3rd Batch Tax Cases

FIRST DIVISION
[G.R. No. L-9996. October 15, 1957.]

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and
FRANCISCA EVANGELISTA, petitioners, vs. THE
COLLECTOR OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS, respondents.
Santiago F. Alidio and Angel S. Dakila, Jr. for petitioner.
Solicitor General Ambrosio Padilla, Assistant Solicitor General
Esmeraldo Umali and Solicitor Felicisimo R. Rosete for the
respondents.
SYLLABUS
1.TAXATION; TAX ON CORPORATIONS INCLUDES
ORGANIZATION WHICH ARE NOT NECESSARY PARTNERSHIP.
"Corporations" strictly speaking are distinct and different from
"partnership". When our Internal Revenue Code includes
"partnership" among the entities subject to the tax on "corporations",
it must be allude to organization which are not
necessarily "partnership" in the technical sense of the term.
2.ID.; DULY REGISTERED GENERAL PARTNERSHIP ARE
EXEMPTED FROM THE TAX UPON CORPORATIONS. Section 24 of
the Internal Revenue Code exempts from the tax imposed upon
corporations "duly registered general partnership", which constitute
precisely one of the most typical form of partnership in this
jurisdiction.
3.ID.; CORPORATION INCLUDES PARTNERSHIP NO MATTER
HOW ORGANIZED. As defined in section 84 (b) of the Internal
Revenue Code "the term corporation includes partnership, no matter
how created or organized." This qualifying expression clearly
indicates that a joint venture need not be undertaken in any of the
standards form, or conformity with the usual requirements of the law
on partnerships, in order that one could be deemed constituted for
the purposes of the tax on corporations.
4.ID.; CORPORATIONS INCLUDES "JOINT ACCOUNT" AND
ASSOCIATIONS WITHOUT LEGAL PERSONALITY. Pursuant to
Section 84 (b) of the Internal Revenue Code, the term "corporations"
includes, among the others, "joint accounts (cuenta en participacion)"
and "associations", none of which has a legal personality of its own
independent of that of its members. For purposes of the tax on
corporations, our National Internal Revenue Code includes these
partnership. with the exception only of duly registered general
partnership. within the purview of the term
"corporations." Held: That the petitioners in the case at bar, who are
engaged in real estate transactions for monetary gain and divide the
same among themselves, constitute a partnership, so far as the said
Code is concerned, and are subject to the income tax for the
corporation.
5.ID.; CORPORATION; PARTNERSHIP WITHOUT LEGAL
PERSONALITY SUBJECT TO RESIDENCE TAX ON CORPORATION.
The pertinent part of the provision of Section 2 of Commonwealth
Act No. 465 which says: "The term corporation as used in this Act
includes joint-stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter how
created or organized." is analogous to that of Section 24 and 84 (b)
of our Internal Revenue Code which was approved the day
immediately after the approval of said Commonwealth Act No. 565.
Apparently, the terms "corporation" and "Partnership" are used both
statutes with substantially the same meaning, Held: That the
petitioners are subject to the residence tax corporations.
D E C I S I O N
CONCEPCION, J p:
This is a petition, filed by Eufemia Evangelista, Manuela
Evangelista and Francisca Evangelista, for review of a decision of the
Court of Tax Appeals, the dispositive part of which reads:
"FOR ALL THE FOREGOING, we hold that the petitioners are
liable for the income tax, real estate dealer's tax and the residence
tax for the years 1945 to 1949, inclusive, in accordance with the
respondent's assessment for the same in the total amount of
P6,878.34, which is hereby affirmed and the petition for review filed
by petitioners is hereby dismissed with costs against petitioners."
It appears from the stipulation submitted by the parties:
"1.That the petitioners borrowed from their father the
sum of P59,140.00 which amount together with their personal
monies was used by them for the purpose of buying real
properties;
"2.That on February 2, 1943 they bought from Mrs.
Josefina Florentino a lot with an area of 3,713.40 sq. m.
including improvements thereon for the sum of P100,000.00;
this property has an assessed value of P57,517.00 as of 1948;
"3.That on April 3, 1944 they purchased from Mrs. Josefa
Oppus 21 parcels of land with an aggregate area of 3,718.40
sq. m. including improvements thereon for P18,000.00; this
property has an assessed value of P8,255.00 as of 1948;
"4.That on April 23, 1944 they purchased from the
Insular Investments, Inc., a lot of 4,358 sq. m. including
improvements thereon for P108,825.00. This property has an
assessed value of P4,983.00 as of 1943;
"5.That on April 28, 1944 they bought from Mrs. Valentin
Afable a lot of 8,371 sq. m. including improvements thereon for
P237,234.14. This property has an assessed value of P59,140.00
as of 1948;
"6.That in a document dated August 16, 1945, they
appointed their brother Simeon Evangelista to 'manage their
properties with full power to lease; to collect and receive rents;
to issue receipts therefor; in default of such payment, to bring
suits against the defaulting tenant; to sign all letters, contracts,
etc., for and in their behalf, and to endorse and deposit all
notes and checks for them;
"7.That after having bought the above-mentioned real
properties, the petitioners had the same rented or leased to
various tenants;
"8.That from the month of March, 1945 up to and
including December, 1945, the total amount collected as rents
on their real properties was P9,599.00 while the expenses
amounted to P3,650.00 thereby leaving them a net rental
income of P5,948.33;
"9.That in 1946, they realized a gross rental income in
the sum of P24,786.30, out of which amount was deducted the
sum of P16,288.27 for expenses thereby leaving them a net
rental income of P7,498.13;
"10.That in 1948 they realized a gross rental income of
P17,453.00 out of the which amount was deducted the sum of
P4,837.65 as expenses, thereby leaving them a net rental
income of P12,615.35."
It further appears that on September 24, 1954, respondent
Collector of Internal Revenue demanded the payment of income tax
on corporations, real estate dealer's fixed tax and corporation
residence tax for the years 1945-1949, computed, according to the
assessments made by said officer, as follows:
INCOME TAXES
1945...........................................................P614.84
1946...........................................................1,144.71
1947..............................................................910.34
1948...........................................................1,912.30
1949...........................................................1,575.90
_______________
Total including surcharge and compromiseP6,157.09
REAL ESTATE DEALER'S FIXED TAX
1946.................................................................P37.50
1947.................................................................150.00
1948.................................................................150.00
1949.................................................................150.00
____________
Total including penaltyP527.50
RESIDENCE TAXES OF CORPORATION
1945................................................................P38.75
1946..................................................................38.75
1947..................................................................38.75
1948..................................................................38.75
1949..................................................................38.75
______________
Total including surchageP193.75
TOTAL TAXES DUEP6,878.34
Said letter of demand and the corresponding assessments
were delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a prayer
that "the decision of the respondent contained in his letter of
demand dated September 24, 1954" be reversed, and that they be
absolved from the payment of the taxes in question, with costs
against the respondent.
After appropriate proceedings, the Court of Tax Appeals
rendered the above-mentioned decision for the respondent, and, a
petition for reconsideration and new trial having been subsequently
denied, the case is now before Us for review at the instance of the
petitioners.
The issue in this case is whether petitioners are subject to the
tax on corporations provided for in section 24 of Commonwealth Act
No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate
dealers' fixed tax. With respect to the tax on corporations, the issue
hinges on the meaning of the terms "corporation" and "partnership",
as used in sections 24 and 84 of said Code, the pertinent parts of
which read:
"SEC. 24.Rate of tax on corporations. There shall be
levied, assessed, collected, and paid annually upon the total net
income received in the preceding taxable year from all sources
by every corporation organized in, or existing under the laws of
the Philippines, no matter how created or organized but not
including duly registered general co-partnerships (compaias
colectivas), a tax upon such income equal to the sum of the
following: . . . ."
"Sec. 84(b).The term 'corporation' includes partnerships,
no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations or
insurance companies, but does not include duly registered
general copartnerships (compaias colectivas)."
Article 1767 of the Civil Code of the Philippines provides:
"By the 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."
Pursuant to this article, the essential elements of a partnership
are two, namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed to,
and did, contribute money and property to a common fund. Hence,
the issue narrows down to their intent in acting as they did. Upon
consideration of all the facts and circumstances surrounding the
case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same
among themselves, because:

1.Said common fund was not something they found already in
existence. It was not a property inherited by them pro indiviso. They
created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2.They invested the same, not merely in one transaction, but in
a series of transactions. On February 2, 1943, they bought a lot for
P100,000.00. On April 3, 1944, they purchased 21 lots for
P18,000.000. This was soon followed, on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for P237,234.14. The number of
lots (24) acquired and transactions undertaken, as well as the brief
interregnum between each, particularly the last three purchases, is
strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned
common fund or even of the property acquired by petitioners in
February, 1943. In other words, one cannot but perceive a character
of habitualitypeculiar to business transactions engaged in for
purposes of gain.
3.The aforesaid lots were not devoted to residential purposes,
or to other personal uses, of petitioners herein. The properties were
leased separately to several persons, who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4.Since August, 1945, the properties have been under the
management of one person, namely, Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business
enterprise operated for profit.
5.The foregoing conditions have existed for more than ten (10)
years, or, to be exact, over fifteen (15) years, since the first property
was acquired, and over twelve (12) years, since Simeon Evangelista
became the manager.
6.Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already adverted to, or
on the causes for its continued existence. They did not even try to
offer an explanation therefor.
Although, taken singly, they might not suffice to establish the
intent necessary to constitute a partnership, the collective effect of
these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the
aforementioned circumstances were present in the cases cited by
petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not
copartners, for, in consequence of the acts performed by them, a
legal entity, with a personality independent of that of its members,
did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was
correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon
"corporations", which, strictly speaking, are distinct and different
from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on
"corporations", said Code must allude, therefore, to organizations
which arenot necessarily "partnerships", in the technical sense of the
term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships", which
constitute precisely one of the most typical forms of partnerships in
this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created
or organized." This qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships, in
order that one could be deemed constituted for purposes of the tax
on corporations. Again, pursuant to said section 84(b), the term
"corporation" includes, among other, "joint accounts, (cuentas en
participacion)" and "associations", none of which has a legal
personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, "duly
registered general copartner ships" which are possessed of the
aforementioned personality have been expressly excluded by law
(sections 24 and 84 [b]) from the connotation of the term
"corporation." It may not be amiss to add that petitioners' allegation
to the effect that their liability in connection with the leasing of the
lots above referred to, under the management of one person
even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that of
corporations, and is, therefore, an additional argument in favor of
the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States,
"corporations" are taxed differently from "partnerships". By specific
provision of said laws, such "corporations" include "associations,
joint-stock companies and insurance companies." However, the term
"association" is not used in the aforementioned laws
". . . in any narrow or technical sense. It includes any
organization, created for the transaction of designated affairs,
or the attainment of some object, which, like a corporation,
continues notwithstanding that its members or participants
change, and the affairs of which, like corporate affairs,
are conducted by a single individual, a committee, a board, or
some other group, acting in a representative capacity. It is
immaterial whether such organization is created by an
agreement, a declaration of trust, a statute, or otherwise. It
includes a voluntary association, a joint-stock corporation or
company, a 'business' trusts a 'Massachusetts' trust, a 'common
law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsurance exchange operating
through an attorney in fact, a partnership association, and any
other type of organization (by whatever name known) which is
not, within the meaning of the Code, a trust or an estate, or a
partnership." (7A Merten's Law of Federal Income Taxation, p.
788; italics ours.)
Similarly, the American Law.
". . . provides its own concept of a partnership. Under
the term 'partnership' it includes not only a partnership as
known at common law but, as well, a syndicate, group,
pool, joint venture, or other unincorporated organization which
carries on any business, financial operation, or venture, and
which is not, within the meaning of the Code, a trust, estate, or
a corporation. . . .." (7A Merten's Law of Federal Income
Taxation, p. 789; italics ours.)
"The term 'partnership' includes a syndicate, group,
pool, joint venture or other unincorporated organization,
through or by means of which any business, financial
operation, or venture is carried on, . . .." (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63; italics ours.)
For purposes of the tax on corporations, our National Internal
Revenue Code, includes these partnerships with the exception
only of duly registered general copartnerships within the purview
of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.
As regards the residence tax for corporations, section 2
of Commonwealth Act No. 465 provides in part:
"Entities liable to residence tax. Every corporation, no
matter how created or organized, whether domestic or resident
foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual
additional tax which, in no case, shall exceed one thousand
pesos, in accordance with the following schedule: . . .
"The term 'corporation' as used in this Act includes joint-
stock company, partnership, joint account (cuentas en
participacion), association or insurance company, no matter
how created or organized." (italics ours.)
Considering that the pertinent part of this provision is
analogous to that of sections 24 and 84(b) of our National Internal
Revenue Code (Commonwealth Act No. 466), and that the latter was
approved on June 15, 1939, the day immediately after the approval
of said Commonwealth Act No. 465 (June 14, 1939), it is apparent
that the terms "corporation" and "partnership" are used in both
statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.
Lastly, the records show that petitioners have habitually
engaged in leasing the properties above mentioned for a period of
over twelve years, and that the yearly gross rentals of said properties
from 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are
subject to the tax provided in section 193 (q) of our National Internal
Revenue Code, for "real estate dealers," inasmuch as, pursuant to
section 194(s) thereof:
"'Real estate dealer' includes any person engaged in the
business of buying, selling, exchanging, leasing, or renting
property or his own account as principal and holding himself
out as a full or part- time dealer in real estate or as an owner
of rental property or properties rented or offered to rent for an
aggregate amount of three thousand pesos or more a year. . .
.." (Italics ours.)
Wherefore, the appealed decision of the Court of Tax Appeals
is hereby affirmed with costs against the petitioners herein. It is so
ordered.
Paras, C. J., Bengzon, Padilla, Reyes, A., Reyes, J. B. L.,
Endencia and Felix, JJ., concur.

Separate Opinions
BAUTISTA ANGELO, J., concurring:
I agree with the opinion that petitioners have actually
contributed money to a common fund with express purpose of
engaging in real estate business for profit. The series of transactions
which they had undertaken attest to this. This appears in the
following portion of of the decision:
"2.They invested the same, not merely in one transaction,
but in a series of transactions. On February 2, 1943, they
bought a lot for P100,000. On April 3, 1944, they purchased 21
lots for P18,000. This was soon followed on April 23, 1944, by
the acquisition of another real estate for P108,825. Five (5) days
later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transactions undertaken, as
well as the brief interregnum between each, particularly the last
three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and
preservation of the afore-mentioned common fund or even of
the property acquired by petitioner in February, 1943. In other
words, one cannot but perceive a character
of habituality peculiar to business transactions engaged in for
purposes of gain."
I wish however to make the following observation: Article 1769
of the new Civil Code lays down the rule for determining when a
transaction should be deemed a partnership or a co-ownership. Said
article paragraphs 2 and 3, provides:
"(2)Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of
the property;
"(3)The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property
from which the returns are derived;"
From the above it appears that the fact that those who agree
to form a co-ownership share or do not share any profits made by
the use of the property held in common does not convert their
venture into a partnership Or the sharing of the gross returns does
not of itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the
property. This only means that, aside from the circumstance of profit,
the presence of other elements constituting partnership is necessary,
such as the clear intent to form a partnership, the existence of a
juridical personality different from that of the individual partners, and
the freedom to transfer or assign any interest in the property by one
with the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635-636).
It is evident that an isolated transaction whereby two or more
persons contribute funds to buy certain real estate for profit in the
absence of other circumstances showing a contrary intention cannot
be considered a partnership.
"Persons who contribute property or funds for a
common enterprise and agree to share the gross returns of
that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not
thereby rendered partners. They have no common stock or
capital, and no community of interest as principal proprietors in
the business itself which the proceeds derived." (Elements of
the law of Partnership by Floyd R. Mechem, 2n Ed., section 83,
p. 74.)
"A joint purchase of land, by two, does not constitute a
copartnership in respect thereto; nor does an agreement to
share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common."
(Clark vs. Sideway, 142 U. S. 682, 12 S. Ct. 327, 35 L. Ed., 1157.)
"Where plaintiff, his brother, and another agreed to
become owners of a single tract of realty, holding as tenants in
common, and to divide the profits of disposing of it, the
brother and the other not being entitled to share in plaintiff's
commissions, no partnership existed as between the three
parties, whatever their relation may have been as to third
parties." (Magee vs. Magee, 123 N. E. 673, 233 Mass. 341.)
"In order to constitute a partnership inter sese there
must be: (a) An intent to form the same; (b) generally a
participating in both profits and losses; (c) and such a
community of interest, as far as third persons are concerned as
enables each party to make contract, manage the business, and
dispose of the whole property." (Municipal Paving
Co. vs. Herring, 150 P. 1067, 50 Ill. 470.)
"The common ownership of property does not itself
create a partnership between the owners, though they may use
it for purpose of making gains; and they may, without
becoming partners, agree among themselves as to the
management and use of such property and the application of
the proceeds therefrom." (Spurlock vs. Wilson, 142 S. W. 363,
160 No. App. 14.)
This is impliedly recognized in the following portion of the
decision: "Although, taken singly, they might not suffice to establish
the intent necessary to constitute a partnership, the collective effect
of these circumstances (referring to the series of transactions) such
as to leave no room for doubt on the existence of said intent in
petitioners herein."
||| (Evangelista v. Collector of Internal Revenue, G.R. No. L-9996, October
15, 1957)

THIRD DIVISION
[G.R. No. 112675. January 25, 1999.]
AFISCO INSURANCE CORPORATION; CCC INSURANCE
CORPORATION; CHARTER INSURANCE CO., INC.;
CIBELES INSURANCE CORPORATION;
COMMONWEALTH INSURANCE COMPANY;
CONSOLIDATED INSURANCE CO., INC.; DEVELOPMENT
INSURANCE & SURETY CORPORATION; DOMESTIC
INSURANCE COMPANY OF THE PHILIPPINES; EASTERN
ASSURANCE COMPANY & SURETY CORP.; EMPIRE
INSURANCE COMPANY; EQUITABLE INSURANCE
CORPORATION; FEDERAL INSURANCE CORPORATION
INC.; FGU INSURANCE CORPORATION; FIDELITY &
SURETY COMPANY OF THE PHILS., INC.; FILIPINO
MERCHANTS' INSURANCE CO., INC.; GOVERNMENT
SERVICE INSURANCE SYSTEM; MALAYAN INSURANCE
CO., INC.; MALAYAN ZURICH INSURANCE CO., INC.;
MERCANTILE INSURANCE CO., INC.; METROPOLITAN
INSURANCE COMPANY; METRO-TAISHO INSURANCE
CORPORATION; NEW ZEALAND INSURANCE CO., LTD.;
PAN-MALAYAN INSURANCE CORPORATION;
PARAMOUNT INSURANCE CORPORATION; PEOPLE'S
TRANS-EAST ASIA INSURANCE CORPORATION; PERLA
COMPANIA DE SEGUROS, INC.; PHILIPPINE BRITISH
ASSURANCE CO., INC.; PHILIPPINE FIRST INSURANCE
CO., INC.; PIONEER INSURANCE & SURETY CORP.;
PIONEER INTERCONTINENTAL INSURANCE
CORPORATION; PROVIDENT INSURANCE COMPANY OF
THE PHILIPPINES; PYRAMID INSURANCE CO., INC.;
RELIANCE SURETY & INSURANCE COMPANY; RIZAL
SURETY & INSURANCE COMPANY; SANPIRO
INSURANCE CORPORATION; SEABOARD-EASTERN
INSURANCE CO., INC.; SOLID GUARANTY, INC.; SOUTH
SEA SURETY & INSURANCE CO., INC.; STATE BONDING
& INSURANCE CO., INC.; SUMMA INSURANCE
CORPORATION; TABACALERA INSURANCE CO., INC.
all assessed as "POOL OF MACHINERY
INSURERS," petitioners, vs. COURT OF APPEALS, COURT
OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
Angara Abello Concepcion Regala for petitioners.
SYNOPSIS
This is a Petition For Review on Certiorari assailing the Decision of the
Court of Appeals dismissing petitioners' appeal of the Decision of the
Court of Tax Appeals which had sustained petitioners' liability for
deficiency income tax, interest and withholding tax. Petitioners
contended that the Court of Appeals erred in finding that the pool or
clearing house was an informal partnership, which was taxable as a
corporation under the NIRC. Petitioners further claimed that the
remittances of the pool to the ceding companies and Munich are not
dividends subject to tax. They insisted that taxing such remittances
contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and would be
tantamount to an illegal double taxation. Moreover, petitioners argued
that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed dividends.
However, even if such remittances were treated as dividends, they
would have been exempt under the previously mentioned sections of
the 1977 NIRC, as well as Article 7 of paragraph 1 and Article 5 of the
RP-West German Tax Treaty. Petitioners likewise contended that the
Internal Revenue Commissioner was already barred by prescription from
making an assessment.
In the present case, the ceding companies entered into a Pool
Agreement or association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and
surplus reinsurance treaty with Munich. AScHCD
Petitioner's allegation of double taxation is untenable. The pool is a
taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is different from the tax on
the dividends received by the said companies. The tax exemptions
claimed by petitioners cannot be granted. The sections of the 1977
NIRC which petitioners cited are inapplicable, because these were not
yet in effect when the income was earned and when the subject
information return for the year ending 1975 was filed. Petitioners' claim
that Munich is tax-exempt based on the RP-West German Tax Treaty is
likewise unpersuasive, because the Internal Revenue Commissioner
assessed the pool for corporate taxes on the basis of the information
return it had submitted for the year ending 1975, a taxable year when
said treaty was not yet in effect. Petitioners likewise failed to comply
with the requirement of Section 333 of the NIRC for the suspension of
the prescriptive period. The Resolutions of the Court of Appeals are
affirmed.
SYLLABUS
1.REMEDIAL LAW; EVIDENCE; RULING OF THE COMMISSION OF
INTERNAL REVENUE IS ACCORDED WEIGHT AND EVEN FINALITY IN THE
ABSENCE OF SHOWING THAT IT IS PATENTLY WRONG. The opinion
or ruling of the Commission of Internal Revenue, the agency tasked
with the enforcement of tax laws, is accorded much weight and even
finality, when there is no showing that it is patently wrong, particularly
in this case where the findings and conclusions of the internal revenue
commissioner were subsequently affirmed by the CTA, a specialized
body created for the exclusive purpose of reviewing tax cases, and the
Court of Appeals. Indeed, "[I]t has been the long standing policy and
practice of this Court to respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of its
authority." TIAEac
2.CIVIL LAW; PARTNERSHIP; REQUISITES. Article 1767 of the Civil
Code recognizes the creation of a contract of partnership when "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." Its requisites are: "(1) mutual contribution to a
common stock, and (2) a joint interest in the profits." In other words, a
partnership is formed when persons contract "to devote to a common
purpose either money, property, or labor with the intention of dividing
the profits between themselves." Meanwhile, an association implies
associates who enter into a "joint enterprise . . . for the transaction of
business."
3.ID.; ID.; INSURANCE POOL IN CASE AT BAR DEEMED PARTNERSHIP
OR ASSOCIATION TAXABLE AS A CORPORATION UNDER SECTION 24
OF THE NIRC. In the case before us, the ceding companies entered
into a Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance treaty
and surplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the
NIRC: (1) The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the pool. This
common fund pays for the administration and operation expenses of
the pool. (2) The pool functions through an executive board, which
resembles the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) True, the pool itself
is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business
of the ceding companies and Munich, because without it they would
not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a
"Rules of Distribution" annexed to the Pool Agreement. Profit motive or
business is, therefore, the primordial reason for the pool's formation.
4.TAXATION; NIRC; SECTION 24 THEREOF, UNREGISTERED
PARTNERSHIPS AND ASSOCIATIONS ARE CONSIDERED AS
CORPORATIONS FOR TAX PURPOSES. This Court rules that the Court
of Appeals, in affirming the CTA which had previously sustained the
internal revenue commissioner, committed no reversible error. Section
24 of the NIRC, as worded in the year ending 1975, provides: "SEC. 24.
Rate 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, no matter how created or
organized, but not including duly registered general co-partnership
(compaias colectivas), general professional partnerships, private
educational institutions, and building and loan associations . . . ."
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NLRC's inclusion of
such entities in the tax on corporations was made even clearer by the
Tax Reform Act of 1997, which amended the Tax Code. The Court of
Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than
ten years, as in the case before us.
5.ID.; DOUBLE TAXATION; DEFINED; NO DOUBLE TAXATION IN CASE AT
BAR. Double taxation means taxing the same property twice when it
should be taxed only once. That is, ". . . taxing the same person twice
by the same jurisdiction for the same thing." In the instant case, the
pool is a taxable entity distinct from the individual corporate entities of
the ceding companies. The tax on its income is obviously different from
the tax on the dividends received by the said companies. Clearly, there
is no double taxation here.
6.ID.; TAX EXEMPTION; GRANT THEREOF NOT JUSTIFIED IN CASE AT
BAR; REASONS. The tax exemptions claimed by petitioners cannot be
granted, since their entitlement thereto remains unproven and
unsubstantiated. It is axiomatic in the law of taxation that taxes are the
lifeblood of the nation. Hence, "exemptions therefrom are highly
disfavored in law and he who claims tax exemption must be able to
justify his claim or right." Petitioners have failed to discharge this
burden of proof. The sections of the 1977 NIRC which they cite are
inapplicable, because these were not yet in effect when the income was
earned and when the subject information return for the year ending
1975 was filed. Referring to the 1975 version of the counterpart sections
of the NIRC, the Court still cannot justify the exemptions claimed.
Section 255 provides that no tax shall ". . . be paid upon reinsurance by
any company that has already paid the tax . . . ." This cannot be applied
to the present case because, as previously discussed, the pool is a
taxable entity distinct from the ceding companies; therefore, the latter
cannot individually claim the income tax paid by the former as their
own. EDSAac

7.ID.; ID.; CANNOT BE CLAIMED BY NON-RESIDENT FOREIGN
INSURANCE CORPORATION IN CASE AT BAR; REASONS; TAX
EXEMPTION CONSTRUED STRICTISSIMI JURIS. Section 24 (b) (1)
pertains to tax on foreign corporations; hence, it cannot be claimed by
the ceding companies which are domestic corporations. Nor can
Munich, a foreign corporation, be granted exemption based solely on
this provision of the Tax Code because the same subsection specifically
taxes dividends, the type of remittances forwarded to it by the pool.
Although not a signatory to the Pool Agreement, Munich is patently an
associate of the ceding companies in the entity formed, pursuant to
their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared
in their income and loss. This is manifest from a reading of Articles 3
and 10 of the Quota-Share Reinsurance Treaty and Articles 3 and 10 of
the Surplus Reinsurance Treaty. The foregoing interpretation of Section
24 (b) (1) is in line with the doctrine that a tax exemption must be
construed strictissimi juris, and the statutory exemption claimed must
be expressed in a language too plain to be mistaken.
8.ID.; ID.; BASED ON TAX TREATY NOT APPLICABLE IN CASE AT BAR;
REASON. The petitioners' claim that Munich is tax-exempt based on
the RP-West German Tax Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the pool for corporate taxes on
the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect. Although
petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on
December 14, 1984.
9.ID.; ASSESSMENT AND COLLECTION OF TAX; PRESCRIPTION; CHANGE
IN THE ADDRESS OF THE TAXPAYER WILL NOT TOLL THE RUNNING OF
THE PRESCRIPTIVE PERIOD UNLESS THE COMMISSIONER OF INTERNAL
REVENUE HAS BEEN INFORMED OF SAID CHANGE. The CA and the
CTA categorically found that the prescriptive period was tolled under
then Section 333 of the NIRC, because "the taxpayer cannot be located
at the address given in the information return filed and for which
reason there was delay in sending the assessment." Indeed, whether the
government's right to collect and assess the tax has prescribed involves
facts which have been ruled upon by the lower courts. It is axiomatic
that in the absence of a clear showing of palpable error or grave abuse
of discretion, as in this case, this Court must not overturn the factual
findings of the CA and the CTA. Furthermore, petitioners admitted in
their Motion for Reconsideration before the Court of Appeals that the
pool changed its address, for they stated that the pool's information
return filed in 1980 indicated therein its "present address." The Court
finds that this falls short of the requirement of Section 333 of the NIRC
for the suspension of the prescriptive period. The law clearly states that
the said period will be suspended only "if the taxpayer informs the
Commissioner of Internal Revenue of any change in the address."
D E C I S I O N
PANGANIBAN, J p:
Pursuant to "reinsurance treaties," a number of local insurance firms
formed themselves into a "pool" in order to facilitate the handling of
business contracted with a nonresident foreign reinsurance company.
May the "clearing house" or "insurance pool" so formed be deemed a
partnership or an association that is taxable as a corporation under the
National Internal Revenue Code (NIRC)? Should the pool's remittances
to the member companies and to the said foreign firm be taxable as
dividends? Under the facts of this case, has the government's right to
assess and collect said tax prescribed? cdasia
The Case
These are the main questions raised in the Petition for Review
on Certiorari before us, assailing the October 11, 1993 Decision 1 of the
Court of Appeals 2 in CA-GR SP 29502, which dismissed petitioners'
appeal of the October 19, 1992 Decision 3 of the Court of Tax
Appeals 4 (CTA) which had previously sustained petitioners' liability for
deficiency income tax, interest and withholding tax. The Court of
Appeals ruled:
"WHEREFORE, the petition is DISMISSED, with costs against
petitioners." 5
The petition also challenges the November 15, 1993 Court of Appeals
(CA) Resolution 6 denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
"The petitioners are 41 non-life insurance corporations,
organized and existing under the laws of the Philippines. Upon
issuance by them of Erection, Machinery Breakdown, Boiler
Explosion and Contractors' All Risk insurance policies, the
petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the
Munchener Ruckversicherungs-Gesselschaft (hereafter called
Munich), a non-resident foreign insurance corporation. The
reinsurance treaties required petitioners to form a [p]ool.
Accordingly, a pool composed of the petitioners was formed
on the same day.
"On April 14, 1976, the pool of machinery insurers submitted a
financial statement and filed an "Information Return of
Organization Exempt from Income Tax" for the year ending in
1975, on the basis of which it was assessed by the
Commissioner of Internal Revenue deficiency corporate taxes in
the amount of P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on dividends paid to
Munich and to the petitioners, respectively. These assessments
were protested by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.
"On January 27, 1986, the Commissioner of Internal Revenue
denied the protest and ordered the petitioners, assessed as
"Pool of Machinery Insurers," to pay deficiency income tax,
interest, and with[h]olding tax, itemized as follows:
Net income per information returnP3,737,370.00
===========
Income tax due thereonP1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79545,193.60

TOTAL AMOUNT DUE &P1,843,273.60
COLLECTIBLE===========
Dividend paid to Munich
Reinsurance CompanyP3,728,412.00
===========
35% withholding tax at source due thereonP1,304,944.20
Add: 25% surcharge326,236.05
14% interest from
1/25/76 to 1/25/79137,019.14
Compromise
penalty-non-filing of return300.00
late payment300.00

TOTAL AMOUNT DUE &P1,768,799.39
COLLECTIBLE===========
Dividend paid to Pool MembersP655,636.00
===========
10% withholding tax at
source due thereonP65,563.60
Add: 25% surcharge16,390.90
14% interest from
1/25/76 to 1/25/796,884.18
Compromise
penalty-non-filing of return300.00
late payment300.00

TOTAL AMOUNT DUE &P89,438.68
COLLECTIBLE==========" 8
The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latter's collection of
premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because "the taxpayer
cannot be located at the address given in the information return filed."
Hence, this Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
"1.Whether or not the Clearing House, acting as a mere agent
and performing strictly administrative functions, and which did
not insure or assume any risk in its own name, was a
partnership or association subject to tax as a corporation;
"2.Whether or not the remittances to petitioners and
MUNICHRE of their respective shares of reinsurance premiums,
pertaining to their individual and separate contracts of
reinsurance, were "dividends" subject to tax; and
"3.Whether or not the respondent Commissioner's right to
assess the Clearing House had already prescribed." 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of
Appeals that the pool is taxable as a corporation, and that the
government's right to assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the
pool or clearing house was an informal partnership, which was taxable
as a corporation under the NIRC. They point out that the reinsurance
policies were written by them "individually and separately," and that
their liability was limited to the extent of their allocated share in the
original risks thus reinsured. 11 Hence, the pool did not act or earn
income as a reinsurer. 12 Its role was limited to its principal function of
"allocating and distributing the risk(s) arising from the original insurance
among the signatories to the treaty or the members of the pool based
on their ability to absorb the risk(s) ceded[;] as well as the performance
of incidental functions, such as records, maintenance, collection and
custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1)
they, the reinsurers, did not share the same risk or solidary
liability; 14 (2) there was no common fund; 15 (3) the executive board of
the pool did not exercise control and management of its funds, unlike
the board of directors of a corporation; 16 and (4) the pool or clearing
house "was not and could not possibly have engaged in the business of
reinsurance from which it could have derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of
Internal Revenue, the agency tasked with the enforcement of tax laws, is
accorded much weight and even finality, when there is no showing that
it is patently wrong, 18 particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently
affirmed by the CTA, a specialized body created for the exclusive
purpose of reviewing tax cases, and the Court of Appeals. 19 Indeed,

"[I]t has been the long standing policy and practice of this
Court to respect the conclusions of quasi-judicial agencies,
such as the Court of Tax Appeals which, by the nature of its
functions, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed
an expertise on the subject, unless there has been an abuse or
improvident exercise of its authority." 20
This Court rules that the Court of Appeals, in affirming the CTA which
had previously sustained the internal revenue commissioner, committed
no reversible error.Section 24 of the NIRC, as worded in the year ending
1975, provides:
"SEC. 24.Rate 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, no matter how created or organized, but not
including duly registered general co-partnership (compaias
colectivas), general professional partnerships, private
educational institutions, and building and loan associations . . .
."
Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered
partnerships and associations. Parenthetically, the NLRC's inclusion of
such entities in the tax on corporations was made even clearer by the
Tax Reform Act of 1997, 21 which amended the Tax Code.Pertinent
provisions of the new law read as follows:
"SEC. 27.Rates of Income Tax on Domestic Corporations.
(A)In General. Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all
sources within and without the Philippines by every
corporation, as defined in Section 22 (B) of this Code, and
taxable under this Title as a corporation . . . ."
"SEC. 22.Definition. When used in this Title:
xxx xxx xxx
(B)The term 'corporation' shall include partnerships, no matter
how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional
partnerships [or] a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a
service contract without the Government. 'General professional
partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or
business. LLphil
xxx xxx xxx."
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held
that Section 24 covered these unregistered partnerships and even
associations or joint accounts, which had no legal personalities apart
from their individual members. 23 The Court of Appeals astutely
applied Evangelista: 24
". . . Accordingly, a pool of individual real property owners
dealing in real estate business was considered a corporation for
purposes of the tax in Sec. 24 of the Tax Code in Evangelista
v. Collector of Internal Revenue, supra. The Supreme Court said:
'The term 'partnership' includes a syndicate, group, pool,
joint venture or other unincorporated organization,
through or by means of which any business, financial
operation, or venture is carried on . . . (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63)'"
Article 1767 of the Civil Code recognizes the creation of a contract of
partnership when "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." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the
profits." 26 In other words, a partnership is formed when persons
contract "to devote to a common purpose either money, property, or
labor with the intention of dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter
into a "joint enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool
Agreement 29 or an association 30 that would handle all the insurance
businesses covered under their quota-share reinsurance treaty 31 and
surplus reinsurance treaty 32 with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the
NIRC:
(1)The pool has a common fund, consisting of money and other
valuables that are deposited in the name and credit of the pool. 33 This
common fund pays for the administration and operation expenses of
the pool. 34
(2)The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for
each of the ceding companies. 35
(3)True, the pool itself is not a reinsurer and does not issue any
insurance policy; however, its work is indispensable, beneficial and
economically useful to the business of the ceding companies and
Munich, because without it they would not have received their
premiums. The ceding companies share "in the business ceded to the
pool" and in the "expenses" according to a "Rules of Distribution"
annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found
by the CTA:
". . . The fact that the pool does not retain any profit or income
does not obliterate an antecedent fact, that of the pool being
used in the transaction of business for profit. It is apparent,
and petitioners admit, that their association or coaction was
indispensable [to] the transaction of the business. . . If together
they have conducted business, profit must have been the
object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of
consequence, as it implies that profit actually resulted." 37
The petitioners' reliance on Pascual v. Commissioner 38 is misplaced,
because the facts obtaining therein are not on all fours with the present
case. In Pascual, there was no unregistered partnership, but merely a
co-ownership which took up only two isolated transactions. 39 The Court
of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than
ten years, as in the case before us.
Second Issues:
Pool's Remittances Are Taxable
Petitioners further contend that the remittances of the pool to the
ceding companies and Munich are not dividends subject to tax. They
insist that taxing such remittances contravene Sections 24 (b) (I)
and 263 of the 1977 NIRC and "would be tantamount to an illegal
double taxation, as it would result in taxing the same premium income
twice in the hands of the same taxpayer." 40 Moreover, petitioners argue
that since Munich was not a signatory to the Pool Agreement, the
remittances it received from the pool cannot be deemed
dividends. 41 They add that even if such remittances were treated as
dividends, they would have been exempt under the previously
mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German
Tax Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the
same property twice when it should be taxed only once. That is, ". . .
taxing the same person twice by the same jurisdiction for the same
thing." 46 In the instant case, the pool is a taxable entity distinct from
the individual corporate entities of the ceding companies. The tax on
its income is obviously different from the tax on the dividends received
by the said companies. Clearly, there is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since
their entitlement thereto remains unproven and unsubstantiated. It is
axiomatic in the law of taxation that taxes are the lifeblood of the
nation. Hence, "exemptions therefrom are highly disfavored in law and
he who claims tax exemption must be able to justify his claim or
right." 47 Petitioners have failed to discharge this burden of proof. The
sections of the 1977 NIRC which they cite are inapplicable, because
these were not yet in effect when the income was earned and when the
subject information return for the year ending 1975 was filed.
Referring to the 1975 version of the counterpart sections of the NIRC,
the Court still cannot justify the exemptions claimed. Section 255
provides that no tax shall ". . . be paid upon reinsurance by any
company that has already paid the tax . . . ." This cannot be applied to
the present case because, as previously discussed, the pool is a taxable
entity distinct from the ceding companies; therefore, the latter cannot
individually claim the income tax paid by the former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies
which are domestic corporations. Nor can Munich, a foreign
corporation, be granted exemption based solely on this provision of the
Tax Code, because the same subsection specifically taxes dividends, the
type of remittances forwarded to it by the pool. Although not a
signatory to the Pool Agreement, Munich is patently an associate of the
ceding companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich shared
in their income and loss. This is manifest from a reading of Articles
3 49 and 10 50 of the Quota-Share Reinsurance Treaty and Articles
3 51 and 10 52 of the Surplus Reinsurance Treaty. The foregoing
interpretation of Section 24 (b) (1) is in line with the doctrine that a tax
exemption must be construed strictissimi juris, and the statutory
exemption claimed must be expressed in a language too plain to be
mistaken. 53

