsideration. Oral arguments were
conducted and Memoranda thereafter
submitted.

On October 13, 1999, the Motion for

Reconsideration was denied.

On October 18, 1999, the DOJ endorsed the

case to the Office of the Solicitor General (OSG).

PROCEEDINGS BEFORE THE COURT OF

APPEALS

On October 20, 1999, the OSG appealed the

RTC-Marikina Orders dated August 28, 1999
and October 13, 1999, to the Court of Appeals.

On December 13, 1999 the Court of Appeals

ordered the parties to file Memoranda.
On August 29, 2000, the Court of Appeals
dismissed the petition for lack of merit. A copy
of the Court of Appeals decision was received by
the OSG on September 6, 2000.

THE PRESENT PETITION

The People of the Philippines, through the Office

of the Solicitor General, filed this Petition for
Review on Certiorari, as earlier stated,
submitting the following assignment of errors:

I. THE COURT A QUO SERIOUSLY ERRED

WHEN IT AFFIRMED THE MeTCS DISMISSAL
OF THE CRIMINAL CASES AGAINST
RESPONDENTS WITHOUT THEIR HAVING
BEEN PLACED FIRST UNDER THE CUSTODY
OF THE LAW.

II. THE COURT A QUO GROSSLY ERRED

WHEN IT SANCTIONED THE MeTCS ACT OF
GIVING THE BIR, A MERE WITNESS TO THE
CASE, THE PREROGATIVE TO CONTROL AND
CAUSE THE DISMISSAL OF THE CASES, THE
CRIMINAL ASPECTS OF WHICH THE BIR HAD
ITSELF [E]NDORSED TO THE DOJ FOR
PROSECUTION.

III. THE COURT A QUO SERIOUSLY ERRED IN

MAKING THE TAX REFORM ACT OF 1997
RETROACTIVELY APPLY TO CASES
PREVIOUSLY ENDORSED TO THE DOJ BY
THE BIR LONG BEFORE THE EFFECTIVITY OF
SAID LAW.

IV. THE COURT A QUO GROSSLY ERRED IN

SANCTIONING THE MeTCS ACT OF
DELEGATING THE TASK OF DETERMINING
PROBABLE CAUSE TO THE BIR, WHICH WAS
BUT A WITNESS.

V. THE COURT A QUO ERRED WHEN IT

IGNORED THE SERIOUS INFIRMITIES
COMMITTED IN THE PROCEEDINGS BELOW
WHICH SHOULD HAVE WARRANTED A
MEASURE OF LIBERALITY TO PAVE THE WAY
FOR A THOROUGH DETERMINATION OF THE
MERITS OF THE CASES AGAINST THE
RESPONDENTS.[30]

ISSUES

A reading of the parties arguments shows that

the resolution of the numerous issues
presented hinges upon the issue of whether or
not the Metropolitan Trial Court (MeTC) erred in
dismissing the criminal cases before it, on the
basis of the Manifestation and Motion of the BIR
to withdraw the said cases.

First Issue: TIMELINESS

After the MeTC dismissed the criminal cases on

March 22, 1999, which Order was received by
the New DOJ Panel on March 24, 1999, it filed
a Motion for Reconsideration on May 7, 1999,
one day before the lapse of the 15-day period to
file the Motion for Reconsideration.[31]

The Motion for Reconsideration was thereafter

denied on May 17, 1999 and the denial was
received by petitioner on May 18, 1999.

Instead of filing an appeal, petitioner filed before

RTC-Marikina a Petition for Certiorari, on July
14, 1999.

Respondents argue that: (1) This was the wrong

remedy; and (2) even assuming this was the
correct mode, the 60-day period to file the
petition had also already lapsed.

This Court has allowed resort to the

extraordinary remedy of certiorari although the
remedy appeal was available. In Metropolitan
Manila Development Authority v. JANCOM
Environmental Corporation,[32] citing Ruiz, Jr.
v. Court of Appeals,[33] this Court stated the
significant exceptions to be, as follows:

xxx when public welfare and the advancement

of public policy dictate; or when the broader
interests of justice so require, or when the writs
issued are nullor when the questioned order
amounts to an oppressive exercise of judicial
authority.

There can be no question as to the public

interest involved in this case.

For the case of the prosecution, if proved, would

mean that a fraudulent scheme to evade taxes
has been resorted to by respondents, and the
amount involved, at the time of the investigation,
is nearly P20 billion pesos.

The principle is well established that taxes are

the lifeblood of government and every citizen is
duty bound to pay taxes and to pay taxes in the
right amount.

Technicalities, therefore, will have to yield to the

paramount interest of the nation to enforce its
laws against tax evasion, especially where the
amounts involved are huge. As aptly put by
petitioner in its Consolidated Reply, procedural
rules should not be applied with rigidity
especially when to do so would result in
manifest failure or miscarriage of justice.

Furthermore, the petition for certiorari filed by

the prosecution is not late. For the provision
under which it can be considered late was
subsequently amended and under the amended
rules the petition is on time. Said amendment
should be retroactively applied since it is a
procedural rule and it is also remedial in
character , i.e., it is intended precisely to correct
the unjust effect of the amended rule. As
correctly argued by the petitioner, also in its
Consolidated Reply:

The eleven (11)-day delay in the filing of the

petition for certiorari before the Regional Trial
Court was brought about y the DOJ New Panels
failure to consider the period it had utilized in
filing its Motion for Reconsideration. It should
be recalled that when the 1997 Rules of Civil
Procedure first took effect, the period for filing a
petition for certiorari was originally set at sixty
(60) days from the time the questioned order or
the order denying the motion for
reconsideration was received. Section 4, Rule
65 of the 1997 Rules of Civil Procedure was
originally couched as follows:

Sec. 4 Where petition filed. - The petition may

be filed not later than sixty (60) days from notice
of the judgment, order or resolution sought to
assailed in the Supreme Court or, if it relates to
the acts or omissions of a lower court or of a
corporation, board, officer or person, in the
Regional Trial Court exercising jurisdiction over
the territorial area as defined by the Supreme
Court. It may also be filed in the Court of
Appeals whether or not the same is in aid of its
jurisdiction. If it involves the acts or omission of
a quasi-judicial agency and unless otherwise
provided by law or these Rules, the petition
shall be filed in and cognizable by the Court of
Appeals.

Subsequently, the aforequoted provision was

amended by Bar Matter No. 803 dated July 21,
1998. Under this amendment, the period used
up in filing a motion for reconsideration shall be
deducted from the sixty (60)-day period for filing
a petition for certiorari.

Recently, however, Section 4, Rule 65 of the

1997 Rules of Civil Procedure was again revised,
and the present policy on the matter, effective
September 1, 2000, is that [t]he petition shall
be filed not later than sixty (60) days from notice
of the judgment, order or resolution. In case a
motion for reconsideration or new trial is timely
filed, whether such motion is required or not,
the sixty (60) day period shall be counted from
notice of the denial of said motion.(SC. A.M. 00-
2-03)

Private respondents, nevertheless, contend that

such amendment may only apply to cases filed
after, or at least pending as of, September 1,
2000. Private respondents sorely missed the
point. The recent amendment to Section 4, Rule
65 of the 1997 Rules of Civil Procedure clearly
shows that the Honorable Court had realized
that the original prescribed period is inadequate;
accordingly, to give the aggrieved party
sufficient time, a new 60-day period is given
from the time the order denying a motion for
reconsideration is received, within which to file
a petition for certiorari. In the light of this recent
amendment, therefore, there is more reason to
relax the rigid application of the old rule and
excuse the procedural lapse in the case below.

This Court has consistently held that rules of

procedure should not be applied in a very
technical sense, for they are adopted to help
secure, not override, substantial justice.[34]
Besides, if the issuances involved are a nullity,
the same can be assailed at any time.

After a thorough review of the orders of the

MeTC dismissing the criminal cases, this Court
finds, that said orders were null and void and
were a result of a gravely injudicious exercise of
judicial authority.

Second Issue: DID THE MeTC GRAVELY

ABUSE ITS
DISCRETION OR EXCEED ITS JURISDICTION
IN DISMISSING THE CRIMINAL CASES?

Petitioner rightly disputes the dismissal of the

cases. In the same case of Martinez v. Court of
Appeals, et al.,[35] this Court, citing the case of
Crespo v. Mogul, held:

The rule therefore in this jurisdiction is that

once a complaint or information is filed in Court
any disposition of the case as its dismissal or
the conviction or acquittal of the accused rests
in the sound discretion of the Court. Although
the fiscal retains the direction and control of the
prosecution of criminal cases even while the
case is already in Court he cannot impose his
opinion on the trial court. The Court is the best
and sole judge on what to do with the case
before it. The determination of the case is within
its exclusive jurisdiction and competence. A
motion to dismiss the case filed by the fiscal
should be addressed to the Court who has the
option to grant or deny the same. It does not
matter if this is done before or after the
arraignment of the accused or that the motion
was filed after a reinvestigation or upon
instructions of the Secretary of Justice who
reviewed the records of the investigation.

In another case,[36] this Court affirmed the

power conferred upon trial courts, reiterating:

This argument is untenable. The court could

have denied the public prosecutor's motion for
the withdrawal of the information against
petitioner, and there would have been no
question of its power to do so. If it could do that,
so could it reconsider what it had ordered.
Every court has the power and indeed the duty
to review and amend or reverse its findings and
conclusions when its attention is timely called
to any error or defect therein.

Jurisprudence mandates that the grant of a

motion to dismiss must be based upon the
judges own personal conviction that there was
no case against the accused.[37] The trial judge
must himself be convinced that there was
indeed no sufficient evidence against the
accused, and this conclusion can be arrived at
only after an assessment of the evidence in the
possession of the prosecution. What was
imperatively required was the trial judge's own
assessment of such evidence, it not being
sufficient for the valid and proper exercise of
judicial discretion merely to accept the
prosecution's word for its supposed
insufficiency.[38]

In the present case, the record clearly shows

that the MeTC failed to discharge its duty to
judiciously and independently rule upon the
motion to withdraw.