Finally, the petitioners' claim that Munich is tax-exempt based on the
RP-West German Tax Treaty is likewise unpersuasive, because the
internal revenue commissioner assessed the pool for corporate taxes on
the basis of the information return it had submitted for the year ending
1975, a taxable year when said treaty was not yet in effect. 54 Although
petitioners omitted in their pleadings the date of effectivity of the
treaty, the Court takes judicial notice that it took effect only later, on
December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect
the subject tax had prescribed. They claim that the subject information
return was filed by the pool on April 14, 1976. On the basis of this
return, the BIR telephoned petitioners on November 11, 1981, to give
them notice of its letter of assessment dated March 27, 1981. Thus, the
petitioners contend that the five-year statute of limitations then
provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an
assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically
found that the prescriptive period was tolled under then Section 333 of
the NIRC, 57 because " the taxpayer cannot be located at the address
given in the information return filed and for which reason there was
delay in sending the assessment." 58 Indeed, whether the government's
right to collect and assess the tax has prescribed involves facts which
have been ruled upon by the lower courts. It is axiomatic that in the
absence of a clear showing of palpable error or grave abuse of
discretion, as in this case, this Court must not overturn the factual
findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration
before the Court of Appeals that the pool changed its address, for they
stated that the pool's information return filed in 1980 indicated therein
its "present address." The Court finds that this falls short of the
requirement of Section 333 of the NIRC for the suspension of the
prescriptive period. The law clearly states that the said period will be
suspended only "if the taxpayer informs the Commissioner of Internal
Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolutions of the Court of
Appeals dated October 11, 1993 and November 15, 1993 are hereby
AFFIRMED. Costs against petitioners. cdasia
SO ORDERED.
Romero, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
Footnotes
1.Rollo, pp. 57-69.
2.Second Division, composed of J. Vicente V. Mendoza (now an associate
justice of the Supreme Court), ponente and chairman of the Division;
concurred in by JJ. Jesus M. Elbinias and Lourdes K. Tayao-Taguros,
members.
3.Rollo, pp. 172-191.
4.Penned by Presiding Judge Ernesto D. Acosta and concurred in by Judges
Manuel K. Gruba and Ramon O. De Veyra.
5.Decision of the Court of Appeals, p. 12; rollo, p. 68.
6.Rollo, p. 71.
7.The petition aptly raises only questions of law, not of facts.
8.CA Decision, pp. 1-3; rollo, pp. 57-59.
9.The case was deemed submitted for resolution on January 20, 1998, upon
receipt by this Court of the Memorandum for Respondent
Commissioner. Petitioners' Memorandum was received earlier, on July
11, 1997.
10.Memorandum for Petitioners, p. 10; rollo, p. 390.
11.Ibid., p. 14; rollo, p. 394.
12.Ibid., p. 28; rollo, p. 408.
13.Ibid., p. 15; rollo, p. 395.
14.Ibid., p. 24; rollo, p. 404.
15.Ibid., p. 26; rollo, p. 406.
16.Ibid., pp. 24-25; rollo, pp. 404-405.
17.Ibid., p. 25; rollo, p. 405.
18.See Joebon Marketing Corporation v. Court of Appeals, the Commissioner
of Internal Revenue, GR No. 125070, July 17, 1996, Third Division,
Minute Resolution; citingMisamis Oriental Association of Coco
Traders, Inc. v. Department of Finance Secretary, 238 SCRA 63, 68,
November 10, 1994.
19.See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA
605, 619-620, April 18, 1997.
20.Commissioner of Internal Revenue v. Court of Appeals, 204 SCRA 182,
189-190, per Regalado, J .
21.RA No. 8424, which took effect on January 1, 1998.
22.102 Phil. 140 (1957).
23.Supra, pp. 146-147; cited in Justice Jose C. Vitug, Compendium of Tax
Law and Jurisprudence, p. 52, 2nd revised ed. (1989).
25.Art. 1767, Civil Code of the Philippines.
26.Tolentino, Civil Code of the Philippines, p. 320, Vol. V (1992).
27.Prautch, Scholes & Co. v. Dolores Hernandez de Goyenechea, 1 Phil. 705,
709-710 (1903), per Willard, J.; cited in Moreno, Philippine Law
Dictionary, p. 445 (1982).
28.Morrissey v. Commissioner, 296 US 344, 356; decided December 16, 1935,
per Hughes, CJ.
29.Pool Agreement, p. 1; rollo, p. 154.
30.Ibid., p. 2; rollo, p. 155.
31.Annex C; rollo, pp. 72-100.
32.Annex D; rollo, pp. 101-153.
33.Pool Agreement, p. 4; rollo, p. 157.
34.Ibid., p. 6; rollo, p. 159.
35.Ibid., p. 2; rollo, p. 155.
36.Ibid., p. 6; rollo, p. 159.
37.CTA Decision, pp. 16-17; rollo, pp. 187-188.
38.166 SCRA 560, October 18, 1988.
39.Pascual v. Commission, supra, p. 568.
40.Memorandum for Petitioners, pp. 32-33; rollo, pp. 412-413.
41.Ibid., p. 29; rollo, p. 409.
42.Ibid., p. 30; rollo, p. 410.
43."1. The profits of an enterprise of a Contracting State shall be taxable
only in that State unless the enterprise carries on business in the
other Contracting State through a permanent establishment situated
therein. . . ."
44."5. An insurance enterprise of a Contracting State shall, except with
regard to re-insurance, be deemed to have a permanent
establishment in the other State, if it collects premiums in the
territory of that State or insures risks situated therein through an
employee or through a representative who is not an agent of
independent status within the meaning of paragraph 6."
45.Memorandum for Petitioners, p. 31; rollo, p. 411. Petitioners are referring
to the treaty entitled "Agreement between the Federal Republic of
Germany and the Republic of the Philippines for the Avoidance of
Double Taxation with respect to Taxes on Income and Capital."
46.Victorias Milling Co., Inc. v. Municipality of Victorias, Negros Occidental,
25 SCRA 192, 209, September 27, 1968, per Sanchez, J.
47.Vitug, supra, p. 29; citing Wonder Mechanical Engineering Corporation
v. Court of Tax Appeals, 64 SCRA 555, June 30, 1975. See
also Commissioner of Internal Revenue v. Court of Appeals, Court of
Tax Appeals and Young Men's Christian Association of the Philippines,
Inc., GR No. 124043, pp. 11-12, October 14, 1998;Commissioner of
Internal Revenue v. Court of Appeals, 271 SCRA 605, 613-614, April
18, 1997.
48.Section 24 (b) (1), as amended by RA No. 6110 which took effect on
August 4, 1969, reads:
"(b)Tax on foreign corporations. (1) Non-resident corporations.
A foreign corporation not engaged in trade or business in the
Philippines including a foreign life insurance company not engaged
in the life insurance business in the Philippines shall pay a tax equal
to thirty-five per cent of the gross income received during each
taxable year from all sources within the Philippines, as interests,
dividends, rents, royalties, salaries, wages, technical services or
otherwise, emoluments or other fixed or determinable annual,
periodical or casual gains, profits, and income, and capital
gains: Provided, however, That premiums shall not include
reinsurance premiums."
49.Rollo, p. 73.
"The 'Ceding Companies' undertake to cede to the 'Munich' fixed
quota share of 40% of all insurances mentioned in Article 2 and the
'Munich' shall be obliged to accept all insurances so ceded."
50.Ibid., p. 76.
"The Munich's proportion of any loss shall be settled by debiting it
in account, and a monthly list comprising all losses paid shall be
rendered to the 'Munich' . . . ."
51.Ibid., p. 102.
"The 'Ceding Companies' bind themselves to cede to the 'Munich'
the entire 15 line surplus of the insurances specified in Article 2
hereof.
The surplus shall consist of all sums insured remaining after
deduction of the Quota Share and of the proportion combined net
retention of the 'Pool'.
The Munich undertakes to accept the amounts so ceded up to
fifteen times the 'Ceding Company's proportionate retention."
52.Ibid., p. 105.
"The 'Munich's' proportion of any loss shall be settled by debiting it
in account. A monthly list comprising all losses paid shall be
rendered to the 'Munich' on forms to be agreed. . . ."
53.Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and
Court of Appeals, GR No. 117359, p. 15, July 23, 1998.
54.See Philippine Treaties Index: 1746-1982, Foreign Service Institute, Manila,
Philippines (1983). See also Philippine Treaty Series, Vol. I to VII.
55.See Bundesgesetzblatt Jahrgang: 1984, Teil II (Federal Law Gazette: 1984,
Part II), p. 1008.
56.Memorandum for Petitioners, pp. 33-35; rollo, pp. 413-415.
57."SEC. 333.Suspension of running of statute. The running of the statute
of limitations provided in section three hundred thirty-one or three
hundred thirty-two on the making of assessment and the beginning
of distraint or levy or a proceeding in the court for collection, in
respect of any deficiency, shall be suspended for the period during
which the Commissioner of Internal Revenue is prohibited from
making the assessment or beginning distraint or levy or a proceeding
in court, and for sixty days thereafter; when the taxpayer requests for
a reinvestigation which is granted by the Commissioner when the
taxpayer cannot be located in the address by him in the return filed
upon which a tax is being assessed or collected: . . ."

||| (Afisco Insurance Corp. v. Court of Appeals, G.R. No. 112675, January
25, 1999)
EN BANC
[G.R. No. 48231. June 30, 1947.]
WISE & CO., INC., ET AL., plaintiffs-appellants, vs.
BIBIANO L. MEER, Collector of Internal
Revenue, defendant-appellee.
Ross, Selph, Carrascoso & Janda for appellants.
The Solicitor General for appellee.
SYLLABUS
1.TAXATION; INCOME TAX; LIQUIDATING DIVIDENDS;
DISTRIBUTION NOT A DIVIDEND, THOUGH SO-CALLED. Although
the various resolutions mentioned in the decision speak of
distributions of dividends when referring to those alluded to therein,
' a distribution does not necessarily become a dividend by reason of
the fact that it is called a dividend by the distributing corporation."
2.ID.; ID.; ID.; CONNOTATION OF. "The ordinary connotation
of liquidating dividend involves the distribution of assets by a
corporation to its stockholders upon dissolution." (Klein, Federal
Income Taxation, 253-254.)
3.ID.; ID.; ID.; ID. The determining element therefore is
whether the distribution was in the ordinary course of business and
with intent to maintain the corporation as a going concern, or after
deciding to quit with intent to liquidate the business. Proceedings
actually begun to dissolve the corporation or formal action taken to
liquidate it are but evidentiary and not indispensable.
4.ID.; ID.; ID.; ID.; DISTINGUISHED FROM ORDINARY DIVIDEND.
"The distinction between a distribution in liquidation and an
ordinary dividend is factual; the result in each case depending on the
particular circumstances of the case and the intent of the parties. If
the distribution is in the nature of a recurring return on stock it is an
ordinary dividend. However, if the corporation is really winding up its
business or recapitalizing and narrowing its activities, the distribution
may properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all or Part of the
stockholders' interest in the company . . ."
5.ID.; ID.; ID.; TAXABILITY OF. Payments for surrendered or
relinquished stock in a corporation in complete liquidation,
sometimes called liquidating dividends, are taxable income under the
Income Tax Law. Act No. 2833, section 25 (a), as amended by section
4 of Act No. 3761.
6.ID; ID.; ID.; ID.; STATUTORY CONSTRUCTION;
CONSTRUCTION IN SOURCE OF LOCAL LAW AUTHORITATIVE.
The judicial construction attached to the sources of statutes adopted
in a jurisdiction are of authoritative value in the interpretation of
such local laws.
7.ID.; ID.; ID.; ID.; NO DOUBLE TAXATION. "The gains
realized by the stockholders from the distribution of the assets in
liquidation were subject to the normal tax in like manner as if they
had sold their stock to third persons. The objection that this results
in double taxation of the accumulated earnings and profits is no
more available in the one case than it would have been in the
other."
8.ID.; ID.; ID.; ID.; INDIVIDUAL OR CORPORATION LIABLE TO
TAX. Gains resulting from distributions made in complete
liquidation or dissolution of a corporation as specifically
contemplated in section 25 (a) of the former Income Tax Law, are
taxable as income, whether the stockholder happens to be an
individual or a corporation.
9.ID.; ID.; ID.; SUBJECT TO NORMAL AND ADDITIONAL TAX.
Payments for surrendered stock, or so-called liquidating dividends,
provided for in section 25 (a) of the former Income Tax Law were
subject to both the normal and the additional tax.
10.ID.; ID.; ID.; GAIN 'TAXABLE IRRESPECTIVE OF
SOURCE OF DISTRIBUTION. Section 25 (a) of the law, far from
limiting the taxability, provides that the gain thus realized is a
"taxable income" under the law so long as a gain is realized, it will
be a taxable income whether the distribution comes from the
earnings or profits of the corporation or from the sale of all of its
assets in general, so long as the distribution is made "in complete
liquidation or dissolution."
11.ID.; ID.; ID.; STATUTORY CONSTRUCTION; LAW PREVAILS
OVER REGULATION. In case of conflict between a law and an
administrative regulation, the law prevails.
12.CORPORATIONS; DIVIDENDS; OWNERSHIP OF. "As
between successive owners of shares of stock in a corporation, the
general rule is that dividends belong to the persons who are the
owners of the stock at the time they are declared, without regard to
the time during which the dividends were earned, and this is true
although the dividends are made payable at a future date." (18 C. J.
S., 1119, sec. 470 [~].)
13.ID.; ID.; ID.; PLACE WHERE EARNED; CASE AT BAR. The
facts and data furnished here by the parties satisfactorily show that
the dividends in question were paid to plaintiffs, personally or thru
their proxies or agents, in the Philippines. But aside from this, from
the moment they were declared and a definite fund specified for
their payment (all surplus remaining "after providing for return of
capital and various expenses") and all of this was done in the
Philippines to all legal intents and purposes they earned those
dividends in this country. From the record it can be deduced that the
funds and assets of the Manila Wine Merchants, Ltd., from which
those dividends proceeded, were in the Philippines where its
business was located. So far as the record discloses, its liquidation
was effected in terms of Philippine pesos, indicating that it was made
here. And this in turn would lead to the deduction that the funds
and assets liquidated were here.
D E C I S I O N
HILADO, J p:
This is an appeal by Wise & Co., Inc. and its co-plaintiffs from
the judgment of the Court of First Instance of Manila in civil case No.
56200 of said court, absolving the defendant Collector of Internal
Revenue from the complaint without costs. The complaint was for
recovery of certain amounts therein specified, which had been paid
by said plaintiffs under written protest to said defendant, who had
previously assessed said amounts against the respective plaintiffs by
way of deficiency income taxes for the year 1937, as detailed under
paragraph 6 of defendant's special defense (Record of Appeal, pp. 7-
10). Appellants made eight assignments of error, to wit:
"The trial court erred in finding:
"I.That the Manila Wine Merchants, Ltd., a Hongkong
corporation, was in liquidation beginning June 1, 1937, and
that all dividends declared and paid thereafter were
distributions of all of its assets in complete liquidation.
"II.That all distributions made by the Hongkong
corporation after June 1, 1937, were subject to both normal tax
and surtax.
"III.That income received by one corporation from
another was taxable under the Income Tax Law, and that Wise
& Co., Inc., was taxable on the distribution of its share of the
same net profits on which the Hongkong Company had already
paid Philippine tax despite the clear provisions of section 10 of
the Income Tax Law then in effect.
"IV.That the non-resident individual stockholder
appellants we subject to both normal and additional tax on the
distributions received despite the clear provisions of section 5
(b) of the Income Tax Law then in effect.
"V.That section 25 (a) of the Income Tax Law makes
distributions in liquidation of a foreign corporation, dissolution
proceedings of which were conducted in a foreign country,
taxable income to a non-resident individual stockholder.
"VI.That section 199 of the Income Tax regulations,
providing that in a distribution by a corporation in complete
liquidation of it assets the gain realized by a stockholder,
whether individual or corporate, is taxable as a dividend, is
ineffective.
"VII.That the deficiency assessment was properly
collected.
"VIII.That the refunds claimed by plaintiffs were not in
order and in rendering judgment absolving the Collector of
Internal Revenue from making such refunds."
The facts have been stipulated in writing, as quote
verbatim in the decision of the trial court thus:
I
"That the allegations of paragraphs I and II of the
complain are true and correct.
II
"That during the year 1937, plaintiffs, except Mr. E. M.
Strickland (who, as husband of the plaintiff Mrs. E. M. G.
Strickland, is only a nominal party herein), were stockholders of
Manila Wine Merchants, Ltd., a foreign corporation duly
authorized to d business in the Philippines.
IIII
"That on May 27, 1937, the Board of Directors of Manila
Win Merchants, Ltd., (hereinafter referred to as the Hongkong
Company), recommended to the stockholders of the company
that the adopt the resolutions necessary to enable the
company to sell it business and assets to Manila Wine
Merchants, Inc., a Philippine corporation formed on May 27,
1937, (hereinafter referred to a the Manila Company), for the
sum of P400,000, Philippine currency; that this sale was duly
authorized by the stockholders of the Hongkong Company at a
meeting held on July 22, 1937; that the contract of sale
between the two companies was executed on the same date, a
copy of the contract being attached hereto as Schedule 'A';
and that the final resolutions completing the said sale and
transferring the business and assets of the Hongkong Company
to the Manila Company were adopted on August 3, 1937, on
which date e Manila Company paid the Hongkong Company
the P400,000 purchase price.
IV
"That pursuant to a resolution by its Board of Directors
purporting to declare a dividend, the Hongkong Company
made a distribution from its earnings for the year 1937 to its
stockholders, Plaintiffs receiving the following:

Declared and paid
June 8, 1937

Wise & Co., Inc.P7,677.82
Mr. J. F. MacGregor2,554.86
Mr. N. C. MacGregor2,369.48
Mr. C. J. Lafrentz529.51
Mrs. E. M. G. Strickland2,369.48
Mrs. M. J. G. Mullins2,369.48

P17,870.63

"That the Hongkong Company has paid Philippine
income tax on the entire earnings from which the said
distributions were paid.
IV
"That after deducting the said dividend of June 8, 1937,
the surplus of the Hongkong Company resulting from the
active conduct of its business was P74,182.12. That as a result
of the sale of its business and assets to the Manila Company,
the surplus of the Hongkong Company was increased to a total
ofP270,116.59.

"That pursuant to resolutions of its Board of Directors,
and of its shareholders, purporting to declare dividends, copies
of which are attached hereto as Schedules 'B' and 'B-1', the
Hongkong Company ,distributed this surplus to its
stockholders, plaintiffs receiving the following sums on the
following dates:

DeclaredDeclared
July 22, 1937July 22, 1937
PaidPaid
August 4, October 28,
19371937

Wise & Co., IncP113,861.85P2,198.24
Mr. J. F. MacGregor37,885.20731.48
Mr. N. C. MacGregor36,137.03678.42
Mr. C. J. Lafrentz7,851.86151.61
Mrs. E. M. G. Strickland35,137.03678.42
Mrs. M. J. G. Mullins35,137.03678.42

P265,000.00P5,116.59

"That Philippine income tax had been paid by the
Hongkong Company on the said surplus from which the said
distributions were made.
IV
"That on August 19, 1937, at a special general meeting
of the shareholders of the Hongkong Company, the
stockholders by power resolution directed that the company be
voluntarily liquidated and its capital distributed among the
stockholders; that the stockholder at such meeting appointed a
liquidator to wind up the Hongkong Company's affairs; that the
said liquidator duly paid off the remaining debts of the
Hongkong Company and distributed its capital among the
stockholders including plaintiffs; that the liquidator duly filed
his accounting on January 12, 1938, and in accordance with the
provisions of Hongkong Law, the Hongkong Company was duly
dissolved at the expiration of three months from that date.
VII
"That plaintiffs duly filed Philippine income tax returns.
That defendant subsequently made the following deficiency
assessments against plaintiffs:
WISE & COMPANY, INC.

Net income as per returnP87,649.67
Add: Deductions disallowed
Loss on shares of stock in the Manila
Wine Merchants, Ltd. resulting from
the liquidation of said firm44,515.00
Income not declared:
Return of capitalP51,185.00
Share of surplus123,727.88

Total liquidating dividends receivedP174,912.88
Less value of shares as per books95,700.00

Profits realized on shares of stock in
the Manila Wine Merchants, Ltd. re-
sulting from the liquidation of the
said firmP79,212
Accrued income tax as per return5,258.98

TotalP216,636.53
Deduct accrued income tax12,262.45

Net income as per investigation204,374.0

6 per cent Normal tax12,262.45
Less amount already paid5,258.98
Balance still due and collectible7,003.47

J. F. MACGREGOR

Net income as per returnP47,479 44
Deduct: Ordinary dividends6,307.92
Net income as per investigation subject to
normal tax:

Less cost of shares17,032.25

Profit realized on shares of stock in the
Manila Wine Merchants, Ltd. result-
ing from the liquidation of said firmP41,171.52

Normal tax at 3 per cent1,235.15
Additional tax due549.59

Total normal and additional taxes1,784.74
Less: Amount already paid549.59


N. C. MACGREGOR


normal tax:


ing from the liquidation of the said firmP38,184.96

Less amount already paid483.55


C. J. LAFRENTZ


normal tax:

Total liquidating dividends received.P12,062.98

Profits realized on shares of stock in the
ing from the liquidation of the said firmP8,532.98

3 per cent normal tax due and collectible255.99

MRS. E. M. G. STRICKLAND


normal tax:


Manila Wine Merchants, Itd. result-



MRS. M. J. G. MULLINS


Net income as per investigation subject
to normal tax:
Return of capitalP15,79675


Manila Wine Merchants Ltd. result-


Less amount already paid481.15

Balance still due and collectibleP1,145.54

VIII
"That said plaintiffs duly paid the said amounts
demanded by defendant under written protest, which was
overruled in due course; that the plaintiffs have since July 1,
1939 requested from defendant a refund of the said amounts
which defendant has refused and still refuses to refund.
IX
"That this stipulation is equally the work of both parties
and shall be fairly interpreted to give effect to their intention
that this case shall be decided solely upon points of law.
X
"The parties incorporate the Corporation Law and
Companies Act of Hongkong, and the applicable decisions
made thereunder, into this stipulation by reference, and either
party may at any stage in the proceedings in this case cite
applicable sections of the law and the authorities decided
thereunder as though the same had been duly proved in
evidence.
XI
"That the parties hereto reserve the right to submit other
and further evidence at the trial of this case." (Record on
Appeal, pp. 19-26.)
1.The first assignment of error. Appellants maintain that the
amounts received by them and on which the taxes in question were
assessed and collected were ordinary dividends; while upon the
other hand, appellee contends that they were liquidating dividends.
If the first proposition is correct, this assignment would be well
taken, otherwise, the decision of the court upon the point must be
upheld.
It appears that on May 27, 1937, the Board of Directors of the
Manila Wine Merchants, Ltd. (hereafter called the Hongkong Co.),
recommended to the stockholders of said company "that the
Company should be wound up voluntarily by the members and the
business sold as a going concern to a new Company incorporated
under the laws of the Philippine Islands under the style of 'The
Manila Wine Merchants, Inc.' " (Annex A defendant's answer, Record
on Appeal, p. 12), and that they adopt the resolutions necessary to
enable the company to sell its business and assets to said new
company (hereafter called the Manila Company), organized on that
same date, for the price of P400,000, Philippine currency; that the
sale was duly authorized by the stockholders of the Hongkong Co. at
a meeting held on July 22, 1937; and that the contract of sale
between the two companies was executed on the same day, as
appears from the copy of the contract, Schedule A of the Stipulation
of Facts (par. III, Stipulation of Facts, Record on Appeal, pp. 19-20). It
will be noted that the Board of Directors of the Hongkong Co., in
recommending the sale, specifically mentioned "a new Company
incorporated under the laws of the Philippine Islands under the style
of 'The Manila Wine Merchants, Inc.' " as the purchaser, which fact
shows that at the time of the recommendation, the Manila Company
had already been formed, although on the very same day; and this
and the further fact that it was really the latter corporation that
became the purchaser should clearly point to the conclusion that the
Manila Company was organized for the express purpose of
succeeding the Hongkong Co. The stipulated facts would admit of
no saner interpretation.
While it is true that the contract of sale was signed on y 22,
1937, it contains in its paragraph 4 of the express vision that the
transfer "will take effect as on and from first day of June, One
thousand nine hundred and thirty-seven, and until completion
thereof, the Company all stand possessed of the property hereby
agreed to be transferred and shall carry on its business in trust for
the Corporation (Schedule A of Stipulation of Facts, Record Appeal,
p. 15). "The Company" was the Hongkong Company and "the
Corporation" was the Manila Company. For "the Company" to carry
on the business in trust for the Corporation," it was necessary for the
latter to be the owner of the business. It is plain that the parties
considered the sale as made as on and from June 1, 1937 for e
purposes of said sale and transfer, both parties agreed at the deed
of July 22, 1937, was to retroact to the first y of the preceding
month.
The cited provision could not have served any other purpose
than to consider the sale as made as of June 1, 1937. it had not
been for this purpose, if the intention had been that the sale was to
be effective upon the date of the written contract or subsequently,
said provision would certainly never have been written, for how
could the transfer sale take effect as of June 1, 1937, if it were to be
considered as made at a later date ?
The first distribution made after June 1, 1937, of what plaintiffs
call ordinary dividends but what defendant denominates liquidating
dividends was declared and paid on June 8, 1937 (Stipulation,
Paragraph IV, Record on Appeal, p. 20). It will be recalled that the
recommendation the Board of Directors of the Hongkong Company,
at their meeting on May 27, 1937, was first of all "that the company
should be wound up voluntarily by the members (Record on Appeal,
p. 12), and in pursuance of that purpose, it was further
recommended that the Company's business be sold as a going
concern to the Manila Company (ibid.). Complying with the
Companies Ordinance 1932 for companies registered in Hongkong
for the voluntary winding up by members, a Declaration of Solvency
was drawn up duly signed before the British Consul-General in
Manila by the same directors, and said declaration was returned to
Hongkong for filing with the Registrar of Companies (ibid.)Both
recommendation were in due course approved and ratified. The later
execution of the formal deed of sale and the successive distributions
of the amounts in question among the stockholder of the Hongkong
Company were obviously other steps in its complete liquidation. And
they leave no room for doubt in the mind of the Court that said
distributions were not in the ordinary course of business and with
intent t maintain the corporation as a going concern in which
case they would have been distributions of ordinary dividend but
after the liquidation of the business had been decide upon, which
makes them payments for the surrender an relinquishment of the
stockholders' interest in the corporation, or so-called liquidating
dividends.

More than with the distribution of June 8, 1937, is this true
with those declared on July 22, 1937, and paid on Au gust 4 and
October 28, 1937, respectively (Stipulation o Facts, par. 5, Record on
Appeal, p. 21) . The distributions thus declared on July 22, 1937, and
paid on August and October 28, 1937, were from the surplus of the
Hongkong Company resulting from the active conduct of it business
and amounting to P74,182.12, which surplus was augmented to a
total of P270,116.59 as a result of the sale of its business and assets
to the Manila Company (ibid.) In both Schedules B and B-1 of the
Stipulation of Fact (Record on Appeal, pp. 16-18), being minutes of
directors meetings of the Hongkong Co., where authorization and
instruction were given to declare and pay in the form of "dividends"
to the shareholders the amounts in question, it was specifically
provided that the surplus to be so distributed be that resulting after
providing for return of capital andnecessary or various expenses, as
shown in the balance sheet prepared as of June 1, 1937, and in the
reconstructed balance sheet of the same date presented by
company's auditors, it having been resolved in Schedule B-l that
"any balance remaining to be distributed when
al liquidator's account has been rendered and paid" record on
Appeal, p. 18; emphasis supplied). It thus comes more evident that
those distributions were to be made in the course or as a result of
the Hongkong Company's liquidation and that said liquidation was
to be complete and final. And although the various resolutions have
mentioned speak of distributions of dividends when referring to
those already alluded to, "a distribution does not necessarily become
a dividend by reason of the fact that it is called a dividend by the
distributing corporation." [Holmes Federal Taxes, 6th edition, 774.)
The ordinary connotation of liquidating dividend involves the
distribution of assets by a corporation to its stockholders upon
dissolution."(Klein, Federal Income Taxation, 253-254.)
But it is contended by plaintiffs that as of August 4, 1937, the
Hongkong Company "had taken no steps toward dissolution or
liquidation and still retained on hand liquid assets in excess of its
capitalization." They also assert 'that it was only on August 19, 1937,
that said company took the first corporate steps toward liquidation
(Appellants' Brief, pp. 9-10). The fact, however, is that since July 22,
1937, when the formal deed of sale of all the properties, assets, and
business of the Hongkong Company to the Manila Company was
made, it was expressly stipulated that the sale or transfer shall take
effect as of June 1, 1937. As already indicated, the transfer of what
was sold, like the sale itself, was, by the mutual agreement of the
parties, considered as made on and from that date, and that, if
thereafter and until final completion of the transfer, the Hongkong
Company continued to run the business, it did so in trust for the
new owner, the Manila Company. In the case of Canal-Commercial T.
& S. Bk. vs. Comm'r (63 Fed. [2d], 619, 620) it was held that:
" . . . The determining element therefore is whether the
distribution was in the ordinary course of business and with
intent to maintain the corporation as a going concern, or after
deciding to quit with intent to liquidate the
business. Proceedings actually begun to dissolve the
corporation or formal action taken to liquidate it are but
evidentiary and not indispensable. Tootle vs. Commissioner (C.
C. A. 58 F. [2d], 576.) The fact that the distribution is wholly
from surplus and not from capital, and therefore lawful as a
dividend is only evidence. In Hellmich vs. Hellman, and Tootle
vs. Commissioner, supra, the distribution was wholly from
profits yet held to be one in liquidation . . ." (Emphasis
supplied.)
In the case at bar, when in the deed of July 22, 1937, by
authority of its stockholders, the Hongkong Company thru its
authorized representative declared and agreed that the aforesaid
sale and transfer shall take effect as of June 1, 1937, and distribution
from its assets to those same stockholders made after June 1, 1937,
although before July 22, 1937, must have been considered by them
as liquidating dividends; for how could they consistently deem all the
business and assets of the corporation sold as of June 1, 1937, and
still say that said corporation, as a going concern, distributed
ordinary dividends to them thereafter?
In Holmby Corporation vs. Comm'r (83 Fed. [2d], 648-550), the
court said:
" . . . The fact that the distributions were called
'dividends' and were made, in part, from earnings and profits,
and that some of them were made before liquidation or
dissolution proceedings were commenced, is not controlling. .
. The determining element is whether the distributions were in
the ordinary course of business and with intent to maintain the
corporation as a going concern, or after deciding to quit and
with intent to liquidate the business . . . " (Emphasis supplied.)
The directors or representatives of the Hongkong Company or
the Manila Company, or both, could of course not convert into
ordinary dividends what in law and in reality re not such. As aptly
stated by Chief Justice Shaw in Comm. vs. Hunt (38 Am. Dec., 354-
355),
"The law is not to be hoodwinked by colorable
pretenses. It looks truth and reality through whatever disguise
they may assume."
The amounts thus distributed among the plaintiffs were not in
the nature of a recurring return on stock in fact, they surrendered
and relinquished their stock in return for id distributions, thus
ceasing to be stockholders of the Hongkong Company, which in turn
ceased to exist in its own right as a going concern during its more
or less brief administration of the business as trustee for the Manila
Company, and finally disappeared even as such trustee.
"The distinction between a distribution in liquidation and
an ordinary dividend is factual; the result in each case
depending on the particular circumstances of the case and the
intent of the parties. If the distribution is in the nature of a
recurring return on stock it is an ordinary dividend. However, if
the corporation is really winding up its business or
recapitalizing and narrowing its activities, the distribution may
properly be treated as in complete or partial liquidation and as
payment by the corporation to the stockholder for his stock.
The corporation is, in the latter instances, wiping out all parts
of the stockholders' interest in the company . . .(Montgomery,
Federal Income Tax Handbook [1938-1939], 258; emphasis
supplied.)
It is our considered opinion that we are not dealing here with
"the legal right of a tax-payer to decrease the amount of what
otherwise will be his taxes, or altogether avoid them, by means
which the law permits" (St. Louis Union Co. U. S., 82 Fed. [2], 61), but
with a situation where we have to apply in favor of the government
the principle that the "liability for taxes cannot be evaded by a
transaction constituting a colorable subterfuge" (61 C. J., 173), it
being clear that the distributions under consideration were not
ordinary dividends and were taxable in the manner form and
amounts decreed by the court below.
2.The second assignment of error. In disposing of the first
assignment of error, we held that the distribution in the instant case
were not ordinary dividends but payments for surrendered or
relinquished stock in a corporation in complete liquidation,
sometimes called liquidating dividends. The question is whether such
amounts were taxable income. The income Tax Law, Act No. 2833,
section 25 (a), as amended by section 4 of Act No. 3761, inter
alia stipulated:
"Where a corporation, partnership, association, joint
account, or insurance company distributes all of its assets in
complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder, whether individual or corporation,
is a taxable income or a deductible loss as the case may be."
(Emphasis supplied.)
Partial source of the foregoing provision was section 201 (c) of
the U. S. Revenue Act of 1918, approved February 24, 1919,
providing:
"Amounts distributed in the liquidation of a corporation
shall be treated as payments in exchange for the stock or
share, and any gain or profit realized thereby shall be taxed to
the distributee as other gains or profits."
It is a familiar rule of statutory construction that the judicial
construction attached to the sources of statutes adopted in a
jurisdiction are of authoritative value in the interpretation of such
local laws. The Supreme Court of the United States has had occasion
to construe certain pertinent parts of the Federal Revenue Act above
mentioned on February 20, 1928, when it decided the case of
Hellmich vs. Hellman (276 U. S., 233; 72 Law. ed., 544). The case
involved the recovery of additional income taxes assessed against
the plaintiffs under the Federal Revenue Act of 1918, and paid under
protest. And its determination hinged around the construction of
parts of said act after which those of our own law now under
discussion were patterned. Justice Sanford said:
"The question here is whether the gains realived by
stockholders from the amounts distributed in the liquidation of
the assets of a dissolved corporation, out of its earnings or
profits accumulated since February 28, 1913, were taxable to
them as other 'gains or profits', whether the amounts so
distributed were 'dividends' exempt from normal tax.
Section 201 (a) of the act defined the term 'dividend' as
'any distribution made by a corporation . . . to its shareholders .
. . whether in cash or in other property . . . out of its earnings
or profits accumulated since February 28, 1913 . . . Section 201
(c) provided that 'amounts distributed in the liquidation
corporation shall be treated as payments in exchange for stock
or shares, and any gain or profit realized thereby shall be taxed
to distributee as other gains or profits.' "
Our law at the time of the transactions in question, in
providing that where a corporation, etc. distributes all its assets in
complete liquidation or dissolution, the gain realized or loss
sustained by the stockholder is a taxable income or a deductible loss
as the case may be, in effect treated such distributions as payments
in exchange for the stock or share. Thus, in making the deficiency
assessments under consideration, the Collector, among other items,
made roper deduction of the "value of shares" or "cost of shares"
the case of each individual plaintiff, assessing the tax only on the
resulting "profit realized" (Stipulation, par. ,VII, Record on Appeal, pp.
22-25); and of course in case the value or cost of the shares should
exceed the distribution received by the stockholder, the resulting
difference will be treated as a "deductible loss."

In the same case the Supreme Court of the United States
made the following quotation, which is here relevant, from Treasury
Regulations 45, article 1548:
. . . So-called liquidation or dissolution dividends are not
dividends within the meaning of the statute, and amounts so
distributed, whether or not including any surplus earned since
February 28, 1913, are to be regarded as payments for the
stock of the dissolved corporation. Any excess so received over
the cost of his stock to the stockholder, or over its fair market
value as of March 1, 1913, if acquired prior thereto, is a taxable
profit. A distribution in liquidation of the assets and business of
a corporation, which is a return to the stockholders of the
value of his stock upon a surrender of his interest in the
corporation, is distinguishable from a dividend paid by a going
corporation out of current earnings or accumulated surplus
when declared by the directors in their discretion, which is in
the nature of a recurrent return upon the stock." (72 Law. ed.,
546.)
The Income Tax Law of the Philippines in force at the time
defined the term "dividend" in section 25 (a), as amended, as "any
distribution made by a corporation . . . out of its earnings or profits
accumulated since March 1, 1913, and payable to its shareholders
whether in cash or other property." This definition is substantially the
same as that given to the same term by the U. S. Revenue Act of
1918 quoted by Justice Sanford in the passage above-inserted.
Plaintiffs contend that defendant's position would result in
double taxation. A similar contention has been adversely disposed of
against the taxpayer in the Hellmich case in these words:
"The gains realized by the stockholders from the
distribution of the assets in liquidation were subject to the
normal tax in like manner as if they had sold their stock to
third persons. The objection that this results in double taxation
of the accumulated earnings and profits is no more available in
the one case than it would have been in the other. See
Merchants' Loan & T. Co. vs. Smietanki, 255 U. S., 509; 65 Law.
ed., 751; 15 A. L. R., 1305; 41 Sup. Ct. Rep., 386; Goodrich vs.
Edwards, 255 U. S. 527; 65 Law. ed., 758; 41 Sup Ct. Rep., 390.
When, as here, Congress has clearly expressed its intention, the
statute must be sustained even though double taxation results.
See Patton vs. Brady, 184 U. S., 608; 46 Law. ed., 713; 22 Sup.
Ct. Rep., 493; Cream of Wheat Co. vs. Grand Forks County, 253
U. S., 325, 330; 64 Law. ed., 931, 934; 40 Sup. Ct. Rep., 558."
(Hellmich vs. Hellman, supra; 72 Law. ed., 547.)
It should be borne in mind that plaintiffs received the
distributions in question in exchange for the surrender and
relinquishment by them of their stock in the Hongkong Company
which was dissolved and in process of complete liquidation. That
money in the hands of the corporation formed a part of its income
and was properly taxable to it under the then existing Income Tax
Law. When the corporation was dissolved and in process of complete
liquidation and its shareholders surrendered their stock to it and it
paid the sums in question to them in exchange, a transaction took
place, which was no different in its essence from a sale of the same
stock to a third party who paid therefor. In either case the
shareholder who received the consideration for the stock earned that
much money as income of his own, which again was properly taxable
to him under the same Income Tax Law. In the case of the sale to a
third person, it is not perceived how the objection of double taxation
could have been successfully raised. Neither can we conceive how it
could be available where, as in this case, the stock was transferred
back to the dissolved .corporation.
3.The third assignment of error. In view of what has been
said in our consideration of the second assignment of error, the third
can be briefly disposed of. Having held that the distributions
involved herein were not ordinary dividends but payments for stock
surrendered and relinquished by the shareholders to the dissolved
corporation, or so-called liquidating dividends, we have the road
clear to declaring that under section 25 (a) of the former Income Tax
Law, as amended, said distributions were taxable alike to Wise and
Co., Inc. and to the other plaintiffs. We hold that both the proviso of
section 10 (a) of said Income Tax Law and section 198 of Regulations
No. 81 refer to ordinary dividends, not to distributions made in
complete liquidation or dissolution of a corporation which result in
the realization of a gain as specifically contemplated in section 25 (a)
,of the same law, as amended, which as aforesaid expressly provides
for the taxability of such gain as income, whether the stockholder
happens to be an individual or a corporation. By analogy, we can
cite the following additional passages from the Hellmich case:
"The controlling question is whether the amounts
distributed to the stockholders out of the earnings and profits
accumulated by the corporation since February 28, 1913, were
to be treated under section 201 (a) as 'dividends,' which were
exempt from the normal tax; or, under section 201 (c) as
payments made by the corporation in exchange for its stock,
which were taxable 'as other gains or profits.'
"It is true that if section 201 (a) stood alone its broad
definition of the term 'dividend' would apparently include
distributions made to stockholders in the liquidation of a
corporation although this term, as generally understood and
used, refers to the recurrent return upon stock paid to
stockholders by a going corporation in the ordinary course of
business, which does not reduce their stock holdings and
leaves them in a position to enjoy future returns upon the
same stock. (See. Lynch vs. Hornby, 247 U. S., 339, 344-346;
and Langstaff vs. Lucas [D. C.], 9 Fed. [2d], 691, 694.)
"However, when section 201 (a) and section 201 (c) are
read together, under the long-established rule that the
intention of the lawmakers is to be deduced from a view of
every material part of the statute (Kohlsaat vs. Murphy, 96 U. S.,
153, 159; 24 Law. ed., 846), we think it clear that the general
definition of a dividend in section 201 (a) was not intended to
apply to distributions made to stockholders in the liquidation
of a corporation, but that it was intended that such
distributions should be governed by section 201 (c), which,
dealing specifically with such liquidation, provided that the
amounts distributed should 'be treated as payments in
exchange for stock, and that any gain realized thereby should
be taxed to the stockholders' as other gains or profits.' This
brings the two sections into entire harmony, and gives to each.
its natural meaning and due effect. . . ." (Hellmich vs.
Hellman, supra; emphasis supplied.)
4.The fourth assignment of error. Under this assignment it is
contended by the non-resident individual stockholder appellants that
they were not subject to the normal tax as regards the distributions
received by them and involved in the instant case. They "reported
these distributions as dividends from profits on which Philippine
income tax had been paid . . . " (Appellants' brief, p. 21.) They assert
that the distributions were subject only to the additional tax; whereas
the Collector contends that they were subject to both the normal
and the additional tax. After what has been said above, it hardly
needs stating that the manner and form of reporting these
distributions employed by said appellants could not, under the law,
change their real nature as payments for surrendered stock, or so-
called liquidating dividends, provided for in section 25 (a) of the then
Income Tax Law. Such distributions under that law were subject to
both the normal and the additional tax therein provided for.
. . . Loosely speaking, the distribution to the stockholders
of a corporation's assets, upon liquidation, might be termed a
dividend; but this is not what is generally meant and
understood by that word. As generally understood and used, a
dividend is a return upon the stock of its stockholders, paid to
them by a going corporation without reducing their
stockholdings, leaving them in a position to enjoy future
returns upon the same stock . . . In other words, it is
earnings paid to him by the corporation upon his invested
capital therein, without wiping out his capital. On the other
hand, when a solvent corporation dissolves and liquidates, it
distributes to its stockholders, not only any earnings it may
have on hand, but it also pays to them their invested capital,
namely, the amount which they had paid in for their stocks,
thus wiping out their interest in the company . . . " (Langstaff
vs. Lucas, 9 Fed. [2d], 691, 694.
5.The fifth assignment of error. This assignment is made in
behalf of those appellants who were non-resident alien individuals,
and for them it is in effect said that if the distributions received by
them were to be considered as a sale of their stock to the Hongkong
Company, the profit realized by them does not constitute income
from Philippine sources and is not subject to Philippine taxes, "since
all steps in the carrying out of this so-called sale took place outside
the Philippines." (Appellants' brief, p. 26.) We do not think this
contention is tenable under the facts and circumstances of record.
The Hongkong Company was at the time of the sale of its business
to the Manila Company as of June 1, 1937, doing business in the
Philippines, and the Manila Company was a domestic corporation
domiciled and doing business also in the Philippines. Schedule A of
the Stipulation of Facts (Record on Appeal, p. 13) declares, among
other things, that the Hongkong Company was incorporated for the
purpose of carrying on in the Philippine Islands the business of wine,
beer, and spirit merchants and the other objects set out in its
memorandum of association. Hence, its earnings, profits, and assets,
including those from whose proceeds the distributions in question
were made, the major part of which consisted in the purchase price
of the business, had been earned and acquired in the Philippines.
From aught that appears in the reco it is clear that said distributions
were income "from Philippine sources."

6.The sixth assignment of error. Section 199 of Regulations
No. 81, deleting immaterial parts, reads:
"SEC. 199.Distributions in liquidation. In all cases
where a corporation . . . distributes all of its property or assets
in complete liquidation or dissolution, the gain realized from
the transaction the stockholder . . . is taxable as a dividend to
the extent that it is paid out of earnings or profits of the
corporation . . . the amount received by the stockholder in
liquidation is less the cost or other basis of the stock, a
deductible loss is sustained."
This regulation would seem to support the contention the
distributions in question, at least those proceeding from sources
other than the earnings or profits of the dissolve corporation, were
not taxable. Placing the above-quote section of Regulations No. 81
side by side with section (a) of the amended Income Tax Law then in
force n notice that while the regulation limits the taxability of the
gain realized by the stockholder "to the extent that It is paid out of
earnings or profits of the corporation," section 25 (a) of the law, far
from so limiting its taxability, provides that the gain thus realized is a
"taxable income" under the law so long as a gain is realized, it will
be taxable income whether the distribution comes from the earnings
or profits of the corporation or from the sale of all of its assets in
general, so long as the distribution is mad ''in complete liquidation
or dissolution". The regulation makes the gain taxable as a
dividend, while the law made it a taxable income. An inevitable
conflict between the two provisions seems to exist, and in such a
case, of course, the law prevails.
"Treasury Department cannot impose or exempt from
income taxes. and regulations purporting to exempt from
taxation income specifically taxed would be void.
xxx xxx xxx
"Any erroneous interpretation of revenue act by
regulation of Treasury Department would not estop
government from asserting tax on an income, though taxpayer
had been misled by such interpretation, and by it induced to
expose property to taxation. ' (Langstaff vs. Lucas, 9 Fed. [2d],
691.)
7 and 8.The seventh and eighth assignments of error. view
of what has been said above, these two assignments need no
separate treatment.
For the foregoing considerations, the judgment appealed from
will be affirmed with the costs of both instances against e appellants.
So ordered.
Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones,
Hontiveros, Padilla and Tuason, JJ., concur.
RESOLUTION ON MOTION FOR RECONSIDERATION
July 28, 1947
HILADO, J .:
Plaintiffs and appellants have filed a motion for reconsideration
dated July 10, 1947. After carefully considerating said motion, which
makes particular reference to appellants fifth assignment of error, the
court does not consider the arguments therein adduced tenable.
Stripped to their bare essentials, the movants' contentions are
summarized in the following propositions found on page 3-4 of their
motion, to wit:
"Since appellants J.F. MacGregor, N. C. MacGregor, C. J.
Lafrentz, E. M. G. Strickland, and Mrs. M.J. G. Mullins were all
nonresident aliens and since the court has held that the
transaction in this case amounted to a sale or exchange of
their shares in a foreign corporation, which sale or exchange
took place entirely outside of the Philippine Island, it follows
that they have not derived income from Philippines sources
and are not subject to the taxes which have been collected
from them by defendant.
xxx xxx xxx
. . . On the other hand if the income results from the
sale or exchange of the shares in question then the non-
resident alien stockholders who converted their shares abroad
have receive no income from the Philippine sources and are
not subject to any tax whatsoever on their profits from the
transaction."
Leaving aside the other portions of the above-quoted
propositions as sufficiently covered in the Courts decision, let us
direct attention to those parts thereof wherein it is pretended that
the transaction took place "entirely outside the Philippine Island" or
"abroad."
In the minutes, Schedule B of the stipulation of facts (Rec. on
Appeal, pp. 16-17), it appears that on July 22, 1937, an extraordinary
meeting of shareholders of the Manila Wine Merchants, Ltd. was
held and in said meeting amount other things, it was resolved that
the Directors of said Company "be authorized and instructed to
declare and pay in the form of dividend to the shareholders the
amount of any surplus existing after the above-referred to sale has
been consummated. This surplus, after providing for return of capital
and necessary expenses, as shown in the Balance Sheet prepared as
of June 1, 1937, after giving effect to the sale transaction above-
referred to, amounts to approximately P270,000." While Schedule B
does not state the place where the meeting was held, Schedule B-1
of the same stipulation of facts (Record on Appeal, pp. 17-18)
furnishes us the information that it was held in Manila Schedule B-1
in this connection says:
"Sale of Company: In accordance with resolution passed
at any Extraordinary Meeting of Shareholders held in Manila
(underscoring supplied) on July 22, 1937, at 3 o'clock, the
Directors of the Manila Wine Merchants Ltd., were authorized
to sell the Company as a going concern in accordance with
sale agreement presented at the Meeting."
Later in the same Schedule B-1 we find that the declaration of
dividends authorized in the previous meeting as stated in the
minutes Schedule B, was made by the Board of Directors of the
same Manila Wine Merchants, Ltd., of whose meeting on that same
date, July 22, 1937, Schedule B-1 constitutes the minutes. The
pertinent parts of the minutes of said meeting read as follows:
"Dividend: The second matter before the Meeting was
the question of declaring a dividend to enable a distribution in
cases to be made, the dividend to be entire amount standing
at surplus after providing for return of capital and various
expenses in accordance with reconstructed balance sheet as at
June 1, 1937 presented by our auditors.
xxx xxx xxx
"Resolved that as after the Manila Wine Merchants Ltd.
has been sold for the stipulated sum of P400,000 and money
received, there will be after providing for return of capital,
payment of income tax and other charges, a sum of
approximately P270,000 standing at surplus account, a dividend
is now hereby declared in amount covering the entire balance
remaining at surplus account after the concern has been
wound up, and we hereby authorize the distribution of
P265,000 as and when funds are available, any balance
remaining to be distributed when final Liquidators account has
been rendered and paid."
Again, while the minutes Schedule B-1 do not reveals the place
where that board meeting was held, the fact stated therein that it
was held on July 22, 1937, the self-same date of the holding of the
extraordinary meeting of shareholders referred to in the minutes
Schedule B, at 3 o'clock (presumably p.m.), as recorded in Schedule
B-1, clearly shows that the said board meeting was held also in
Manila, and not in Hongkong or elsewhere abroad, for J.F.
MacGregor and E. Heybrook, both of whom appear in both
Schedules B and B-1 to have participated in both meetings, could
not, so far as the record discloses, very well be in Manila and
Hongkong or elsewhere abroad on the same date. There is no
showing nor is it even pretended that these two gentlemen after the
meeting held in Manila on July 22, 1937, at 3 o'clock, took an
airplane or other mode of conveyance, as fast or faster, and hurried
to Hongkong or elsewhere abroad and attended the other meeting
that very same day. Indeed, that both meetings must have been held
in manila would seem to be only natural and logical supposition
from that the fact that the Manila Wine Merchants, Ltd., was
admittedly conducting its business in said city and the Philippines is
general (Schedule A, Rec. on Appeal, p. 13). It seems clear, therefore,
that the dividends in question were declared in the Philippine
Islands.
What was the legal effect of the declaration? Paragraph V of
the stipulation of facts (Rec. on Appeal, pp. 20-21) states that,
pursuant to these resolutions, "the Hongkong Company (the same
Manila Wine Merchants, Ltd.) distributed this surplus to its
stockholders, plaintiffs receiving (underscoring supplied) the
following sums on the following dates" (then follow plaintiffs names
with the respective amounts in Philippine pesos received by them on
the dates stated). It is not stated that they received their dividends in
Hongkong or other foreign money. And in their own brief (p. 25)
they say that the payments or distributions thus received by them, as
a result of the liquidation and sale of said company, "were included
as gross income their Philippine income tax returns". This facts
further tends to show that those payments or distributions were
received in the Philippine Island, either by plaintiffs personally or
through their proxies or agents. Besides, in paragraph V of the
stipulation of facts (Rec. on Appeal, p. 21) it appears that the
dividends or distributions pertaining to their co-plaintiff Wise and
Co., Inc., were paid on the same dates, namely, August 24, 1937, and
October 28, 1937; and it being undisputed that Wise and Co., Inc.
was domiciled and had its principal office of Manila (complaint, par.
I, Rec. on Appeal, p. 2) in which city it was presumably paid, it would
seem obvious that the concomitant payments thus made to the
other plaintiffs were likewise effected in the same place, whether the
individual plaintiffs acted personally or through proxies or agents. It
should also be remembered that while the "registered office" of the
Manila Wine Merchants, Ltd. was stuated in the colony of Hongkong
(Schedule A, Rec. on Appeal, p. 13), the fact is that the only business
for which it was incorporated was the wine, beer, and spirit business,
which the Philippine Islands, and form the record we deduce that it
had also an office in manila where, so far as the record discloses, the
payments were made. Finally, the fact that payments was made in
the Philippine pesos would strongly corrobarate the conclusion that
it was made in this country if it had been made in Hongkong or
elsewhere abroad, the reasonable assumption is that it would have
been made in Hongkong dollars or in the currency of such other
place abroad.

" . . . However, where a corporation has not only
declared a dividend but has specifically appropriated and set
apart from its other assets a fund out of which the dividend is
to be paid, such action constitutes the assets to set apart a
trust fund in the hands of the corporation for the payment of
the stockholders to the exclusion of other creditors. . . (18
C.J.S., p. 1115; emphasis supplied.)
"As between successive owners of shares of stock in a
corporation, the general rule is that dividends belong to the
persons who are the owners of the stock at the time they are
declared, without regard to the time during which the
dividends were earned, and this is true although the dividends
are made payable at a future date." (18 C.J.S., 119, sec. 470 [a];
emphasis supplied.)
"There is no controversy about the legal proposition that
dividends declared belong to the owner of the stock at the
time the dividend is declared." (Livingstone Country Bank vs.
First State Bank, 136 Ky., 546, 554, cited in footnote 36, p.818,
14 C.J.; emphasis supplied.)
"The moment the dividend is declared, it becomes then
separate and distinct from the stock and the dividend falls to
him who is proprietor of the stock of which it was therefore
incident.
"The doctrine is that a dividend is considered parcel of
the mass of corporate property until declared and therefore
incident to and parcel of the stock up to the time it is declared;
and before its declaration, will pass with the sale or devise of
the stock. whosoever owns the stock prior to the declaration of
a dividend, owns the dividend also." (MsLaren vs. Cresent
Planning Mill Co., 117 Mo. A., 40, 47, cited in note 36, p. 818,
14 C.J.; emphasis supplied.)
In De Koven vs. Alsop (201 Ill., 309; 63 L.R.A., 587), the court
said:
"A dividend is defined as a corporate profit set aside,
declared and ordered by the directions to be paid to the
stockholders on demand or at a fixed time. Until the dividend
is declared, these corporate profits belong to the corporation,
not to the stockholders, and are liable for corporate
indebtedness." (Emphasis supplied.)
We are fully satisfied from the facts and data furnished here by
the parties themselves that the dividends in question were paid to
plaintiffs, personally or thru their proxies or agents, in the
Philippines. But aside from this, from the moment they were declared
and a definite fund specified for their payment (all surplus remaining
"after providings for return of capital and various expenses") and
all of this was done in the Philippines to all legal intents and
purposes they earned those dividends in this country. From the
records we deduce that the funds and assets of the Manila wine
Merchants, Ltd., from which those dividends proceeded, were in the
Philippine pesos, indicating that it was made here. And this in turn
would lead to the deduction that the funds and assets liquidated
were here.
Motion denied. So ordered.
Moran, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Briones,
Hontiveros, Padilla and Tuason, JJ., concur.

||| (Wise & Co., Inc. v. Meer, G.R. No. 48231, June 30, 1947)
FIRST DIVISION
[G.R. No. 153793. August 29, 2006.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
JULIANE BAIER-NICKEL, as represented by Marina Q.
Guzman (Attorney-in-fact),respondent.
D E C I S I O N
YNARES-SANTIAGO, J p:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the
January 18, 2002 Decision 1 of the Court of Appeals in CA-G.R. SP No.
59794, which granted the tax refund of respondent Juliane Baier-Nickel
and reversed the June 28, 2000 Decision 2 of the Court of Tax Appeals
(CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002
Resolution 3 of the Court of Appeals denying its motion for
reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in "[m]anufacturing, marketing on wholesale only,
buying or otherwise acquiring, holding, importing and exporting, selling
and disposing embroidered textile products." 4Through JUBANITEX's
General Manager, Marina Q. Guzman, the corporation appointed and
engaged the services of respondent as commission agent. It was agreed
that respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts. 5
In 1995, respondent received the amount of P1,707,772.64, representing
her sales commission income from which JUBANITEX withheld the
corresponding 10% withholding tax amounting to P170,777.26, and
remitted the same to the Bureau of Internal Revenue (BIR). On October
17, 1997, respondent filed her 1995 income tax return reporting a
taxable income of P1,707,772.64 and a tax due of P170,777.26. 6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales
commission income is not taxable in the Philippines because the same
was a compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA
contending that no action was taken by the BIR on her claim for
refund. 7 On June 28, 2000, the CTA rendered a decision denying her
claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as President
of JUBANITEX and not as a mere sales agent thereof. The income
derived by respondent is therefore an income taxable in the Philippines
because JUBANITEX is a domestic corporation. cDCSET
On petition with the Court of Appeals, the latter reversed the Decision
of the CTA, holding that respondent received the commissions as sales
agent of JUBANITEX and not as President thereof. And since the
"source" of income means the activity or service that produce the
income, the sales commission received by respondent is not taxable in
the Philippines because it arose from the marketing activities performed
by respondent in Germany. The dispositive portion of the appellate
court's Decision, reads:
WHEREFORE, premises considered, the assailed decision of the
Court of Tax Appeals dated June 28, 2000 is hereby REVERSED
and SET ASIDE and the respondent court is hereby directed to
grant petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED. 8
Petitioner filed a motion for reconsideration but was denied. 9 Hence,
the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in
the Philippines because the source thereof is JUBANITEX, a domestic
corporation located in the City of Makati. It thus implied that source of
income means the physical source where the income came from. It
further argued that since respondent is the President of JUBANITEX, any
remuneration she received from said corporation should be construed
as payment of her overall managerial services to the company and
should not be interpreted as a compensation for a distinct and separate
service as a sales commission agent.
Respondent, on the other hand, claims that the income she received
was payment for her marketing services. She contended that income of
nonresident aliens like her is subject to tax only if the source of the
income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the
income she derived from said activities is not subject to Philippine
income taxation.
The issue here is whether respondent's sales commission income is
taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25.Tax on Nonresident Alien Individual.
(A)Nonresident Alien Engaged in Trade or Business Within the
Philippines.
(1)In General. A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all
sources within the Philippines. A nonresident alien individual
who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines,' Section 22(G) of this Code
notwithstanding.
xxx xxx xxx
(B)Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. There shall be levied,
collected and paid for each taxable year upon the entire
income received from all sources within the Philippines by
every nonresident alien individual not engaged in trade or
business within the Philippines . . . a tax equal to twenty-five
percent (25%) of such income. . . .
Pursuant to the foregoing provisions of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to Philippine
income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-
resident aliens is the income's "source." In construing the meaning of
"source" in Section 25 of the NIRC, resort must be had on the origin of
the provision. ScTaEA
The first Philippine income tax law enacted by the Philippine Legislature
was Act No. 2833, 10 which took effect on January 1, 1920. 11 Under
Section 1 thereof, nonresident aliens are likewise subject to tax on
income "from all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and
paid annually upon the entire net income received in the
preceding calendar year from all sources by every individual, a
citizen or resident of the Philippine Islands, a tax of two per
centum upon such income; and a like tax shall be levied,
assessed, collected, and paid annually upon the entire net
income received in the preceding calendar year from all
sources within the Philippine Islands by every individual, a
nonresident alien, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue
Law of 1916 as amended by U.S. Revenue Law of 1917. 12 Being a law
of American origin, the authoritative decisions of the official charged
with enforcing it in the U.S. have peculiar persuasive force in the
Philippines. 13
The Internal Revenue Code of the U.S. enumerates specific types of
income to be treated as from sources within the U.S. and specifies when
similar types of income are to be treated as from sources outside the
U.S. 14 Under the said Code, compensation for labor and personal
services performed in the U.S., is generally treated as income from U.S.
sources; while compensation for said services performed outside the
U.S., is treated as income from sources outside the U.S. 15 A similar
provision is found in Section 42 of our NIRC, thus:
SEC. 42.. . .
(A)Gross Income From Sources Within the Philippines. . . .
xxx xxx xxx
(3)Services. Compensation for labor or personal services
performed in the Philippines;
xxx xxx xxx
(C)Gross Income From Sources Without the Philippines. . . .
xxx xxx xxx
(3)Compensation for labor or personal services performed
without the Philippines;
The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but
often debated, that income may be derived from three possible
sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. While the three elements of this attempt at
definition need not be accepted as all-inclusive, they serve as
useful guides in any inquiry into whether a particular item is
from "sources within the United States" and suggest an
investigation into the nature and location of the activities or
property which produce the income.
If the income is from labor the place where the labor is done
should be decisive; if it is done in this country, the income
should be from "sources within the United States." If the
income is from capital, the place where the capital is employed
should be decisive; if it is employed in this country, the income
should be from "sources within the United States." If the
income is from the sale of capital assets, the place where the
sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source"
in this fundamental light. It is not a place, it is an activity or
property. As such, it has a situs or location, and if that situs or
location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. HSTAcI

The intention of Congress in the 1916 and subsequent statutes
was to discard the 1909 and 1913 basis of taxing nonresident
aliens and foreign corporations and to make the test of
taxability the "source," or situs of the activities or property
which produce the income. The result is that, on the one hand,
nonresident aliens and nonresident foreign corporations are
prevented from deriving income from the United States free
from tax, and, on the other hand, there is no undue imposition
of a tax when the activities do not take place in, and the
property producing income is not employed in, this country.
Thus, if income is to be taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out
of which the income issues or is derived must be situated
within the jurisdiction so that the source of the income may be
said to have a situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to
be levied upon to defray the burdens of the United States
Government is that income which is created by activities and
property protected by this Government or obtained by persons
enjoying that protection. 16
The important factor therefore which determines the source of income
of personal services is not the residence of the payor, or the place
where the contract for service is entered into, or the place of payment,
but the place where the services were actually rendered. 17
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, 18 the
Court addressed the issue on the applicable source rule relating to
reinsurance premiums paid by a local insurance company to a foreign
insurance company in respect of risks located in the Philippines. It was
held therein that the undertaking of the foreign insurance company to
indemnify the local insurance company is the activity that produced the
income. Since the activity took place in the Philippines, the income
derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law
of Federal Income Taxation, the Court emphasized that the technical
meaning of source of income is the property, activity or service that
produced the same. Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking
is the activity that produced the reinsurance premiums, and the
same took place in the Philippines. . . . the reinsured, the
liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance
premiums and indemnity were based, were all situated in the
Philippines. . . . 19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC), 20 the issue was whether BOAC, a foreign airline
company which does not maintain any flight to and from the
Philippines is liable for Philippine income taxation in respect of sales of
air tickets in the Philippines, through a general sales agent relating to
the carriage of passengers and cargo between two points both outside
the Philippines. Ruling in the affirmative, the Court applied the case
of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and
reiterated the rule that the source of income is that "activity" which
produced the income. It was held that the "sale of tickets" in the
Philippines is the "activity" that produced the income and therefore
BOAC should pay income tax in the Philippines because it undertook an
income producing activity in the country. aHADTC
Both the petitioner and respondent cited the case of Commissioner of
Internal Revenue v. British Overseas Airways Corporation in support of
their arguments, but the correct interpretation of the said case favors
the theory of respondent that it is the situs of the activity that
determines whether such income is taxable in the Philippines. The
conflict between the majority and the dissenting opinion in the said
case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander Howden
& Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion
centered on whether the sale of tickets in the Philippines is to be
construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by
Justice Florentino P. Feliciano in his dissent. The majority, through
Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of
tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that
source of income is the physical source of the money earned. If such
was the interpretation of the majority, the Court would have simply
stated that source of income is not the business activity of BOAC but
the place where the person or entity disbursing the income is located
or where BOAC physically received the same. But such was not the
import of the ruling of the Court. It even explained in detail
the business activity undertaken by BOAC in the Philippines to pinpoint
the taxable activity and to justify its conclusion that BOAC is subject to
Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That
general sales agent, from 1959 to 1971, "was engaged in (1)
selling and issuing tickets; (2) breaking down the whole trip
into series of trips each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole
trip; and (4) consequently allocating to the various airline
companies on the basis of their participation in the services
rendered through the mode of interline settlement as
prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit
of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged in" business
in the Philippines through a local agent during the period
covered by the assessments. . . . 21
xxx xxx xxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that
the income is derived from activity within the Philippines. In
BOAC's case, the sale of tickets in the Philippines is the activity
that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine
currency. The situs of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the
flow of wealth should share the burden of supporting the
government.
A transportation ticket is not a mere piece of paper. When
issued by a common carrier, it constitutes the contract between
the ticket-holder and the carrier. It gives rise to the obligation
of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the
passenger upon the terms and conditions set forth thereon.
The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute
it a valid contract, binding upon the parties entering into the
relationship. 22
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect to
rendition of labor or personal service, as in the instant case, it is the
place where the labor or service was performed that determines the
source of the income. There is therefore no merit in petitioner's
interpretation which equates source of income in labor or personal
service with the residence of the payor or the place of payment of the
income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital
question posed in this controversy. 23
The settled rule is that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the taxpayer. 24 To
those therefore, who claim a refund rest the burden of proving that the
transaction subjected to tax is actually exempt from taxation. aDHCAE
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would entitle
her to 10% commission income, are "sales actually concluded and
collected through [her] efforts." 25 What she presented as evidence to
prove that she performed income producing activities abroad, were
copies of documents she allegedly faxed to JUBANITEX and bearing
instructions as to the sizes of, or designs and fabrics to be used in the
finished products as well as samples of sales orders purportedly relayed
to her by clients. However, these documents do not show whether the
instructions or orders faxed ripened into concluded or collected sales in
Germany. At the very least, these pieces of evidence show that while
respondent was in Germany, she sent instructions/orders to JUBANITEX.
As to whether these instructions/orders gave rise to consummated sales
and whether these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable
connection between the orders/instructions faxed and the reported
monthly sales purported to have transpired in Germany.

The paucity of respondent's evidence was even noted by Atty. Minerva
Pacheco, petitioner's counsel at the hearing before the Court of Tax
Appeals. She pointed out that respondent presented no contracts or
orders signed by the customers in Germany to prove the sale
transactions therein. 26 Likewise, in her Comment to the Formal Offer of
respondent's evidence, she objected to the admission of the faxed
documents bearing instruction/orders marked as Exhibits "R," 27 "V,"
"W", and "X," 28for being self serving. 29 The concern raised by
petitioner's counsel as to the absence of substantial evidence that
would constitute proof that the sale transactions for which respondent
was paid commission actually transpired outside the Philippines, is
relevant because respondent stayed in the Philippines for 89 days in
1995. Except for the months of July and September 1995, respondent
was in the Philippines in the months of March, May, June, and August
1995, 30 the same months when she earned commission income for
services allegedly performed abroad. Furthermore, respondent
presented no evidence to prove that JUBANITEX does not sell
embroidered products in the Philippines and that her appointment as
commission agent is exclusively for Germany and other European
markets.
In sum, we find that the faxed documents presented by respondent did
not constitute substantial evidence, or that relevant evidence that a
reasonable mind might accept as adequate to support the
conclusion 31 that it was in Germany where she performed the income
producing service which gave rise to the reported monthly sales in the
months of March and May to September of 1995. She thus failed to
discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our income
tax law. Hence, the claim for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-
Nickel, 32 a previous case for refund of income withheld from
respondent's remunerations for services rendered abroad, the Court in a
Minute Resolution dated February 17, 2003, 33 sustained the ruling of
the Court of Appeals that respondent is entitled to refund the sum
withheld from her sales commission income for the year 1994. This
ruling has no bearing in the instant controversy because the subject
matter thereof is the income of respondent for the year 1994 while, the
instant case deals with her income in 1995. Otherwise, stated, res
judicata has no application here. Its elements are: (1) there must be a
final judgment or order; (2) the court that rendered the judgment must
have jurisdiction over the subject matter and the parties; (3) it must be
a judgment on the merits; (4) there must be between the two cases
identity of parties, of subject matter, and of causes of action. 34 The
instant case, however, did not satisfy the fourth requisite because there
is no identity as to the subject matter of the previous and present case
of respondent which deals with income earned and activities performed
for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002
Decision and May 8, 2002 Resolution of the Court of Appeals in CA-G.R.
SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000 Decision
of the Court of Tax Appeals in C.T.A. Case No. 5633, which denied
respondent's claim for refund of income tax paid for the year 1995 is
REINSTATED. IAEcCa
SO ORDERED.
Panganiban, C.J., Austria-Martinez, Callejo, Sr. and Chico-Nazario,
JJ., concur.
Footnotes
1.Penned by Associate Justice Salvador J. Valdez, Jr. and concurred in by
Associate Justices Mercedes Gozo-Dadole and Juan Q. Enriquez,
Jr; rollo, pp. 47-57.
2.Penned by Presiding Judge Ernesto D. Acosta, with Associate Judges
Ramon O. De Veyra, concurring and Amancio Q. Saga,
dissenting; rollo, pp. 78-91.
3.Rollo, pp. 59-61.
4.General Information Sheet of JUBANITEX, Inc., rollo, p. 211.
5.Rollo, p. 100.
6.Exhibit "A," Folder of Exhibits, unpaged.
7.Petition for Review with the CTA, records, p. 4.
8.Rollo, p. 57.
9.Resolution dated May 8, 2002; rollo, pp. 59-61.
10.An Act establishing the income tax law, making other provisions relating
to said tax, and amending certain sections of Act Numbered Twenty-
seven hundred and eleven.
11.F. Dalupan, National Internal Revenue Code Annotated, 1964 ed., vol. 1,
p. 25.
12.Id.
13.J. Araas, Annotations and Jurisprudence on the National Internal
Revenue Code, as Amended, 1963 ed., vol. 1, p. 34.
14.34 Am Jur 2d, 30651, p. 453 (2000).
15.34 Am Jur 2d, 30654, p. 453 (2000).
16.12 J. Mertens, The Law of Federal Income Taxation, Section 45C:04, pp.
45C-12 to 45C-13 (1996). The 1957 edition thereof was cited in the
dissenting opinion of Justice Florentino P. Feliciano in Commissioner
of Internal Revenue v. British Overseas Airways Corporation, G.R. Nos.
L-65773-74, April 30, 1987, 149 SCRA 395, 415-416.
17.12 J. Mertens, The Law of Federal Income Taxation, Section 45C:11, p.
45C-32 (1996).
18.121 Phil. 579 (1965).
19.Id. at 583.
20.Supra note 16.
21.Id. at 405-406.
22.Id. at 407-408.
23.Velarde v. Social Justice Society, G.R. No. 159357, April 28, 2004, 428
SCRA 283, 312.
24.Calamba Steel Center, Inc. v. Commissioner of Internal Revenue, G.R. No.
151857, April 28, 2005, 457 SCRA 482, 500.
25.Rollo, p. 100.
26.TSN, November 10, 1998, pp. 49-55.
27.Rollo, pp. 95-99.
28.Folder of Exhibits, unpaged.
29.Records, pp. 74-75.
30.Respondent's Formal Offer of Evidence, rollo, p. 202.
31.Transglobe International, Inc. v. Court of Appeals, 361 Phil. 727, 738
(1999).
32.G.R. No. 156305.
33.It became final and executory on March 31, 2003.
34.Barbacina v. Court of Appeals, G.R. No. 135365, August 31, 2004, 437
SCRA 300, 307.
||| (Commr. v. Baier-Nickel, G.R. No. 153793, August 29, 2006)
THIRD DIVISION
[G.R. No. 180066. July 7, 2009.]
PHILIPPINE AIRLINES, INC., respondent.
D E C I S I O N
CHICO-NAZARIO, J p:
Before this Court is a Petition for Review on Certiorari, under Rule 45 of
the Revised Rules of Court, seeking the reversal and setting aside of the
Decision 1 dated 9 August 2007 and Resolution 2 dated 11 October
2007 of the Court of Tax Appeals (CTA) en banc in CTA E.B. No. 246.
The CTA en banc affirmed the Decision 3 dated 31 July 2006 of the CTA
Second Division in C.T.A. Case No. 7010, ordering the cancellation and
withdrawal of Preliminary Assessment Notice (PAN) No. INC FY-3-31-01-
000094 dated 3 September 2003 and Formal Letter of Demand dated
12 January 2004, issued by the Bureau of Internal Revenue (BIR) against
respondent Philippine Airlines, Inc. (PAL), for the payment of Minimum
Corporate Income Tax (MCIT) in the amount of P272,421,886.58. ADTCaI
There is no dispute as to the antecedent facts of this case.
PAL is a domestic corporation organized under the corporate laws of
the Republic of the Philippines; declared the national flag carrier of the
country; and the grantee under Presidential Decree No. 1590 4 of a
franchise to establish, operate, and maintain transport services for the
carriage of passengers, mail, and property by air, in and between any
and all points and places throughout the Philippines, and between the
Philippines and other countries. 5
For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly
incurred zero taxable income, 6 which left it with unapplied creditable
withholding tax 7 in the amount of P2,334,377.95. PAL did not pay any
MCIT for the period. cDCSTA
In a letter dated 12 July 2002, addressed to petitioner Commissioner of
Internal Revenue (CIR), PAL requested for the refund of its unapplied
creditable withholding tax for FY 2000-2001. PAL attached to its letter
the following: (1) Schedule of Creditable Tax Withheld at Source for FY
2000-2001; (2) Certificates of Creditable Taxes Withheld; and (3) Audited
Financial Statements.
Acting on the aforementioned letter of PAL, the Large Taxpayers Audit
and Investigation Division 1 (LTAID 1) of the BIR Large Taxpayers Service
(LTS), issued on 16 August 2002, Tax Verification Notice No. 00201448,
authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to verify the
supporting documents and pertinent records relative to the claim of
PAL for refund of its unapplied creditable withholding tax for FY 2000-
2001. In a letter dated 19 August 2003, LTAID 1 Chief Armit S.
Linsangan invited PAL to an informal conference at the BIR National
Office in Diliman, Quezon City, on 27 August 2003, at 10:00 a.m., to
discuss the results of the investigation conducted by Revenue Officer
Cueto, supervised by Revenue Officer Madelyn T. Sacluti.
BIR officers and PAL representatives attended the scheduled informal
conference, during which the former relayed to the latter that the BIR
was denying the claim for refund of PAL and, instead, was assessing
PAL for deficiency MCIT for FY 2000-2001. The PAL representatives
argued that PAL was not liable for MCIT under its franchise. The BIR
officers then informed the PAL representatives that the matter would be
referred to the BIR Legal Service for opinion. CDTHSI
The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-31-01-
000094, which was received by PAL on 23 October 2003. LTAID 1
assessed PAL for P262,474,732.54, representing deficiency MCIT for FY
2000-2001, plus interest and compromise penalty, computed as follows:

Sales/Revenues from Operation P38,798,721,685.00
Less: Cost of Services 30,316,679,013.00

Gross Income from Operation 8,482,042,672.00
Add: Non-operating income 465,111,368.00