In the Order dated March 22, 1999, the trial

court stated:

The Court agrees with the Bureau of Internal

Revenue that in view of the aforecited Section of
the Tax Reform Act of 1997, a substantive law,
and the fact that it is evident that the
Commissioner of Internal Revenue has not
approved the filing of the instant cases, this
Court, thus, has no other recourse but to obey
the law and dismiss the cases at bar.

Moreover, pursuant to the ruling of the

Supreme Court in the case of Commissioner of
Internal Revenue et al. vs. The Honorable Court
of Appeals, et al., G.R. No. 119322, promulgated
June 4, 1996 (257 SCRA 200, 225) said Court
held that:

xxx

According to the Memorandum dated February

11, 1999 filed by the Bureau of Internal
Revenue in connection with its Manifestation
and Motion, the Bureau of Internal Revenue in
fact conducted several hearings on the tax
liability of the accused relative to the protest
filed by Fortune Tobacco Corporation regarding
its tax liabilities connected with the filing of the
instant cases against Lucio C. Tan, et al., and
that thereafter the Bureau of Internal Revenue
found no fraud committed by the Fortune
Tobacco Corporation and, that, therefore, there
is no legal justification to further pursue the
three tax evasion cases against Lucio C. Tan, et
al.

This finding of non-fraud was approved by the

Commissioner of Internal Revenue.

Again, in view of the Bureau of Internal

Revenues finding that Fortune Tobacco
Corporation has not committed any tax
violation relative to these cases now before this
Court by the panel of state prosecutors, this
Court, pursuant to the above-mentioned ruling
of the Supreme Court, that there must first be
a finding of tax fraud by the Bureau of Internal
Revenue before a criminal case may be filed
against a taxpayer has, therefore, no other
recourse but to dismiss these cases also for lack
of probable cause as found by the Bureau of
Internal Revenue itself.

xxx

As the Court finds it, the government, that is to

say, more accurately, the People, by statute has
ordained the government prosecutors not to
come to Court and file a criminal case involving
violations of the National Internal Revenue Code
without first getting the nod and approval of the
Commissioner of Internal Revenue. No such
Commissioner of Internal Revenue certification
has been submitted to this Court against any of
the accused in these cases. As to such a
primordial statutory requirement, this Court
believes that the statute rather than the Rules
of Court, applies and governs.

Accordingly, these cases, namely, Criminal

Cases Nos. 98-38181 to 98-38189, are hereby
dismissed. No costs.

SO ORDERED.

A reading of the MeTC order thus shows that

the same was basically anchored only on the
Manifestation and Motion of the BIR, praying
for the withdrawal of the complaints.

Contrary to its mandate, the trial court

abandoned its duty to evaluate the submissions
before it. By relying on the manifestation and
motion of the BIR alone, it ignored the positive
findings of the panel of state prosecutors, which
had, themselves, painstakingly conducted the
preliminary investigation on the subject
criminal liability of the respondents.

Furthermore, it is not quite correct that, as

respondents claim, BIR Commissioner
Liwayway Vinzons-Chato referred the matter to
the Department of Justice for preliminary
investigation only. The three letters of
referral/complaints she wrote and filed with the
Department of Justice and the Office of the City
Prosecutor, dated September 6, 1993, October
22, 1993 and December 21, 1993, all stated I
hereby recommend the prosecution of the
following for violations of the provisions of the
National Internal Revenue Code, as amended,
to wit: xxx[39]

Hence, the same clearly constituted approval of

the filing of the cases in court.

The fact, moreover, is that the cases had been

filed in court and were already under the courts
control.

By merely echoing the findings of the BIR, the

MeTC abdicated its duty as a court of law, and
subjugated itself to the administrative agency.
In failing to make an independent finding of the
merits of the case and merely anchoring the
dismissal on the position of the BIR, the trial
court relinquished the discretion it was obliged
to exercise, in violation of the ruling in Crespo
v. Mogul.[40]

For this reason, this Court is constrained to

annul and set aside the Orders of the MeTC.

WHEREFORE, the Petition is GRANTED and

the Decision of the Court of Appeals dated
August 29, 2000 in CA-G.R. SP No. 56077 and
the Orders of the Regional Trial Court of
Marikina City dated August 25, 1999 and
October 13, 1999 in SCA Case No. 95-340-MK
are hereby REVERSED, and the Orders dated
March 22, 1999 and May 17, 1999 of the
Metropolitan Trial Court (MeTC), Branch 75,
Marikina City, dismissing the criminal
informations filed by the DOJ Panel against
herein respondents, and denying the DOJ
Panels Motion for Reconsideration, are hereby
declared NULL and VOID and SET ASIDE, and
the criminal informations are reinstated.

Criminal Cases Nos. 98-38181 to 98-38189 are

hereby REMANDED to the Metropolitan Trial
Court (MeTC), Branch 75, Marikina City,[41] for
appropriate proceedings. Costs de oficio.
SO ORDERED.

Davide, Jr., C.J., Puno, Panganiban, Ynares-

Santiago, Sandoval-Gutierrez, Austria-Martinez,
Corona, Carpio-Morales, Callejo, Sr., and Tinga,
JJ., concur.
Vitug, and Quisumbing, JJ., in the result.
Carpio, J., no part. As Presidential Legal
Counsel, I made some recommendations on this
and other cases.

CIR v Lednicky | GR Nos. L-18169, L-18262,

L-21434 | 31 July 1964

G.R. Nos. L-18169, L-18262 & L-21434

July 31, 1964

COMMISSIONER OF INTERNAL REVENUES,

petitioner,
vs.
V.E. LEDNICKY and MARIA VALERO
LEDNICKY, respondents.

Office of the Solicitor General for petitioner.

Ozaeta, Gibbs and Ozaeta for respondents.

REYES, J.B.L., J.:

The above-captioned cases were elevated to this

Court under separate petitions by the
Commissioner for review of the corresponding
decisions of the Court of Tax Appeals. Since
these cases involve the same parties and issues
akin to each case presented, they are herein
decided jointly.

The respondents, V. E. Lednicky and Maria

Valero Lednicky, are husband and wife,
respectively, both American citizens residing in
the Philippines, and have derived all their
income from Philippine sources for the taxable
years in question.

In compliance with local law, the aforesaid

respondents, on 27 March 1957, filed their
income tax return for 1956, reporting therein a
gross income of P1,017,287. 65 and a net
income of P733,809.44 on which the amount of
P317,395.4 was assessed after deducting
P4,805.59 as withholding tax. Pursuant to the
petitioner's assessment notice, the respondents
paid the total amount of P326,247.41, inclusive
of the withheld taxes, on 15 April 1957.

On 17 March 1959, the respondents Lednickys

filed an amended income tax return for 1956.
The amendment consists in a claimed
deduction of P205,939.24 paid in 1956 to the
United States government as federal income tax
for 1956. Simultaneously with the filing of the
amended return, the respondents requested the
refund of P112,437.90.

When the petitioner Commissioner of Internal

Revenue failed to answer the claim for refund,
the respondents filed their petition with the Tax
Court on 11 April 1959 as CTA Case No. 646,
which is now G. R. No. L-18286 in the Supreme
Court.

G. R. No. L-18169 (formerly CTA Case No. 570)

is also a claim for refund in the amount of
P150,269.00, as alleged overpaid income tax for
1955, the facts of which are as follows:

On 28 February 1956, the same respondents-

spouses filed their domestic income tax return
for 1955, reporting a gross income of
P1,771,124.63 and a net income of
P1,052,550.67. On 19 April 1956, they filed an
amended income tax return, the amendment
upon the original being a lesser net income of
P1,012,554.51, and, on the basis of this
amended return, they paid P570,252.00,
inclusive of withholding taxes. After audit, the
petitioner determined a deficiency of
P16,116.00, which amount, the respondents
paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with

the U.S. Internal Revenue Agent in Manila their
federal income tax return for the years 1947,
1951, 1952, 1953, and 1954 on income from
Philippine sources on a cash basis. Payment of
these federal income taxes, including penalties
and delinquency interest in the amount of
P264,588.82, were made in 1955 to the U.S.
Director of Internal Revenue, Baltimore,
Maryland, through the National City Bank of
New York, Manila Branch. Exchange and bank
charges in remitting payment totaled P4,143.91.

Wherefore, the parties respectfully pray that the

foregoing stipulation of facts be admitted and
approved by this Honorable Court, without
prejudice to the parties adducing other evidence
to prove their case not covered by this
stipulation of facts. 1äwphï1.ñët

On 11 August 1958, the said respondents

amended their Philippine income tax return for
1955 to include the following deductions:

U.S. Federal income taxes P471,867.32

Interest accrued up to May 15, 1955 40,333.92
Exchange and bank charges 4,143.91
Total
P516,345.15
and therewith filed a claim for refund of the sum
of P166,384.00, which was later reduced to
P150,269.00.

The respondents Lednicky brought suit in the

Tax Court, which was docketed therein as CTA
Case No. 570.

In G. R. No. 21434 (CTA Case No. 783), the facts

are similar, but refer to respondents Lednickys'
income tax return for 1957, filed on 28
February 1958, and for which respondents paid
a total sum of P196,799.65. In 1959, they filed
an amended return for 1957, claiming
deduction of P190,755.80, representing taxes
paid to the U.S. Government on income derived
wholly from Philippine sources. On the strength
thereof, respondents seek refund of P90 520.75
as overpayment. The Tax Court again decided
for respondents.

The common issue in all three cases, and one

that is of first impression in this jurisdiction, is
whether a citizen of the United States residing
in the Philippines, who derives income wholly
from sources within the Republic of the
Philippines, may deduct from his gross income
the income taxes he has paid to the United
States government for the taxable year on the
strength of section 30 (C-1) of the Philippine
Internal Revenue Code, reading as follows:

SEC. 30. Deduction from gross income. — In

computing net income there shall be allowed as
deductions —

(a) ...

(b) ...

(c) Taxes:

(1) In general. — Taxes paid or accrued within

the taxable year, except —

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes

imposed by the authority of any foreign country;
but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return
his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to
credit for foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a

kind tending to increase the value of the
property assessed. (Emphasis supplied)

The Tax Court held that they may be deducted

because of the undenied fact that the
respondent spouses did not "signify" in their
income tax return a desire to avail themselves
of the benefits of paragraph 3 (B) of the
subsection, which reads:

Par. (c) (3) Credits against tax for taxes of

foreign countries. — If the taxpayer signifies in
his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall
be credited with —

(A) ...;

(B) Alien resident of the Philippines. — In the

case of an alien resident of the Philippines, the
amount of any such taxes paid or accrued
during the taxable year to any foreign country,
if the foreign country of which such alien
resident is a citizen or subject, in imposing such
taxes, allows a similar credit to citizens of the
Philippines residing in such country;

It is well to note that the tax credit so authorized

is limited under paragraph 4 (A and B) of the
same subsection, in the following terms:

Par. (c) (4) Limitation on credit. — The amount

of the credit taken under this section shall be
subject to each of the following limitations:

(A) The amount of the credit in respect to the tax

paid or accrued to any country shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer's net
income from sources within such country
taxable under this Title bears to his entire net
income for the same taxable year; and

(B) The total amount of the credit shall not

exceed the same proportion of the tax against
which such credit is taken, which the taxpayer's
net income from sources without the
Philippines taxable under this Title bears to his
entire net income for the same taxable year.

We agree with appellant Commissioner that the

Construction and wording of Section 30 (c) (1)
(B) of the Internal Revenue Act shows the law's
intent that the right to deduct income taxes
paid to foreign government from the taxpayer's
gross income is given only as an alternative or
substitute to his right to claim a tax credit for
such foreign income taxes under section 30 (c)
(3) and (4); so that unless the alien resident has
a right to claim such tax credit if he so chooses,
he is precluded from deducting the foreign
income taxes from his gross income. For it is
obvious that in prescribing that such deduction
shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have
to any extent the benefits of paragraph (3)
(relating to credits for taxes paid to foreign
countries), the statute assumes that the
taxpayer in question also may signify his desire
to claim a tax credit and waive the deduction;
otherwise, the foreign taxes would always be
deductible, and their mention in the list of non-
deductible items in Section 30(c) might as well
have been omitted, or at least expressly limited
to taxes on income from sources outside the
Philippine Islands.

Had the law intended that foreign income taxes

could be deducted from gross income in any
event, regardless of the taxpayer's right to claim
a tax credit, it is the latter right that should be
conditioned upon the taxpayer's waiving the
deduction; in which Case the right to reduction
under subsection (c-1-B) would have been made
absolute or unconditional (by omitting foreign
taxes from the enumeration of non-deductions),
while the right to a tax credit under subsection
(c-3) would have been expressly conditioned
upon the taxpayer's not claiming any deduction
under subsection (c-1). In other words, if the
law had been intended to operate as contended
by the respondent taxpayers and by the Court
of Tax Appeals section 30 (subsection (c-1)
instead of providing as at present:

SEC. 30. Deduction from gross income. — In

computing net income there shall be allowed as
deductions —

(a) ...

(b) ...

(c) Taxes:
(1) In general. — Taxes paid or accrued within
the taxable year, except —

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes

imposed by the authority of any foreign country;
but this deduction shall be allowed in the case
of a taxpayer who does not signify in his return
his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to
credit for taxes of foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a

kind tending to increase the value of the
property assessed.

would have merely provided:

SEC. 30. Decision from grow income. — In

computing net income there shall be allowed as
deductions:

(a) ...

(b) ...

(c) Taxes paid or accrued within the taxable year,

EXCEPT —

(A) The income tax provided for in this Title;

(B) Omitted or else worded as follows:

Income, war profits and excess profits taxes

imposed by authority of any foreign country on
income earned within the Philippines if the
taxpayer does not claim the benefits under
paragraph 3 of this subsection;

(C) Estate, inheritance or gift taxes;

(D) Taxes assessed against local benefits of a

kind tending to increase the value of the
property assessed.
while subsection (c-3) would have been made
conditional in the following or equivalent terms:

(3) Credits against tax for taxes of foreign

countries. — If the taxpayer has not deducted
such taxes from his gross income but signifies
in his return his desire to have the benefits of
this paragraph, the tax imposed by Title shall
be credited with ... (etc.).

Petitioners admit in their brief that the purpose

of the law is to prevent the taxpayer from
claiming twice the benefits of his payment of
foreign taxes, by deduction from gross income
(subs. c-1) and by tax credit (subs. c-3). This
danger of double credit certainly can not exist if
the taxpayer can not claim benefit under either
of these headings at his option, so that he must
be entitled to a tax credit (respondent taxpayers
admittedly are not so entitled because all their
income is derived from Philippine sources), or
the option to deduct from gross income
disappears altogether.

Much stress is laid on the thesis that if the

respondent taxpayers are not allowed to deduct
the income taxes they are required to pay to the
government of the United States in their return
for Philippine income tax, they would be
subjected to double taxation. What respondents
fail to observe is that double taxation becomes
obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental
entity (cf. Manila vs. Interisland Gas Service, 52
Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89
Phil. 357). In the present case, while the
taxpayers would have to pay two taxes on the
same income, the Philippine government only
receives the proceeds of one tax. As between the
Philippines, where the income was earned and
where the taxpayer is domiciled, and the United
States, where that income was not earned and
where the taxpayer did not reside, it is
indisputable that justice and equity demand
that the tax on the income should accrue to the
benefit of the Philippines. Any relief from the
alleged double taxation should come from the
United States, and not from the Philippines,
since the former's right to burden the taxpayer
is solely predicated on his citizenship, without
contributing to the production of the wealth
that is being taxed.

Aside from not conforming to the fundamental

doctrine of income taxation that the right of a
government to tax income emanates from its
partnership in the production of income, by
providing the protection, resources, incentive,
and proper climate for such production, the
interpretation given by the respondents to the
revenue law provision in question operates, in
its application, to place a resident alien with
only domestic sources of income in an equal, if
not in a better, position than one who has both
domestic and foreign sources of income, a
situation which is manifestly unfair and short
of logic.

Finally, to allow an alien resident to deduct from

his gross income whatever taxes he pays to his
own government amounts to conferring on the
latter the power to reduce the tax income of the
Philippine government simply by increasing the
tax rates on the alien resident. Everytime the
rate of taxation imposed upon an alien resident
is increased by his own government, his
deduction from Philippine taxes would
correspondingly increase, and the proceeds for
the Philippines diminished, thereby
subordinating our own taxes to those levied by
a foreign government. Such a result is
incompatible with the status of the Philippines
as an independent and sovereign state.

IN VIEW OF THE FOREGOING, the decisions of

the Court of Tax Appeals are reversed, and, the
disallowance of the refunds claimed by the
respondents Lednicky is affirmed, with costs
against said respondents-appellees.

Bengzon, C.J., Padilla, Bautista Angelo,

Labrador, Concepcion, Paredes, Regala and
Makalintal, JJ., concur.
CIR v Isabela Cultural Corporation | GR No.
172231 | 12 February 2007

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,
vs.
ISABELA CULTURAL CORPORATION,
Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue

(CIR) assails the September 30, 2005 Decision1
of the Court of Appeals in CA-G.R. SP No. 78426
affirming the February 26, 2003 Decision2 of
the Court of Tax Appeals (CTA) in CTA Case No.
5211, which cancelled and set aside the
Assessment Notices for deficiency income tax
and expanded withholding tax issued by the
Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC,

a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-
1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for
the taxable year 1986.

The deficiency income tax of P333,196.86, arose

from:

(1) The BIR’s disallowance of ICC’s claimed

expense deductions for professional and
security services billed to and paid by ICC in
1986, to wit:

(a) Expenses for the auditing services of SGV &

Co.,3 for the year ending December 31, 1985;4
(b) Expenses for the legal services [inclusive of
retainer fees] of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson for
the years 1984 and 1985.5

(c) Expense for security services of El Tigre

Security & Investigation Agency for the months
of April and May 1986.6

(2) The alleged understatement of ICC’s interest

income on the three promissory notes due from
Realty Investment, Inc.

The deficiency expanded withholding tax of

P4,897.79 (inclusive of interest and surcharge)
was allegedly due to the failure of ICC to
withhold 1% expanded withholding tax on its
claimed P244,890.00 deduction for security
services.7

On March 23, 1990, ICC sought a

reconsideration of the subject assessments. On
February 9, 1995, however, it received a final
notice before seizure demanding payment of the
amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the
petition is premature because the final notice of
assessment cannot be considered as a final
decision appealable to the tax court. This was
reversed by the Court of Appeals holding that a
demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final
decision on the protested assessment and may
therefore be questioned before the CTA. This
conclusion was sustained by this Court on July
1, 2001, in G.R. No. 135210.8 The case was
thus remanded to the CTA for further
proceedings.

On February 26, 2003, the CTA rendered a

decision canceling and setting aside the
assessment notices issued against ICC. It held
that the claimed deductions for professional
and security services were properly claimed by
ICC in 1986 because it was only in the said year
when the bills demanding payment were sent to
ICC. Hence, even if some of these professional
services were rendered to ICC in 1984 or 1985,
it could not declare the same as deduction for
the said years as the amount thereof could not
be determined at that time.

The CTA also held that ICC did not understate

its interest income on the subject promissory
notes. It found that it was the BIR which made
an overstatement of said income when it
compounded the interest income receivable by
ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a
stipulation in the contract providing for a
compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that
would justify the application of compounded
interest.

Likewise, the CTA found that ICC in fact

withheld 1% expanded withholding tax on its
claimed deduction for security services as
shown by the various payment orders and
confirmation receipts it presented as evidence.
The dispositive portion of the CTA’s Decision,
reads:

WHEREFORE, in view of all the foregoing,

Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-
1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for
the taxable year 1986, are hereby CANCELLED
and SET ASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the

Court of Appeals, which affirmed the CTA
decision,10 holding that although the
professional services (legal and auditing
services) were rendered to ICC in 1984 and
1985, the cost of the services was not yet
determinable at that time, hence, it could be
considered as deductible expenses only in 1986
when ICC received the billing statements for
said services. It further ruled that ICC did not
understate its interest income from the
promissory notes of Realty Investment, Inc.,
and that ICC properly withheld and remitted
taxes on the payments for security services for
the taxable year 1986.