Total Gross Income for MCIT purposes 9,947,154,040.00 8
Rate of Tax 2%
Tax Due 178,943,080.80
Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74

Compromise Penalty 25,000.00

Total Amount Due P262,474,732.54 9
==============

PAL protested PAN No. INC FY-3-31-01-000094 through a letter dated
4 November 2003 to the BIR LTS. TEcHCA
On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of Demand
for deficiency MCIT for FY 2000-2001 in the amount of P271,421,88658,
based on the following calculation:

Sales/Revenues from Operation P38,798,721,685.00
Less: Cost of Services

Direct Costs P30,749,761,017.00
Less: Non-deductible

interest expense 433,082,004.00 30,316,679,013.00

Gross Income from Operation P8,482,042,672.00
Add: Non-operating Income 465,111,368.00

Total Gross Income for MCIT purposes P9,947,154,040.00

MCIT tax due P178,943,080.80
Interest 20% per annum 7/16/01 to 02/15/04 92,453,805.78
Compromise Penalty 25,000.00

Total MCIT due and demandable P271,421,886.58 10
==============

PAL received the foregoing Formal Letter of Demand on 12 February
2004, prompting it to file with the BIR LTS a formal written protest
dated 13 February 2004. SEDIaH
The BIR LTS rendered on 7 May 2004 its Final Decision on Disputed
Assessment, which was received by PAL on 26 May 2004. Invoking
Revenue Memorandum Circular (RMC) No. 66-2003, the BIR LTS denied
with finality the protest of PAL and reiterated the request that PAL
immediately pay its deficiency MCIT for FY 2000-2001, inclusive of
penalties incident to delinquency.
PAL filed a Petition for Review with the CTA, which was docketed as
C.T.A. Case No. 7010 and raffled to the CTA Second Division. The CTA
Second Division promulgated its Decision on 31 July 2006, ruling in
favor of PAL. The dispositive portion of the judgment of the CTA
Second Division reads: ETHCDS
WHEREFORE, premises considered, the instant Petition for
Review is hereby GRANTED. Accordingly, Assessment Notice
No. INC FY-3-31-01-000094 and Formal Letter of Demand for
the payment of deficiency Minimum Corporate Income Tax in
the amount of P272,421,886.58 are
hereby CANCELLED and WITHDRAWN.11
In a Resolution dated 2 January 2007, the CTA Second Division denied
the Motion for Reconsideration of the CIR.
It was then the turn of the CIR to file a Petition for Review with the
CTA en banc, docketed as C.T.A. E.B. No. 246. The CTA en banc found
that "the cited legal provisions and jurisprudence are teeming with life
with respect to the grant of tax exemption too vivid to pass unnoticed,"
and that "the Court in Division correctly ruled in favor of the
respondent [PAL] granting its petition for the cancellation of
Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of
Demand for the deficiency MCIT in the amount of
P272,421,886.58." 12 Consequently, the CTA en banc denied the Petition
of the CIR for lack of merit. The CTA en banc likewise denied the
Motion for Reconsideration of the CIR in a Resolution dated 11 October
2007. STcHDC
Hence, the CIR comes before this Court via the instant Petition for
Review on Certiorari, based on the grounds stated hereunder:
THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW
IN ITS ASSAILED DECISION BECAUSE:
(1)[PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX
PROVISION OF THE NATIONAL INTERNAL REVENUE CODE OF
1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS
COVERED BY THE MCIT PROVISION OF THE SAME CODE.
(2)THE MCIT DOES NOT BELONG TO THE CATEGORY OF
"OTHER TAXES" WHICH WOULD ENABLE RESPONDENT TO
AVAIL ITSELF OF THE " IN LIEU" (sic) OF ALL OTHER TAXES"
CLAUSE UNDER SECTION 13 OF P.D. NO. 1590 ("CHARTER"). EHaASD
(3)THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN
AMENDMENT OF [PAL'S] CHARTER.
(4)PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE
BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A LOWER TAX,
BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE
TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RA NO. 9337.
(5)A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER
PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY MCIT. 13 HIAEcT
There is only one vital issue that the Court must resolve in the Petition
at bar, i.e., whether PAL is liable for deficiency MCIT for FY 2000-2001.
The Court answers in the negative.
Presidential Decree No. 1590, the franchise of PAL, contains provisions
specifically governing the taxation of said corporation, to wit:
Section 13.In consideration of the franchise and rights hereby
granted, the grantee shall pay to the Philippine Government
during the life of this franchisewhichever of subsections (a)
and (b) hereunder will result in a lower tax: AHDTIE
(a)The basic corporate income tax based on the grantee's
annual net taxable income computed in accordance with the
provisions of the National Internal Revenue Code; or
(b)A franchise tax of two per cent (2%) of the gross revenues
derived by the grantee from all sources, without distinction as
to transport or nontransport operations; provided, that with
respect to international air-transport service, only the gross
passenger, mail, and freight revenues from its outgoing flights
shall be subject to this tax.
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: DCcSHE
1.All taxes, duties, charges, royalties, or fees due on local
purchases by the grantee of aviation gas, fuel, and oil, whether
refined or in crude form, and whether such taxes, duties,
charges, royalties, or fees are directly due from or imposable
upon the purchaser or the seller, producer, manufacturer, or
importer of said petroleum products but are billed or passed
on to the grantee either as part of the price or cost thereof or
by mutual agreement or other arrangement; provided, that all
such purchases by, sales or deliveries of aviation gas, fuel, and
oil to the grantee shall be for exclusive use in its transport and
nontransport operations and other activities incidental thereto;

2.All taxes, including compensating taxes, duties, charges,
royalties, or fees due on all importations by the grantee of
aircraft, engines, equipment, machinery, spare parts,
accessories, commissary and catering supplies, aviation gas,
fuel, and oil, whether refined or in crude form and other
articles, supplies, or materials; provided, that such articles or
supplies or materials are imported for the use of the grantee in
its transport and nontransport operations and other activities
incidental thereto and are not locally available in reasonable
quantity, quality, or price; cSTDIC
3.All taxes on lease rentals, interest, fees, and other charges
payable to lessors, whether foreign or domestic, of aircraft,
engines, equipment, machinery, spare parts, and other property
rented, leased, or chartered by the grantee where the payment
of such taxes is assumed by the grantee;
4.All taxes on interest, fees, and other charges on foreign loans
obtained and other obligations incurred by the grantee where
the payment of such taxes is assumed by the grantee;
5.All taxes, fees, and other charges on the registration,
licensing, acquisition, and transfer of aircraft, equipment, motor
vehicles, and all other personal and real property of the
grantee; and
6.The corporate development tax under Presidential Decree No.
1158-A.
The grantee, shall, however, pay the tax on its real property in
conformity with existing law.
For purposes of computing the basic corporate income
tax as provided herein, the grantee is authorized:
(a)To depreciate its assets to the extent of not more
than twice as fast the normal rate of depreciation; and AacDHE
(b)To carry over as a deduction from taxable income any net
loss incurred in any year up to five years following the year of
such loss.
Section 14.The grantee shall pay either the franchise tax or the
basic corporate income tax on quarterly basis to the
Commissioner of Internal Revenue. Within sixty (60) days after
the end of each of the first three quarters of the taxable
calendar or fiscal year, the quarterly franchise or income-tax
return shall be filed and payment of either the franchise or
income tax shall be made by the grantee. ATSIED
A final or an adjustment return covering the operation of the
grantee for the preceding calendar or fiscal year shall be filed
on or before the fifteenth day of the fourth month following
the close of the calendar or fiscal year. The amount of the final
franchise or income tax to be paid by the grantee shall be the
balance of the total franchise or income tax shown in the final
or adjustment return after deducting therefrom the total
quarterly franchise or income taxes already paid during the
preceding first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual
annual franchise of income tax due as shown in the final or
adjustment franchise or income-tax return shall either be
refunded to the grantee or credited against the grantee's
quarterly franchise or income-tax liability for the succeeding
taxable year or years at the option of the grantee.
The term "gross revenues" is herein defined as the total gross
income earned by the grantee from; (a) transport, nontransport,
and other services; (b) earnings realized from investments in
money-market placements, bank deposits, investments in
shares of stock and other securities, and other investments; (c)
total gains net of total losses realized from the disposition of
assets and foreign-exchange transactions; and (d) gross income
from other sources. (Emphases ours.)
According to the afore-quoted provisions, the taxation of PAL, during
the lifetime of its franchise, shall be governed by two fundamental rules,
particularly: (1) PAL shall pay the Government either basic corporate
income tax or franchise tax, whichever is lower; and (2) the tax paid by
PAL, under either of these alternatives, shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges, except
only real property tax.
The basic corporate income tax of PAL shall be based on its annual net
taxable income, computed in accordance with the National Internal
Revenue Code (NIRC).Presidential Decree No. 1590 also explicitly
authorizes PAL, in the computation of its basic corporate income tax, to
(1) depreciate its assets twice as fast the normal rate of
depreciation; 14 and (2) carry over as a deduction from taxable income
any net loss incurred in any year up to five years following the year of
such loss. 15
Franchise tax, on the other hand, shall be two per cent (2%) of the
gross revenues derived by PAL from all sources, whether transport or
nontransport operations. However, with respect to international air-
transport service, the franchise tax shall only be imposed on the gross
passenger, mail, and freight revenues of PAL from its outgoing
flights. AHECcT
In its income tax return for FY 2000-2001, filed with the BIR, PAL
reported no net taxable income for the period, resulting in zero basic
corporate income tax, which would necessarily be lower than any
franchise tax due from PAL for the same period.
The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the
position of the CIR that the MCIT is income tax for which PAL is liable.
The CIR reasons that Section 13 (a) of Presidential Decree No.
1590 provides that the corporate income tax of PAL shall be computed
in accordance with the NIRC. And, since the NIRC of 1997 imposes
MCIT, and PAL has not applied for relief from the said tax, then PAL is
subject to the same.
The Court is not persuaded. The arguments of the CIR are contrary to
the plain meaning and obvious intent of Presidential Decree No. 1590,
the franchise of PAL.
Income tax on domestic corporations is covered by Section 27 of the
NIRC of 1997, 16 pertinent provisions of which are reproduced below for
easy reference: DCIAST
SEC. 27.Rates of Income Tax on Domestic Corporations.
(A)In General Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed
upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
effective January 1, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
xxx xxx xxx
(E)Minimum Corporate Income Tax on Domestic Corporations.

(1)Imposition of Tax. A minimum corporate income tax
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.CSIcHA
Hence, a domestic corporation must pay whichever is higher of: (1) the
income tax under Section 27 (A) of the NIRC of 1997, computed by
applying the tax rate therein to the taxable income of the corporation;
or (2) the MCIT under Section 27 (E), also of the NIRC of 1997,
equivalent to 2% of the gross income of the corporation. Although this
may be the general rule in determining the income tax due from a
domestic corporation under the NIRC of 1997, it can only be applied to
PAL to the extent allowed by the provisions in the franchise of PAL
specifically governing its taxation.
After a conscientious study of Section 13 of Presidential Decree No.
1590, in relation to Sections 27 (A) and 27 (E) of the NIRC of 1997, the
Court, like the CTA en bancand Second Division, concludes that PAL
cannot be subjected to MCIT for FY 2000-2001.
First, Section 13 (a) of Presidential Decree No. 1590 refers to "basic
corporate income tax." In Commissioner of Internal Revenue v.
Philippine Airlines, Inc., 17 the Court already settled that the "basic
corporate income tax", under Section 13 (a) of Presidential Decree No.
1590, relates to the general rate of 35% (reduced to 32% by the year
2000) as stipulated in Section 27 (A) of the NIRC of 1997. cSIADH
Section 13 (a) of Presidential Decree No. 1590 requires that the basic
corporate income tax be computed in accordance with the NIRC. This
means that PAL shall compute its basic corporate income tax using the
rate and basis prescribed by the NIRC of 1997 for the said tax. There is
nothing in Section 13 (a) of Presidential Decree No. 1590 to support the
contention of the CIR that PAL is subject to the entire Title II of the
NIRC of 1997, entitled "Tax on Income".
Second, Section 13 (a) of Presidential Decree No. 1590 further provides
that the basic corporate income tax of PAL shall be based on its annual
net taxable income. This is consistent with Section 27 (A) of the NIRC
of 1997, which provides that the rate of basic corporate income tax,
which is 32% beginning 1 January 2000, shall be imposed on
the taxable income of the domestic corporation.
Taxable income is defined under Section 31 of the NIRC of 1997 as
the pertinent items of gross income specified in the said Code, less
the deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the same Code or other
special laws. The gross income, referred to in Section 31, is described in
Section 32 of the NIRC of 1997 as income from whatever source,
including compensation for services; the conduct of trade or business or
the exercise of profession; dealings in property; interests; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and a partner's
distributive share in the net income of a general professional
partnership. SIaHTD

Pursuant to the NIRC of 1997, the taxable income of a domestic
corporation may be arrived at by subtracting from gross income
deductions authorized, not just by the NIRC of 1997, 18 but also by
special laws. Presidential Decree No. 1590 may be considered as one of
such special laws authorizing PAL, in computing its annual net taxable
income, on which its basic corporate income tax shall be based, to
deduct from its gross income the following: (1) depreciation of assets at
twice the normal rate; and (2) net loss carry-over up to five years
following the year of such loss.
In comparison, the 2% MCIT under Section 27 (E) of the NIRC of 1997
shall be based on the gross income of the domestic corporation. The
Court notes that gross income, as the basis for MCIT, is given a special
definition under Section 27 (E) (4) of the NIRC of 1997, different from
the general one under Section 34 of the same Code.
According to the last paragraph of Section 27 (E) (4) of the NIRC of
1997, gross income of a domestic corporation engaged in the sale of
service means gross receipts, less sales returns, allowances, discounts
and cost of services. "Cost of services" refers to 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. 19 Noticeably, inclusions in and exclusions/deductions from
gross income for MCIT purposes are limited to those directly arising
from the conduct of the taxpayer's business. It is, thus, more limited
than the gross income used in the computation of basic corporate
income tax. acCETD
In light of the foregoing, there is an apparent distinction under the
NIRC of 1997 between taxable income, which is the basis for basic
corporate income tax under Section 27 (A); and gross income, which is
the basis for the MCIT under Section 27 (E). The two terms have their
respective technical meanings, and cannot be used interchangeably. The
same reasons prevent this Court from declaring that the basic corporate
income tax, for which PAL is liable under Section 13 (a) of Presidential
Decree No. 1590, also covers MCIT under Section 27 (E) of the NIRC of
1997, since the basis for the first is the annual net taxable income, while
the basis for the second is gross income.
Third, even if the basic corporate income tax and the MCIT are both
income taxes under Section 27 of the NIRC of 1997, and one is paid in
place of the other, the two are distinct and separate taxes.
The Court again cites Commissioner of Internal Revenue v. Philippine
Airlines, Inc., 20 wherein it held that income tax on the passive
income 21 of a domestic corporation, under Section 27 (D) of the NIRC
of 1997, is different from the basic corporate income tax on the taxable
income of a domestic corporation, imposed by Section 27 (A), also of
the NIRC of 1997. Section 13 of Presidential Decree No. 1590 gives PAL
the option to pay basic corporate income tax or franchise tax, whichever
is lower; and the tax so paid shall be in lieu of all other taxes, except
real property tax. The income tax on the passive income of PAL falls
within the category of "all other taxes" from which PAL is exempted,
and which, if already collected, should be refunded to PAL. ADCIca
The Court herein treats MCIT in much the same way. Although both are
income taxes, the MCIT is different from the basic corporate income tax,
not just in the rates, but also in the bases for their computation. Not
being covered by Section 13 (a) of Presidential Decree No. 1590, which
makes PAL liable only for basic corporate income tax, then MCIT is
included in "all other taxes" from which PAL is exempted.
That, under general circumstances, the MCIT is paid in place of the
basic corporate income tax, when the former is higher than the latter,
does not mean that these two income taxes are one and the same. The
said taxes are merely paid in the alternative, giving the Government the
opportunity to collect the higher amount between the two. The
situation is not much different from Section 13 of Presidential Decree
No. 1590, which reversely allows PAL to pay, whichever is lower of the
basic corporate income tax or the franchise tax. It does not make the
basic corporate income tax indistinguishable from the franchise tax.
Given the fundamental differences between the basic corporate income
tax and the MCIT, presented in the preceding discussion, it is not
baseless for this Court to rule that, pursuant to the franchise of PAL,
said corporation is subject to the first tax, yet exempted from the
second. IDaEHS
Fourth, the evident intent of Section 13 of Presidential Decree No.
1520 is to extend to PAL tax concessions not ordinarily available to
other domestic corporations. Section 13 of Presidential Decree No.
1520 permits PAL to pay whichever is lower of the basic corporate
income tax or the franchise tax; and the tax so paid shall be in lieu of
all other taxes, except only real property tax. Hence, under its franchise,
PAL is to pay the least amount of tax possible.
Section 13 of Presidential Decree No. 1520 is not unusual. A public
utility is granted special tax treatment (including tax
exceptions/exemptions) under its franchise, as an inducement for the
acceptance of the franchise and the rendition of public service by the
said public utility. 22 In this case, in addition to being a public utility
providing air-transport service, PAL is also the official flag carrier of the
country.
The imposition of MCIT on PAL, as the CIR insists, would result in a
situation that contravenes the objective of Section 13 of Presidential
Decree No. 1590. In effect, PAL would not just have two, but three tax
alternatives, namely, the basic corporate income tax, MCIT, or franchise
tax. More troublesome is the fact that, as between the basic corporate
income tax and the MCIT, PAL shall be made to pay whichever is
higher, irrefragably, in violation of the avowed intention of Section 13
of Presidential Decree No. 1590 to make PAL pay for the lower amount
of tax.
Fifth, the CIR posits that PAL may not invoke in the instant case the "in
lieu of all other taxes" clause in Section 13 of Presidential Decree No.
1520, if it did not pay anything at all as basic corporate income tax or
franchise tax. As a result, PAL should be made liable for "other taxes"
such as MCIT. This line of reasoning has been dubbed as the
Substitution Theory, and this is not the first time the CIR raised the
same. The Court already rejected the Substitution Theory
in Commissioner of Internal Revenue v. Philippine Airlines, Inc., 23 to wit:
"Substitution Theory"
of the CIR Untenable
A careful reading of Section 13 rebuts the argument of the
CIR that the "in lieu of all other taxes" proviso is a mere
incentive that applies only when PAL actually pays
something. It is clear that PD 1590 intended to give
respondent the option to avail itself of Subsection (a) or (b) as
consideration for its franchise. Either option excludes the
payment of other taxes and dues imposed or collected by the
national or the local government. PAL has the option to choose
the alternative that results in lower taxes. It is not the fact of
tax payment that exempts it, but the exercise of its
option. DcAaSI
Under Subsection (a), the basis for the tax rate is respondent's
annual net taxable income, which (as earlier discussed) is
computed by subtracting allowable deductions and exemptions
from gross income. By basing the tax rate on the annual net
taxable income, PD 1590 necessarily recognized the situation in
which taxable income may result in a negative amount and
thus translate into a zero tax liability.
Notably, PAL was owned and operated by the government at
the time the franchise was last amended. It can reasonably be
contemplated that PD 1590 sought to assist the finances of the
government corporation in the form of lower taxes: When
respondent operates at a loss (as in the instant case), no taxes
are due; in this instances, it has a lower tax liability than that
provided by Subsection (b).
The fallacy of the CIR's argument is evident from the fact
that the payment of a measly sum of one peso would
suffice to exempt PAL from other taxes, whereas a zero
liability arising from its losses would not. There is no
substantial distinction between a zero tax and a one-peso
tax liability. (Emphasis ours.) CaSAcH
Based on the same ratiocination, the Court finds the Substitution Theory
unacceptable in the present Petition.
The CIR alludes as well to Republic Act No. 9337, for reasons similar to
those behind the Substitution Theory. Section 22 of Republic Act No.
9337, more popularly known as the Expanded Value Added Tax (E-VAT)
Law, abolished the franchise tax imposed by the charters of particularly
identified public utilities, including Presidential Decree No. 1590 of PAL.
PAL may no longer exercise its options or alternatives under Section 13
of Presidential Decree No. 1590, and is now liable for both corporate
income tax and the 12% VAT on its sale of services. The CIR alleges
that Republic Act No. 9337 reveals the intention of the Legislature to
make PAL share the tax burden of other domestic corporations.
The CIR seems to lose sight of the fact that the Petition at bar involves
the liability of PAL for MCIT for the fiscal year ending 31 March
2001. Republic Act No. 9337, which took effect on 1 July 2005, cannot
be applied retroactively 24 and any amendment introduced by said
statute affecting the taxation of PAL is immaterial in the present
case. EDaHAT
And sixth, Presidential Decree No. 1590 explicitly allows PAL, in
computing its basic corporate income tax, to carry over as deduction
any net loss incurred in any year, up to five years following the year of
such loss. Therefore, Presidential Decree No. 1590 does not only
consider the possibility that, at the end of a taxable period, PAL shall
end up with zero annual net taxable income (when its deductions
exactly equal its gross income), as what happened in the case at bar,
but also the likelihood that PAL shall incur net loss (when its
deductions exceed its gross income). If PAL is subjected to MCIT, the
provision in Presidential Decree No. 1590 on net loss carry-over will be
rendered nugatory. Net loss carry-over is material only in computing
the annual net taxable income to be used as basis for the basic
corporate income tax of PAL; but PAL will never be able to avail itself of
the basic corporate income tax option when it is in a net loss position,
because it will always then be compelled to pay the necessarily higher
MCIT.

Consequently, the insistence of the CIR to subject PAL to MCIT cannot
be done without contravening Presidential Decree No. 1520.
Between Presidential Decree No. 1520, on one hand, which is a special
law specifically governing the franchise of PAL, issued on 11 June 1978;
and the NIRC of 1997, on the other, which is a general law on national
internal revenue taxes, that took effect on 1 January 1998, the former
prevails. The rule is that on a specific matter, the special law shall
prevail over the general law, which shall be resorted to only to supply
deficiencies in the former. In addition, where there are two statutes, the
earlier special and the later general the terms of the general broad
enough to include the matter provided for in the special the fact that
one is special and the other is general creates a presumption that the
special is to be considered as remaining an exception to the general,
one as a general law of the land, the other as the law of a particular
case. It is a canon of statutory construction that a later statute, general
in its terms and not expressly repealing a prior special statute, will
ordinarily not affect the special provisions of such earlier statute. 25 IaTSED
Neither can it be said that the NIRC of 1997 repealed or
amended Presidential Decree No. 1590.
While Section 16 of Presidential Decree No. 1590 provides that the
franchise is granted to PAL with the understanding that it shall be
subject to amendment, alteration, or repeal by competent authority
when the public interest so requires, Section 24 of the same Decree also
states that the franchise or any portion thereof may only be modified,
amended, or repealed expressly by a special law or decree that shall
specifically modify, amend, or repeal said franchise or any portion
thereof. No such special law or decree exists herein.
The CIR cannot rely on Section 7 (B) of Republic Act No. 8424, which
amended the NIRC in 1997 and reads as follows:
Section 7.Repealing Clauses.
xxx xxx xxx
(B)The provisions of the National Internal Revenue Code, as
amended, and all other laws, including charters of
government-owned or controlled corporations, decrees,
orders, or regulations or parts thereof, that are inconsistent
with this Act are hereby repealed or amended accordingly. TACEDI
The CIR reasons that PAL was a government-owned and controlled
corporation when Presidential Decree No. 1590, its franchise or
charter, was issued in 1978. Since PAL was still operating under the
very same charter when Republic Act No. 8424 took effect in 1998,
then the latter can repeal or amend the former by virtue of Section 7
(B).
The Court disagrees.
A brief recount of the history of PAL is in order. PAL was established as
a private corporation under the general law of the Republic of the
Philippines in February 1941. In November 1977, the government,
through the Government Service Insurance System (GSIS), acquired the
majority shares in PAL. PAL was privatized in January 1992 when the
local consortium PR Holdings acquired a 67% stake therein. 26
It is true that when Presidential Decree No. 1590 was issued on 11 June
1978, PAL was then a government-owned and controlled corporation;
but when Republic Act No. 8424, amending the NIRC, took effect on 1
January 1998, PAL was already a private corporation for six years. The
repealing clause under Section 7 (B) of Republic Act No. 8424 simply
refers to charters of government-owned and controlled corporations,
which would simply and plainly mean corporations under the ownership
and control of the government at the time of effectivity of said
statute. It is already a stretch for the Court to read into said provision
charters, issued to what were then government-owned and controlled
corporations that are now private, but still operating under the same
charters. EHCaDS
That the Legislature chose not to amend or repeal Presidential Decree
No. 1590, even after PAL was privatized, reveals the intent of the
Legislature to let PAL continue enjoying, as a private corporation, the
very same rights and privileges under the terms and conditions stated
in said charter. From the moment PAL was privatized, it had to be
treated as a private corporation, and its charter became that of a
private corporation. It would be completely illogical to say that PAL is a
private corporation still operating under a charter of a government-
owned and controlled corporation.
The alternative argument of the CIR that the imposition of the MCIT is
pursuant to the amendment of the NIRC, and not of Presidential Decree
No. 1590 is just as specious. As has already been settled by this Court,
the basic corporate income tax under Section 13 (a) of Presidential
Decree No. 1590 relates to the general tax rate under Section 27 (A) of
the NIRC of 1997, which is 32% by the year 2000, imposed on taxable
income. Thus, only provisions of the NIRC of 1997 necessary for the
computation of the basic corporate income tax apply to PAL. And even
though Republic Act No. 8424 amended the NIRC by introducing the
MCIT, in what is now Section 27 (E) of the said Code, this amendment is
actually irrelevant and should not affect the taxation of PAL, since the
MCIT is clearly distinct from the basic corporate income tax referred to
in Section 13 (a) of Presidential Decree No. 1590, and from which PAL is
consequently exempt under the "in lieu of all other taxes" clause of its
charter.
The CIR calls the attention of the Court to RMC No. 66-2003, on
"Clarifying the Taxability of Philippine Airlines (PAL) for Income Tax
Purposes As Well As Other Franchise Grantees Similarly Situated."
According to RMC No. 66-2003: aESTAI
Section 27(E) of the Code, as implemented by Revenue
Regulations No. 9-98, provides that 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 imposed upon any domestic corporation
beginning the 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 MCIT is greater than the normal income tax due
from such corporation.
With the advent of such provision beginning January 1, 1998, it
is certain that domestic corporations subject to normal income
tax as well as those choose to be subject thereto, such as PAL,
are bound to pay income tax regardless of whether they are
operating at a profit or loss.
Thus, in case of operating loss, PAL may either opt to subject
itself to minimum corporate income tax or to the 2% franchise
tax, whichever is lower. On the other hand, if PAL is operating
at a profit, the income tax liability shall be the lower amount
between: cTADCH
(1)normal income tax or MCIT whichever is higher; and
(2)2% franchise tax.
The CIR attempts to sway this Court to adopt RMC No. 66-2003 since
the "[c]onstruction by an executive branch of government of a particular
law although not binding upon the courts must be given weight as the
construction comes from the branch of the government called upon to
implement the law." 27
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on 14
October 2003, more than two years after FY 2000-2001 of PAL ended
on 31 March 2001. This violates the well-entrenched principle that
statutes, including administrative rules and regulations, operate
prospectively only, unless the legislative intent to the contrary is
manifest by express terms or by necessary implication. 28 aDcHIC
Moreover, despite the claims of the CIR that RMC No. 66-2003 is just a
clarificatory and internal issuance, the Court observes that RMC No. 66-
2003 does more than just clarify a previous regulation and goes beyond
mere internal administration. It effectively increases the tax burden of
PAL and other taxpayers who are similarly situated, making them liable
for a tax for which they were not liable before. Therefore, RMC No. 66-
2003 cannot be given effect without previous notice or publication to
those who will be affected thereby. In Commissioner of Internal
Revenue v. Court of Appeals, 29 the Court ratiocinated that:
It should be understandable that when an administrative rule is
merely interpretative in nature, its applicability needs nothing
further than its bare issuance for it gives no real consequence
more than what the law itself has already prescribed. When,
upon the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render
least cumbersome the implementation of the law but
substantially adds to or increases the burden of those
governed, it behooves the agency to accord at least to
those directly affected a chance to be heard, and thereafter
to be duly informed, before that new issuance is given the
force and effect of law.
A reading of RMC 37-93, particularly considering the
circumstances under which it has been issued, convinces us
that the circular cannot be viewed simply as a corrective
measure (revoking in the process the previous holdings of past
Commissioners) or merely as construing Section 142(c)(1) of
the NIRC, as amended, but has, in fact and most importantly,
been made in order to place "Hope Luxury", "Premium More"
and "Champion" within the classification of locally
manufactured cigarettes bearing foreign brands and to thereby
have them covered by RA 7654. Specifically, the new law would
have its amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so
classified as bearing foreign brands. Prior to the issuance of the
questioned circular, "Hope Luxury", "Premium More", and
"Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to
45% ad valorem tax. Hence, without RMC 37-93, the enactment
of RA 7654, would have had no new tax rate consequence on
private respondent's products. Evidently, in order to place
"Hope Luxury", "Premium More", and "Champion" cigarettes
within the scope of the amendatory law and subject them to
an increased tax rate, the now disputed RMC 37-93 had to be
issued. In so doing, the BIR not simply interpreted the law;
verily, it legislated under its quasi-legislative authority. The
due observance of the requirements of notice, of hearing,
and of publication should not have been then ignored. HcISTE

Indeed, the BIR itself, in its RMC 10-86,
*
has observed and
provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations "It
has been observed that one of the problem areas
bearing on compliance with Internal Revenue Tax rules
and regulations is lack or insufficiency of due notice to
the tax paying public. Unless there is due notice, due
compliance therewith may not be reasonably
expected. And most importantly, their strict enforcement
could possibly suffer from legal infirmity in the light of
the constitutional provision on 'due process of law' and
the essence of the Civil Code provision concerning
effectivity of laws, whereby due notice is a basic
requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil
Code).
"In order that there shall be a just enforcement of rules
and regulations, in conformity with the basic element
of due process, the following procedures are hereby
prescribed for the drafting, issuance and implementation
of the said Revenue Tax Issuances: EAIaHD
"(1).This Circular shall apply only to (a) Revenue
Regulations; (b) Revenue Audit Memorandum Orders;
and (c) Revenue Memorandum Circulars and Revenue
Memorandum Orders bearing on internal revenue tax
rules and regulations.
"(2).Except when the law otherwise expressly provides,
the aforesaid internal revenue tax issuances shall not
begin to be operative until after due notice thereof
may be fairly presumed.
"Due notice of the said issuances may be fairly
presumed only after the following procedures have been
taken:
". . . "(5).Strict compliance with the foregoing procedures
is enjoined.
Nothing on record could tell us that it was either impossible or
impracticable for the BIR to observe and comply with the
above requirements before giving effect to its questioned
circular. (Emphases ours.) SDTaHc
The Court, however, stops short of ruling on the validity of RMC No. 66-
2003, for it is not among the issues raised in the instant Petition. It only
wishes to stress the requirement of prior notice to PAL before RMC No.
66-2003 could have become effective. Only after RMC No. 66-2003 was
issued on 14 October 2003 could PAL have been given notice of said
circular, and only following such notice to PAL would RMC No. 66-2003
have taken effect. Given this sequence, it is not possible to say that
RMC No. 66-2003 was already in effect and should have been strictly
complied with by PAL for its fiscal year which ended on 31 March 2001.
Even conceding that the construction of a statute by the CIR is to be
given great weight, the courts, which include the CTA, are not bound
thereby if such construction is erroneous or is clearly shown to be in
conflict with the governing statute or the Constitution or other laws. "It
is the role of the Judiciary to refine and, when necessary, correct
constitutional (and/or statutory) interpretation, in the context of the
interactions of the three branches of the government." 30 It is
furthermore the rule of long standing that this Court will not set aside
lightly the conclusions reached by the CTA which, by the very nature of
its functions, is dedicated exclusively to the resolution of tax problems
and has, accordingly, developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority. 31 In the
Petition at bar, the CTA en banc and in division both adjudged that PAL
is not liable for MCIT under Presidential Decree No. 1590, and this
Court has no sufficient basis to reverse them.aTEAHc
As to the assertions of the CIR that exemption from tax is not
presumed, and the one claiming it must be able to show that it
indubitably exists, the Court recalls its pronouncements
in Commissioner of Internal Revenue v. Court of Appeals: 32
We disagree. Petitioner Commissioner of Internal Revenue
erred in applying the principles of tax exemption without first
applying the well-settled doctrine of strict interpretation in
the imposition of taxes. It is obviously both illogical and
impractical to determine who are exempted without first
determining who are covered by the aforesaid provision.
The Commissioner should have determined first if private
respondent was covered by Section 205, applying the rule of
strict interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its exemption
therefrom. The Court takes this occasion to reiterate the
hornbook doctrine in the interpretation of tax laws that "(a)
statute will not be construed as imposing a tax unless it does
so clearly, expressly, and unambiguously. . . . (A) tax cannot be
imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the
letter in construing statutes applies with peculiar strictness
to tax laws and the provisions of a taxing act are not to be
extended by implication." Parenthetically, in answering the
question of who is subject to tax statutes, it is basic that "in
case of doubt, such statutes are to be construed most
strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed
nor presumed to be imposed beyond what statutes
expressly and clearly import." (Emphases ours.) ACTISD
For two decades following the grant of its franchise by Presidential
Decree No. 1590 in 1978, PAL was only being held liable for the basic
corporate income tax or franchise tax, whichever was lower; and its
payment of either tax was in lieu of all other taxes, except real property
tax, in accordance with the plain language of Section 13 of the charter
of PAL. Therefore, the exemption of PAL from "all other taxes" was not
just a presumption, but a previously established, accepted, and
respected fact, even for the BIR.
The MCIT was a new tax introduced by Republic Act No. 8424. Under
the doctrine of strict interpretation, the burden is upon the CIR to
primarily prove that the new MCIT provisions of the NIRC of 1997,
clearly, expressly, and unambiguously extend and apply to PAL, despite
the latter' s existing tax exemption. To do this, the CIR must convince
the Court that the MCIT is a basic corporate income tax, 33 and is not
covered by the "in lieu of all other taxes" clause of Presidential Decree
No. 1590. Since the CIR failed in this regard, the Court is left with no
choice but to consider the MCIT as one of "all other taxes," from which
PAL is exempt under the explicit provisions of its charter. HSacEI
Not being liable for MCIT in FY 2000-2001, it necessarily follows that
PAL need not apply for relief from said tax as the CIR maintains.
WHEREFORE, premises considered, the instant Petition for Review is
hereby DENIED, and the Decision dated 9 August 2007 and Resolution
dated 11 October 2007 of the Court of Tax Appeals en banc in CTA E.B.
No. 246 is hereby AFFIRMED. No costs. DEICaA
SO ORDERED.
Ynares-Santiago, Velasco, Jr., Nachura and Peralta, JJ., concur.
Footnotes
1.Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D.
Acosta and Associate Justices Juanito C. Castaeda, Jr., Lovell R.
Bautista, Caesar A. Casanova, and Olga Palanca-Enriquez,
concurring; rollo, pp. 43-56.
2.Id. at 67-68.
3.Penned by Associate Justice Juanito C. Castaeda with Associate Justices
Erlinda P. Uy and Olga Palanca-Enriquez, concurring, id. at 70-90.
4.An Act Granting a New Franchise to Philippine Airlines, Inc. to Establish,
Operate, and Maintain Air-Transport Services in the Philippines and
Other Countries.
5.Section 1 of Presidential Decree No. 1590.
6.According to the Annual Income Tax Return of PAL for the fiscal year in
question, its allowable deductions exactly equalled its total gross
income of P39,470,862,232.00, thus, leaving zero taxable income.
7.Withheld at source, meaning, it was previously deducted and withheld by
various withholding agents from the income payments made to PAL.
8.Should be P8,947,154,040.00.
9.Rollo, p. 105.
10.Id. at 114.
11.Id. at 89.
12.Id. at 55.
13.Id. at 17-18.
14.As a general rule, there shall be allowed as a depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade
or business. (Section 34 (F) (1) of the NIRC of 1997).
15.In general, losses shall be deducted from gross income in the same
taxable year said losses were incurred. The recognized exception
under Section 39 (D) of the NIRC of 1997, allowing net capital loss
carryover, may only be availed of by a taxpayer "other than a
corporation".
16.Prior to its amendment by Republic Act No. 9337, which was signed into
law on 24 May 2005 and took effect on 1 July 2005.
17.G.R. No. 160528, 9 October 2006, 504 SCRA 90, 100.
18.Section 34 of the NIRC of 1997 enumerates the allowable deductions,
while Section 35 identifies the personal and additional exemptions.
19.Section 27 (E) (4) of the NIRC of 1997.
20.Supra note 17 at 98, 100.
21.Passive income includes interest from deposits and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements and royalties [Section 27 (D) (1) of the Tax Code
of 1997]; capital gains from the sale of shares of stock not traded in
the stock exchange [Section 27 (D) (2); income derived under the
Expanded Foreign Currency Deposit System [Section 27 (D) (3)];
intercorporate dividends [Section 27 (D) (4)]; and capital gains realized
from sale, exchange or disposition of lands and/or buildings [Section
27 (D) (5)].
22.See Carcar Electric and Ice Plant Co., Inc. v. Collector of Internal Revenue,
100 Phil. 50, 54 (1956).
23.Supra note 17 at 100-101.
24.Article 4 of the Civil Code provides that "Laws shall have no retroactive
effect, unless the contrary is provided".
25.Commissioner of Internal Revenue v. Central Luzon Drug
Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414, 449.
26.http://www.philippineairlines.com/about_pal/milestones/milestones.jsp.