Hence, petitioner, through the Office of the

Solicitor General, filed the instant petition
contending that since ICC is using the accrual
method of accounting, the expenses for the
professional services that accrued in 1984 and
1985, should have been declared as deductions
from income during the said years and the
failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986.
As to the alleged deficiency interest income and
failure to withhold expanded withholding tax
assessment, petitioner invoked the
presumption that the assessment notices
issued by the BIR are valid.

The issue for resolution is whether the Court of

Appeals correctly: (1) sustained the deduction
of the expenses for professional and security
services from ICC’s gross income; and (2) held
that ICC did not understate its interest income
from the promissory notes of Realty Investment,
Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security
services.

The requisites for the deductibility of ordinary

and necessary trade, business, or professional
expenses, like expenses paid for legal and
auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been
paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other
pertinent papers.11

The requisite that it must have been paid or

incurred during the taxable year is further
qualified by Section 45 of the National Internal
Revenue Code (NIRC) which states that: "[t]he
deduction provided for in this Title shall be
taken for the taxable year in which ‘paid or
accrued’ or ‘paid or incurred’, dependent upon
the method of accounting upon the basis of
which the net income is computed x x x".

Accounting methods for tax purposes comprise

a set of rules for determining when and how to
report income and deductions.12 In the instant
case, the accounting method used by ICC is the
accrual method.

Revenue Audit Memorandum Order No. 1-2000,

provides that under the accrual method of
accounting, expenses not being claimed as
deductions by a taxpayer in the current year
when they are incurred cannot be claimed as
deduction from income for the succeeding year.
Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable
deductions for the current year but failed to do
so cannot deduct the same for the next year.13

The accrual method relies upon the taxpayer’s

right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment,
which characterizes the cash method of
accounting. Amounts of income accrue where
the right to receive them become fixed, where
there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to
indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the

determinative question is, when do the facts
present themselves in such a manner that the
taxpayer must recognize income or expense?
The accrual of income and expense is permitted
when the all-events test has been met. This test
requires: (1) fixing of a right to income or
liability to pay; and (2) the availability of the
reasonable accurate determination of such
income or liability.
The all-events test requires the right to income
or liability be fixed, and the amount of such
income or liability be determined with
reasonable accuracy. However, the test does not
demand that the amount of income or liability
be known absolutely, only that a taxpayer has
at his disposal the information necessary to
compute the amount with reasonable accuracy.
The all-events test is satisfied where
computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a
computation may be unknown, but is not as
much as unknowable, within the taxable year.
The amount of liability does not have to be
determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less
than an exact or completely accurate
amount.[15]

The propriety of an accrual must be judged by

the facts that a taxpayer knew, or could
reasonably be expected to have known, at the
closing of its books for the taxable year.[16]
Accrual method of accounting presents largely
a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual
of an item of income or deduction.17

Corollarily, it is a governing principle in taxation

that tax exemptions must be construed in
strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify
the same by the clearest grant of organic or
statute law. An exemption from the common
burden cannot be permitted to exist upon vague
implications. And since a deduction for income
tax purposes partakes of the nature of a tax
exemption, then it must also be strictly
construed.18

In the instant case, the expenses for

professional fees consist of expenses for legal
and auditing services. The expenses for legal
services pertain to the 1984 and 1985 legal and
retainer fees of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, and
for reimbursement of the expenses of said firm
in connection with ICC’s tax problems for the
year 1984. As testified by the Treasurer of ICC,
the firm has been its counsel since the
1960’s.19 From the nature of the claimed
deductions and the span of time during which
the firm was retained, ICC can be expected to
have reasonably known the retainer fees
charged by the firm as well as the compensation
for its legal services. The failure to determine
the exact amount of the expense during the
taxable year when they could have been claimed
as deductions cannot thus be attributed solely
to the delayed billing of these liabilities by the
firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount
of their obligation to the firm, especially so that
it is using the accrual method of accounting.
For another, it could have reasonably
determined the amount of legal and retainer
fees owing to its familiarity with the rates
charged by their long time legal consultant.

As previously stated, the accrual method

presents largely a question of fact and that the
taxpayer bears the burden of establishing the
accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the
firm’s performance of its services in connection
with the 1984 tax problems were completed, or
whether ICC exercised reasonable diligence to
inquire about the amount of its liability, or
whether it does or does not possess the
information necessary to compute the amount
of said liability with reasonable accuracy, are
questions of fact which ICC never established.
It simply relied on the defense of delayed billing
by the firm and the company, which under the
circumstances, is not sufficient to exempt it
from being charged with knowledge of the
reasonable amount of the expenses for legal and
auditing services.

In the same vein, the professional fees of SGV &

Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as
expense deductions in 1986. This is so because
ICC failed to present evidence showing that
even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co.
in the year 1985, it cannot determine the
professional fees which said company would
charge for its services.

ICC thus failed to discharge the burden of

proving that the claimed expense deductions for
the professional services were allowable
deductions for the taxable year 1986. Hence,
per Revenue Audit Memorandum Order No. 1-
2000, they cannot be validly deducted from its
gross income for the said year and were
therefore properly disallowed by the BIR.

As to the expenses for security services, the

records show that these expenses were incurred
by ICC in 198620 and could therefore be
properly claimed as deductions for the said year.

Anent the purported understatement of interest

income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the
CTA and the Court of Appeals that no such
understatement exists and that only simple
interest computation and not a compounded
one should have been applied by the BIR. There
is indeed no stipulation between the latter and
ICC on the application of compounded
interest.21 Under Article 1959 of the Civil Code,
unless there is a stipulation to the contrary,
interest due should not further earn interest.

Likewise, the findings of the CTA and the Court

of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for
security services and remitted the same to the
BIR is supported by payment order and
confirmation receipts.22 Hence, the
Assessment Notice for deficiency expanded
withholding tax was properly cancelled and set
aside.

In sum, Assessment Notice No. FAS-1-86-90-

000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and
set aside but only insofar as the claimed
deductions of ICC for security services. Said
Assessment is valid as to the BIR’s disallowance
of ICC’s expenses for professional services. The
Court of Appeal’s cancellation of Assessment
Notice No. FAS-1-86-90-000681 in the amount
of P4,897.79 for deficiency expanded
withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY

GRANTED. The September 30, 2005 Decision of
the Court of Appeals in CA-G.R. SP No. 78426,
is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680,
which disallowed the expense deduction of
Isabela Cultural Corporation for professional
and security services, is declared valid only
insofar as the expenses for the professional fees
of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is
affirmed in all other respects.

The case is remanded to the BIR for the

computation of Isabela Cultural Corporation’s
liability under Assessment Notice No. FAS-1-
86-90-000680.

SO ORDERED

Fernandez Hermanos, Inc. v CIR | GR Nos.

L-21551, L-21557, L-24972, L-24978 | 30
September 1969

G.R. No. L-21551 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-21557 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
FERNANDEZ HERMANOS, INC., and COURT
OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24972 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE,

petitioner,
vs.
FERNANDEZ HERMANOS INC., and the
COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24978 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL
REVENUE, and HON. ROMAN A. UMALI,
COURT OF TAX APPEALS, respondents.

L-21551:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Arturo A. Alafriz,
Solicitor Alejandro B. Afurong and Special
Attorney Virgilio G. Saldajeno for respondent.

L-21557:

Office of the Solicitor General for petitioner.

Rafael Dinglasan for respondent Fernandez
Hermanos, Inc.

L-24972:

Office of the Solicitor General Antonio P.

Barredo, Assistant Solicitor General Felicisimo
R. Rosete and Special Attorney Virgilio G.
Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez
Hermanos, Inc.
L-24978:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Antonio P.
Barredo, Assistant Solicitor General Antonio G.
Ibarra and Special Attorney Virgilio G.
Saldajeno for respondent.

TEEHANKEE, J.:

These four appears involve two decisions of the

Court of Tax Appeals determining the taxpayer's
income tax liability for the years 1950 to 1954
and for the year 1957. Both the taxpayer and
the Commissioner of Internal Revenue, as
petitioner and respondent in the cases a quo
respectively, appealed from the Tax Court's
decisions, insofar as their respective
contentions on particular tax items were therein
resolved against them. Since the issues raised
are interrelated, the Court resolves the four
appeals in this joint decision.

Cases L-21551 and L-21557

The taxpayer, Fernandez Hermanos, Inc., is a

domestic corporation organized for the principal
purpose of engaging in business as an
"investment company" with main office at
Manila. Upon verification of the taxpayer's
income tax returns for the period in question,
the Commissioner of Internal Revenue assessed
against the taxpayer the sums of P13,414.00,
P119,613.00, P11,698.00, P6,887.00 and
P14,451.00 as alleged deficiency income taxes
for the years 1950, 1951, 1952, 1953 and 1954,
respectively. Said assessments were the result
of alleged discrepancies found upon the
examination and verification of the taxpayer's
income tax returns for the said years,
summarized by the Tax Court in its decision of
June 10, 1963 in CTA Case No. 787, as follows:

1. Losses —
a. Losses in Mati Lumber Co. (1950) P
8,050.00

b. Losses in or bad debts of Palawan Manganese

Mines, Inc. (1951) 353,134.25

c. Losses in Balamban Coal Mines —

1950 8,989.76
1951 27,732.66
d. Losses in Hacienda Dalupiri —

1950 17,418.95
1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56
e. Losses in Hacienda Samal —

1951 8,380.25
1952 7,621.73
2. Excessive depreciation of Houses —

1950 P 8,180.40
1951 8,768.11
1952 18,002.16
1953 13,655.25
1954 29,314.98
3. Taxable increase in net worth —

1950 P 30,050.00
1951 1,382.85
4. Gain realized from sale of real property in
1950 P 11,147.2611

The Tax Court sustained the Commissioner's

disallowances of Item 1, sub-items (b) and (e)
and Item 2 of the above summary, but overruled
the Commissioner's disallowances of all the
remaining items. It therefore modified the
deficiency assessments accordingly, found the
total deficiency income taxes due from the
taxpayer for the years under review to amount
to P123,436.00 instead of P166,063.00 as
originally assessed by the Commissioner, and
rendered the following judgment:
RESUME

1950 P2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501.00
1954 5,863.00
Total
P123,436.00
WHEREFORE, the decision appealed from is
hereby modified, and petitioner is ordered to
pay the sum of P123,436.00 within 30 days
from the date this decision becomes final. If the
said amount, or any part thereof, is not paid
within said period, there shall be added to the
unpaid amount as surcharge of 5%, plus
interest as provided in Section 51 of the
National Internal Revenue Code, as amended.
With costs against petitioner. (Pp. 75, 76,
Taxpayer's Brief as appellant)

Both parties have appealed from the respective

adverse rulings against them in the Tax Court's
decision. Two main issues are raised by the
parties: first, the correctness of the Tax Court's
rulings with respect to the disputed items of
disallowances enumerated in the Tax Court's
summary reproduced above, and second,
whether or not the government's right to collect
the deficiency income taxes in question has
already prescribed.

On the first issue, we will discuss the disputed

items of disallowances seriatim.

1. Re allowances/disallowances of losses.

(a) Allowance of losses in Mati Lumber Co.

(1950). — The Commissioner of Internal
Revenue questions the Tax Court's allowance of
the taxpayer's writing off as worthless securities
in its 1950 return the sum of P8,050.00
representing the cost of shares of stock of Mati
Lumber Co. acquired by the taxpayer on
January 1, 1948, on the ground that the
worthlessness of said stock in the year 1950
had not been clearly established. The
Commissioner contends that although the said
Company was no longer in operation in 1950, it
still had its sawmill and equipment which must
be of considerable value. The Court, however,
found that "the company ceased operations in
1949 when its Manager and owner, a certain Mr.
Rocamora, left for Spain ,where he
subsequently died. When the company eased to
operate, it had no assets, in other words,
completely insolvent. This information as to the
insolvency of the Company — reached (the
taxpayer) in 1950," when it properly claimed the
loss as a deduction in its 1950 tax return,
pursuant to Section 30(d) (4) (b) or Section 30
(e) (3) of the National Internal Revenue Code. 2

We find no reason to disturb this finding of the

Tax Court. There was adequate basis for the
writing off of the stock as worthless securities.
Assuming that the Company would later
somehow realize some proceeds from its
sawmill and equipment, which were still
existing as claimed by the Commissioner, and
that such proceeds would later be distributed to
its stockholders such as the taxpayer, the
amount so received by the taxpayer would then
properly be reportable as income of the taxpayer
in the year it is received.

(b) Disallowance of losses in or bad debts of

Palawan Manganese Mines, Inc. (1951). — The
taxpayer appeals from the Tax Court's
disallowance of its writing off in 1951 as a loss
or bad debt the sum of P353,134.25, which it
had advanced or loaned to Palawan Manganese
Mines, Inc. The Tax Court's findings on this
item follow:

Sometime in 1945, Palawan Manganese Mines,

Inc., the controlling stockholders of which are
also the controlling stockholders of petitioner
corporation, requested financial help from
petitioner to enable it to resume it mining
operations in Coron, Palawan. The request for
financial assistance was readily and
unanimously approved by the Board of
Directors of petitioner, and thereafter a
memorandum agreement was executed on
August 12, 1945, embodying the terms and
conditions under which the financial assistance
was to be extended, the pertinent provisions of
which are as follows:

"WHEREAS, the FIRST PARTY, by virtue of its

resolution adopted on August 10, 1945, has
agreed to extend to the SECOND PARTY the
requested financial help by way of
accommodation advances and for this purpose
has authorized its President, Mr. Ramon J.
Fernandez to cause the release of funds to the
SECOND PARTY.

"WHEREAS, to compensate the FIRST PARTY

for the advances that it has agreed to extend to
the SECOND PARTY, the latter has agreed to
pay to the former fifteen per centum (15%) of its
net profits.

"NOW THEREFORE, for and in consideration of

the above premises, the parties hereto have
agreed and covenanted that in consideration of
the financial help to be extended by the FIRST
PARTY to the SECOND PARTY to enable the
latter to resume its mining operations in Coron,
Palawan, the SECOND PARTY has agreed and
undertaken as it hereby agrees and undertakes
to pay to the FIRST PARTY fifteen per centum
(15%) of its net profits." (Exh. H-2)

Pursuant to the agreement mentioned above,

petitioner gave to Palawan Manganese Mines,
Inc. yearly advances starting from 1945, which
advances amounted to P587,308.07 by the end
of 1951. Despite these advances and the
resumption of operations by Palawan
Manganese Mines, Inc., it continued to suffer
losses. By 1951, petitioner became convinced
that those advances could no longer be
recovered. While it continued to give advances,
it decided to write off as worthless the sum of
P353,134.25. This amount "was arrived at on
the basis of the total of advances made from
1945 to 1949 in the sum of P438,981.39, from
which amount the sum of P85,647.14 had to be
deducted, the latter sum representing its pre-
war assets. (t.s.n., pp. 136-139, Id)." (Page 4,
Memorandum for Petitioner.) Petitioner decided
to maintain the advances given in 1950 and
1951 in the hope that it might be able to recover
the same, as in fact it continued to give
advances up to 1952. From these facts, and as
admitted by petitioner itself, Palawan
Manganese Mines, Inc., was still in operation
when the advances corresponding to the years
1945 to 1949 were written off the books of
petitioner. Under the circumstances, was the
sum of P353,134.25 properly claimed by
petitioner as deduction in its income tax return
for 1951, either as losses or bad debts?

It will be noted that in giving advances to

Palawan Manganese Mine Inc., petitioner did
not expect to be repaid. It is true that some
testimonial evidence was presented to show
that there was some agreement that the
advances would be repaid, but no documentary
evidence was presented to this effect. The
memorandum agreement signed by the parties
appears to be very clear that the consideration
for the advances made by petitioner was 15% of
the net profits of Palawan Manganese Mines,
Inc. In other words, if there were no earnings or
profits, there was no obligation to repay those
advances. It has been held that the voluntary
advances made without expectation of
repayment do not result in deductible losses.
1955 PH Fed. Taxes, Par. 13, 329, citing W. F.
Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR
395; George B. Markle, 17 TC. 1593.

Is the said amount deductible as a bad debt? As

already stated, petitioner gave advances to
Palawan Manganese Mines, Inc., without
expectation of repayment. Petitioner could not
sue for recovery under the memorandum
agreement because the obligation of Palawan
Manganese Mines, Inc. was to pay petitioner 15%
of its net profits, not the advances. No bad debt
could arise where there is no valid and
subsisting debt.
Again, assuming that in this case there was a
valid and subsisting debt and that the debtor
was incapable of paying the debt in 1951, when
petitioner wrote off the advances and deducted
the amount in its return for said year, yet the
debt is not deductible in 1951 as a worthless
debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner
continued to give advances in those years. It
has been held that if the debtor corporation,
although losing money or insolvent, was still
operating at the end of the taxable year, the
debt is not considered worthless and therefore
not deductible. 3

The Tax Court's disallowance of the write-off

was proper. The Solicitor General has rightly
pointed out that the taxpayer has taken an
"ambiguous position " and "has not definitely
taken a stand on whether the amount involved
is claimed as losses or as bad debts but insists
that it is either a loss or a bad debt." 4 We
sustain the government's position that the
advances made by the taxpayer to its 100%
subsidiary, Palawan Manganese Mines, Inc.
amounting to P587,308,07 as of 1951 were
investments and not loans. 5 The evidence on
record shows that the board of directors of the
two companies since August, 1945, were
identical and that the only capital of Palawan
Manganese Mines, Inc. is the amount of
P100,000.00 entered in the taxpayer's balance
sheet as its investment in its subsidiary
company. 6 This fact explains the liberality with
which the taxpayer made such large advances
to the subsidiary, despite the latter's admittedly
poor financial condition.

The taxpayer's contention that its advances

were loans to its subsidiary as against the Tax
Court's finding that under their memorandum
agreement, the taxpayer did not expect to be
repaid, since if the subsidiary had no earnings,
there was no obligation to repay those advances,
becomes immaterial, in the light of our
resolution of the question. The Tax Court
correctly held that the subsidiary company was
still in operation in 1951 and 1952 and the
taxpayer continued to give it advances in those
years, and, therefore, the alleged debt or
investment could not properly be considered
worthless and deductible in 1951, as claimed by
the taxpayer. Furthermore, neither under
Section 30 (d) (2) of our Tax Code providing for
deduction by corporations of losses actually
sustained and charged off during the taxable
year nor under Section 30 (e) (1) thereof
providing for deduction of bad debts actually
ascertained to be worthless and charged off
within the taxable year, can there be a partial
writing off of a loss or bad debt, as was sought
to be done here by the taxpayer. For such losses
or bad debts must be ascertained to be so and
written off during the taxable year, are therefore
deductible in full or not at all, in the absence of
any express provision in the Tax Code
authorizing partial deductions.

The Tax Court held that the taxpayer's loss of

its investment in its subsidiary could not be
deducted for the year 1951, as the subsidiary
was still in operation in 1951 and 1952. The
taxpayer, on the other hand, claims that its
advances were irretrievably lost because of the
staggering losses suffered by its subsidiary in
1951 and that its advances after 1949 were
"only limited to the purpose of salvaging
whatever ore was already available, and for the
purpose of paying the wages of the laborers who
needed help." 7 The correctness of the Tax
Court's ruling in sustaining the disallowance of
the write-off in 1951 of the taxpayer's claimed
losses is borne out by subsequent events shown
in Cases L-24972 and L-24978 involving the
taxpayer's 1957 income tax liability. (Infra,
paragraph 6.) It will there be seen that by 1956,
the obligation of the taxpayer's subsidiary to it
had been reduced from P587,398.97 in 1951 to
P442,885.23 in 1956, and that it was only on
January 1, 1956 that the subsidiary decided to
cease operations. 8
(c) Disallowance of losses in Balamban Coal
Mines (1950 and 1951). — The Court sustains
the Tax Court's disallowance of the sums of
P8,989.76 and P27,732.66 spent by the
taxpayer for the operation of its Balamban coal
mines in Cebu in 1950 and 1951, respectively,
and claimed as losses in the taxpayer's returns
for said years. The Tax Court correctly held that
the losses "are deductible in 1952, when the
mines were abandoned, and not in 1950 and
1951, when they were still in operation." 9 The
taxpayer's claim that these expeditions should
be allowed as losses for the corresponding years
that they were incurred, because it made no
sales of coal during said years, since the
promised road or outlet through which the coal
could be transported from the mines to the
provincial road was not constructed, cannot be
sustained. Some definite event must fix the time
when the loss is sustained, and here it was the
event of actual abandonment of the mines in
1952. The Tax Court held that the losses,
totalling P36,722.42 were properly deductible in
1952, but the appealed judgment does not show
that the taxpayer was credited therefor in the
determination of its tax liability for said year.
This additional deduction of P36,722.42 from
the taxpayer's taxable income in 1952 would
result in the elimination of the deficiency tax
liability for said year in the sum of P3,600.00 as
determined by the Tax Court in the appealed
judgment.