27.Memorandum of the CIR, rollo, p. 264.
28.BPI Leasing Corporation v. Court of Appeals, 461 Phil. 451, 460 (2003).
29.329 Phil. 987, 1007-1009 (1996).
30.Philippine Scout Veterans Security and Investigation Agency, Inc. v.
National Labor Relations Commission, 330 Phil. 665, 676 (1996).
31.Commissioner of Internal Revenue v. Philippine National Bank, G.R. No.
161997, 25 October 2005, 474 SCRA 303, 320; Commissioner of
Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, 31
August 2005, 468 SCRA 571, 593-594.
32.338 Phil. 322, 330-331 (1997).
33.Since it is readily apparent that the MCIT does not constitute the
alternative franchise tax.
||| (Commr. v. PAL, Inc., G.R. No. 180066, July 07, 2009)
SECOND DIVISION
[G.R. No. 195909. September 26, 2012.]
ST. LUKE'S MEDICAL CENTER, INC., respondent.
[G.R. No. 195960. September 26, 2012.]
ST. LUKE'S MEDICAL CENTER,
INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
DECISION
CARPIO, J p:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45
of the Rules of Court assailing the Decision of 19 November 2010 of
the Court of Tax Appeals (CTA) En Banc and its Resolution 2 of 1 March
2011 in CTA Case No. 6746. This Court resolves this case on a pure
question of law, which involves the interpretation of Section 27 (B) vis-
-vis Section 30 (E) and (G) of the National Internal Revenue Code of
the Philippines (NIRC), on the income tax treatment of proprietary non-
profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a
non-stock and non-profit corporation. Under its articles of
incorporation, among its corporate purposes are:
(a)To establish, equip, operate and maintain a non-stock,
non-profit Christian, benevolent, charitable and scientific
hospital which shall give curative, rehabilitative and spiritual
care to the sick, diseased and disabled persons; provided that
purely medical and surgical services shall be performed by
duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
(b)To provide a career of health science education and
provide medical services to the community through organized
clinics in such specialties as the facilities and resources of the
corporation make possible;
(c)To carry on educational activities related to the
maintenance and promotion of health as well as provide
facilities for scientific and medical researches which, in the
opinion of the Board of Trustees, may be justified by the
facilities, personnel, funds, or other requirements that are
available;
(d)To cooperate with organized medical societies, agencies of
both government and private sector; establish rules and
regulations consistent with the highest professional ethics; IDaEHC
xxx xxx xxx 3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed
St. Luke's deficiency taxes amounting to P76,063,116.06 for 1998,
comprised of deficiency income tax, value-added tax, withholding tax on
compensation and expanded withholding tax. The BIR reduced the
amount to P63,935,351.57 during trial in the First Division of the CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the
BIR against the deficiency tax assessments. The BIR did not act on the
protest within the 180-day period under Section 228 of the NIRC. Thus,
St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27 (B) of the NIRC, which
imposes a 10% preferential tax rate on the income of proprietary non-
profit hospitals, should be applicable to St. Luke's. According to the BIR,
Section 27 (B), introduced in 1997, "is a new provision intended to
amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of
the 1997 Tax Code . . . ." 5 It is a specific provision which prevails over
the general exemption on income tax granted under Section 30 (E) and
(G) for non-stock, non-profit charitable institutions and civic
organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998
because only 13% of its revenues came from charitable purposes.
Moreover, the hospital's board of trustees, officers and employees
directly benefit from its profits and assets. St. Luke's had total revenues
of P1,730,367,965 or approximately P1.73 billion from patient services in
1998. 7
St. Luke's contended that the BIR should not consider its total revenues,
because its free services to patients was P218,187,498 or 65.20% of its
1998 operating income (i.e., total revenues less operating expenses) of
P334,642,615. 8 St. Luke's also claimed that its income does not inure to
the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for
charitable and social welfare purposes under Section 30 (E) and (G) of
the NIRC. It argued that the making of profit per se does not destroy its
income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates
its arguments before the CTA that Section 27 (B) applies to St. Luke's.
The petition raises the sole issue of whether the enactment of Section
27 (B) takes proprietary non-profit hospitals out of the income tax
exemption under Section 30 of the NIRC and instead, imposes a
preferential rate of 10% on their taxable income. The BIR prays that St.
Luke's be ordered to pay P57,659,981.19 as deficiency income and
expanded withholding tax for 1998 with surcharges and interest for late
payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on
the treatment and withholding of a part of its income, 9 as well as the
payment of surcharge and delinquency interest. There is no ground for
this Court to undertake such a factual review. Under the
Constitution 10 and the Rules of Court, 11 this Court's review power is
generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails
to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the
CTA First Division Decision dated 23 February 2009 which held: ISaTCD
WHEREFORE, the Amended Petition for Review [by St. Luke's]
is hereby PARTIALLY GRANTED. Accordingly, the 1998
deficiency VAT assessment issued by respondent against
petitioner in the amount of P110,000.00 is
hereby CANCELLED and WITHDRAWN. However, petitioner is
hereby ORDERED to PAYdeficiency income tax and deficiency
expanded withholding tax for the taxable year 1998 in the
respective amounts of P5,496,963.54 and P778,406.84 or in the
sum of P6,275,370.38, . . . .
xxx xxx xxx
In addition, petitioner is hereby ORDERED to PAY twenty
percent (20%) delinquency interest on the total amount of
P6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of
1997.
SO ORDERED. 13
The deficiency income tax of P5,496,963.54, ordered by the CTA En
Banc to be paid, arose from the failure of St. Luke's to prove that part
of its income in 1998 (declared as "Other Income-Net") 14 came from
charitable activities. The CTA cancelled the remainder of the
P63,113,952.79 deficiency assessed by the BIR based on the 10% tax
rate under Section 27 (B) of the NIRC, which the CTA En Banc held was
not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable
institution covered by Section 30 (E) and (G) of the NIRC. This ruling
would exempt all income derived by St. Luke's from services to its
patients, whether paying or non-paying. The CTA reiterated its earlier
decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its
articles of incorporation and various documents 17 identifying St. Luke's
as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay
City, 18 which states that "a charitable institution does not lose its
charitable character and its consequent exemption from taxation merely
because recipients of its benefits who are able to pay are required to
do so, where funds derived in this manner are devoted to the charitable
purposes of the institution . . . ." 19 The generation of income from
paying patients does not per se destroy the charitable nature of St.
Luke's.TIaDHE
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of
Internal Revenue, 20 which ruled that the old NIRC (Commonwealth Act
No. 466, as amended) 21"positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto,
because of the existence of . . . net income." 22 The NIRC of 1997
substantially reproduces the provision on charitable institutions of the
old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart
College declared: "[E]very responsible organization must be run to at
least insure its existence, by operating within the limits of its own
resources, especially its regular income. In other words, it should always
strive, whenever possible, to have a surplus." 23
The CTA held that Section 27 (B) of the present NIRC does not apply to
St. Luke's. 24 The CTA explained that to apply the 10% preferential rate,
Section 27 (B) requires a hospital to be "non-profit." On the other hand,
Congress specifically used the word "non-stock" to qualify a charitable
"corporation or association" in Section 30 (E) of the NIRC. According to
the CTA, this is unique in the present tax code, indicating an intent to
exempt this type of charitable organization from income tax. Section 27
(B) does not require that the hospital be "non-stock." The CTA stated,
"it is clear that non-stock, non-profit hospitals operated exclusively for
charitable purpose are exempt from income tax on income received by
them as such, applying the provision of Section 30 (E) of the NIRC of
1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in
1998 under Section 27 (B) of the NIRC, which imposes a preferential tax
rate of 10% on the income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in
G.R. No. 195960 because the petition raises factual issues. Under
Section 1, Rule 45 of the Rules of Court, "[t]he petition shall raise only
questions of law which must be distinctly set forth." St. Luke's
cites Martinez v. Court of Appeals 26 which permits factual review "when
the Court of Appeals [in this case, the CTA] manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly
considered, would justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St.
Luke's itself stated that the CTA "disregarded the testimony of [its]
witness, Romeo B. Mary, being allegedly self-serving, to show the nature
of the 'Other Income-Net' . . . ." 28 This is not a case of overlooking or
failing to consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared that it
has "gone through the records of this case and found no other
evidence aside from the self-serving affidavit executed by [the]
witnesses [of St. Luke's] . . . ." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is
liable to pay the 25% surcharge under Section 248 (A) (3) of the NIRC.
There is "[f]ailure to pay the deficiency tax within the time prescribed
for its payment in the notice of assessment[.]" 30 St. Luke's is also liable
to pay 20% delinquency interest under Section 249 (C) (3) of the
NIRC. 31 As explained by the CTA En Banc, the amount of P6,275,370.38
in the dispositive portion of the CTA First Division Decision includes
only deficiency interest under Section 249 (A) and (B) of the NIRC and
not delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of
the introduction of Section 27 (B) in the NIRC of 1997 vis- -vis Section
30 (E) and (G) on the income tax exemption of charitable and social
welfare institutions. The 10% income tax rate under Section 27 (B)
specifically pertains to proprietary educational institutions and
proprietary non-profit hospitals. The BIR argues that Congress intended
to remove the exemption that non-profit hospitals previously enjoyed
under Section 27 (E) of the NIRC of 1977, which is now substantially
reproduced in Section 30 (E) of the NIRC of 1997. 33 Section 27 (B) of
the present NIRC provides: CTIDcA
SEC. 27.Rates of Income Tax on Domestic Corporations.
xxx xxx xxx
(B)Proprietary Educational Institutions and Hospitals.
Proprietary educational institutions and hospitals which
are non-profit shall pay a tax of ten percent (10%) on their
taxable income except those covered by Subsection (D)
hereof: Provided, That if the gross income from unrelated
trade, business or other activity exceeds fifty percent (50%) of
the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable
income. For purposes of this Subsection, the term 'unrelated
trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially
related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A
'proprietary educational institution' is any private school
maintained and administered by private individuals or groups
with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis
supplied)
St. Luke's claims tax exemption under Section 30 (E) and (G) of the
NIRC. It contends that it is a charitable institution and an organization
promoting social welfare. The arguments of St. Luke's focus on the
wording of Section 30 (E) exempting from income tax non-stock, non-
profit charitable institutions. 34 St. Luke's asserts that the legislative
intent of introducing Section 27 (B) was only to remove the exemption
for "proprietary non-profit" hospitals. 35 The relevant provisions of
Section 30 state:
SEC. 30.Exemptions from Tax on Corporations. The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
xxx xxx xxx
(E)Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer
or any specific person; cCTIaS
xxx xxx xxx
(G)Civic league or organization not organized for profit
but operated exclusively for the promotion of social welfare;
xxx xxx xxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such
income, shall be subject to tax imposed under this Code.
(Emphasis supplied)
The Court partly grants the petition of the BIR but on a different
ground. We hold that Section 27 (B) of the NIRC does not remove the
income tax exemption of proprietary non-profit hospitals under Section
30 (E) and (G). Section 27 (B) on one hand, and Section 30 (E) and (G)
on the other hand, can be construed together without the removal of
such tax exemption. The effect of the introduction of Section 27 (B) is to
subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions 36 and proprietary non-
profit hospitals, among the institutions covered by Section 30, to the
10% preferential rate under Section 27 (B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation to
Section 27 (A) (1).
Section 27 (B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals. The only qualifications for hospitals are
that they must be proprietary and non-profit. "Proprietary" means
private, following the definition of a "proprietary educational institution"
as "any private school maintained and administered
by private individuals or groups" with a government permit. "Non-
profit" means no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to
the institution's purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of
Internal Revenue v. Club Filipino, Inc. de Cebu, 37 this Court considered
as non-profit a sports club organized for recreation and entertainment
of its stockholders and members. The club was primarily funded by
membership fees and dues. If it had profits, they were used for
overhead expenses and improving its golf course. 38 The club was non-
profit because of its purpose and there was no evidence that it was
engaged in a profit-making enterprise. 39 EACIaT
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it
was not charitable. The Court defined "charity" in Lung Center of the
Philippines v. Quezon City 40as "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
[by] otherwise lessening the burden of government." 41 A non-profit
club for the benefit of its members fails this test. An organization may
be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax
exempt institution, any income such institution earns from activities
conducted for profit is taxable, as expressly provided in the last
paragraph of Section 30.
To be a charitable institution, however, an organization must meet the
substantive test of charity in Lung Center. The issue in Lung
Center concerns exemption from real property tax and not income tax.
However, it provides for the test of charity in our jurisdiction. Charity is
essentially a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions provide
for free goods and services to the public which would otherwise fall
on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by
appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax
exemption. The requirements for a tax exemption are specified by the
law granting it. The power of Congress to tax implies the power to
exempt from tax. Congress can create tax exemptions, subject to the
constitutional provision that "[n]o law granting any tax exemption shall
be passed without the concurrence of a majority of all the Members of
Congress." 43 The requirements for a tax exemption are strictly
construed against the taxpayer 44 because an exemption restricts the
collection of taxes necessary for the existence of the government.
The Court in Lung Center declared that the Lung Center of the
Philippines is a charitable institution for the purpose of exemption from
real property taxes. This ruling uses the same premise as Hospital de
San Juan 45 and Jesus Sacred Heart College 46 which says that receiving
income from paying patients does not destroy the charitable nature of
a hospital.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution. 47
For real property taxes, the incidental generation of income is
permissible because the test of exemption is the use of the property.
The Constitution provides that "[c]haritable institutions, churches and
personages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational purposes
shall be exempt from taxation." 48 The test of exemption is not strictly a
requirement on the intrinsic nature or character of the institution. The
test requires that the institution use the property in a certain way, i.e.,
for a charitable purpose. Thus, the Court held that the Lung Center of
the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet
the use requirement is simply to remove from the tax exemption that
portion of the property not devoted to charity. HIaAED
The Constitution exempts charitable institutions only from real property
taxes. In the NIRC, Congress decided to extend the exemption to
income taxes. However, the way Congress crafted Section 30 (E) of the
NIRC is materially different from Section 28 (3), Article VI of the
Constitution. Section 30 (E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section
28 (3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution "actually, directly and
exclusively" use the property for a charitable purpose.
Section 30 (E) of the NIRC provides that a charitable institution must be:
(1)A non-stock corporation or association;
(2)Organized exclusively for charitable purposes;
(3)Operated exclusively for charitable purposes; and
(4)No part of its net income or asset shall belong to or
inure to the benefit of any member, organizer,
officer or any specific person.
Thus, both the organization and operations of the charitable
institution must be devoted "exclusively" for charitable purposes.
The organization of the institution refers to its corporate form, as
shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30 (E) of the NIRC specifically requires that the
corporation or association be non-stock, which is defined by the
Corporation Code as "one where no part of its income is
distributable as dividends to its members, trustees, or officers" 49 and
that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was
organized." 50 However, under Lung Center, any profit by a charitable
institution must not only be plowed back "whenever necessary or
proper," but must be "devoted or used altogether to the charitable
object which it is intended to achieve." 51 SDIaCT
The operations of the charitable institution generally refer to its regular
activities. Section 30 (E) of the NIRC requires that these operations
be exclusive to charity. There is also a specific requirement that "no
part of [the] net income or asset shall belong to or inure to the benefit
of any member, organizer, officer or any specific person." The use of
lands, buildings and improvements of the institution is but a part of its
operations.
There is no dispute that St. Luke's is organized as a non-stock and non-
profit charitable institution. However, this does not automatically
exempt St. Luke's from paying taxes. This only refers to the organization
of St. Luke's. Even if St. Luke's meets the test of charity, a charitable
institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28 (3), Article VI of the Constitution requires that
a charitable institution use the property "actually, directly and
exclusively" for charitable purposes. To be exempt from income taxes,
Section 30 (E) of the NIRC requires that a charitable institution must
be "organized and operated exclusively"for charitable purposes.
Likewise, to be exempt from income taxes, Section 30 (G) of the NIRC
requires that the institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the
words "organized and operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or
from any of their activities conducted for profit regardless
of the disposition made of such income, shall be subject
to tax imposed under this Code. (Emphasis supplied) HDTSIE
In short, the last paragraph of Section 30 provides that if a tax
exempt charitable institution conducts "any" activity for profit, such
activity is not tax exempt even as its not-for-profit activities remain
tax exempt. This paragraph qualifies the requirements in Section 30
(E) that the "[n]on-stock corporation or association [must
be]organized and operated exclusively for . . . charitable . . .
purposes . . . ." It likewise qualifies the requirement in Section 30 (G)
that the civic organization must be "operated exclusively" for the
promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated
exclusively" for charitable purposes, it is nevertheless allowed to engage
in "activities conducted for profit" without losing its tax exempt status
for its not-for-profit activities. The only consequence is that
the "income of whatever kind and character" of a charitable
institution "from any of its activities conducted for profit, regardless
of the disposition made of such income, shall be subject to
tax." Prior to the introduction of Section 27 (B), the tax rate on such
income from for-profit activities was the ordinary corporate rate under
Section 27 (A). With the introduction of Section 27 (B), the tax rate is
now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services
to paying patients. It cannot be disputed that a hospital which receives
approximately P1.73 billion from paying patients is not an institution
"operated exclusively" for charitable purposes. Clearly, revenues
from paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared P1,730,367,965 as "Revenues from Services
to Patients" in contrast to its "Free Services" expenditure of
P218,187,498. In its Comment in G.R. No. 195909, St. Luke's showed the
following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53
REVENUES FROM SERVICES TO PATIENTS P1,730,367,965.00
OPERATING EXPENSES
Professional care of patients P1,016,608,394.00
Administrative 287,319,334.00
Household and Property 91,797,622.00

P1,395,725,350.00
==============
INCOME FROM OPERATIONS P334,642,615.00 100%
Free Services- 218,187,498.00 - 65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES P116,455,117.00 34.80%
OTHER INCOME 17,482,304.00
EXCESS OF REVENUES OVER EXPENSES P133,937,421.00
In Lung Center, this Court declared: HATEDC
"[e]xclusive" 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." . . . The words "dominant
use" or "principal use" cannot be substituted for the words
"used exclusively" without doing violence to the Constitution
and the law. Solely is synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated
exclusively" without violating the NIRC. Services to paying patients
are activities conducted for profit. They cannot be considered any
other way. There is a "purpose to make profit over and above the
cost" of services. 55 The P1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of
P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20%
of its operating income in 1998. However, if a part of the remaining
34.80% of the operating income is reinvested in property, equipment or
facilities used for services to paying and non-paying patients, then it
cannot be said that the income is "devoted or used altogether to the
charitable object which it is intended to achieve." 56 The income is
plowed back to the corporation not entirely for charitable purposes, but
for profit as well. In any case, the last paragraph of Section 30 of the
NIRC expressly qualifies that income from activities for profit is taxable
"regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative
record explaining the phrase "any activity conducted for profit."
However, it quoted a deposition of Senator Mariano Jesus Cuenco, who
was a member of the Committee of Conference for the Senate, which
introduced the phrase "or from any activity conducted for profit." DcHSEa
P.Cuando ha hablado de la Universidad de Santo Toms que
tiene un hospital, no cree Vd. que es una actividad
esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?
xxx xxx xxx
R.Si el hospital se limita a recibir enformos pobres, mi
contestacin seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posicin social
econmica, lo que se paga por estos enfermos debe
estar sujeto a 'income tax', y es una de las razones que
hemos tenido para insertar las palabras o frase 'or from
any activity conducted for profit.' 57
The question was whether having a hospital is essential to an
educational institution like the College of Medicine of the University
of Santo Tomas. Senator Cuenco answered that if the hospital has
paid rooms generally occupied by people of good economic
standing, then it should be subject to income tax. He said that this
was one of the reasons Congress inserted the phrase "or any activity
conducted for profit."
The question in Jesus Sacred Heart College involves an educational
institution. 58 However, it is applicable to charitable institutions because
Senator Cuenco's response shows an intent to focus on the activities of
charitable institutions. Activities for profit should not escape the reach
of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable
activities from being taxed.
The Court finds that St. Luke's is a corporation that is not "operated
exclusively" for charitable or social welfare purposes insofar as its
revenues from paying patients are concerned. This ruling is based not
only on a strict interpretation of a provision granting tax exemption, but
also on the clear and plain text of Section 30 (E) and (G). Section 30 (E)
and (G) of the NIRC requires that an institution be "operated
exclusively" for charitable or social welfare purposes to
be completely exempt from income tax. An institution under Section 30
(E) or (G) does not lose its tax exemption if it earns income from its for-
profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate
pursuant to Section 27 (B). DaTEIc
A tax exemption is effectively a social subsidy granted by the State
because an exempt institution is spared from sharing in the expenses of
government and yet benefits from them. Tax exemptions for charitable
institutions should therefore be limited to institutions beneficial to the
public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.
St. Luke's fails to meet the requirements under Section 30 (E) and (G) of
the NIRC to be completely tax exempt from all its income. However, it
remains a proprietary non-profit hospital under Section 27 (B) of the
NIRC as long as it does not distribute any of its profits to its members
and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under
Section 27 (B) of the NIRC. However, St. Luke's has good reasons to rely
on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's
is "a corporation for purely charitable and social welfare
purposes" 59 and thus exempt from income tax. 60 In Michael J. Lhuillier,
Inc. v. Commissioner of Internal Revenue, 61 the Court said that "good
faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement
the tax law, are sufficient justification to delete the imposition of
surcharges and interest." 62 SHAcID
WHEREFORE, the petition of the Commissioner of Internal Revenue in
G.R. No. 195909 is PARTLY GRANTED. The Decision of the Court of Tax
Appeals En Banc dated 19 November 2010 and its Resolution dated 1
March 2011 in CTA Case No. 6746 are MODIFIED. St. Luke's Medical
Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998
based on the 10% preferential income tax rate under Section 27 (B) of
the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections
248 and 249 of the National Internal Revenue Code. All other parts of
the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R.
No. 195960 is DENIED for violating Section 1, Rule 45 of the Rules of
Court.
SO ORDERED.
Leonardo-de Castro, *Brion, Perez and Perlas-Bernabe, JJ., concur.
Footnotes

*Designated Acting Member per Special Order No. 1308 dated 21
September 2012.
1.The consolidation of the petitions is pursuant to the Resolution of this
Court dated 4 April 2011. Rollo (G.R. No. 195960), p. 9.
2.This Resolution denied the motions filed by both parties to reconsider the
CTA En Banc Decision dated 19 November 2010.
3.CTA First Division Decision dated 23 February 2009, citing the earlier
decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, CTA Case No. 6993, 21 November 2008. Rollo (G.R. No.
195909), p. 68.
4.This prompted St. Luke's to file an Amended Petition for Review on 12
December 2003 before the First Division of the CTA.
5.CTA First Division Decision, citing the Answer filed by the BIR before the
CTA. Rollo (G.R. No. 195909), p. 62.
6.Id. at 63.
7.Id. at 65-67.
8.Id. at 67. The operating expenses of St. Luke's consisted of professional
care of patients, administrative, household and property expenses.
9.This income in the amount of P17,482,304 was declared by St. Luke's as
"Other Income-Net" in its 1998 Income Tax Return/Audited
Statements of Revenues and Expenses.
10.CONSTITUTION, Art. VIII, Sec. 5 (2) (e). Except for criminal cases where
the penalty imposed is reclusion perpetua or higher, the enumeration
under Article VIII, Section 5 (1) and (2) of the Constitution generally
involves a question of law.
11.RULES OF COURT, Rule 45, Sec. 1.
12.CONSTITUTION, Art. VIII, Sec. 5 (2) (e). See note 10.
13.Rollo (G.R. No. 195909), pp. 82-83. Emphases in the original.
14.See note 9. This is one of the errors assigned by St. Luke's in its petition
before this Court.
15.Rollo (G.R. No. 195909), p. 65. The revised total deficiency income tax
assessed by the BIR is P63,113,952.79, which includes the deficiency
under "Other Income-Net."
16.CTA Case No. 6993, 21 November 2008.
17.These are documentary evidence which, among others, show that
government agencies such as the Department of Social Welfare and
Development and the Philippine Charity Sweepstakes Office recognize
St. Luke's as a charitable institution.
18.123 Phil. 38 (1966).
19.Id. at 41 citing 51 Am. Jur. 607.
20.95 Phil. 16 (1954).
21.Commonwealth Act No. 466, as amended by Republic Act No. 82, Sec. 27
provides: Exemption from tax on corporation. The following
organizations shall not be taxed under this Title in respect to income
received by them as such
xxx xxx xxx
(e) Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, cultural, or educational
purposes, or for the rehabilitation of veterans no part of the net
income of which inures to the benefit of any private stockholder or
individual: 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[.]
22.Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20
at 21.
23.Id.
24.The CTA adopted its earlier interpretation in St. Luke's Medical Center,
Inc. v. Commissioner of Internal Revenue. Supra note 16.
25.Rollo (G.R. No. 195909), p. 76. Italics in the original.
26.410 Phil. 241 (2001).
27.Id. at 257; rollo (G.R. No. 195960), pp. 15-16.
28.Rollo (G.R. No. 195960), p. 24.
29.Id. at 50.
30.NIRC, Sec. 248 (A) (3).
31.NIRC, Sec. 249 (C) (3) provides: "A deficiency tax, or any surcharge or
interest thereon on the due date appearing in the notice and demand
of the Commissioner, there shall be assessed and collected on the
unpaid amount, interest at the rate prescribed in Subsection (A)
hereof until the amount is fully paid, which interest shall form part of
the tax."
32.CTA En Banc Resolution dated 1 March 2011. Rollo (G.R. No. 195909), p.
56.
Section 249 of the NIRC provides:
(A) In General. There shall be assessed and collected on any unpaid
amount of tax, interest at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for its payment until the
amount is fully paid.
(B) Deficiency Interest. Any deficiency in the tax due, as the term is defined
in this Code, shall be subject to the interest prescribed in Subsection
(A) hereof, which interest shall be assessed and collected from the
date prescribed for its payment until the full payment thereof.
xxx xxx xxx
33.Id. at 21-27. Section 27 (E) of the NIRC of 1977 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
xxx xxx xxx
(E) Corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of the net income of which inures
to the benefit of any private stockholder or individual.
xxx xxx xxx
34.See Comment of St. Luke's dated 19 September 2011 in G.R. No.
195909. Id. at 105-116.
35.Id. at 106-108.
36.Cf. NIRC, Sec. 30 (H).
37.115 Phil. 310 (1962).
38.Id. at 311.
39.Id. at 314.
40.G.R. No. 144104, 29 June 2004, 433 SCRA 119.
41.Id. at 128-129. Emphasis supplied.
42.For further discussion of the Subsidy Theory of Tax Exemption, see H.
Hansmann, The Rationale for Exempting Nonprofit Organizations from
Corporate Income Taxation, 91 YALE L. J. 54 (1981) at 66-75. See
also M. Hall & J. Colombo, The Charitable Status of Nonprofit
Hospitals: Toward a Donative Theory of Tax Exemption, 66 WASH. L.
REV. 307 (1991).
43.CONSTITUTION, Art. VI, Sec. 28 (4).
44.Commissioner of Internal Revenue v. The Philippine American Accident
Insurance Company, Inc., 493 Phil. 785 (2005); Lung Center of the
Philippines v. Quezon City, supra note 40 at 133-134; Mactan Cebu
International Airport Authority v. Marcos, 330 Phil. 392 (1996); Manila
Electric Company v. Vera, 160-A Phil. 498 (1975).
45.Supra note 18.
46.Supra note 20.
47.Lung Center of the Philippines v. Quezon City, supra note 40 at 131-132.
Citation omitted.
48.CONSTITUTION, Art. VI, Sec. 28 (3).
49.CORPORATION CODE (B.P. Blg. 68), Sec. 87.
50.Id.
51.Supra note 40. Emphasis supplied.
52.Since the exemption is proportional to the revenue of the institution, Hall
& Colombo say that "a general tax exemption suffers from the same
'upside down' effect as many tax deductions: those entities with the
highest net revenues or the greatest value of otherwise-taxable
property receive the greatest amount of subsidy, yet these are the
entities that least need support. From the standpoint of equity among
different tax-exempt entities, the result of the general tax exemption
is that entities that are the 'poorest' in either an income or property
tax sense, and thus most in need of government assistance to serve
impoverished and uninsured patients, receive the least government
assistance. Because uncompensated care is an expense item, those
hospitals with the most net revenues are more likely to have actually
rendered the least free care, all other things being equal." Hall &
Colombo, supra note 42 at 355-356. Citations omitted.
53.Comment of St. Luke's dated 19 September 2011. Rollo (G.R. No. 195909),
p. 113.
54.Supra note 40 at 137. Emphasis supplied; citations omitted.
55.Jesus Sacred Heart College v. Collector of Internal Revenue, supra note 20
at 20-21.
56.Lung Center of the Philippines v. Quezon City, supra note 40.
57.Supra note 20 at 29.
58.Supra note 20 at 23. Jesus Sacred Heart College distinguished an
educational institution from a charitable institution: "More important
still, the law applied in the case relied upon by [the BIR] exempted
from taxation only such educational institutions as were established
for charitable or philanthropic purposes. Consequently, the amount
of fees charged or the intent to collect more than the cost of
operation or instruction was material to the determination of such
purpose. Upon the other hand, under Section 27 (e) of [the old]
National Internal Revenue Code, as amended, an institution operated
exclusively for educational purposes need not have, in addition
thereto, a charitable or philanthropic character, to be exempt from
taxation, provided only that no part of its net income 'inures to the
benefit of any private stockholder or individual.'" (Italics in the
original; emphasis supplied)
59.Italics supplied.
60.See CTA First Division Decision dated 23 February 2009. Rollo (G.R. No.
195909), p. 69.
61.533 Phil. 101 (2006).
62.Id. at 108-109.
||| (Commr. v. St. Luke's Medical Center, Inc., G.R. No. 195909, 195960,
September 26, 2012)
SECOND DIVISION
[G.R. No. 139786. September 27, 2006.]
CITYTRUST INVESTMENT PHILS., INC., respondent.
[G.R. No. 140857. September 27, 2006.]
ASIANBANK CORPORATION, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
D E C I S I O N
SANDOVAL-GUTIERREZ, J p:
Does the twenty percent (20%) final withholding tax (FWT) on a bank's
passive income 1 form part of the taxable gross receipts for the purpose
of computing the five percent (5%) gross receipts tax (GRT)? This is the
central issue in the present two (2) consolidated petitions for review.
In G.R. No. 139786, petitioner Commissioner of Internal Revenue
(Commissioner) assails the Court of Appeals Decision dated August 17,
1999 in CA-G.R. SP No. 527072 affirming the Court of Tax Appeals (CTA)
Decision 3 ordering the refund or issuance of tax credit certificate in
favor of respondent Citytrust Investment Philippines., Inc. (Citytrust).
In G.R. No. 140857, petitioner Asianbank Corporation (Asianbank)
challenges the Court of Appeals Decision dated November 22, 1999 in
CA-G.R. SP No. 51248 4 reversing the CTA Decision 5 ordering a tax
refund in its (Asianbank's) favor.
A brief review of the taxation laws provides an adequate backdrop for
our subsequent narration of facts.
Under Section 27(D), formerly Section 24(e)(1) of the National Internal
Revenue Code of 1997 (Tax Code), the earnings of banks from passive
income are subject to a 20% FWT, 6 thus:
(D)Rates of Tax on Certain Passive Incomes
(1)Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. A final tax at the rate
of twenty percent (20%)is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds
and similar arrangements received by domestic corporation
and royalties, derived from sources within the Philippines: . . .
Apart from the 20% FWT, banks are also subject to the 5% GRT on their
gross receipts, which includes their passive income. Section 121
(formerly Section 119) of the Tax Code reads:
SEC. 121.Tax on banks and Non-bank financial
intermediaries. There shall be collected a tax on gross
receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with
the following schedule:
(a)On interest, commissions and discounts from lending
activities as well as income from financial leasing,
on the basis of remaining maturities of
instruments from which such receipts are derived:
Short-term maturity (not in excess of two [2]
years)5%
Medium-term maturity (over two [2] years but not
exceeding four [4] years)3%
Long-term maturity
(1)Over four (4) years but not exceeding
seven (7) years1%
(2)Over seven (7) years0%
(b)On dividends0%
(c)On royalties, rentals of property, real or
personal,
profits from exchange and all other items treated
as gross income under Section 32 of this
Code5%
Provided, however, That in case the maturity period referred to
in paragraph (a) is shortened thru pretermination, then the
maturity period shall be reckoned to end as of the date of
pretermination for purposes of classifying the transaction as
short, medium or long-term and the correct rate of tax shall be
applied accordingly.
Nothing in this Code shall preclude the Commissioner from
imposing the same tax herein provided on persons performing
similar banking activities.
I - G.R. No. 139786
Citytrust, respondent, is a domestic corporation engaged in quasi-
banking activities. In 1994, Citytrust reported the amount of
P110,788,542.30 as its total gross receipts and paid the amount of
P5,539,427.11 corresponding to its 5% GRT.
Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v.
Commissioner of Internal Revenue 7 (ASIAN BANK case), ruled that the
basis in computing the 5% GRT is the gross receipts minus the 20%
FWT. In other words, the 20% FWT on a bank's passive income does not
form part of the taxable gross receipts.
On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling,
filed with the Commissioner a written claim for the tax refund or credit
in the amount of P326,007.01. It alleged that its reported total gross
receipts included the 20% FWT on its passive income amounting to
P32,600,701.25. Thus, it sought to be reimbursed of the 5% GRT it paid
on the portion of 20% FWT or the amount of P326,007.01.
On the same date, Citytrust filed a petition for review with the CTA,
which eventually granted its claim. 8
On appeal by the Commissioner, the Court of Appeals affirmed the CTA
Decision, citing as main bases Commissioner of Internal Revenue v.
Tours Specialist Inc. 9 andCommissioner of Internal Revenue v. Manila
Jockey Club, 10 holding that monies or receipts that do not redound to
the benefit of the taxpayer are not part of its gross receipts, thus:
Patently, as expostulated by our Supreme Court, monies or
receipts that do not redound to the benefit of the taxpayer
are not part of its gross receipts for the purpose of
computing its taxable gross receipts. In Manila Jockey Club, a
portion of the wager fund and the ten-peso contribution,
although actually received by the Club, was not considered as
part of its gross receipts for the purpose of imposing the
amusement tax. Similarly, in Tours Specialists, the room or
hotel charges actually received by them from the foreign travel
agency was, likewise, not included in its gross receipts for the
imposition of the 3% contractor's tax. In both cases, the fees,
bets or hotel charges, as the case may be, were actually
received and held in trust by the taxpayers. On the other
hand, the 20% final tax on the Respondent's passive income
was already deducted and withheld by various withholding
agents. Hence, the actual or the exact amount received by
the Respondent, as its passive income in the year 1994, was
less the 20% final tax already withheld by various
withholding agents. The various withholding agents at
source were required under section 50 (a), of the National
Internal Revenue Code of 1986, to withhold the 20% final
tax on certain passive income . . . . SIcCTD
Moreover, under Section 51 (g) of the said Code, all taxes
withheld pursuant to the provisions of this Code and its
implementing regulations are considered trust funds and
shall be maintained in a separate account and not
commingled with any other funds of the withholding agent.
Accordingly, the 20% final tax withheld against the
Respondent's passive income was already remitted to the
Bureau of Internal Revenue, for the corresponding year that
the same was actually withheld and considered final
withholding taxes under Section 50 of the same Code.
Indubitably, to include the same to the Respondent's gross
receipts for the year 1994 would be to tax twice the passive
income derived by Respondent for the said year, which
would constitute double taxation anathema to our taxation
laws.
II - G.R. No. 140857
Asianbank, petitioner, is a domestic corporation also engaged in
banking business. For the taxable quarters ending June 30, 1994 to June
30, 1996, Asianbank filed and remitted to the Bureau of Internal
Revenue (BIR) the 5% GRT on its total gross receipts.
On the strength of the January 30, 1996 CTA Decision in the ASIAN
BANK case, Asianbank filed with the Commissioner a claim for refund of
the overpaid GRT amounting to P2,022,485.78.
To toll the running of the two-year prescriptive period for filing of
claims, Asianbank also filed a petition for review with the CTA.
On February 3, 1999, the CTA allowed refund in the reduced amount of
P1,345,743.01, 11 the amount proven by Asianbank. Unsatisfied, the
Commissioner filed with the Court of Appeals a petition for review.
On November 22, 1999, the Court of Appeals reversed the CTA Decision
and ruled in favor of the Commissioner, thus:
It is true that Revenue Regulation No. 12-80 provides that the
gross receipts tax on banks and other financial institutions
should be based on all items of income actually received.
Actual receipt here is used in opposition to mere accrual.
Accrued income refers to income already earned but not yet
received. (Rep. v. Lim Tian Teng Sons & Co., 16 SCRA 584).
But receipt may be actual or constructive. Article 531 of the
Civil Code provides that possession is acquired by the material
occupation of a thing or the exercise of a right, or by the fact
that it is subject to the action of one will, or by the proper acts
and legal formalities established for acquiring such right.
Moreover, taxation income may be received by the taxpayer
himself or by someone authorized to receive it for him (Art.
532, Civil Code). The 20% final tax withheld from interest
income of banks and other similar institutions is not income
that they have not received; it is simply withheld from them
and paid to the government, for their benefit. Thus, the
20% income tax withheld from the interest income is, in
fact, money of the taxpayer bank but paid by the payor to
the government in satisfaction of the bank's obligation to
pay the tax on interest earned. It is the bank's obligation to
pay the tax. Hence, the withholding of the said tax and its
payment to the government is for its benefit.
xxx xxx xxx
The case of Collector of Internal Revenue vs. Manila Jockey
Club is inapplicable. In that case, a percentage of the gross
receipts to be collected by the Manila Jockey Club was
earmarked by law to be turned over to the Board on Races and
distributed as prizes among owners of winning horses and
authorized bonus for jockeys. The Manila Jockey Club itself
derives no benefit at all from earmarked percentage. That is
why it cannot be considered as part of its gross receipts.
WHEREFORE, the C.T.A's judgment herein appealed from is
hereby REVERSED, and judgment is hereby
rendered DISMISSING the respondent's Petition for Review in
C.T.A Case No. 5412.