(d) and (e) Allowance of losses in Hacienda

Dalupiri (1950 to 1954) and Hacienda Samal
(1951-1952). — The Tax Court overruled the
Commissioner's disallowance of these items of
losses thus:

Petitioner deducted losses in the operation of its

Hacienda Dalupiri the sums of P17,418.95 in
1950, P29,125.82 in 1951, P26,744.81 in 1952,
P21,932.62 in 1953, and P42,938.56 in 1954.
These deductions were disallowed by
respondent on the ground that the farm was
operated solely for pleasure or as a hobby and
not for profit. This conclusion is based on the
fact that the farm was operated continuously at
a loss.1awphîl.nèt

From the evidence, we are convinced that the

Hacienda Dalupiri was operated by petitioner
for business and not pleasure. It was mainly a
cattle farm, although a few race horses were
also raised. It does not appear that the farm was
used by petitioner for entertainment, social
activities, or other non-business purposes.
Therefore, it is entitled to deduct expenses and
losses in connection with the operation of said
farm. (See 1955 PH Fed. Taxes, Par. 13, 63,
citing G.C.M. 21103, CB 1939-1, p.164)

Section 100 of Revenue Regulations No. 2,

otherwise known as the Income Tax Regulations,
authorizes farmers to determine their gross
income on the basis of inventories. Said
regulations provide:

"If gross income is ascertained by inventories,

no deduction can be made for livestock or
products lost during the year, whether
purchased for resale, produced on the farm, as
such losses will be reflected in the inventory by
reducing the amount of livestock or products on
hand at the close of the year."

Evidently, petitioner determined its income or

losses in the operation of said farm on the basis
of inventories. We quote from the memorandum
of counsel for petitioner:

"The Taxpayer deducted from its income tax

returns for the years from 1950 to 1954
inclusive, the corresponding yearly losses
sustained in the operation of Hacienda Dalupiri,
which losses represent the excess of its yearly
expenditures over the receipts; that is, the
losses represent the difference between the
sales of livestock and the actual cash
disbursements or expenses." (Pages 21-22,
Memorandum for Petitioner.)

As the Hacienda Dalupiri was operated by

petitioner for business and since it sustained
losses in its operation, which losses were
determined by means of inventories authorized
under Section 100 of Revenue Regulations No.
2, it was error for respondent to have disallowed
the deduction of said losses. The same is true
with respect to loss sustained in the operation
of the Hacienda Samal for the years 1951 and
1952. 10

The Commissioner questions that the losses

sustained by the taxpayer were properly based
on the inventory method of accounting. He
concedes, however, "that the regulations
referred to does not specify how the inventories
are to be made. The Tax Court, however, felt
satisfied with the evidence presented by the
taxpayer ... which merely consisted of an alleged
physical count of the number of the livestock in
Hacienda Dalupiri for the years involved." 11
The Tax Court was satisfied with the method
adopted by the taxpayer as a farmer breeding
livestock, reporting on the basis of receipts and
disbursements. We find no Compelling reason
to disturb its findings.

2. Disallowance of excessive depreciation of

buildings (1950-1954). — During the years
1950 to 1954, the taxpayer claimed a
depreciation allowance for its buildings at the
annual rate of 10%. The Commissioner claimed
that the reasonable depreciation rate is only 3%
per annum, and, hence, disallowed as excessive
the amount claimed as depreciation allowance
in excess of 3% annually. We sustain the Tax
Court's finding that the taxpayer did not submit
adequate proof of the correctness of the
taxpayer's claim that the depreciable assets or
buildings in question had a useful life only of 10
years so as to justify its 10% depreciation per
annum claim, such finding being supported by
the record. The taxpayer's contention that it has
many zero or one-peso assets, 12 representing
very old and fully depreciated assets serves but
to support the Commissioner's position that a
10% annual depreciation rate was excessive.
3. Taxable increase in net worth (1950-1951).
— The Tax Court set aside the Commissioner's
treatment as taxable income of certain
increases in the taxpayer's net worth. It found
that:

For the year 1950, respondent determined that

petitioner had an increase in net worth in the
sum of P30,050.00, and for the year 1951, the
sum of P1,382.85. These amounts were treated
by respondent as taxable income of petitioner
for said years.

It appears that petitioner had an account with

the Manila Insurance Company, the records
bearing on which were lost. When its records
were reconstituted the amount of P349,800.00
was set up as its liability to the Manila
Insurance Company. It was discovered later
that the correct liability was only 319,750.00,
or a difference of P30,050.00, so that the
records were adjusted so as to show the correct
liability. The correction or adjustment was
made in 1950. Respondent contends that the
reduction of petitioner's liability to Manila
Insurance Company resulted in the increase of
petitioner's net worth to the extent of
P30,050.00 which is taxable. This is erroneous.
The principle underlying the taxability of an
increase in the net worth of a taxpayer rests on
the theory that such an increase in net worth,
if unreported and not explained by the taxpayer,
comes from income derived from a taxable
source. (See Perez v. Araneta, G.R. No. L-9193,
May 29, 1957; Coll. vs. Reyes, G.R. Nos. L-
11534 & L-11558, Nov. 25, 1958.) In this case,
the increase in the net worth of petitioner for
1950 to the extent of P30,050.00 was not the
result of the receipt by it of taxable income. It
was merely the outcome of the correction of an
error in the entry in its books relating to its
indebtedness to the Manila Insurance Company.
The Income Tax Law imposes a tax on income;
it does not tax any or every increase in net worth
whether or not derived from income. Surely, the
said sum of P30,050.00 was not income to
petitioner, and it was error for respondent to
assess a deficiency income tax on said amount.

The same holds true in the case of the alleged

increase in net worth of petitioner for the year
1951 in the sum of P1,382.85. It appears that
certain items (all amounting to P1,382.85)
remained in petitioner's books as outstanding
liabilities of trade creditors. These accounts
were discovered in 1951 as having been paid in
prior years, so that the necessary adjustments
were made to correct the errors. If there was an
increase in net worth of the petitioner, the
increase in net worth was not the result of
receipt by petitioner of taxable income." 13 The
Commissioner advances no valid grounds in his
brief for contesting the Tax Court's findings.
Certainly, these increases in the taxpayer's net
worth were not taxable increases in net worth,
as they were not the result of the receipt by it of
unreported or unexplained taxable income, but
were shown to be merely the result of the
correction of errors in its entries in its books
relating to its indebtednesses to certain
creditors, which had been erroneously
overstated or listed as outstanding when they
had in fact been duly paid. The Tax Court's
action must be affirmed.

4. Gain realized from sale of real property (1950).

— We likewise sustain as being in accordance
with the evidence the Tax Court's reversal of the
Commissioner's assessment on all alleged
unreported gain in the sum of P11,147.26 in the
sale of a certain real property of the taxpayer in
1950. As found by the Tax Court, the evidence
shows that this property was acquired in 1926
for P11,852.74, and was sold in 1950 for
P60,000.00, apparently, resulting in a gain of
P48,147.26. 14 The taxpayer reported in its
return a gain of P37,000.00, or a discrepancy of
P11,147.26. 15 It was sufficiently proved from
the taxpayer's books that after acquiring the
property, the taxpayer had made improvements
totalling P11,147.26, 16 accounting for the
apparent discrepancy in the reported gain. In
other words, this figure added to the original
acquisition cost of P11,852.74 results in a total
cost of P23,000.00, and the gain derived from
the sale of the property for P60,000.00 was
correctly reported by the taxpayer at
P37,000.00.

On the second issue of prescription, the

taxpayer's contention that the Commissioner's
action to recover its tax liability should be
deemed to have prescribed for failure on the
part of the Commissioner to file a complaint for
collection against it in an appropriate civil
action, as contradistinguished from the answer
filed by the Commissioner to its petition for
review of the questioned assessments in the
case a quo has long been rejected by this Court.
This Court has consistently held that "a judicial
action for the collection of a tax is begun by the
filing of a complaint with the proper court of
first instance, or where the assessment is
appealed to the Court of Tax Appeals, by filing
an answer to the taxpayer's petition for review
wherein payment of the tax is prayed for." 17
This is but logical for where the taxpayer avails
of the right to appeal the tax assessment to the
Court of Tax Appeals, the said Court is vested
with the authority to pronounce judgment as to
the taxpayer's liability to the exclusion of any
other court. In the present case, regardless of
whether the assessments were made on
February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as
claimed by the taxpayer, the government's right
to collect the taxes due has clearly not
prescribed, as the taxpayer's appeal or petition
for review was filed with the Tax Court on May
4, 1960, with the Commissioner filing on May
20, 1960 his Answer with a prayer for payment
of the taxes due, long before the expiration of
the five-year period to effect collection by
judicial action counted from the date of
assessment.

Cases L-24972 and L-24978

These cases refer to the taxpayer's income tax

liability for the year 1957. Upon examination of
its corresponding income tax return, the
Commissioner assessed it for deficiency income
tax in the amount of P38,918.76, computed as
follows:

Net income per return P29,178.70

Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as
an expense under Mines Operations 48,481.62
Net income per investigation
P167,297.65
Tax due thereon 38,818.00
Less: Amount already assessed
5,836.00
Balance P32,982.00
Add: 1/2% monthly interest from 6-20-
59 to 6-20-62 5,936.76
TOTAL AMOUNT DUE AND COLLECTIBLE
P38,918.76
18
The Tax Court overruled the Commissioner's
disallowance of the taxpayer's losses in the
operation of its Hacienda Dalupiri in the sum of
P89,547.33 but sustained the disallowance of
the sum of P48,481.62, which allegedly
represented 1/5 of the cost of the "contractual
right" over the mines of its subsidiary, Palawan
Manganese Mines, Inc. which the taxpayer had
acquired. It found the taxpayer liable for
deficiency income tax for the year 1957 in the
amount of P9,696.00, instead of P32,982.00 as
originally assessed, and rendered the following
judgment:

WHEREFORE, the assessment appealed from is

hereby modified. Petitioner is hereby ordered to
pay to respondent the amount of P9,696.00 as
deficiency income tax for the year 1957, plus
the corresponding interest provided in Section
51 of the Revenue Code. If the deficiency tax is
not paid in full within thirty (30) days from the
date this decision becomes final and executory,
petitioner shall pay a surcharge of five per cent
(5%) of the unpaid amount, plus interest at the
rate of one per cent (1%) a month, computed
from the date this decision becomes final until
paid, provided that the maximum amount that
may be collected as interest shall not exceed the
amount corresponding to a period of three (3)
years. Without pronouncement as to costs. 19

Both parties again appealed from the respective

adverse rulings against them in the Tax Court's
decision.

5. Allowance of losses in Hacienda Dalupiri

(1957). — The Tax Court cited its previous
decision overruling the Commissioner's
disallowance of losses suffered by the taxpayer
in the operation of its Hacienda Dalupiri, since
it was convinced that the hacienda was
operated for business and not for pleasure. And
in this appeal, the Commissioner cites his
arguments in his appellant's brief in Case No.
L-21557. The Tax Court, in setting aside the
Commissioner's principal objections, which
were directed to the accounting method used by
the taxpayer found that:

It is true that petitioner followed the cash basis

method of reporting income and expenses in the
operation of the Hacienda Dalupiri and used the
accrual method with respect to its mine
operations. This method of accounting,
otherwise known as the hybrid method,
followed by petitioner is not without
justification.

... A taxpayer may not, ordinarily, combine the

cash and accrual bases. The 1954 Code
provisions permit, however, the use of a hybrid
method of accounting, combining a cash and
accrual method, under circumstances and
requirements to be set out in Regulations to be
issued. Also, if a taxpayer is engaged in more
than one trade or business he may use a
different method of accounting for each trade or
business. And a taxpayer may report income
from a business on accrual basis and his
personal income on the cash basis.' (See
Mertens, Law of Federal Income Taxation, Zimet
& Stanley Revision, Vol. 2, Sec. 12.08, p. 26.)
20
The Tax Court, having satisfied itself with the
adequacy of the taxpayer's accounting method
and procedure as properly reflecting the
taxpayer's income or losses, and the
Commissioner having failed to show the
contrary, we reiterate our ruling [supra,
paragraph 1 (d) and (e)] that we find no
compelling reason to disturb its findings.

6. Disallowance of amortization of alleged

"contractual rights." — The reasons for
sustaining this disallowance are thus given by
the Tax Court:

It appears that the Palawan Manganese Mines,

Inc., during a special meeting of its Board of
Directors on January 19, 1956, approved a
resolution, the pertinent portions of which read
as follows:

"RESOLVED, as it is hereby resolved, that the

corporation's current assets composed of ores,
fuel, and oil, materials and supplies, spare
parts and canteen supplies appearing in the
inventory and balance sheet of the Corporation
as of December 31, 1955, with an aggregate
value of P97,636.98, contractual rights for the
operation of various mining claims in Palawan
with a value of P100,000.00, its title on various
mining claims in Palawan with a value of
P142,408.10 or a total value of P340,045.02 be,
as they are hereby ceded and transferred to
Fernandez Hermanos, Inc., as partial
settlement of the indebtedness of the
corporation to said Fernandez Hermanos Inc. in
the amount of P442,895.23." (Exh. E, p. 17,
CTA rec.)

On March 29, 1956, petitioner's corporation

accepted the above offer of transfer, thus:

"WHEREAS, the Palawan Manganese Mines,

Inc., due to its yearly substantial losses has
decided to cease operation on January 1, 1956
and in order to satisfy at least a part of its
indebtedness to the Corporation, it has
proposed to transfer its current assets in the
amount of NINETY SEVEN THOUSAND SIX
HUNDRED THIRTY SIX PESOS & 98/100
(P97,636.98) as per its balance sheet as of
December 31, 1955, its contractual rights
valued at ONE HUNDRED THOUSAND PESOS
(P100,000.00) and its title over various mining
claims valued at ONE HUNDRED FORTY TWO
THOUSAND FOUR HUNDRED EIGHT PESOS &
10/100 (P142,408.10) or a total evaluation of
THREE HUNDRED FORTY THOUSAND FORTY
FIVE PESOS & 08/100 (P340,045.08) which
shall be applied in partial settlement of its
obligation to the Corporation in the amount of
FOUR HUNDRED FORTY TWO THOUSAND
EIGHT HUNDRED EIGHTY FIVE PESOS &
23/100 (P442,885.23)," (Exh. E-1, p. 18, CTA
rec.)

Petitioner determined the cost of the mines at

P242,408.10 by adding the value of the
contractual rights (P100,000.00) and the value
of its mining claims (P142,408.10). Respondent
disallowed the deduction on the following
grounds: (1) that the Palawan Manganese Mines,
Inc. could not transfer P242,408.10 worth of
assets to petitioner because the balance sheet
of the said corporation for 1955 shows that it
had only current as worth P97,636.96; and (2)
that the alleged amortization of "contractual
rights" is not allowed by the Revenue Code.

The law in point is Section 30(g) (1) (B) of the

Revenue Code, before its amendment by
Republic Act No. 2698, which provided in part:

"(g) Depletion of oil and gas wells and mines.:

"(1) In general. — ... (B) in the case of mines, a

reasonable allowance for depletion thereof not
to exceed the market value in the mine of the
product thereof, which has been mined and sold
during the year for which the return and
computation are made. The allowances shall be
made under rules and regulations to be
prescribed by the Secretary of Finance:
Provided, That when the allowances shall equal
the capital invested, ... no further allowance
shall be made."

Assuming, arguendo, that the Palawan

Manganese Mines, Inc. had assets worth
P242,408.10 which it actually transferred to the
petitioner in 1956, the latter cannot just deduct
one-fifth (1/5) of said amount from its gross
income for the year 1957 because such
deduction in the form of depletion charge was
not sanctioned by Section 30(g) (1) (B) of the
Revenue Code, as above-quoted.

xxx xxx xxx

The sole basis of petitioner in claiming the

amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp.
31-32, CTA rec.), who stated that the ore
reserves of the Busuange Mines (Mines
transferred by the Palawan Manganese Mines,
Inc. to the petitioner) would be exhausted in five
(5) years, hence, the claim for P48,481.62 or
one-fifth (1/5) of the alleged cost of the mines
corresponding to the year 1957 and every year
thereafter for a period of 5 years. The said
memorandum merely showed the estimated ore
reserves of the mines and it probable selling
price. No evidence whatsoever was presented to
show the produced mine and for how much they
were sold during the year for which the return
and computation were made. This is necessary
in order to determine the amount of depletion
that can be legally deducted from petitioner's
gross income. The method employed by
petitioner in making an outright deduction of
1/5 of the cost of the mines is not authorized
under Section 30(g) (1) (B) of the Revenue Code.
Respondent's disallowance of the alleged
"contractual rights" amounting to P48,481.62
must therefore be sustained. 21

The taxpayer insists in this appeal that it could

use as a method for depletion under the
pertinent provision of the Tax Code its "capital
investment," representing the alleged value of
its contractual rights and titles to mining claims
in the sum of P242,408.10 and thus deduct
outright one-fifth (1/5) of this "capital
investment" every year. regardless of whether it
had actually mined the product and sold the
products. The very authorities cited in its brief
give the correct concept of depletion charges
that they "allow for the exhaustion of the capital
value of the deposits by production"; thus, "as
the cost of the raw materials must be deducted
from the gross income before the net income
can be determined, so the estimated cost of the
reserve used up is allowed." 22 The alleged
"capital investment" method invoked by the
taxpayer is not a method of depletion, but the
Tax Code provision, prior to its amendment by
Section 1, of Republic Act No. 2698, which took
effect on June 18, 1960, expressly provided that
"when the allowances shall equal the capital
invested ... no further allowances shall be
made;" in other words, the "capital investment"
was but the limitation of the amount of
depletion that could be claimed. The outright
deduction by the taxpayer of 1/5 of the cost of
the mines, as if it were a "straight line" rate of
depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.

ACCORDINGLY, the judgment of the Court of

Tax Appeals, subject of the appeals in Cases
Nos. L-21551 and L-21557, as modified by the
crediting of the losses of P36,722.42 disallowed
in 1951 and 1952 to the taxpayer for the year
1953 as directed in paragraph 1 (c) of this
decision, is hereby affirmed. The judgment of
the Court of Tax Appeals appealed from in
Cases Nos. L-24972 and L-24978 is affirmed in
toto. No costs. So ordered.

Concepcion, C.J., Dizon, Makalintal, Zaldivar,

Sanchez, Castro, Fernando, Capistrano and
Barredo, JJ., concur.

Limpian Investment Corporation v CIR | GR

No. L-21570 | 26 July 1966

G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION,
petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, ET
AL., respondents.

Vicente L. San Luis for petitioner.

Office of the Solicitor General A. A. Alafriz,
Assistant Solicitor General F. B. Rosete,
Solicitor A. B. Afurong and Atty. V. G. Saldajeno
for respondents.

REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan

Investment Corporation against a decision of
the Court of Tax Appeals, in its CTA Case No.
699, holding and ordering it (petitioner) to pay
respondent Commissioner of Internal Revenue
the sums of P7,338.00 and P30,502.50,
representing deficiency income taxes, plus 50%
surcharge and 1% monthly interest from June
30, 1959 to the date of payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly

registered since June 21, 1955, is engaged in
the business of leasing real properties. It
commenced actual business operations on July
1, 1955. Its principal stockholders are the
spouses Isabelo P. Lim and Purificacion Ceñiza
de Lim, who own and control ninety-nine per
cent (99%) of its total paid-up capital. Its
president and chairman of the board is the
same Isabelo P. Lim.1äwphï1.ñët

Its real properties consist of several lots and

buildings, mostly situated in Manila and in
Pasay City, all of which were acquired from said
Isabelo P. Lim and his mother, Vicente
Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and

1957 income tax returns, reporting therein net
incomes of P3,287.81 and P11,098.36,
respectively, for which it paid the corresponding
taxes therefor in the sums of P657.00 and
P2,220.00.

Sometime in 1958 and 1959, the examiners of

the Bureau of Internal Revenue conducted an
investigation of petitioner's 1956 and 1957
income tax returns and, in the course thereof,
they discovered and ascertained that petitioner
had underdeclared its rental incomes by
P20,199.00 and P81,690.00 during these
taxable years and had claimed excessive
depreciation of its buildings in the sums of
P4,260.00 and P16,336.00 covering the same
period. On the basis of these findings,
respondent Commissioner of Internal Revenue
issued its letter-assessment and demand for
payment of deficiency income tax and
surcharge against petitioner corporation,
computed as follows:

90-AR-C-348-58/56
Net income per audited return P 3,287.81
Add: Unallowable deductions:
Undeclared Rental Receipt
(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched.
B) . . . . . . . . . . . . . . . . . 4,260.00
P24,459.00
Net income per investigation P27,746.00
Tax due thereon P5,549.00
Less: Amount already assessed 657.00
Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57
Net income per audited return P11,098.00
Add: Unallowable deductions:
Undeclared Rental Receipt (Sched. A) . . . . . . . .
P81,690.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . .
16,338.00 P98,028.00
Net income per investigation P109,126.00
Tax due thereon P22,555.00
Less: Amount already assessed 2,220.00
Balance 20,335.00
Add: 50% Surcharge 10,167.50
DEFICIENCY TAX DUE P30,502.50
Petitioner corporation requested respondent
Commissioner of Internal Revenue to reconsider
the above assessment but the latter denied said
request and reiterated its original assessment
and demand, plus 5% surcharge and the 1%
monthly interest from June 30, 1959 to the date
of payment; hence, the corporation filed its
petition for review before the Tax Appeals court,
questioning the correctness and validity of the
above assessment of respondent Commissioner
of Internal Revenue. It disclaimed having
received or collected the amount of P20,199.00,
as unreported rental income for 1956, or any
part thereof, reasoning out that 'the previous
owners of the leased building has (have) to
collect part of the total rentals in 1956 to apply
to their payment of rental in the land in the
amount of P21,630.00" (par. 11, petition). It
also denied having received or collected the
amount of P81,690.00, as unreported rental
income for 1957, or any part thereof, explaining
that part of said amount totalling P31,380.00
was not declared as income in its 1957 tax
return because its president, Isabelo P. Lim,
who collected and received P13,500.00 from
certain tenants, did not turn the same over to
petitioner corporation in said year but did so
only in 1959; that a certain tenant (Go Tong)
deposited in court his rentals amounting to
P10,800.00, over which the corporation had no
actual or constructive control; and that a sub-
tenant paid P4,200.00 which ought not be
declared as rental income.

Petitioner likewise alleged in its petition that the

rates of depreciation applied by respondent
Commissioner of its buildings in the above
assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the

Tax Court was its Secretary-Treasurer, Vicente
G. Solis, who admitted that it had omitted to
report the sum of P12,100.00 as rental income
in its 1956 tax return and also the sum of
P29,350.00 as rental income in its 1957 tax
return. However, with respect to the difference
between this omitted income (P12,100.00) and
the sum (P20,199.00) found by respondent
Commissioner as undeclared in 1956,
petitioner corporation, through the same
witness (Solis), tried to establish that it did not
collect or receive the same because, in view of
the refusal of some tenants to recognize the new
owner, Isabelo P. Lim and Vicenta Pantangco
Vda. de Lim, the former owners, on one hand,
and the same Isabelo P. Lim, as president of
petitioner corporation, on the other, had
verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of the
value of all its properties, computed at
P21,630.00, in exchange for whatever rentals
the Lims may collect from the tenants. And,
with respect to the difference between the
admittedly undeclared sum of P29,350.00 and
that found by respondent Commissioner as
unreported rental income, (P81,690.00) in 1957,
the same witness Solis also tried to establish
that petitioner corporation did not receive or
collect the same but that its president, Isabelo
P. Lim, collected part thereof and may have
reported the same in his own personal income
tax return; that same Isabelo P. Lim collected
P13,500.00, which he turned over to petitioner
in 1959 only; that a certain tenant (Go Tong
deposited in court his rentals (P10,800.00), over
which the corporation had no actual or
constructive control and which were withdrawn
only in 1958; and that a sub-tenant paid
P4,200.00 which ought not be declared as
rental income in 1957.

With regard to the depreciation which

respondent disallowed and deducted from the
returns filed by petitioner, the same witness
tried to establish that some of its buildings are
old and out of style; hence, they are entitled to
higher rates of depreciation than those adopted
by respondent in his assessment.

Isabelo P. Lim was not presented as witness to

corroborate the above testimony of Vicente G.
Solis.
On the other hand, Plaridel M. Mingoa, one of
the BIR examiners who personally conducted
the investigation of the 1956 and 1957 income
tax returns of petitioner corporation, testified
for the respondent that he personally
interviewed the tenants of petitioner and found
that these tenants had been regularly paying
their rentals to the collectors of either petitioner
or its president, Isabelo P. Lim, but these
payments were not declared in the
corresponding returns; and that in applying
rates of depreciation to petitioner's buildings,
he adopted Bulletin "F" of the U.S. Federal
Internal Revenue Service.

On the basis of the evidence, the Tax Court

upheld respondent Commissioner's assessment
and demand for deficiency income tax which, as
above stated in the beginning of this opinion,
petitioner has appealed to this Court.

Petitioner corporation pursues, the same theory

advocated in the court below and assigns the
following alleged errors of the trial court in its
brief, to wit:

I. The respondent Court erred in holding that

the petitioner had an unreported rental income
of P20,199.00 for the year 1956.

II. The respondent Court erred in holding that

the petitioner had an unreported rental income
of P81,690.00 for the year 1957.

III. The respondent Court erred in holding that

the depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and
1957 was excessive.

and prays that the appealed decision be

reversed.

This appeal is manifestly unmeritorious.

Petitioner having admitted, through its own
witness (Vicente G. Solis), that it had
undeclared more than one-half (1/2) of the
amount (P12,100.00 out of P20,199.00) found
by the BIR examiners as unreported rental
income for the year 1956 and more than one-
third (1/3) of the amount (P29,350.00 out of
P81,690.00) ascertained by the same examiners
as unreported rental income for the year 1957,
contrary to its original claim to the revenue
authorities, it was incumbent upon it to
establish the remainder of its pretensions by
clear and convincing evidence, that in the case
is lacking.

With respect to the balance, which petitioner

denied having unreported in the disputed tax
returns, the excuse that Isabelo P. Lim and
Vicenta Pantangco Vda. de Lim retained
ownership of the lands and only later
transferred or disposed of the ownership of the
buildings existing thereon to petitioner
corporation, so as to justify the alleged verbal
agreement whereby they would turn over to
petitioner corporation six percent (6%) of the
value of its properties to be applied to the
rentals of the land and in exchange for whatever
rentals they may collect from the tenants who
refused to recognize the new owner or vendee of
the buildings, is not only unusual but
uncorroborated by the alleged transferors, or by
any document or unbiased evidence. Hence, the
first assigned error is without merit.

As to the second assigned error, petitioner's

denial and explanation of the non-receipt of the
remaining unreported income for 1957 is not
substantiated by satisfactory corroboration. As
above noted, Isabelo P. Lim was not presented
as witness to confirm accountant Solis nor was
his 1957 personal income tax return submitted
in court to establish that the rental income
which he allegedly collected and received in
1957 were reported therein.

The withdrawal in 1958 of the deposits in court

pertaining to the 1957 rental income is no
sufficient justification for the non-declaration of
said income in 1957, since the deposit was
resorted to due to the refusal of petitioner to
accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have
constructively received such rentals in 1957.
The payment by the sub-tenant in 1957 should
have been reported as rental income in said
year, since it is income just the same regardless
of its source.

On the third assigned error, suffice it to state

that this Court has already held that
"depreciation is a question of fact and is not
measured by theoretical yardstick, but should
be determined by a consideration of actual
facts", and the findings of the Tax Court in this
respect should not be disturbed when not
shown to be arbitrary or in abuse of discretion
(Commissioner of Internal Revenue vs. Priscila
Estate, Inc., et al., L-18282, May 29, 1964), and
petitioner has not shown any arbitrariness or
abuse of discretion in the part of the Tax Court
in finding that petitioner claimed excessive
depreciation in its returns. It appearing that the
Tax Court applied rates of depreciation in
accordance with Bulletin "F" of the U.S. Federal
Internal Revenue Service, which this Court
pronounced as having strong persuasive effect
in this jurisdiction, for having been the result of
scientific studies and observation for a long
period in the United States, after whose Income
Tax Law ours is patterned (M. Zamora vs.
Collector of internal Revenue & Collector of
Internal Revenue vs. M. Zamora; E. Zamora vs.
Collector of Internal Revenue and Collector of
Internal Revenue vs. E. Zamora, Nos. L-15280,
L-15290, L-15289 and L-15281, May 31, 1963),
the foregoing error is devoid of merit.

Wherefore, the appealed decision should be, as

it is hereby, affirmed. With costs against
petitioner-appellant, Limpan Investment
Corporation.

Concepcion, C.J., Barrera, Dizon, Regala,

Makalintal, Bengzon, J.P., Zaldivar, Sanchez
and Castro, JJ., concur.