SO ORDERED.
Hence, the present consolidated petitions.
The Commissioner's arguments in the two (2) petitions may be
synthesized as follows:
first, there is no law which excludes the 20% FWT from the
taxable gross receipts for the purpose of computing the 5%
GRT;
second, the imposition of the 20% FWT on the bank's passive
income and the 5% GRT on its taxable gross receipts, which
include the bank's passive income, does not constitute double
taxation;
third, the ruling by this Court in Manila Jockey Club, 12 cited in
the ASIAN BANK case, is not applicable; and
fourth, in the computation of the 5% GRT, the passive income
need not be actually received in order to form part of the
taxable gross receipts.
In its Resolution 13 dated January 17, 2000, this Court adopted as
Citytrust's Comment on the instant petition for review its Memorandum
submitted to the CTA and its Comment submitted to the Court of
Appeals. Citytrust contends therein that: first, Section 4(e) of Revenue
Regulations No. 12-80 dated November 7, 1980 provides that the rates
of taxes on the gross receipts of financial institutions shall be based
only on all items of income actually received; and, second, this Court's
ruling inManila Jockey Club 14 is applicable. Asianbank echoes similar
arguments.
We rule in favor of the Commissioner.
The issue of whether the 20% FWT on a bank's interest income forms
part of the taxable gross receipts for the purpose of computing the 5%
GRT is no longer novel. This has been previously resolved by this Court
in a catena of cases, such as China Banking Corporation v. Court of
Appeals, 15 Commissioner of Internal Revenue v. Solidbank
Corporation, 16 Commissioner of Internal Revenue v. Bank of
Commerce, 17 and the latest, Commissioner of Internal Revenue v. Bank
of the Philippine Islands. 18
The above cases are unanimous in defining "gross receipts" as "the
entire receipts without any deduction." We quote the Court's
enlightening ratiocination in Bank of the Philippines Islands, 19 thus:
The Tax Code does not provide a definition of the term "gross
receipts". Accordingly, the term is properly understood in its
plain and ordinary meaning and must be taken to comprise of
the entire receipts without any deduction. We, thus, made the
following disquisition in Bank of Commerce:
The word "gross" must be used in its plain and
ordinary meaning. It is defined as "whole, entire,
total, without deduction." A common definition is
"without deduction." "Gross" is also defined as
"taking in the whole; having no deduction or
abatement; whole, total as opposed to a sum
consisting of separate or specified parts." Gross is the
antithesis of net. Indeed, in China Banking Corporation
v. Court of Appeals, the Court defined the term in this
wise:
As commonly understood, the term "gross
receipts" means the entire receipts without any
deduction. Deducting any amount from the
gross receipts changes the result, and the
meaning, to net receipts. Any deduction from
gross receipts is inconsistent with a law that
mandates a tax on gross receipts, unless the law
itself makes an exception. As explained by
the Supreme Court of Pennsylvania in
Commonwealth of Pennsylvania v. Koppers
Company, Inc.
Highly refined and technical tax concepts
have been developed by the accountant
and legal technician primarily because of
the impact of federal income tax legislation.
However, this is no way should affect or
control the normal usage of words in the
construction of our statutes; and we see
nothing that would require us not to
include the proceeds here in question in
the gross receipts allocation unless
statutorily such inclusion is
prohibited. Under the ordinary basic
methods of handling accounts, the term
gross receipts, in the absence of any
statutory definition of the term, must be
taken to include the whole total gross
receipts without any deductions, . . . .
[Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St. Louis, the
Supreme Court of Missouri held:
The word "gross" appearing in the term
"gross receipts," as used in the ordinance,
must have been and was there used as the
direct antithesis of the word "net." In its
usual and ordinary meaning, "gross
receipts" of a business is the whole and
entire amount of the receipts without
deduction, . . . . On the ordinary, "net
receipts" usually are the receipts which
remain after deductions are made from the
gross amount thereof of the expenses and
cost of doing business, including fixed
charges and depreciation. Gross receipts
become net receipts after certain proper
deductions are made from the gross. And
in the use of the words "gross receipts," the
instant ordinance, or course, precluded
plaintiff from first deducting its costs and
expenses of doing business, etc., in arriving
at the higher base figure upon which it
must pay the 5% tax under this ordinance.
(Emphasis supplied)
xxx xxx xxx
Additionally, we held in Solidbank, to wit:
[W]e note that US cases have persuasive effect in our
jurisdiction because Philippine income tax law is
patterned after its US counterpart.
[G]ross receipts with respect to any period means
the sum of: (a) The total amount received or
accrued during such period from the sale,
exchange, or other disposition of . . . other
property of a kind which would properly be
included in the inventory of the taxpayer if on
hand at the close of the taxable year, or property
held by the taxpayer primarily for sale to
customers in the ordinary course of its trade or
business, and (b) The gross income, attributable to
a trade or business, regularly carried on by the
taxpayer, received or accrued during such period .
. . .
. . . [B]y gross earnings from operations . . . was
intended all operations . . . including incidental,
subordinate, and subsidiary operations, as well as
principal operations.
When we speak of the "gross earnings" of a
person or corporation, we mean the entire
earnings or receipts of such person or corporation
from the business or operation to which we refer.
From these cases, "gross receipts" refer to the
total, as opposed to the net income. These are
therefore the total receipts before any deduction
for the expenses of management. Webster's New
International Dictionary, in fact, defines gross as
"whole or entire." cHaDIA
In China Banking Corporation, 20 this Court further explained that the
legislative intent to apply the term in its plain and ordinary meaning
may be surmised from a historical perspective of the levy on gross
receipts. From the time the GRT on banks was first imposed in 1946
under Republic Act No. 39 21 and throughout its successive re-
enactments, 22 the legislature has not established a definition of the
term "gross receipts." Under Revenue Regulations No. 12-80 and No.
17-84, as well as several numbered rulings, the BIR has consistently
ruled that the term "gross receipts" does not admit of any deduction.
This interpretation has remained unchanged throughout the various re-
enactments of the present Section 121 of the Tax Code. On the
presumption that the legislature is familiar with the contemporaneous
interpretation of a statute given by the administrative agency tasked to
enforce the statute, the reasonable conclusion is that the legislature has
adopted the BIR's interpretation. In other words, the subsequent re-
enactments of the present Section 121, without changes in the term
interpreted by the BIR, confirm that its interpretation carries out the
legislative purpose.
Now, bereft of any laudable statutory basis, Citytrust and Asianbank
simply anchor their argument on Section 4(e) of Revenue Regulations
No. 12-80 stating that "the rates of taxes to be imposed on the gross
receipts of such financial institutions shall be based on all items of
income actually received." They contend that since the 20% FWT is
withheld at source and is paid directly to the government by the
entities from which the banks derived the income, the same cannot be
considered actually received, hence, must be excluded from the taxable
gross receipts.
The argument is bereft of merit.
First, Section 4(e) merely recognizes that income may be taxable either
at the time of its actual receipt or its accrual, depending on the
accounting method of the taxpayer. It does not really exclude accrued
interest income from the taxable gross receipts but merely
postpones its inclusion until actual payment of the interest to the
lending bank. Thus, while it is true that Section 4(e) states that "the
rates of taxes to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually received," it
goes on to distinguish actual receipt from accrual, i.e., that "mere
accrual shall not be considered, but once payment is received in
such accrual or in case of prepayment, then the amount actually
received shall be included in the tax base of such financial
institutions."
And second, Revenue Regulations No. 12-80, issued on November 7,
1980, had been superseded by Revenue Regulations No. 17-84 issued
on October 12, 1984. Section 4(e) of Revenue Regulations No. 12-80
provides that only items of income actually received shall be included
in the tax base for computing the GRT. On the other hand, Section 7(c)
of Revenue Regulations No. 17-84 includes all interest income in
computing the GRT, thus:
SECTION 7.Nature and Treatment of Interest on Deposits and
Yield on Deposit Substitutes.
(a)The interest earned on Philippine Currency bank
deposits and yield from deposit substitutes
subjected to the withholding taxes in accordance
with these regulations need not be included in the
gross income in computing the
depositor's/investor's income tax liability in
accordance with the provision of Section 29 (b),
(c) and (d) of the National Internal Revenue Code,
as amended.
(b)Only interest paid or accrued on bank deposits, or
yield from deposit substitutes declared for
purposes of imposing the withholding taxes in
accordance with these regulations shall be allowed
as interest expense deductible for purposes of
computing taxable net income of the payor.

(c)If the recipient of the above-mentioned items of
income are financial institutions, the same shall
be included as part of the tax base upon which
the gross receipt tax is imposed.
Revenue Regulations No. 17-84 categorically states that if the recipient
of the above-mentioned items of income are financial institutions,
the same shall be included as part of the tax base upon which the
gross receipt tax is imposed. There is, therefore, an implied repeal of
Section 4(e). There exists a disparity between Section 4(e) which
imposes the GRT only on all items of income actually received (as
opposed to their mere accrual) and Section 7(c) which includes all
interest income (whether actual or accrued) in computing the GRT. As
held by this Court in Commissioner of Internal Revenue v. Solidbank
Corporation, 23 "the exception having been eliminated, the clear
intent is that the later R.R. No. 17-84 includes the exception within
the scope of the general rule." Clearly, then, the current Revenue
Regulations require interest income, whether actually received or merely
accrued, to form part of the bank's taxable gross receipts. 24
Moreover, this Court, in Bank of Commerce, 25 settled the matter by
holding that "actual receipt may either be physical receipt or
constructive receipt," thus:
Actual receipt of interest income is not limited to physical
receipt. Actual receipt may either be physical receipt or
constructive receipt. When the depositary bank withholds
the final tax to pay the tax liability of the lending bank,
there is prior to the withholding a constructive receipt by
the lending bank of the amount withheld. From the amount
constructively received by the lending bank, the depositary
bank deducts the final withholding tax and remits it to the
government for the account of the lending bank. Thus, the
interest income actually received by the lending bank, both
physically and constructively, is the net interest plus the
amount withheld as final tax.
The concept of a withholding tax on income obviously and
necessarily implies that the amount of the tax withheld comes
from the income earned by the taxpayer. Since the amount of
the tax withheld constitute income earned by the taxpayer,
then that amount manifestly forms part of the taxpayer's gross
receipts. Because the amount withheld belongs to the taxpayer,
he can transfer its ownership to the government in payment of
his tax liability. The amount withheld indubitably comes from
the income of the taxpayer, and thus forms part of his gross
receipts.
Corollarily, the Commissioner contends that the imposition of the 20%
FWT and 5% GRT does not constitute double taxation.
We agree.
Double taxation means taxing for the same tax period the same thing
or activity twice, when it should be taxed but once, for the same
purpose and with the same kind of character of tax. 26 This is not the
situation in the case at bar. The GRT is a percentage tax under Title V of
the Tax Code ([Section 121], Other Percentage Taxes), while the FWT is
an income tax under Title II of the Code (Tax on Income). The two
concepts are different from each other. In Solidbank Corporation, 27 this
Court defined that a percentage tax is a national tax measured by a
certain percentage of the gross selling price or gross value in money of
goods sold, bartered or imported; or of the gross receipts or earnings
derived by any person engaged in the sale of services. It is not subject
to withholding. An income tax, on the other hand, is a national tax
imposed on the net or the gross income realized in a taxable year. It is
subject to withholding. Thus, there can be no double taxation here as
the Tax Code imposes two different kinds of taxes.
Now, both Asianbank and Citytrust rely on Manila Jockey Club 28 in
support of their positions. We are not convinced. In said case, Manila
Jockey Club paid amusement tax on its commission in the total amount
of bets called wager funds from the period November 1946 to October
1950. But such payment did not include the 5 1/2% of the funds which
went to the Board on Races and to the owners of horses and jockeys.
We ruled that the gross receipts of the Manila Jockey Club should not
include the 5 1/2% because although delivered to the Club, such money
has been especially earmarked by law or regulation for other
persons. CHcETA
The Manila Jockey Club 29 does not apply to the cases at bar because
what happened there is earmarking and not withholding. Earmarking is
not the same as withholding. Amounts earmarked do not form part of
gross receipts because these are by law or regulation reserved for some
person other than the taxpayer, although delivered or received. On the
contrary, amounts withheld form part of gross receipts because these
are in constructive possession and not subject to any reservation, the
withholding agent being merely a conduit in the collection
process. 30 The distinction was explained in Solidbank, thus:
"The Manila Jockey Club had to deliver to the Board on Races,
horse owners and jockeys amounts that never became the
property of the race track (Manila Jockey Club merely held that
these amounts were held in trust and did not form part of
gross receipts). Unlike these amounts, the interest income
that had been withheld for the government became
property of the financial institutions
upon constructive possession thereof. Possession was
indeed acquired, since it was ratified by the financial
institutions in whose name the act of possession had been
executed. The money indeed belonged to the taxpayers;
merely holding it in trust was not enough (A trustee does
not own money received in trust.) It is a basic concept in
taxation that such money does not constitute taxable income
to the trustee [China Banking Corp. v. Court of Appeals, supra,
p. 27]).
The government subsequently becomes the owner of the
money when the financial institutions pay the FWT to
extinguish their obligation to the government. As this Court
has held before, this is the consideration for the transfer of
ownership of the FWT from these institutions to the
government (Ibid., p. 26). It is ownership that determines
whether interest income forms part of taxable gross receipts
(Ibid., p. 27). Being originally owned by these financial
institutions as part of their interest income, the FWT should
form part of their taxable gross receipts.
In fine, let it be stressed that tax exemptions are highly disfavored. It is
a governing principle in taxation that tax exemptions are to be
construed in strictissimi jurisagainst the taxpayer and liberally in favor of
the taxing authority and should be granted only by clear and
unmistakable terms.
WHEREFORE, in G.R. No. 139786, we GRANT the petition of the
Commissioner of Internal Revenue and REVERSE the Decision of the
Court of Appeals dated August 17, 1999 in CA-G.R. SP No. 52707.
In G.R. No. 140857, we DENY the petition of Asianbank Corporation and
AFFIRM in toto the Decision of the Court of Appeals in CA-G.R. SP No.
51248. Costs against petitioner. HDAaIS
SO ORDERED.
Puno, Corona, Azcuna and Garcia, JJ., concur.
Footnotes
1.Also referred to as "interest income" as it pertains to interest from bank
deposits and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and
royalties.
2.Entitled Commissioner of Internal Revenue v. Citytrust Investment Phils.,
Inc., penned by Associate Justice Romeo J. Callejo, Sr. (now a member
of this Court) and concurred in by Associate Justice Quirino D. Abad
Santos, Jr. and Associate Justice Mariano M. Umali (both retired).
3.CTA Case No. 5403, entitled Citytrust Investment Philippines, Inc. v.
Commissioner of Internal Revenue, penned by Associate Justice
Ramon O. De Veyra.
4.Entitled Commissioner of Internal Revenue v. Asianbank Corporation,
penned by Associate Justice Hector L. Hofilea (retired) and concurred
in by Associate Justice Omar U. Amin (retired) and Associate Justice
Jose L. Sabio, Jr.
5.CTA Case No. 5412.
6.This tax is withheld at source and is thus not actually and physically
received by the banks, because it is paid directly to the government
by the entities from which the banks derived the income.
(Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No.
148191, November 25, 2003, 416 SCRA 436.)
7.CTA Decision in CTA Case No. 4720.
8.On April 19, 1999, the Court of Tax Appeals rendered a Decision, the
dispositive portion of which reads:
"WHEREFORE, in view of the foregoing, Respondent is
hereby ORDERED to REFUND or to ISSUE a tax credit certificate in
favor of Petitioner in the amount of P39,629.44 representing overpaid
gross receipts tax for the taxable year 1994."
9.G.R. No. 66416, March 21, 1990, 183 SCRA 402.
10.108 Phil. 821 (1960).
11.The amount as alleged in the petition; P1,345,749.01, as it appears in the
CA decision.
12.Supra, footnote 10.
13.Rollo, p. 50.
14.Supra.
15.G.R. No. 146749, June 10, 2003, 403 SCRA 634.
17.G.R. No. 149636, June 8, 2005, 459 SCRA 638.
18.G.R. No. 147375, June 26, 2006.
19.Id.
21.Republic Act No. 39 amended Section 249 of the Tax Code of 1939
(effective October 1, 1946), which states:
"Sec. 249. Tax on banks. There shall be collected a tax of five per
centum on the gross receipts derived by all banks doing business in
the Philippines from interests, discounts, dividends, commissions,
profits from exchange, royalties, rentals of property, real and personal,
and all other items treated as gross income under section twenty-nine
of this Code."
22.Since 1 October 1946 when R.A. No. 39 first imposed the gross receipts
tax on banks under Section 249 of the Tax Code, the legislature has
re-enacted several times this section of the Tax Code. On 24
December 1972, Presidential Decree No. 69, which enacted into law
the Omnibus Tax Bill of 1972, re-enacted Section 249 of the Tax
Code. Then on 11 June 1977, Presidential Decree No. 1158, otherwise
known as the National Internal Revenue Code of 1977, re-enacted
Section 249 as Section 119 of the Tax Code. Finally, on 11 December
1997, Republic Act No. 8424, otherwise known as the Tax Reform Act
of 1987, re-enacted Section 119 as the present Section 121 of the Tax
Code. (See China Banking Corporation v. Court of Appeals, supra).

26.Tax Law and Jurisprudence, by Justice Jose C. Vitug and Judge Ernesto D.
Acosta, Second Edition, 2000.
29.Id.

||| (Commr. v. Citytrust Investment Phils., Inc., G.R. No. 139786, 140857,
September 27, 2006)
THIRD DIVISION
[G.R. No. 76573. September 14, 1989.]
MARUBENI CORPORATION (formerly Marubeni Iida,
Co., Ltd.), petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE AND COURT OF TAX APPEALS, respondents.
Melquiades C. Gutierrez for petitioner.
The Solicitor General for respondents.
SYLLABUS
1.TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON
CORPORATIONS; RESIDENT FOREIGN CORPORATION, DEFINED.
Under the Tax Code, a resident foreign corporation is one that is
"engaged in trade or business" within the Philippines.
2.ID.; ID.; ID.; A SINGLE CORPORATION CANNOT BE BOTH A RESIDENT
AND NON-RESIDENT CORPORATION. A single corporate entity
cannot be both a resident and a non-resident corporation depending
on the nature of the particular transaction involved. Accordingly,
whether the dividends are paid directly to the head office or coursed
through its local branch is of no moment for after all, the head office
and the office branch constitute but one corporate entity, the Marubeni
Corporation, which, under both Philippine tax and corporate laws, is a
resident foreign corporation because it is transacting business in the
Philippines.
3.ID.; ID.; ID.; EACH TAX HAS A DIFFERENT TAX BASIS; CASE AT BAR.
But while public respondents correctly concluded that the dividends in
dispute were neither subject to the 15% profit remittance tax nor to the
10% intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was
forthcoming to the petitioner because the taxes thus withheld totalled
the 25% rate imposed by the Philippine-Japan Tax Convention pursuant
to Article 10 (2) (b). To simply add the two taxes to arrive at the 25%
tax rate is to disregard a basic rule in taxation that each tax has a
different tax basis. While the tax on dividends is directly levied on the
dividends received, "the tax base upon which the 15% branch profit
remittance tax is imposed is the profit actually remitted abroad."
4.ID.; ID.; ID.; PHILIPPINE-JAPAN TAX TREATY; 25% MAXIMUM RATE,
IMPOSABLE ONLY WHEN THE LOCAL TAX EXCEEDS THE SAME.
Public respondents likewise erred in automatically imposing the 25%
rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate.
A closer look at the Treaty reveals that the tax rates fixed by Article 10
are the maximum rates as reflected in the phrase "shall not exceed."
This means that any tax imposable by the contracting state concerned
should not exceed the 25% limitation and that said rate would apply
only if the tax imposed by our laws exceeds the same. In other words,
by reason of our bilateral negotiations with Japan, we have agreed to
have our right to tax limited to a certain extent to attain the goals set
forth in the Treaty.
5.ID.; ID.; ID.; ID.; NON-RESIDENT CORPORATION IS TAXED 35% OF ITS
GROSS INCOME FROM ALL SOURCES WITHIN THE PHILIPPINES.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is
Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of
1980. Proceeding to apply the above section to the case at bar,
petitioner, being a non-resident foreign corporation, as a general rule, is
taxed 35% of its gross income from all sources within the Philippines.
[Section 24 (b) (1)].
6.ID.; ID.; ID.; ID.; ID.; DISCOUNTED RATE OF 15% GRANTED WHERE A
TAX CREDIT OF NOT LESS THAN 20% OF THE DIVIDENDS RECEIVED IS
EXTENDED TO OUR DOMESTIC CORPORATION. A discounted rate of
15% is given to petitioner on dividends received from a domestic
corporation (AG&P) on the condition that its domicile state (Japan)
extends in favor of petitioner, a tax credit of not less than 20% of the
dividends received. This 20% represents the difference between the
regular tax of 35% on non-resident foreign corporations which
petitioner would have ordinarily paid, and the 15% special rate on
dividends received from a domestic corporation.
7.ID.; ID.; ID.; ID.; ID.; TAX REFUND PROPER WHERE A FOREIGN NON-
RESIDENT CORPORATION PAID INCOME TAX ON BRANCH PROFIT
REMITTANCE WITHIN THE MAXIMUM CEILING RATE DECREED IN THE
TAX TREATY. Petitioner is entitled to a refund on the transaction in
question. It is readily apparent that the 15% tax rate imposed on the
dividends received by a foreign non-resident stockholder from a
domestic corporation under Section 24 (b) (1) (iii) is easily within the
maximum ceiling of 25% of the gross amount of the dividends as
decreed in Article 10 (2) (b) of the Tax Treaty.
8.REMEDIAL LAW; BATAS PAMBANSA BLG. 129; DOES NOT INCLUDE
REORGANIZATION OF THE COURT OF TAX APPEALS. BP Blg.
129 does not include the Court of Tax Appeals which has been created
by virtue of a special law, Republic Act No. 1125. Respondent court is
not among those courts specifically mentioned in Section 2 of BP Blg.
129 as falling within its scope.
9.ID.; REPUBLIC ACT NO. 1125; COURT OF TAX APPEALS; THIRTY (30)
DAYS PERIOD TO APPEAL FROM NOTICE; PERIOD BEGINS AGAIN FROM
NOTICE OF DENIAL OF MOTION FOR RECONSIDERATION; CASE AT
BAR. Under Section 18 of Republic Act No. 1125, a party adversely
affected by an order, ruling or decision of the Court of Tax Appeals is
given thirty (30) days from notice to appeal therefrom. Otherwise, said
order, ruling, or decision shall become final. Records show that
petitioner received notice of the Court of Tax Appeal's decision denying
its claim for refund on April 15, 1986. On the 30th day, or on May 15,
1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on
November 17, 1986, and notice of which was received by petitioner on
November 26, 1986. Two days later, or on November 28, 1986,
petitioner simultaneously filed a notice of appeal with the Court of Tax
Appeals and a petition for review with the Supreme Court. From the
foregoing, it is evident that the instant appeal was perfected well within
the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial
of petitioner's motion for reconsideration.
D E C I S I O N
FERNAN, C.J p:
Petitioner, Marubeni Corporation, representing itself as a foreign
corporation duly organized and existing under the laws of Japan and
duly licensed to engage in business under Philippine laws with branch
office at the 4th Floor, FEEMI Building, Aduana Street, Intramuros,
Manila seeks the reversal of the decision of the Court of Tax Appeals 1
dated February 12, 1986 denying its claim for refund or tax credit in the
amount of P229,424.40 representing alleged overpayment of branch
profit remittance tax withheld from dividends by Atlantic Gulf and
Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has
equity investments in AG&P of Manila. For the first quarter of 1981
ending March 31, AG&P declared and paid cash dividends to petitioner
in the amount of P849,720 and withheld the corresponding 10% final
dividend tax thereon. Similarly, for the third quarter of 1981 ending
September 30, AG&P declared and paid P849,720 as cash dividends to
petitioner and withheld the corresponding 10% final dividend tax
thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in
Tokyo, Japan, net not only of the 10% final dividend tax in the amounts
of P764,748 for the first and third quarters of 1981, but also of the
withheld 15% profit remittance tax based on the remittable amount
after deducting the final withholding tax of 10%. A schedule of
dividends declared and paid by AG&P to its stockholder Marubeni
Corporation of Japan, the 10% final intercorporate dividend tax and the
15% branch profit remittance tax paid thereon, is shown below:
1981FIRST QUARTERTHIRD QUARTERTOTAL OF FIRST
(three months(three monthsand Third
ended 3.31.81)ended 9.30.81)quarters
(In Pesos)

Cash
Dividends
Paid849,720.44849,720.001,699,440.00
10% Dividend
Tax With-
held84,972.0084,972.00169,944.00
Cash Dividend
net of 10% Dividend
Tax With-
held764,748.00764,748.001,529,496.00
15% Branch Profit
Remittance Tax
Withheld114,712.20114,712.20 229,424.40 3
Net Amount
Remitted to
Petitioner650,035.80650,035.801,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit
remittance tax of P114,712.20 for the first quarter of 1981 were paid to
the Bureau of Internal Revenue by AG&P on April 20, 1981 under
Central Bank Receipt No. 6757880. Likewise, the 10% final dividend tax
of P84,972 and the 15% branch profit remittance tax of P114,712 for the
third quarter of 1981 were paid to the Bureau of Internal Revenue by
AG&P on August 4, 1981 under Central Bank Confirmation Receipt No.
7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding
agent paid 15% branch profit remittance on cash dividends declared
and remitted to petitioner at its head office in Tokyo in the total
amount of P229,424.40 on April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting
firm Sycip, Gorres, Velayo and Company, sought a ruling from the
Bureau of Internal Revenue on whether or not the dividends petitioner
received from AG&P are effectively connected with its conduct or
business in the Philippines as to be considered branch profits subject to
the 15% profit remittance tax imposed under Section 24 (b) (2) of the
National Internal Revenue Code as amended by Presidential Decrees
Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta
ruled:
"Pursuant to Section 24 (b) (2) of the Tax Code, as amended,
only profits remitted abroad by a branch office to its head
office which are effectively connected with its trade or business
in the Philippines are subject to the 15% profit remittance tax.
To be 'effectively connected' it is not necessary that the income
be derived from the actual operation of taxpayer-corporation's
trade or business; it is sufficient that the income arises from
the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the
buying and selling of machineries in the Philippines and invests
in some shares of stock on which dividends are subsequently
received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country.
(Revenue Memorandum Circular No. 55-80).

In the instant case, the dividends received by Marubeni from
AG&P are not income arising from the business activity in
which Marubeni is engaged. Accordingly, said dividends if
remitted abroad are not considered branch profits for purposes
of the 15% profit remittance tax imposed by Section 24 (b) (2)
of the Tax Code, as amended . . . ." 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner
claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends
remitted by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20
and August 4, 1981 to . . . head office in Tokyo." 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following
grounds:
"While it is true that said dividends remitted were not subject
to the 15% profit remittance tax as the same were not income
earned by a Philippine Branch of Marubeni Corporation of
Japan; and neither is it subject to the 10% intercorporate
dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is
subject to the 25% tax pursuant to Article 10 (2) (b) of the Tax
Treaty dated February 13, 1980 between the Philippines and
Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni
Corporation, Japan is subject to 25% tax, and that the taxes
withheld of 10% as intercorporate dividend tax and 15% as
profit remittance tax totals (sic) 25%, the amount refundable
offsets the liability, hence, nothing is left to be refunded." 8
Petitioner appealed to the Court of Tax Appeals which affirmed the
denial of the refund by the Commissioner of Internal Revenue in its
assailed judgment of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax
Court explained:
"Whatever the dialectics employed, no amount of sophistry can
ignore the fact that the dividends in question are income
taxable to the Marubeni Corporation of Tokyo, Japan. The said
dividends were distributions made by the Atlantic, Gulf and
Pacific Company of Manila to its shareholder out of its profits
on the investments of the Marubeni Corporation of Japan, a
non-resident foreign corporation. The investments in the
Atlantic Gulf & Pacific Company of the Marubeni Corporation
of Japan were directly made by it and the dividends on the
investments were likewise directly remitted to and received by
the Marubeni Corporation of Japan. Petitioner Marubeni
Corporation Philippine Branch has no participation or
intervention, directly or indirectly, in the investments and in the
receipt of the dividends. And it appears that the funds invested
in the Atlantic Gulf & Pacific Company did not come out of the
funds invested by the Marubeni Corporation of Japan to the
Marubeni Corporation Philippine Branch. As a matter of fact,
the Central Bank of the Philippines, in authorizing the
remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of
Japan as a non-resident stockholder of the Atlantic Gulf &
Pacific Company based on the supporting documents
submitted to it.
"Subject to certain exceptions not pertinent hereto, income is
taxable to the person who earned it. Admittedly, the dividends
under consideration were earned by the Marubeni Corporation
of Japan, and hence, taxable to the said corporation. While it is
true that the Marubeni Corporation Philippine Branch is duly
licensed to engage in business under Philippine laws, such
dividends are not the income of the Philippine Branch and are
not taxable to the said Philippine branch. We see no
significance thereto in the identity concept or principal-agent
relationship theory of petitioner because such dividends are the
income of and taxable to the Japanese corporation in Japan
and not to the Philippine branch." 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-
agent relationship theory, Marubeni, Japan is likewise a resident foreign
corporation subject only to the 10% intercorporate final tax on
dividends received from a domestic corporation in accordance with
Section 24(c) (1) of the Tax Code of 1977 which states:
"Dividends received by a domestic or resident foreign
corporation liable to tax under this Code (1) Shall be subject
to a final tax of 10% on the total amount thereof, which shall
be collected and paid as provided in Sections 53 and 54 of this
Code . . ."
Public respondents, however, are of the contrary view that Marubeni,
Japan, being a non-resident foreign corporation and not engaged in
trade or business in the Philippines, is subject to tax on income earned
from Philippine sources at the rate of 35% of its gross income under
Section 24 (b) (1) of the same Code which reads:
"(b)Tax on foreign corporations (1) Nonresident
corporations. A foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five
per cent of the gross income received during each taxable year
from all sources within the Philippines as . . . dividends . . ."
but expressly made subject to the special rate of 25% under Article
10(2) (b) of the Tax Treaty of 1980 concluded between the
Philippines and Japan. 11 Thus:
"Article 10 (1) Dividends paid by a company which is a resident
of a Contracting State to a resident of the other Contracting
State may be taxed in that other Contracting State.
"(2)However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends
is a resident, and according to the laws of that Contracting
State, but if the recipient is the beneficial owner of the
dividends the tax so charged shall not exceed;
"(a). . .
"(b)25 per cent of the gross amount of the dividends in all
other cases."
Central to the issue of Marubeni, Japan's tax liability on its dividend
income from Philippine sources is therefore the determination of
whether it is a resident or a non-resident foreign corporation under
Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is
"engaged in trade or business" within the Philippines. Petitioner
contends that precisely because it is engaged in business in the
Philippines through its Philippine branch that it must be considered as a
resident foreign corporation. Petitioner reasons that since the Philippine
branch and the Tokyo head office are one and the same entity, whoever
made the investment in AG&P, Manila does not matter at all. A single
corporate entity cannot be both a resident and a non-resident
corporation depending on the nature of the particular transaction
involved. Accordingly, whether the dividends are paid directly to the
head office or coursed through its local branch is of no moment for
after all, the head office and the office branch constitute but one
corporate entity, the Marubeni Corporation, which, under both
Philippine tax and corporate laws, is a resident foreign corporation
because it is transacting business in the Philippines.
The Solicitor General has adequately refuted petitioner's arguments in
this wise: llcd
"The general rule that a foreign corporation is the same
juridical entity as its branch office in the Philippines cannot
apply here. This rule is based on the premise that the business
of the foreign corporation is conducted through its branch
office, following the principal-agent relationship theory. It is
understood that the branch becomes its agent here. So that
when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent
relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the
resident foreign corporation.
"Corollarily, if the business transaction is conducted through
the branch office, the latter becomes the taxpayer, and not the
foreign corporation." 12
In other words, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is a
separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment (totalling 283.260 shares including
that of nominee) was made for purposes peculiarly germane to the
conduct of the corporate affairs of Marubeni, Japan, but certainly not of
the branch in the Philippines. It is thus clear that petitioner, having
made this independent investment attributable only to the head office,
cannot now claim the increments as ordinary consequences of its trade
or business in the Philippines and avail itself of the lower tax rate of
10%.
But while public respondents correctly concluded that the dividends in
dispute were neither subject to the 15% profit remittance tax nor to the
10% intercorporate dividend tax, the recipient being a non-resident
stockholder, they grossly erred in holding that no refund was
forthcoming to the petitioner because the taxes thus withheld totalled
the 25% rate imposed by the Philippine-Japan Tax Convention pursuant
to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25% tax rate is to disregard
a basic rule in taxation that each tax has a different tax basis. While the
tax on dividends is directly levied on the dividends received, "the tax
base upon which the 15% branch profit remittance tax is imposed is the
profit actually remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25%
rate under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate.
A closer look at the Treaty reveals that the tax rates fixed by Article 10
are the maximum rates as reflected in the phrase "shall not exceed."
This means that any tax imposable by the contracting state concerned
should not exceed the 25% limitation and that said rate would apply
only if the tax imposed by our laws exceeds the same. In other words,
by reason of our bilateral negotiations with Japan, we have agreed to
have our right to tax limited to a certain extent to attain the goals set
forth in the Treaty. LexLib

Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is
Section 24 (b) (1) (iii) in conjunction with the Philippine-Japan Treaty of
1980. Said section provides:
"(b)Tax on foreign corporations. (1) Nonresident
corporations . . . (iii) On dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be
15% of the dividends received, which shall be collected and
paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due
from the non-resident foreign corporation, taxes deemed to
have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this
Section; . . ."
Proceeding to apply the above section to the case at bar, petitioner,
being a non-resident foreign corporation, as a general rule, is taxed
35% of its gross income from all sources within the Philippines. [Section
24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not
less than 20% of the dividends received. This 20% represents the
difference between the regular tax of 35% on non-resident foreign
corporations which petitioner would have ordinarily paid, and the 15%
special rate on dividends received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in
question to be computed as follows:
Total cash dividend paidP1,699,440.00
less 15% under Sec. 24
(b) (1) (iii)254,916.00

Cash dividend net of 15% tax
due petitionerP1,444.524.00
less net amount
actually remitted1,300,071.60

Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remittedP144.452.40
==========
It is readily apparent that the 15% tax rate imposed on the dividends
received by a foreign non-resident stockholder from a domestic
corporation under Section 24 (b) (1) (iii) is easily within the maximum
ceiling of 25% of the gross amount of the dividends as decreed in
Article 10 (2) (b) of the Tax Treaty.
There is one final point that must be settled. Respondent Commissioner
of Internal Revenue is laboring under the impression that the Court of
Tax Appeals is covered by Batas Pambansa Blg. 129, otherwise known as
the Judiciary Reorganization Act of 1980. He alleges that the instant
petition for review was not perfected in accordance with Batas
Pambansa Blg. 129 which provides that "the period of appeal from final
orders, resolutions, awards, judgments, or decisions of any court in all
cases shall be fifteen (15) days counted from the notice of the final
order, resolution, award, judgment or decision appealed from . . ."
This is completely untenable. The cited BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special
law, Republic Act No. 1125. Respondent court is not among those
courts specifically mentioned in Section 2 of BP Blg. 129 as falling within
its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely
affected by an order, ruling or decision of the Court of Tax Appeals is
given thirty (30) days from notice to appeal therefrom. Otherwise, said
order, ruling, or decision shall become final. llcd
Records show that petitioner received notice of the Court of Tax
Appeal's decision denying its claim for refund on April 15, 1986. On the
30th day, or on May 15, 1986 (the last day for appeal), petitioner filed a
motion for reconsideration which respondent court subsequently denied
on November 17, 1986, and notice of which was received by petitioner
on November 26, 1986. Two days later, or on November 28, 1986,
petitioner simultaneously filed a notice of appeal with the Court of Tax
Appeals and a petition for review with the Supreme Court. 14 From the
foregoing, it is evident that the instant appeal was perfected well within
the 30-day period provided under R.A. No. 1125, the whole 30-day
period to appeal having begun to run again from notice of the denial
of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax
Appeals dated February 12, 1986 which affirmed the denial by
respondent Commissioner of Internal Revenue of petitioner Marubeni
Corporation's claim for refund is hereby REVERSED. The Commissioner
of Internal Revenue is ordered to refund or grant as tax credit in favor
of petitioner the amount of P144,452.40 representing overpayment of
taxes on dividends received. No costs.
So ordered.
Gutierrez, Jr., Bidin and Cortes, JJ ., concur.
Feliciano, J ., is on leave.
Footnotes
1.Penned by Amante Filler, Presiding Judge and concurred in by Constante
Roaquin and Alex Reyes, Associate Judges.
2.Rollo, p. 37.
3.Amount sought to be refunded. See Rollo, p. 38.
4.Rollo, pp. 38-39.
5.Rollo, p. 39.
6.Annex C, Ruling No. 157-81, Original Record, pp. 11-12.
7.Original B.I.R. Record, p. 8.
8.Annex E, Original Record, p. 15.
9.Original Record, p. 122.
10.Original Record, pp. 119-121.
11.Convention between the Republic of the Philippines and Japan for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income.
12.Memorandum, p. 142, Rollo.
13.Commissioner of Internal Revenue vs. Burroughs, Limited, G.R. No. 66653,
June 19, 1986, 142 SCRA 324.
14.Rollo, p. 2; Original Record, p. 170.
||| (Marubeni Corp. v. Commr., G.R. No. 76573, September 14, 1989)
SECOND DIVISION
[G.R. No. L-26145. February 20, 1984.]
THE MANILA WINE MERCHANTS,
INC., petitioner, vs. THE COMMISSIONER OF INTERNAL
REVENUE, respondent.
Rafael D. Salcedo for petitioner.
The Solicitor General for respondent.
SYLLABUS
1.TAXATION; NATIONAL INTERNAL REVENUE CODE; CORPORATE
INCOME TAX; ADDITIONAL TAX ON ACCUMULATED EARNINGS;
EXEMPTION THEREFROM. A prerequisite to the imposition of the tax
has been that the corporation be formed or availed of for the purpose
of avoiding the income tax (or surtax) on its shareholders, or on the
shareholders of any other corporation by permitting the earnings and
profits of the corporation to accumulate instead of dividing them
among or distributing them to the shareholders. If the earnings and
profits were distributed, the shareholders would be required to pay an
income tax thereon whereas, if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and
profits of the corporation (Mertens, Law on Federal Income Taxation,
Vol. 7, Chapter 39, p. 44). The touchstone of liability is the purpose
behind the accumulation of the income and not the consequences of
the accumulation (Ibid., p. 47). Thus, if the failure to pay dividends is
due to some other cause, such as the use of undistributed earnings and
profits for the reasonable needs of the business, such purpose does not
fall within the interdiction of the statute (Ibid., p. 45).
2.ID.; ID.; ID.; ID.; ID.; WHEN ACCUMULATION CONSIDERED
UNREASONABLE. An accumulation of earnings or profits (including
undistributed earnings or profits of prior years) is unreasonable if it is
not required for the purpose of the business, considering all the
circumstances of the case (Sec. 21, Revenue Regulations No. 2).
3.ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS,"
CONSTRUED. To determine the "reasonable needs" of the business in
order to justify an accumulation of earnings, the Courts of the United
States have invented the so-called "Immediacy Test" which construed
the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation
did not prove an immediate need for the accumulation of the earnings
and profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. American cases likewise hold
that investment of the earnings and profits of the corporation in stock
or securities of an unrelated business usually indicates an accumulation
beyond the reasonable needs of the business. (Helvering vs. Chicago
Stockyards Co., 318 US 693; Helvering vs. National Grocery Co., 304 US
282).
4.REMEDIAL LAW; APPEALS; FACTUAL FINDINGS OF THE COURT OF TAX
APPEALS, BINDING. The finding of the Court of Tax Appeals that the
purchase of the U.S.A. Treasury bonds were in no way related to
petitioner's business of importing and selling wines whisky, liquors and
distilled spirits, and thus construed as an investment beyond the
reasonable needs of the business is binding on Us, the same being
factual (Renato Raymundo vs. Hon. De Jova, 101 SCRA 495).
Furthermore, the wisdom behind thus finding cannot be doubted, The
case of J.M. Perry & Co. vs. Commissioner of Internal Revenue supports
the same.
5.TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX OF
CORPORATIONS; ADDITIONAL TAX ON ACCUMULATED EARNINGS;
EXCEPTION THEREFROM; ACCUMULATION OF EARNINGS, MUST BE
USED FOR REASONABLE NEEDS OF BUSINESS WITHIN A REASONABLE
TIME. The records further reveal that from May 1951 when petitioner
purchased the U.S.A. Treasury shares, until 1962 when it finally
liquidated the same, it (petitioner) never had the occasion to use the
said shares in aiding or financing its importation. This militates against
the purpose enunciated earlier by petitioner that the shares were
purchased to finance its importation business. To justify an
accumulation of earnings and profits for the reasonably anticipated
future needs, such accumulation must be used within a reasonable time
after the close of the taxable year (Mertens, Ibid., p. 104).
6.ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION,
BASIS OF THE TAX; ACCUMULATION OF PROFITS IN CASE AT BAR,
UNREASONABLE. In order to determine whether profits are
accumulated for the reasonable needs of the business as to avoid the
surtax upon shareholders, the controlling intention of the taxpayer is
that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought
(Basilan Estates, Inc. vs. Comm. of Internal Revenue, 21 SCRA 17 citing
Jacob Mertens, Jr., The law of Federal Income Taxation, Vol. 7,
Cumulative Supplement, p. 213; Smoot and San & Gravel Corp. vs.
Comm., 241 F 2d 197). A speculative and indefinite purpose will not
suffice. The mere recognition of a future problem and the discussion of
possible and alternative solutions is not sufficient. Definiteness of plan
coupled with action taken towards its consummation are essential (Fuel
Carriers, Inc. vs. US 202 F supp. 497; Smoot Sand & Gravel Corp. vs.
Comm., supra). Viewed on the foregoing analysis and tested under the
"immediacy doctrine," We are convinced that the Court of Tax Appeals
is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the
reasonable needs of petitioner's business. cdasia
7.ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO
ACCOUNT IN DETERMINATION OF LIABILITY THEREFOR. The rule is
now settled in Our jurisprudence that undistributed earnings or profits
of prior years are taken into consideration in determining unreasonable
accumulation for purposes of the 25% surtax. The case of Basilan
Estates, Inc. vs. Commissioner of Internal Revenue further strengthen
this rule in determining unreasonable accumulation for the year
concerned. 'In determining whether accumulations of earnings or profits
in a particular year are within the reasonable needs of a corporation, it
is necessary to take into account prior accumulations, since
accumulations prior to the year involved may have been sufficient to
cover the business needs and additional accumulations during the year
involved would not reasonably be necessary.
D E C I S I O N
GUERRERO, J p:
In this Petition for Review on Certiorari, petitioner, the Manila Wine
Merchants, Inc., disputes the decision of the Court of Tax Appeals
ordering it (petitioner) to pay respondent, the Commissioner of Internal
Revenue, the amount of P86,804.38 as 25% surtax plus interest which
represents the additional tax due petitioner for improperly accumulating
profits or surplus in the taxable year 1957 under Sec. 25 of the National
Internal Revenue Code. LLjur
The Court of Tax Appeals made the following finding of facts, to wit:
"Petitioner, a domestic corporation organized in 1937, is
principally engaged in the importation and sale of whisky,
wines, liquors and distilled spirits. Its original subscribed and
paid capital was P500,000.00. Its capital of P500,000.00 was
reduced to P250,000.00 in 1950 with the approval of the
Securities and Exchange Commission but the reduction of the
capital was never implemented. On June 21, 1958, petitioner's
capital was increased to P1,000,000.00 with the approval of the
said Commission.
On December 31, 1957, herein respondent caused the
examination of herein petitioner's book of account and found
the latter of having unreasonably accumulated surplus of
P428,934.32 for the calendar year 1947 to 1957, in excess of
the reasonable needs of the business subject to the 25% surtax
imposed by Section 25 of the Tax Code.
On February 26, 1963, the Commissioner of Internal Revenue
demanded upon the Manila Wine Merchants, Inc. payment of
P126,536.12 as 25% surtax and interest on the latter's
unreasonable accumulation of profits and surplus for the year
1957, computed as follows:
Unreasonable accumulation of surtaxP428,934.42

25% surtax due thereonP107,234.00
Add: 1/2% monthly interest from June 20,
1959 to June 20, 196219,302.12

TOTAL AMOUNT DUE AND COLLECTIBLEP126,536.12
=========
Respondent contends that petitioner has accumulated earnings
beyond the reasonable needs of its business because the
average ratio of the cash dividends declared and paid by
petitioner from 1947 to 1957 was 40.33% of the total surplus
available for distribution at the end of each calendar year. On
the other hand, petitioner contends that in 1957, it distributed
100% of its net earnings after income tax and part of the
surplus for prior years. Respondent further submits that the
accumulated earnings tax should be based on 25% of the total
surplus available at the end of each calendar year while
petitioner maintains that the 25% surtax is imposed on the
total surplus or net income for the year after deducting
therefrom the income tax due.
The records show the following analysis of petitioner's net
income, cash dividends and earned surplus for the years 1946
to 1957: 1
Percentage of
Dividends to
Net IncomeTotal Cash Net IncomeBalance
After IncomeDividendsAfterof Earned
YearTaxPaidIncome TaxSurplus
1946P 613,790.00P 200,000.32.58%P 234,104.81
1947425,719.87360,000.84.56%195,167.10
1948415,591.83375,000.90.23%272,991.38
1949335,058.06200,000.59.69%893,113.42
1950399,698.09600,000.150.11%234,987.07
1951346,257.26300,000.86.64%281,244.33
1952196,161.97200,000.101.96%277,406.30
1953169,714.04200,000.117.85%301,138.84
1954238,124.85250,000.104.99%289,262.69
1955312,284.74200,000.64.04%401,548.43
1956374,240.28300,000.80.16%475,788.71
1957353,145.71400,000.113.27%428,934.42

P4,179,787.36P3,585.000.85.77%P3,785.688.50
====================================
Another basis of respondent in assessing petitioner for
accumulated earnings tax is its substantial investment of
surplus or profits in unrelated business. These investments are
itemized as follows:

1.Acme Commercial Co., Inc.P 27,501.00
2.Union Insurance Society
of Canton1,145.76
3.U.S.A. Treasury Bond347,217.50
4.Wack Wack Golf &
Country Club1.00

375,865.26
=========
As to the investment of P27,501.00 made by petitioner in the
Acme Commercial Co., Inc., Mr. N.R.E. Hawkins, president of the
petitioner corporation 2 explained as follows:
'The first item consists of shares of Acme Commercial
Co., Inc. which the Company acquired in 1947 and 1949.
In the said years, we thought it prudent to invest in a
business which patronizes us. As a supermarket, Acme
Commercial Co., Inc. is one of our best customers. The
investment has proven to be beneficial to the
stockholders of this Company. As an example, the
Company received cash dividends in 1961 totalling
P16,875.00 which was included in its income tax return
for the said year.'
As to the investments of petitioner in Union Insurance Society
of Canton and Wack Wack Golf Club in the sums of P1,145.76
and P1.00, respectively, the same official of the petitioner-
corporation stated that: 3
'The second and fourth items are small amounts which
we believe would not affect this case substantially. As
regards the Union Insurance Society of Canton shares,
this was a pre-war investment, when Wise & Co., Inc.,
Manila Wine Merchants and the said insurance firm were
common stockholders of the Wise Bldg. Co.,, Inc. and
the three companies were all housed in the same
building. Union Insurance invested in Wise Bldg. Co., Inc.
but invited Manila Wine Merchants, Inc. to buy a few of
its shares.'
As to the U.S.A. Treasury Bonds amounting to P347,217.50, Mr.
Hawkins explained as follows: 4
'With regards to the U.S.A. Treasury Bills in the amount
of P347,217.50, in 1950, our balance sheet for the said
year shows the Company had deposited in current
account in various banks P629,403.64 which was not
earning any interest. We decided to utilize part of this
money as reserve to finance our importations and to
take care of future expansion including acquisition of a
lot and the construction of our own office building and
bottling plant.
At that time, we believed that a dollar reserve abroad
would be useful to the Company in meeting immediate
urgent orders of its local customers. In order that the
money may earn interest, the Company, on May 31,
1951 purchased US Treasury bills with 90-day maturity
and earning approximately 1% interest with the face
value of US$175,000.00. US Treasury Bills are easily
convertible into cash and for the said reason they may
be better classified as cash rather than investments.
The Treasury Bills in question were held as such for
many years in view of our expectation that the Central
Bank inspite of the controls would allow no-dollar
licenses importations. However, since the Central Bank
did not relax its policy with respect thereto, we decided
sometime in 1957 to hold the bills for a few more years
in view of our plan to buy a lot and construct a building
of our own. According to the lease agreement over the
building formerly occupied by us in Dasmarias St., the
lease was to expire sometime in 1957. At that time, the
Company was not yet qualified to own real property in
the Philippines. We therefore waited until 60% of the
stocks of the Company would be owned by Filipino
citizens before making definite plans. Then in 1959 when
the Company was already more than 60% Filipino
owned, we commenced looking for a suitable location
and then finally in 1961, we bought the man lot with an
old building on Otis St., Paco, our present site, for
P665,000.00. Adjoining smaller lots were bought later.
After the purchase of the main property, we proceeded
with the remodelling of the old building and the
construction of additions, which were completed at a
cost of P143,896.00 in April, 1962.
In view of the needs of the business of this Company
and the purchase of the Otis lots and the construction of
the improvements thereon, most of its available funds
including the Treasury Bills had been utilized, but inspite
of the said expenses the Company consistently declared
dividends to its stockholders. The Treasury Bills were
liquidated on February 15, 1962.'
Respondent found that the accumulated surplus in question
were invested to 'unrelated business' which were not
considered in the 'immediate needs' of the Company such that
the 25% surtax be imposed therefrom."
Petitioner appealed to the Court of Tax Appeals.
On the basis of the tabulated figures, supra, the Court of Tax Appeals
found that the average percentage of cash dividends distributed was
85.77% for a period of 11 years from 1946 to 1957 and not only 40.33%
of the total surplus available for distribution at the end of each calendar
year actually distributed by the petitioner to its stockholders, which is
indicative of the view that the Manila Wine Merchants, Inc. was not
formed for the purpose of preventing the imposition of income tax
upon its shareholders. 5
With regards to the alleged substantial investment of surplus or profits
in unrelated business, the Court of Tax Appeals held that the investment
of petitioner with Acme Commercial Co., Inc., Union Insurance Society
of Canton and with the Wack Wack Golf and Country Club are harmless
accumulation of surplus and, therefore, not subject to the 25% surtax
provided in Section 25 of the Tax Code. 6
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of
Tax Appeals ruled that its purchase was in no way related to petitioner's
business of importing and selling wines, whisky, liquors and distilled
spirits. Respondent Court was convinced that the surplus of P347,217.50
which was invested in the U.S.A. Treasury Bonds was availed of by
petitioner for the purpose of preventing the imposition of the surtax
upon petitioner's shareholders by permitting its earnings and profits to
accumulate beyond the reasonable needs of business. Hence, the Court
of Tax Appeals modified respondent's decision by imposing upon
petitioner the 25% surtax for 1957 only in the amount of P86,804.38
computed as follows:
Unreasonable accumulation
of surplusP347,217.50

25% surtax due thereonP 86,804.38 7
On May 30, 1966, the Court of Tax Appeals denied the motion for
reconsideration filed by petitioner on March 30, 1966. Hence, this
petition.
Petition assigns the following errors:
I
The Court of Tax Appeals erred in holding that petitioner was
availed of for the purpose of preventing the imposition of a
surtax on its shareholders.
II
The Court of Tax Appeals erred in holding that petitioner's
purchase of U.S.A. Treasury Bills in 1951 was an investment in
unrelated business subject to the 25% surtax in 1957 as surplus
profits improperly accumulated in the latter years.
III
The Court of Tax Appeals erred in not finding that petitioner
did not accumulate its surplus profits improperly in 1957, and
in not holding that such surplus profits, including the so-called
unrelated investments, were necessary for its reasonable
business needs.
IV
The Court of Tax Appeals erred in not holding that petitioner
had overcome the prima facie presumption provided for in
Section 25(c) of the Revenue Code.
V
The Court of Tax Appeals erred in finding petition liable for the
payment of the surtax of P86,804.38 and in denying petitioner's
Motion for Reconsideration and/or New Trial.
The issues in this case can be summarized as follows: (1) whether the
purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be
construed as an investment to an unrelated business and hence, such
was availed of by petitioner for the purpose of preventing the
imposition of the surtax upon petitioner's shareholders by permitting its
earnings and profits to accumulate beyond the reasonable needs of the
business, and if so, (2) whether the penalty tax of twenty-five percent
(25%) can be imposed on such improper accumulation in 1957 despite
the fact that the accumulation occurred in 1951. LLjur
The pertinent provision of the National Internal Revenue Code reads as
follows:
"Sec. 25.Additional tax on corporations improperly
accumulating profits or surplus. (a) Imposition of Tax. If
any corporation, except banks, insurance companies, or
personal holding companies whether domestic or foreign, is
formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate
instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax
equal to twenty-five per centum of the undistributed portion of
its accumulated profits or surplus which shall be in addition to
the tax imposed by section twenty-four and shall be computed,
collected and paid in the same manner and subject to the
same provisions of law, including penalties, as that
tax: Provided, that no such tax shall be levied upon any
accumulated profits or surplus, if they are invested in any
dollar-producing or dollar-saving industry or in the purchase of
bonds issued by the Central Bank of the Philippines.
xxx xxx xxx
(c)Evidence determinative of purpose. The fact that the
earnings of profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary." (As
amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax Appeals, inasmuch as the
provisions of Section 25 of the National Internal Revenue Code were
bodily lifted from Section 102 of the U.S. Internal Revenue Code of
1939, including the regulations issued in connection therewith, it would
be proper to resort to applicable cases decided by the American Federal
Courts for guidance and enlightenment. Cdpr
A prerequisite to the imposition of the tax has been that the
corporation be formed or availed of for the purpose of avoiding the
income tax (or surtax) on its shareholders, or on the shareholders of any
other corporation by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or
distributing them to the shareholders. If the earnings and profits were
distributed, the shareholders would be required to pay an income tax
thereon whereas, if the distribution were not made to them, they would
incur no tax in respect to the undistributed earnings and profits of the
corporation. 8 The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the
accumulation. 9 Thus, if the failure to pay dividends is due to some
other cause, such as the use of undistributed earnings and profits for
the reasonable needs of the business, such purpose does not fall within
the interdiction of the statute. 10

An accumulation of earnings or profits (including undistributed earnings
or profits of prior years) is unreasonable if it is not required for the
purpose of the business, considering all the circumstances of the case.
11
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that
these bonds were so purchased (1) in order to finance their importation;
and that a dollar reserve abroad would be useful to the Company in
meeting urgent orders of its local customers and (2) to take care of
future expansion including the acquisition of a lot and the construction
of their office building and bottling plant.
We find no merit in the petition.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove
that the purchase of the U.S.A. Treasury Bonds in 1951 with a face value
of $175,000.00 was an investment within the reasonable needs of the
Corporation.
To determine the "reasonable needs" of the business in order to justify
an accumulation of earnings, the Courts of the United States have
invented the so-called "Immediacy Test" which construed the words
"reasonable needs of the business" to mean the immediate needs of
the business, and it was generally held that if the corporation did not
prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the
business, and the penalty tax would apply. 12 American cases likewise
hold that investment of the earnings and profits of the corporation in
stock or securities of an unrelated business usually indicates an
accumulation beyond the reasonable needs of the business. 13
The finding of the Court of Tax Appeals that the purchase of the U.S.A.
Treasury bonds were in no way related to petitioner's business of
importing and selling wines whisky, liquors and distilled spirits, and thus
construed as an investment beyond the reasonable needs of the
business 14 is binding on Us, the same being factual. 15Furthermore, the
wisdom behind thus finding cannot be doubted, The case of J.M. Perry
& Co. vs. Commissioner of Internal Revenue 16 supports the same. In
that case, the U.S. Court said the following:
"It appears that the taxpayer corporation was engaged in the
business of cold storage and wareshousing in Yahima,
Washington. It maintained a cold storage plant, divided into
four units, having a total capacity of 490,000 boxes of fruits. It
presented evidence to the effect that various alterations and
repairs to its plant were contemplated in the tax years, . . .
It also appeared that in spite of the fact that the taxpayer
contended that it needed to maintain this large cash reserve
on hand, it proceeded to make various investments which had
no relation to its storage business. In 1934, it purchased mining
stock which it sold in 1935 at a profit of US $47,995.29. . . .
All these things may reasonably have appealed to the Board as
incompatible with a purpose to strengthen the financial
position of the taxpayer and to provide for needed alteration."
The records further reveal that from May 1951 when petitioner
purchased the U.S.A. Treasury shares, until 1962 when it finally
liquidated the same, it (petitioner) never had the occasion to use the
said shares in aiding or financing its importation. This militates against
the purpose enunciated earlier by petitioner that the shares were
purchased to finance its importation business. To justify an
accumulation of earnings and profits for the reasonably anticipated
future needs, such accumulation must be used within a reasonable time
after the close of the taxable year. 17
Petitioner advanced the argument that the U.S.A. Treasury shares were
held for a few more years from 1957, in view of a plan to buy a lot and
construct a building of their own; that at that time (1957), the Company
was not yet qualified to own real property in the Philippines, hence it
(petitioner) had to wait until sixty percent (60%) of the stocks of the
Company would be owned by Filipino citizens before making definite
plans. 18
These arguments of petitioner indicate that it considers the U.S.A.
Treasury shares not only for the purpose of aiding or financing its
importation but likewise for the purpose of buying a lot and
constructing a building thereon in the near future, but conditioned
upon the completion of the 60% citizenship requirement of stock
ownership of the Company in order to qualify it to purchase and own a
lot. The time when the company would be able to establish itself to
meet the said requirement and the decision to pursue the same are
dependent upon various future contingencies. Whether these
contingencies would unfold favorably to the Company and if so,
whether the Company would decide later to utilize the U.S.A. Treasury
shares according to its plan, remains to be seen. From these assertions
of petitioner, We cannot gather anything definite or certain. This, We
cannot approve. LLphil
In order to determine whether profits are accumulated for the
reasonable needs of the business as to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is
manifested at the time of accumulation not subsequently declared
intentions which are merely the product of afterthought. 19 A
speculative and indefinite purpose will not suffice. The mere recognition
of a future problem and the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan coupled with action taken
towards its consummation are essential. 20 The Court of Tax Appeals
correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the
expansion program of the petitioner by purchasing a lot and
building of its own, we find no justifiable reason for the
retention in 1957 or thereafter of the US Treasury Bonds which
were purchased in 1951.
xxx xxx xxx
"Moreover, if there was any thought for the purchase of a lot
and building for the needs of petitioner's business, the
corporation may not with impunity permit its earnings to pile
up merely because at some future time certain outlays would
have to be made. Profits may only be accumulated for the
reasonable needs of the business, and implicit in this is further
requirement of a reasonable time."
Viewed on the foregoing analysis and tested under the "immediacy
doctrine," We are convinced that the Court of Tax Appeals is correct in
finding that the investment made by petitioner in the U.S.A. Treasury
shares in 1951 was an accumulation of profits in excess of the
reasonable needs of petitioner's business.
Finally, petitioner asserts that the surplus profits allegedly accumulated
in the form of U.S.A. Treasury shares in 1951 by it (petitioner) should
not be subject to the surtax in 1957. In other words, petitioner claims
that the surtax of 25% should be based on the surplus accumulated in
1951 and not in 1957.
This is devoid of merit.
The rule is now settled in Our jurisprudence that undistributed earnings
or profits of prior years are taken into consideration in determining
unreasonable accumulation for purposes of the 25% surtax. 22 The case
of Basilan Estates, Inc. vs. Commissioner of Internal Revenue 23 further
strengthen this rule, and We quote:
"Petitioner questions why the examiner covered the period
from 1948-1953 when the taxable year on review was 1953.
The surplus of P347,507.01 was taken by the examiner from the
balance sheet of the petitioner for 1953. To check the figure
arrived at, the examiner traced the accumulation process from
1947 until 1953, and petitioner's figure stood out to be correct.
There was no error in the process applied, for previous
accumulations should be considered in determining
unreasonable accumulation for the year concerned. 'In
determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a
corporation, it is necessary to take into account prior
accumulations, since accumulations prior to the year involved
may have been sufficient to cover the business needs and
additional accumulations during the year involved would not
reasonably be necessary.'" cdasia
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of
Tax Appeals is AFFIRMED in toto, with costs against petitioner.
SO ORDERED.
Makasiar, Aquino, Concepcion, Jr., Abad Santos, De Castro and Escolin,
JJ ., concur.
Footnotes
1.Exhibit "C".
2.Exhibit "D".
3.Exhibit "E".
4.Exhibit "B".
5.CTA Decision, pp. 9-11.
6.Ibid., pp. 12-13.
7.Ibid., pp. 18-20.
8.Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 44.
9.Ibid., p. 47.
10.Ibid., p. 45.
11.Sec. 21, Revenue Regulations No. 2.
12.Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103.
13.Helvering vs. Chicago Stockyards Co., 318 US 693; Helvering vs. National
Grocery Co., 304 US 282.
14.Court of Tax Appeals' Decision, pp. 15-16.
15.Renato Raymundo vs. Hon. De Joya, 101 SCRA 495; Comm. of Internal
Revenue vs. Cadwallader Pacific Co., 73 SCRA 59; Vive Chemicals
Products, Inc. vs. Comm., 60 SCRA 52; Nasiad vs. CTA, 61 SCRA 238;
Aznar vs. CTA, 58 SCRA 519; Coca Cola Export Corp. vs. Comm., 56
SCRA 5; Comm. of Internal Revenue vs. Priscila Estate Inc., 11 SCRA
130.
16.120 F 2d 123.
17.Mertens, Ibid., p. 104.
18.Exhibit "B".
19.Basilan Estates, Inc. vs. Comm. of Internal Revenue, 21 SCRA 17 citing
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7,
Cumulative Supplement, p. 213; Smoot Sand & Gravel Corp. vs.
Comm., 241 F 2d 197.
20.Fuel Carriers, Inc. vs. US 202 F supp. 497; Smoot Sand & Gravel Corp. vs.
Comm., supra.
21.CTA Decision, p. 17.
22.Sec. 21, Revenue Regulations No. 2.
23.21 SCRA 27.

||| (Manila Wine Merchants, Inc. v. Commr., G.R. No. L-26145, February 20,
1984)
SECOND DIVISION
[G.R. No. 108067. January 20, 2000.]
CYANAMID PHILIPPINES, INC., petitioner, vs. THE
COURT OF APPEALS, THE COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondents.
Romulo Mabanta Buenaventura Sayoc & De Los Angeles for petitioner.
SYNOPSIS
On February 7, 1985, the Commissioner of Internal Revenue (CIR) sent
an assessment letter to petitioner Cyanamid Philippines, Inc. for taxable
year 1981. On March 4, 1985 petitioner protested the assessment
particularly, (1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981
Deficiency Income Assessment of P119,817.00; and (3) 1981 Deficiency
Percentage Assessment of P8,846.72. Petitioner, through its external
accountant, Sycip, Gorres, Velayo & Co., claimed, among others, that
the surtax for the undue accumulation of earnings was not proper
because the said profits were retained to increase petitioner's working
capital and it could be used for reasonable business needs of the
company. Petitioner contended further that it availed of the tax amnesty
under Executive Order No. 41, hence, it enjoyed amnesty from civil and
criminal prosecution granted by law. In reply, the CIR refused to allow
the cancellation of the assessment notices on the ground that the
availment of the tax amnesty under Executive Order No. 41, as
amended, is sufficient basis, in appropriate cases, for the cancellation of
the assessment issued after August 21, 1986 only. Petitioner appealed
to the Court of Tax Appeals (CTA). During the pendency of the case,
however, both parties agreed to compromise the 1981 deficiency
income tax assessment and the petitioner paid the reduced amount.
With regards to the surtax on improperly accumulated profits, the CTA
denied the petition by ruling that there was no need for petitioner to
set aside a portion of its retained earnings as working capital reserve as
it claims since it had considerable liquid funds. On appeal, the Court of
Appeals affirmed the CTA decision.
In this petition, the Court ruled that the Tax Court opted to determine
the working capital sufficiency by using the ratio between current assets
to current liabilities. The working capital needs of a business depend
upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable, the
collection rate, the availability of credit to the business, and similar
factors. Petitioner, by adhering to the "Bardahl" formula, failed to
impress the tax court with the required definiteness envisioned by the
statute. The Court agreed with the tax court that the burden of proof to
establish that the profits accumulated were not beyond the reasonable
needs of the company, remained on the taxpayer. The Court will not set
aside lightly the conclusion reached by the Court of Tax Appeals which,
by the very nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident
exercise of authority. Unless rebutted, all presumptions generally are
indulged in favor of the correctness of the CIR's assessment against the
taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and
conclusively, this Court was constrained to uphold the correctness of tax
court's ruling, as affirmed by the Court of Appeals.
SYLLABUS
1.TAXATION; TAX ON CORPORATIONS; TAX ON IMPROPER
ACCUMULATION OF SURPLUS; A PENALTY TAX DESIGNED TO COMPEL
CORPORATIONS TO DISTRIBUTE EARNINGS. Section 25 of the
National Internal Revenue Code discouraged tax avoidance through
corporate surplus accumulation. When corporations do not declare
dividends, income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in
turn, be taxed.
2.ID.; ID.; ACCUMULATED EARNINGS TAX; NOT LIMITED TO CLOSELY
HELD CORPORATIONS. A review of American taxation history on
accumulated earnings tax will show that the application of the
accumulated earnings tax to publicly held corporations has been
problematic. Initially, the Tax Court and the Court of Claims held that
the accumulated earnings tax applies to publicly held corporations.
Then, the Ninth Circuit Court of Appeals ruled in Golconda that the
accumulated earnings tax could only apply to closely held corporations.
Despite Golconda, the Internal Revenue Service asserted that the tax
could be imposed on widely held corporations including those not
controlled by a few shareholders or groups of shareholders. The Service
indicated it would not follow the Ninth Circuit regarding publicly held
corporations. In 1984, American legislation nullified the Ninth
Circuit's Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations.
Clearly, Golconda is no longer a reliable precedent.
3.POLITICAL LAW; STATUTORY CONSTRUCTION; LAWS GRANTING
EXEMPTION FROM TAX ARE CONSTRUED STRICTISSIMI JURIS AGAINST
THE TAXPAYER AND LIBERALLY IN FAVOR OF TAXING POWER. The
amendatory provision of Section 25 of the 1977 NIRC, which was PD
1739, enumerated the corporations exempt from the imposition of
improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations organized
primarily and authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that the express mention of
one person, thing, act, or consequence is construed to exclude all
others. Laws granting exemption from tax are construedstrictissimi
juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The burden of
proof rests upon the party claiming exemption to prove that it is, in
fact, covered by the exemption so claimed, a burden which petitioner
here has failed to discharge.
4.TAXATION; TAX ON CORPORATIONS; SURTAX ON IMPROPER
ACCUMULATED PROFITS; "BARDAHL" FORMULA; ELUCIDATED. The
"Bardahl" formula was developed to measure corporate liquidity. The
formula requires an examination of whether the taxpayer has sufficient
liquid assets to pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it
takes to convert cash into raw materials, raw materials into inventory,
and inventory into sales, including the time it takes to collect payment
for the sales.
5.ID.; ID.; ID.; ID.; NOT A PRECISE RULE; USED FOR ADMINISTRATIVE
CONVENIENCE ONLY. We note, however, that the companies where
the "Bardahl" formula was applied, had operating cycles much shorter
than that of petitioner. In Atlas Tool Co., Inc. vs. CIR, the company's
operating cycle was only 3.33 months or 27.75% of the year.
In Cataphote Corp. of Mississippi vs. United States, the corporation's
operating cycle was only 56.87 days, or 15.58% of the year. In the case
of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year,
reflecting that petitioner will need sufficient liquid funds, of at least
three quarters of the year, to cover the operating costs of the business.
There are variations in the application of the "Bardahl" formula, such as
average operating cycle or peak operating cycle. In times when there is
no recurrence of a business cycle, the working capital needs cannot be
predicted with accuracy. As stressed by American authorities, although
the "Bardahl" formula is well-established and routinely applied by the
courts, it is not a precise rule. It is used only for administrative
convenience.
6.ID.; ID.; ID.; "2 TO 1" RULE; USED TO DETERMINE SUFFICIENCY OF
WORKING CAPITAL. Other formulas are also used, e.g. the ratio of
currents assets to current liabilities and the adoption of the industry
standard. The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the working capital
should equal the current liabilities and there must be 2 units of current
asset for every unit of current liability, hence the so-called "2 to 1" rule.
7.ID.; ID.; ID.; ID.; APPLIED IN CASE AT BAR. As of 1981 the working
capital of Cyanamid was P25,776,991.00, or more than twice its current
liabilities. That current ratio of Cyanamid, therefore, projects adequacy
in working capital. Said working capital was expected to increase further
when more funds were generated from the succeeding year's sales.
Available income covered expenses or indebtedness for that year, and
there appeared no reason to expect an impending 'working capital
deficit' which could have necessitated an increase in working capital, as
rationalized by petitioner.
8.ID.; ID.; ID.; BURDEN OF PROOF TO ESTABLISH THAT PROFITS
ACCUMULATED WERE NOT BEYOND THE REASONABLE NEED OF
COMPANY, REMAINED ON THE TAXPAYER. If the CIR determined
that the corporation avoided the tax on shareholders by permitting
earnings or profits to accumulate, and the taxpayer contested such a
determination, the burden of proving the determination wrong,
together with the corresponding burden of first going forward with
evidence, is on the taxpayer. This applies even if the corporation is not
a mere holding or investment company and does not have an
unreasonable accumulation of earnings or profits.
9.ID.; ID.; ID.; ID.; PETITIONER FAILED TO ESTABLISH THE REQUIRED
PROOF. In the present case, the Tax Court opted to determine the
working capital sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business depend upon
the nature of the business, its credit policies, the amount of inventories,
the rate of turnover, the amount of accounts receivable, the collection
rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the
tax court with the required definiteness envisioned by the statute. We
agree with the tax court that the burden of proof to establish that the
profits accumulated were not beyond the reasonable needs of the
company, remained on the taxpayer.

10.ID.; ID.; ID.; CONTROLLING INTENTION OF TAXPAYER MUST BE
SHOWN AT TIME OF ACCUMULATION; ACCUMULATED PROFITS MUST
BE USED WITHIN REASONABLE TIME; NOT ESTABLISHED IN CASE AT
BAR. In order to determine whether profits are accumulated for the
reasonable heeds of the business to avoid the surtax upon shareholders,
it must be shown that the controlling intention of the taxpayer is
manifested at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts. Furthermore, the
accumulated profits must be used within a reasonable time after the
close of the taxable year. In the instant case, petitioner did not
establish, by clear and convincing evidence, that such accumulation of
profit was for the immediate needs of the business.
11.REMEDIAL LAW; CREDIBILITY; ALL PRESUMPTIONS GENERALLY ARE
INDULGED IN FAVOR OF CORRECTNESS OF CIR's ASSESSMENT
AGAINST THE TAXPAYER. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very
nature of its function, is dedicated exclusively to the consideration of
tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority.
Unless rebutted, all presumptions generally are indulged in favor of the
correctness of the CIR's assessment against the taxpayer. With
petitioner's failure to prove the CIR incorrect, clearly and conclusively,
this Court is constrained to uphold the correctness of the tax court's
ruling as affirmed by the Court of Appeals.
D E C I S I O N
QUISUMBING, J p:
Petitioner disputes the decision 1 of the Court of Appeals which
affirmed the decision 2 of the Court of Tax Appeals, ordering petitioner
to pay respondent Commissioner of Internal Revenue the amount of
three million, seven hundred seventy-four thousand, eight hundred
sixty-seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on
improper accumulation of profits for 1981, plus 10% surcharge and 20%
annual interest from January 30, 1985 to January 30, 1987, under Sec.
25 of the National Internal Revenue Code. cdphil
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner and
demanded the payment of deficiency income tax of one hundred
nineteen thousand eight hundred seventeen (P119,817.00) pesos for
taxable year 1981, as follows:
"Net income disclosed by the return as audited14,575,210.00
Add: Discrepancies:
Professional fees/yr.17018262,877.00
per investigation110,399.37
Total Adjustment152,477.00
Net income per Investigation14,727,687.00
Less: Personal and additional exemptions
Amount subject to tax14,727,687.00
Income tax due thereon25% Surtax 2,385,231.503,237,495.00
Less: Amount already assessed5,161,788.00
BALANCE75,709.00
monthly interest from1,389,636.0044,108.00

Compromise penalties
TOTAL AMOUNT DUE3,774,867.50119,817.00" 3
On March 4, 1985, petitioner protested the assessments particularly, (1)
the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency
Income Assessment of P119,817.00; and 1981 Deficiency Percentage
Assessment of P8,846.72. 4 Petitioner, through its external accountant,
Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for
the undue accumulation of earnings was not proper because the said
profits were retained to increase petitioner's working capital and it
would be used for reasonable business needs of the company.
Petitioner contended that it availed of the tax amnesty under Executive
Order No. 41, hence enjoyed amnesty from civil and criminal
prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co.,
refused to allow the cancellation of the assessment notices and
rendered its resolution, as follows:
"It appears that your client availed of Executive Order No.
41 under File No. 32A-F-000455-41B as certified and confirmed
by our Tax Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the
availment of the tax amnesty under Executive Order No. 41, as
amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986.
(Revenue Memorandum Order No. 4-87) Said availment does
not, therefore, result in cancellation of assessments issued
before August 21, 1986, as in the instant case. In other words,
the assessments in this case issued on January 30, 1985 despite
your client's availment of the tax amnesty under Executive
Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your
client to pay this Office the aforementioned deficiency income
tax and surtax on undue accumulation of surplus in the
respective amounts of P119,817.00 and P3,774,867.50 inclusive
of interest thereon for the year 1981, within thirty (30) days
from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed
by law.
This constitutes the final decision of this Office on this
matter." 5
Petitioner appealed to the Court of Tax Appeals. During the pendency
of the case, however, both parties agreed to compromise the 1981
deficiency income tax assessment of P119,817.00. Petitioner paid a
reduced amount twenty-six thousand, five hundred seventy-seven
pesos (P26,577.00) as compromise settlement. However, the surtax
on improperly accumulated profits remained unresolved.
Petitioner claimed that CIR's assessment representing the 25% surtax on
its accumulated earnings for the year 1981 had no legal basis for the
following reasons: (a) petitioner accumulated its earnings and profits for
reasonable business requirements to meet working capital needs and
retirement of indebtedness; (b) petitioner is a wholly owned subsidiary
of American Cyanamid Company, a corporation organized under the
laws of the State of Maine, in the United States of America, whose
shares of stock are listed and traded in New York Stock Exchange. This
being the case, no individual shareholder of petitioner could have
evaded or prevented the imposition of individual income taxes by
petitioner's accumulation of earnings and profits, instead of distribution
of the same.
In denying the petition, the Court of Tax Appeals made the following
pronouncements:
"Petitioner contends that it did not declare dividends for the
year 1981 in order to use the accumulated earnings as working
capital reserve to meet its "reasonable business needs." The law
permits a stock corporation to set aside a portion of its
retained earnings for specified purposes (citing Section 43,
paragraph 2 of the Corporation Code of the Philippines). In the
case at bar, however, petitioner's purpose for accumulating its
earnings does not fall within the ambit of any of these
specified purposes.
More compelling is the finding that there was no need for
petitioner to set aside a portion of its retained earnings as
working capital reserve as it claims since it had considerable
liquid funds. A thorough review of petitioner's financial
statement (particularly the Balance Sheet, p. 127, BIR Records)
reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its
sales for the period is adequate to meet the normal needs of
the business. This can be determined by computing the current
asset to liability ratio of the company: cdll
current ratio= current assets/current liabilities
= P47,052,535.00/P21,275,544.00
= 2.21:1
======
The significance of this ratio is to serve as a primary test of a
company's solvency to meet current obligations from current
assets as a going concern or a measure of adequacy of
working capital.
xxx xxx xxx
We further reject petitioner's argument that "the accumulated
earnings tax does not apply to a publicly-held corporation"
citing American jurisprudence to support its position. The
reference finds no application in the case at bar because under
Section 25 of the NIRC as amended by Section 5 of P.D. No.
1379[1739] (dated September 17, 1980), the exceptions to the
accumulated earnings tax are expressly enumerated, to wit:
Bank, non-bank financial intermediaries, corporations organized
primarily, and authorized by the Central Bank of the Philippines
to hold shares of stock of banks, insurance companies, or
personal holding companies, whether domestic or foreign. The
law on the matter is clear and specific. Hence, there is no need
to resort to applicable cases decided by the American Federal
Courts for guidance and enlightenment as to whether the
provision of Section 25 of the NIRC should apply to petitioner.
Equally clear and specific are the provisions of E.O.
41 particularly with respect to its effectivity and coverage . . .
. . . Said availment does not result in cancellation of
assessments issued before August 21, 1986 as petitioner seeks
to do in the case at bar. Therefore, the assessments in this
case, issued on January 30, 1985 despite petitioner's availment
of the tax amnesty under E.O. 41 as amended, still subsist."
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered
to pay respondent Commissioner of Internal Revenue the sum
of P3,774,867.50 representing 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20%
annual interest from January 30, 1985 to January 30, 1987." 6
Petitioner appealed the Court of Tax Appeal's decision to the Court of
Appeals. Affirming the CTA decision, the appellate court said:
"In reviewing the instant petition and the arguments raised
herein, We find no compelling reason to reverse the findings of
the respondent Court. The respondent Court's decision is
supported by evidence, such as petitioner corporation's
financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come
up with an alternative formula lifted from a decision rendered
by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24
T.C.M. [CCH] 1030). Applying said formula to its particular
financial position, the petitioner corporation attempts to justify
its accumulated surplus earnings. To Our mind, the petitioner
corporation's alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as well
as standards in the computation of taxes and penalties
practiced in this jurisdiction.

WHEREFORE, in view of the foregoing, the instant petition is
hereby DISMISSED and the decision of the Court of Tax
Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is
AFFIRMED in toto." 7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING
THAT THE PETITIONER IS LIABLE FOR THE ACCUMULATED
EARNINGS TAX FOR THE YEAR 1981. 8
Section 25 9 of the old National Internal Revenue Code of 1977 states:
"Sec. 25. Additional tax on corporation improperly
accumulating profits or surplus.
"(a)Imposition of tax. If any corporation is formed or availed
of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or
members of another corporation, through the medium of
permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-
five per-centum of the undistributed portion of its accumulated
profits or surplus which shall be in addition to the tax imposed
by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
"(b)Prima facie evidence. The fact that any corporation is
mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment
company where at any time during the taxable year more than
fifty per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
"(c)Evidence determinative of purpose. The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.
"(d)Exception The provisions of this sections shall not apply
to banks, non-bank financial intermediaries, corporation
organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign. llcd
The provision discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income
taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially
a penalty tax designed to compel corporations to distribute earnings so
that the said earnings by shareholders could, in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner stresses
that the accumulated earnings tax does not apply to Cyanamid, a
wholly owned subsidiary of a publicly owned company. 10 Specifically,
petitioner cites Golconda Mining Corp. vs. Commissioner, 507 F.2d 594,
whereby the U.S. Ninth Circuit Court of Appeals had taken the position
that the accumulated earnings tax could only apply to a closely held
corporation.
A review of American taxation history on accumulated earnings tax will
show that the application of the accumulated earnings tax to publicly
held corporations has been problematic. Initially, the Tax Court and the
Court of Claims held that the accumulated earnings tax applies to
publicly held corporations. Then, the Ninth Circuit Court of Appeals
ruled in Golconda that the accumulated earnings tax could only apply
to closely held corporations. Despite Golconda, the Internal Revenue
Service asserted that the tax could be imposed on widely held
corporations including those not controlled by a few shareholders or
groups of shareholders. The Service indicated it would not follow the
Ninth Circuit regarding publicly held corporations. 11 In 1984, American
legislation nullified the Ninth Circuit's Golconda ruling and made it clear
that the accumulated earnings tax is not limited to closely held
corporations. 12 Clearly, Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which
was PD 1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations organized
primarily and authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those exempt
classes. Besides, the rule on enumeration is that the express mention of
one person, thing, act, or consequence is construed to exclude all
others. 13 Laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of
the taxing power. 14 Taxation is the rule and exemption is the
exception. 15 The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so
claimed, 16 a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment, is
that increase of working capital by a corporation justifies accumulating
income. Petitioner asserts that respondent court erred in concluding
that Cyanamid need not infuse additional working capital reserve
because it had considerable liquid funds based on the 2.21:1 ratio of
current assets to current liabilities. Petitioner relies on the so-called
"Bardahl" formula, which allowed retention, as working capital reserve,
sufficient amounts of liquid assets to carry the company through one
operating cycle. The "Bardahl" 17 formula was developed to measure
corporate liquidity. The formula requires an examination of whether the
taxpayer has sufficient liquid assets to pay all of its current liabilities and
any extraordinary expenses reasonably anticipated,plus enough to
operate the business during one operating cycle. Operating cycle is the
period of time it takes to convert cash into raw materials, raw materials
into inventory, and inventory into sales, including the time it takes to
collect payment for the sales. 18
Using this formula, petitioner contends, Cyanamid needed at least
P33,763,624.00 pesos as working capital. As of 1981, its liquid asset was
only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a
working capital deficit of P7,986,633.00. 19 Therefore, the P9,540,926.00
accumulated income as of 1981 may be validly accumulated to increase
the petitioner's working capital for the succeeding year.
We note, however, that the companies where the "Bardahl" formula was
applied, had operating cycles much shorter than that of petitioner.
In Atlas Tool Co., Inc. vs.CIR, 20 the company's operating cycle was only
3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi
vs. United States, 21 the corporation's operating cycle was only 56.87
days, or 15.58% of the year. In the case of Cyanamid, the operating
cycle was 288.35 days, or 78.55% of a year, reflecting that petitioner will
need sufficient liquid funds, of at least three quarters of the year, to
cover the operating costs of the business. There are variations in the
application of the "Bardahl" formula, such as average operating cycle or
peak operating cycle. In times when there is no recurrence of a business
cycle, the working capital needs cannot be predicted with accuracy. As
stressed by American authorities, although the "Bardahl" formula is well-
established and routinely applied by the courts, it is not a precise rule.
It is used only for administrative convenience. 22 Petitioner's application
of the "Bardahl" formula merely creates a false illusion of exactitude.
Other formulas are also used, e.g. the ratio of current assets to current
liabilities and the adoption of the industry standard. 23 The ratio of
current assets to current liabilities is used to determine the sufficiency
of working capital. Ideally, the working capital should equal the current
liabilities and there must be 2 units of current assets for every unit of
current liability, hence the so-called "2 to 1" rule. 24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or
more than twice its current liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital. Said working capital was
expected to increase further when more funds were generated from the
succeeding year's sales. Available income covered expenses or
indebtedness for that year, and there appeared no reason to expect an
impending 'working capital deficit' which could have necessitated an
increase in working capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue, 25 we held
that:
". . . [T]here is no need to have such a large amount at the
beginning of the following year because during the year,
current assets are converted into cash and with the income
realized from the business as the year goes, these expenses
may well be taken care of. [citation omitted]. Thus, it is
erroneous to say that the taxpayer is entitled to retain enough
liquid net assets in amounts approximately equal to current
operating needs for the year to cover 'cost of goods sold and
operating expenses'; for 'it excludes proper consideration of
funds generated by the collection of notes receivable as trade
accounts during the course of the year." 26
If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and the
taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first
going forward with evidence, is on the taxpayer. This applies even if the
corporation is not a mere holding or investment company and does not
have an unreasonable accumulation of earnings or profits. 27
In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon shareholders,
it must be shown that the controlling intention of the taxpayer is
manifested at the time of accumulation, not intentions declared
subsequently, which are mere afterthoughts. 28 Furthermore, the
accumulated profits must be used within a reasonable time after the
close of the taxable year. In the instant case, petitioner did not
establish, by clear and convincing evidence, that such accumulation of
profit was for the immediate needs of the business. LibLex

In Manila Wine Merchants, Inc. vs. Commissioner of Internal
Revenue, 29 we ruled:
"To determine the 'reasonable needs' of the business in order
to justify an accumulation of earnings, the Courts of the United
States have invented the so-called 'Immediacy Test' which
construed the words 'reasonable needs of the business' to
mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of
the business, and the penalty tax would apply. (Mertens, Law of
Federal Income Taxation, Vol. 7, Chapter 39, p. 103). 30
In the present case, the Tax Court opted to determine the working
capital sufficiency by using the ratio between current assets to current
liabilities. The working capital needs of a business depend upon the
nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate,
the availability of credit to the business, and similar factors. Petitioner,
by adhering to the "Bardahl" formula, failed to impress the tax court
with the required definiteness envisioned by the statute. We agree with
the tax court that the burden of proof to establish that the profits
accumulated were not beyond the reasonable needs of the company,
remained on the taxpayer. This Court will not set aside lightly the
conclusion reached by the Court of Tax Appeals which, by the very
nature of its function, is dedicated exclusively to the consideration of
tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of
authority. 31 Unless rebutted, all presumptions generally are indulged in
favor of the correctness of the CIR's assessment against the taxpayer.
With petitioner's failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of tax
court's ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the
Court of Appeals, sustaining that of the Court of Tax Appeals, is hereby
AFFIRMED. Costs against petitioner. LexLib
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
Footnotes
1.Rollo, pp. 25-34.
2.CA Rollo, pp. 19-28.
3.Records, CA Rollo, p. 24.
4.Id. at 25.
5.Id. at 27.
6.Id., at 24-28.
7.Rollo, p. 33.
8.Id. at 9.
9.The tax on improperly accumulated income tax underwent changes since
the time of assessment of herein petitioner, in 1985, until the
enactment of the present tax code, the 1997 NIRC. This provision was
subsequently repealed by Executive Order No. 37 which took effect
on January 1, 1986. The reason for the repeal was explained by the
Commissioner of Internal Revenue through Revenue Memorandum
Circular No. 26-86 as follows: "The tax on improper accumulation of
surplus is essentially a penalty tax designed to compel corporations to
distribute corporate earnings so that the said earnings will be taxed
to the shareholders. The exemption of dividends from income tax
renders the improperly accumulated surplus tax meaningless.
Accordingly, the provisions of the tax on improper accumulation or
surplus are repealed and replaced with provisions to govern the
taxation of foreign corporation which are lifted from Section 24 (b)."
(Annotation, Improper Accumulation of Corporate Surplus or Profit by
Severiano S. Tabios, 173 SCRA, pp. 403-408.) However, Section 29 of
the New 1997 NIRC provides for the revival of the imposition of
improperly accumulated earnings tax. The exemption from this rule
now includes publicly held corporation (par. B, 2, Section 29, 1997
NIRC).
10.A publicly owned corporation was one where the outstanding stock was
owned by more than 1,500 persons and not more than 10% of either
the total combined voting power, or, the total value of all classes of
its outstanding stock was owned at the close of the taxable year, by
any one individual, either directly or indirectly, under the provision for
attribution of ownership.
11.10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated
Earnings Tax, Sec. 39.05.
12.Ibid.
13.Commissioner of Customs vs. Court of Tax Appeals, 224 SCRA 665, 669-
670 (1993); Centeno vs. Villalon-Pornillos, 236 SCRA 197 (1994).
14.Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, 181
SCRA 214, 223-224 (1990).
15.Ibid.
16.Ibid.
17.Bardahl Manufacturing Corp. vs. Commissioner, 24 TCM 1030.
19.Rollo, p. 118.
20.614 F2d 860.
21.535 F 2d 1225.
23.Id. at Sec. 39.128.
24.19 Fletcher Cyclopedia Corporations, Chapter 68, Corporation Practice,
Section 9248 (1975).
25.21 SCRA 17 (1967).
26.Id. at 27.
27.Nolledo and Nolledo, The National Internal Revenue Code of the
Philippines, Annotated (1982).
28.Basilan Estates, Inc. vs. Commissioner of Internal Revenue, 21 SCRA 17, 26
(1967), citing Jacob Mertens, Jr., The Law of Federal Income Taxation,
Vol. 7, Cumulative Supplement, p. 213.
29.127 SCRA 483 (1984).
30.Id. at 494.
31.Commissioner of Internal Revenue vs. Court of Appeals, 271 SCRA 605,
608 (1997).
||| (Cyanamid Phil., Inc. v. Court of Appeals, G.R. No. 108067, January 20,
2000)
FIRST DIVISION
[G.R. No. 124043. October 14, 1998.]
COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
SYLLABUS
1.TAXATION; COURT OF TAX APPEALS; FACTUAL FINDINGS, WHEN
SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE DISTURBED ON
APPEAL; CASE AT BAR. It is a basic rule in taxation that the factual
findings of the CTA, when supported by substantial evidence, will not
be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts. In the present case, this Court
finds that the February 16, 1994 Decision of the CA did not deviate
from this rule. The latter merely applied the law to the facts as found by
the CTA and ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977,
as amended." Clearly, the CA did not alter any fact or evidence. It
merely resolved the aforementioned issue, as indeed it was expected to.
That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings. cdasia
2.ID.; APPEAL; QUESTION OF LAW AND QUESTION OF FACT,
DISTINGUISHED. 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." In the present case, the CA did not doubt, much less change, the
facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
3.ID.; TAX EXEMPTION; COURT HAS ALWAYS APPLIED THE DOCTRINE
OF STRICT INTERPRETATION IN CONSTRUING THEREOF; APPLICATION
IN CASE AT BAR. Because taxes are the lifeblood of the nation, the
Court has always applied the doctrine of strict interpretation in
construing tax exemptions. Furthermore, a claim of statutory exemption
from taxation should be manifest and unmistakable from the language
of the law on which it is based. Thus, the claimed exemption "must
expressly be granted in a statute stated in a language too clear to be
mistaken." In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last paragraph of then
Section 27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the
last paragraph of said section unequivocally subjects to tax the rent
income of the YMCA from its real property, the Court is duty-bound to
abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. It is axiomatic that where the
language of the law is clear and unambiguous, its express terms must
be applied. Parenthetically, a consideration of the question of
construction must not even begin, particularly when such question is on
whether to apply a strict construction or a liberal one on statutes that
grant tax exemptions to "religious, charitable and educational
propert[ies] or institutions." The phrase "any of their activities conducted
for profit" does not qualify the word "properties." This makes income
from the property of the organization taxable, regardless of how that
income is used whether for profit or for lofty non-profit
purposes. Verba legis non est recedendum. Hence, Respondent Court of
Appeals committed reversible error when it allowed, on reconsideration,
the tax exemption claimed by YMCA on income it derived from renting
out its real property, on the solitary but unconvincing ground that the
said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it is used
or disposed of. Where the law does not distinguished, neither should
we.
4.ID.; ID.; WHEN GRANTED; REQUISITES. Private respondent is
exempt from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a non-
stock, non-profit educational institution is insufficient to justify its
exemption from the payment of income tax. For the YMCA to be
granted the exemption it claims under the aforecited provision, it must
prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the
income it seeks to be exempted from taxation is used actually, directly,
and exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by private respondent to
prove that it met the said requisites.
5.ID.; ID.; EDUCATIONAL INSTITUTION, CONSTRUED; WHEN NOT
APPLICABLE; CASE AT BAR. Is the YMCA and educational institution
within the purview of Article XIV, Section 4, par. 3 of the Constitution?
We rule that it is not. The term "educational institution" or "institution
of learning" has acquired a well-known technical meaning, of which the
members of the Constitutional Commission are deemed cognizant.
Under the Education Act of 1982, such term refers to schools. The
school system is synonymous with formal education, which "refers to
the hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which
certification is required in order for the learner to progress through the
grades or move to the higher levels." The Court has examined the
"Amended Articles of Incorporation" and "By-Laws" of the YMCA, but
found nothing in them that even hints that it is a school or an
educational institution. Furthermore, under the Education Act of 1982,
even non-formal education is understood to be school-based and
"private auspices such as foundations and civic-spirited organizations"
are ruled out. It is settled that the term "educational institution," when
used in laws granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." Therefore, the private
respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration. ". . . Words
used in the Constitution are to be taken in their ordinary acceptation.
While in its broadest and best sense education embraces all forms and
phases of instruction, improvement and development of mind and
body, and as well of religious and moral sentiments, yet in the common
understanding and application it means a place where systematic
institution in any or all of the useful branches of learning is given by
methods common to schools and instruction of learning. That we
conceive to be the true intent and scope of the term [educational
institutions] as used in the Constitution."
BELLOSILLO, J., dissenting opinion:
1.TAXATION; COURT OF TAX APPEALS; FINDINGS OF FACTS, WHEN
SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE DISTURBED ON
APPEAL; EXCEPTION; NOT APPLICABLE IN CASE AT BAR. The basic
rule is that the factual findings of the Court of Tax Appeals when
supported by substantial evidence will not be disturbed on appeal
unless it is shown that the court committed grave error in the
appreciation of facts. In the instant case, there is no dispute as to the
validity of the findings of the Court of Tax Appeals that private
respondent Young Men's Christian Association (YMCA) is an association
organized and operated exclusively for the promotion of social welfare
and other non-profitable purposes, particularly the physical and
character development of the youth. cHAaEC
2.ID.; TAX EXEMPTION; WHEN INCOME DERIVED FROM ITS PROPERTY
BY A TAX EXEMPT ORGANIZATION IS NOT ABSOLUTELY TAXABLE; CASE
AT BAR. Respondent YMCA is undoubtedly exempt from corporate
income tax under the provisions of Sec. 27, pars. (g) and (h), of the
National Internal Revenue Code, to wit: 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 . . . (g) civic
league or organization not organized for profit but operated exclusively
for the promotion of social welfare; (h) club organized and operated
exclusively for pleasure, recreation and other non-profitable purposes,
no part of the net income of which inures to the benefit of any private
stockholder or member . . . Notwithstanding the provisions in the
preceding paragraphs, the income of whatever kind and character of
the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless
of the disposition made of such income, shall be subject to tax imposed
under this Code. Income derived from its property by a tax exempt
organization is not absolutely taxable. Taken in solitude, a word or
phrase such as, in this case, "the income of whatever kind and character
. . . from any of their properties" might easily convey a meaning quite
different from the one actually intended and evident when a word or
phrase is considered with those with which it is associated. It is a rule in
statutory construction that every part of the statute must be interpreted
with reference to the context, that every part of the statute must be
considered together with the other parts and kept subservient to the
general intent of the whole enactment. A close reading of the last
paragraph of Sec. 27 of the National Internal Revenue Code, in relation
to the whole section on tax exemption of the organizations enumerated
therein, shows that the phrase "conducted for profit" in the last
paragraph of Sec. 27 qualifies, limits and describes "the income of
whatever kind and character of the foregoing organizations from any of
their properties, real or personal, or from any of their activities" in order
to make such income taxable. It is the exception to Sec. 27, pars. (g)
and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other
property is not conducted for profit, then it is not taxable. Even taken
alone and understood according to its plain, simple and literal meaning,
the word "income" which is derived from property, real or personal,
provided in the last paragraph of Sec. 27 means the amount of money
coming to a person or corporation within a specified time as profit from
investment; the return in money from one's business or capital invested.
Income from property also means gains and profits derived from the
sale or other disposition of capital assets; the money which any person
or corporation periodically receives either as profits from business, or as
returns from investments. The word "income" as used in tax statutes is
to be taken in its ordinary sense as gain or profit. Clearly, therefore,
income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the
ordinary meaning of income from property as profit to the language of
the last paragraph of Sec. 27 of the NIRC, then only those profits arising
from business and investment involving property are taxable. In the
instant case, there is no question that in leasing its facilities to small
shop owners and in operating parking spaces, YMCA does not engage
in any profit-making business. Both the Court of Tax Appeals, and the
Court of Appeals in its resolution of 25 September 1995, categorically
found that these activities conducted on YMCA's property were aimed
not only at fulfilling the needs and requirements of its members as part
of YMCA'S youth program but, more importantly, at raising funds to
finance the multifarious projects of the Association.

3.ID.; ID.; THE MERE REALIZATION OF PROFITS OUT OF ITS OPERATION
DOES NOT AUTOMATICALLY RESULT IN THE LOSS THEREOF, AS LONG
AS NO PART OF THE PROFITS OF AN EDUCATIONAL INSTITUTION
INURES TO THE BENEFIT OF ANY STOCKHOLDER OR INDIVIDUAL; CASE
AT BAR. As the Court has ruled in one case, the fact that an
educational institution charges tuition fees and other fees for the
different services it renders to the students does not in itself make the
school a profit-making enterprise that would place it beyond the
purview of the law exempting it from taxation. The mere realization of
profits out of its operation does not automatically result in the loss of
an educational institution's exemption from income tax as long as no
part of its profits inures to the benefit of any stockholder or individual.
In order to claim exemption from income tax, a corporation or
association must show that it is organized and operated exclusively for
religious, charitable, scientific, athletic, cultural or educational purposes
or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. The main
evidence of the purpose of a corporation should be its articles of
incorporation and by-laws, for such purpose is required by statute to be
stated in the articles of incorporation, and the by-laws outline the
administrative organization of the corporation which, in turn, is
supposed to insure or facilitate the accomplishment of said purpose.
The foregoing principle applies to income derived by tax exempt
corporations from their property. The criterion or test in order to make
such income taxable is when it arises from purely profit-making
business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or
religious purpose for which the corporation or association is created,
such income should be tax-exempt. The majority, if not all, of the
income of the organizations covered by the exemption provided in Sec.
27, pars. (g) and (h), of the NIRC are derived from their properties, real
or personal. If we are to interpret the last paragraph of Sec. 27 to the
effect that all income of whatever kind from the properties of said
organization, real or personal, are taxable, even if not conducted for
profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective and
nugatory. As this Court elucidated in Jesus Sacred Heart College v.
Collector of Internal Revenue, (95 Phil. 16 [1954]) every responsible
organization must be so run as to at least insure its existence by
operating within the limits of its own resources, especially its regular
income. It should always strive whenever possible to have a surplus. If
the benefits of the exemption would be limited to institutions which do
not hope or propose to have such surplus, then the exemption would
apply only to schools which are on the verge of bankruptcy. Unlike the
United States where a substantial number of institutions of learning are
dependent upon voluntary contributions and still enjoy economic
stability, such as Harvard, the trust fund of which has been steadily
increasing with the years, there are and there have always been very
few educational enterprises in the Philippines which are supported by
donations, and these organizations usually have a very precarious
existence. ESAHca
D E C I S I O N
PANGANIBAN, J p:
Is the income derived from rentals of real property owned by the Young
Men's Christian Association of the Philippines, Inc. (YMCA)
established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution? cdphil
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of
Appeals 1 on September 28, 1995 2and February 29, 1996 3 in CA-GR SP
No. 32007. Both Resolutions affirmed the Decision of the Court of Tax
Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's
income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock,
non-profit institution, which conducts various programs and activities
that are beneficial to the public, especially the young people, pursuant
to its religious, educational and charitable objectives. cda
In 1980, private respondent earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small shop
owners, like restaurants and canteen operators, and P44,259.00 from
parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded withholding
taxes on rentals and professional fees and deficiency withholding tax on
wages. Private respondent formally protested the assessment and, as a
supplement to its basic protest, filed a letter dated October 8, 1985. In
reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review
at the Court of Tax Appeals (CTA) on March 14, 1989. In due course, the
CTA issued this ruling in favor of the YMCA: cdtai
". . . [T]he leasing of [private respondent's] facilities to small
shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and
reasonably necessary for the accomplishment of the objectives
of the [private respondents]. It appears from the testimonies of
the witnesses for the [private respondent] particularly Mr.
James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service
the needs of its members and their guests. The rentals were
minimal as for example, the barbershop was only charged P300
per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the
sides of the building. The parking was primarily for members
with stickers on the windshields of their cars and they charged
P.50 for non-members. The rentals and parking fees were just
enough to cover the costs of operation and maintenance only.
The earning[s] from these rentals and parking charges
including those from lodging and other charges for the use of
the recreational facilities constitute [the] bulk of its income
which [is] channeled to support its many activities and
attainment of its objectives. As pointed out earlier, the
membership dues are very insufficient to support its program.
We find it reasonably necessary therefore for [private
respondent] to make [the] most out [of] its existing facilities to
earn some income. It would have been different if under the
circumstances, [private respondent] will purchase a lot and
convert it to a parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it out to the
highest bidder or at the market rate for commercial purposes,
or should it invest its funds in the buy and sell of properties,
real or personal. Under these circumstances, we could conclude
that the activities are already profit oriented, not incidental and
reasonably necessary to the pursuit of the objectives of the
association and therefore, will fall under the last paragraph of
Section 27 of the Tax Code and any income derived therefrom
shall be taxable. LLpr
"Considering our findings that [private respondent] was not
engaged in the business of operating or contracting [a] parking
lot, we find no legal basis also for the imposition of [a]
deficiency fixed tax and [a] contractor's tax in the amount[s] of
P353.15 and P3,129.73, respectively.
xxx xxx xxx
"WHEREFORE, in view of all the foregoing, the following
assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages
P33,058.82
plus 10% surcharge and 20% interest per annum from July 2,
1984 until fully paid but not to exceed three (3) years pursuant
to Section 51(e)(2) & (3) of the National Internal Revenue Code
effective as of 1984." 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court
of Appeals (CA). In its Decision of February 16, 1994, the CA 6 initially
decided in favor of the CIR and disposed of the appeal in the following
manner:
"Following the ruling in the aforecited cases of Province of
Abra vs. Hernando and Abra Valley College Inc. vs. Aquino, the
ruling of the respondent Court of Tax Appeals that 'the leasing
of petitioner's (herein respondent's) facilities to small shop
owners, to restaurant and canteen operators and the operation
of the parking lot are reasonably incidental to and reasonably
necessary for the accomplishment of the objectives of the
petitioners,' and the income derived therefrom are tax exempt,
must be reversed. cda
"WHEREFORE, the appealed decision is hereby REVERSED in so
far as it dismissed the assessment for:
1980 Deficiency Income Tax P353.15
1980 Deficiency Contractor's TaxP3,129.23, &
1980 Deficiency Income TaxP372,578.20,
but the same is AFFIRMED in all other respect." 7
Aggrieved, the YMCA asked for reconsideration based on the following
grounds: cdll
I
"The findings of facts of the Public Respondent Court of Tax
Appeals being supported by substantial evidence [are] final and
conclusive.
II
"The conclusions of law of [p]ublic [r]espondent exempting
[p]rivate [r]espondent from the income on rentals of small
shops and parking fees [are] in accord with the applicable law
and jurisprudence." 8

Finding merit in the Motion for Reconsideration filed by the YMCA, the
CA reversed itself and promulgated on September 28, 1995 its first
assailed Resolution which, in part, reads:
"The Court cannot depart from the CTA's findings of fact, as
they are supported by evidence beyond what is considered as
substantial. Cdpr
xxx xxx xxx
"The second ground raised is that the respondent CTA did not
err in saying that the rental from small shops and parking fees
do not result in the loss of the exemption. Not even the
petitioner would hazard the suggestion that YMCA is designed
for profit. Consequently, the little income from small shops and
parking fees help[s] to keep its head above the water, so to
speak, and allow it to continue with its laudable work.
"The Court, therefore, finds the second ground of the motion
to be meritorious and in accord with law and jurisprudence.
"WHEREFORE, the motion for reconsideration is GRANTED; the
respondent CTA's decision is AFFIRMED in toto." 9
The internal revenue commissioner's own Motion for Reconsideration
was denied by Respondent Court in its second assailed Resolution of
February 29, 1996. Hence, this petition for review under Rule 45 of the
Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following
errors:
I
"In holding that it had departed from the findings of fact of
Respondent Court of Tax Appeals when it rendered its Decision
dated February 16, 1994, and llcd
II
"In affirming the conclusion of Respondent Court of Tax
Appeals that the income of private respondent from rentals of
small shops and parking fees [is] exempt from taxation." 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision
reversed the factual findings of the CTA. On the other hand, petitioner
argues that the CA merely reversed the "ruling of the CTA that the
leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are
reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the private respondent and that
the income derived therefrom are tax exempt." 12 Petitioner insists that
what the appellate court reversed was the legal conclusion, not the
factual finding of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA,
when supported by substantial evidence, will not be disturbed on
appeal unless it is shown that the said court committed gross error in
the appreciation of facts. 14 In the present case, this Court finds that the
February 16, 1994 Decision of the CA did not deviate from this rule. The
latter merely applied the law to the facts as found by the CTA and ruled
on the issue raised by the CIR: "Whether or not the collection or
earnings of rental income from the lease of certain premises and
income earned from parking fees shall fall under the last paragraph of
Section 27 of the National Internal Revenue Code of 1977, as
amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the
aforementioned issue, as indeed it was expected to. That it did so in a
manner different from that of the CTA did not necessarily imply a
reversal of factual findings. cdll
The distinction between a question of law and a question of fact is
clear-cut. It has been held that "[t]here is a question of law in a given
case when the doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or falsehood of alleged facts." 16 In the
present case, the CA did not doubt, much less change, the facts
narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA
from its real estate subject to tax? At the outset, we set forth the
relevant provision of the NIRC: prLL
"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
xxx xxx xxx
(g)Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(h)Club organized and operated exclusively for pleasure,
recreation, and other non-profitable purposes, no part of the
net income of which inures to the benefit of any private
stockholder or member;
xxx xxx xxx
from any of their activities conducted for profit, regardless of
the disposition made of such income, shall be subject to the
tax imposed under this Code. (as amended by Pres. Decree No.
1457)" Cdpr
Petitioner argues that while the income received by the organizations
enumerated in Section 27 (now Section 26) of the NIRC is, as a rule,
exempted from the payment of tax "in respect to income received by
them as such," the exemption does not apply to income derived ". . .
from any of their properties, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of
such income . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal, [is] not,
therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives." 17 We agree
with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict interpretation in construing tax
exemptions. 18Furthermore, a claim of statutory exemption from taxation
should be manifest and unmistakable from the language of the law on
which it is based. Thus, the claimed exemption "must expressly be
granted in a statute stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section 27
of the NIRC which mandates that the income of exempt organizations
(such as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income
of the YMCA from its real property, 20 the Court is duty-bound to abide
strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction. LLpr
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be applied. 21Parenthetically, a
consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to
"religious, charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject
to the qualification that the income from the properties must arise from
activities 'conducted for profit' before it may be considered
taxable." 23 This argument is erroneous. As previously stated, a reading
of said paragraph ineludibly shows that the income from any property
of exempt organizations, as well as that arising from any activity it
conducts for profit, is taxable. The phrase "any of their activities
conducted for profit" does not qualify the word "properties." This makes
income from the property of the organization taxable, regardless of how
that income is used whether for profit or for lofty non-profit
purposes. cdrep
Verba legis non est recedendum. Hence, Respondent Court of Appeals
committed reversible error when it allowed, on reconsideration, the tax
exemption claimed by YMCA on income it derived from renting out its
real property, on the solitary but unconvincing ground that the said
income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it is used
or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation
Invoking not only the NIRC but also the fundamental law, private
respondent submits that Article VI, Section 28 of par. 3 of the 1987
Constitution, 24 exempts "charitable institutions" from the payment not
only of property taxes but also of income tax from any source. 25 In
support of its novel theory, it compares the use of the words "charitable
institutions," "actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22, par. 3 of
the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision
is divisible into two categories: (1) "[c]haritable institutions, churches
and parsonages or convents appurtenant thereto, mosques and non-
profit cemeteries," the incomes of which are, from whatever source, all
tax-exempt; 27 and (2) "[a]ll lands, buildings and improvements actually
and directly used for religious, charitable or educational purposes,"
which are exempt only from property taxes. 28 Second, Lladoc
v.Commissioner of Internal Revenue, 29 which limited the exemption
only to the payment of property taxes, referred to the provision of
the 1935 Constitution and not to its counterparts in the 1973 and the
1987 Constitutions. 30 Third, the phrase "actually, directly and exclusively
used for religious, charitable or educational purposes" refers not only to
"all lands, buildings and improvements," but also to the above-quoted
first category which includes charitable institutions like the private
respondent.31

The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution reveal their
intent which, in turn, may have guided the people in ratifying the
Charter. 32 Such intent must be effectuated. dctai
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional
commissioner, who is now a member of this Court, stressed during the
Concom debates that ". . . 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." 33 Father Joaquin G. Bernas, an
eminent authority on the Constitution and also a member of the
Concom, adhered to the same view that the exemption created by said
provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that
"[t]he tax exemption covers property taxes only." 35 Indeed, the income
tax exemption claimed by private respondent finds no basis in Article VI,
Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Charter, 36 claiming that the YMCA "is a non-stock, non-profit
educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from
taxes on its properties and income." 37 We reiterate that private
respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone
that it is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax. cdtai
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock,
non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for
educational purposes. However, the Court notes that not a scintilla of
evidence was submitted by private respondent to prove that it met the
said requisites.
Is the YMCA an educational institution within the purview of Article XIV,
Section 4, par. 3 of the Constitution? We rule that it is not. The term
"educational institution " or "institution of learning" has acquired a well-
known technical meaning, of which the members of the Constitutional
Commission are deemed cognizant. 38 Under the Education Act of 1982,
such term refers to schools. 39 The school system is synonymous with
formal education, 40 which "refers to the hierarchically structured and
chronologically graded learnings organized and provided by the formal
school system and for which certification is required in order for the
learner to progress through the grades or move to the higher
levels." 41 The Court has examined the "Amended Articles of
Incorporation" 42 and "By-Laws" 43 of the YMCA, but found nothing in
them that even hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private auspices such
as foundations and civic-spirited organizations" are ruled out. 45 It is
settled that the term "educational institution," when used in laws
granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . ." 46 Therefore, the private respondent
cannot be deemed one of the educational institutions covered by the
constitutional provision under consideration. cdphil
". . . Words used in the Constitution are to be taken in their
ordinary acceptation. While in its broadest and best sense
education embraces all forms and phases of instruction,
improvement and development of mind and body, and as well
of religious and moral sentiments, yet in the common
understanding and application it means a place where
systematic instruction in any or all of the useful branches of
learning is given by methods common to schools and
institutions of learning. That we conceive to be the true intent
and scope of the term [educational institutions,] as used in the
Constitution ." 47
Moreover, without conceding that Private Respondent YMCA is an
educational institution, the Court also notes that the former did not
submit proof of the proportionate amount of the subject income that
was actually, directly and exclusively used for educational purposes.
Article XIII, Section 5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since the same merely
signified that "[t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and
Member Associations as the National Board may decide." 48 In sum, we
find no basis for granting the YMCA exemption from income tax under
the constitutional provision invoked. LLphil
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its
cause. YMCA of Manila v. Collector of Internal Revenue 50 and Abra
Valley College, Inc. v. Aquino 51 are not applicable, because the
controversy in both cases involved exemption from the payment of
property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay
City 52 is not in point either, because it involves a claim for exemption
from the payment of regulatory fees, specifically electrical inspection
fees, imposed by an ordinance of Pasay City an issue not at all
related to that involved in a claimed exemption from the payment of
income taxes imposed on property leases. In Jesus Sacred Heart College
v. Com. of Internal Revenue, 53 the party therein, which claimed an
exemption from the payment of income tax, was an educational
institution which submitted substantial evidence that the income subject
of the controversy had been devoted or used solely for educational
purposes. On the other hand, the private respondent in the present
case has not given any proof that it is an educational institution, or that
part of its rent income is actually directly and exclusively used for
educational purposes. prLL
Epilogue
In deliberating on this petition, the Court expresses its sympathy with
private respondent. It appreciates the nobility of its cause. However, the
Court's power and function are limited merely to applying the law fairly
and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its
role and invading the realm of legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can facilitate, and
not frustrate, its humanitarian tasks. But the Court regrets that, given its
limited constitutional authority, it cannot rule on the wisdom or
propriety of legislation. That prerogative belongs to the political
departments of government. Indeed, some of the members of the Court
may even believe in the wisdom and prudence of granting more tax
exemptions to private respondent. But such belief, however well-
meaning and sincere, cannot bestow upon the Court the power to
change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of
Appeals dated September 28, 1995 and February 29, 1996 are hereby
REVERSED and SET ASIDE. The Decision of the Court of Appeals dated
February 16, 1995 is REINSTATED, insofar as it ruled that the income
derived by petitioner from rentals of its real property is subject to
income tax. No pronouncement as to costs. cda
SO ORDERED.
Davide, Jr., Vitug and Quisumbing, JJ ., concur.
Separate Opinions
BELLOSILLO, J ., dissenting:
I vote to deny the petition. The basic rule is that the factual findings of
the Court of Tax Appeals when supported by substantial evidence will
not be disturbed on appeal unless it is shown that the court committed
grave error in the appreciation of facts. 1 In the instant case, there is no
dispute as to the validity of the findings of the Court of Tax Appeals
that private respondent Young Men's Christian Association (YMCA) is an
association organized and operated exclusively for the promotion of
social welfare and other non-profitable purposes, particularly the
physical and character development of the youth. 2 The enduring
objectives of respondent YMCA as reflected in its Constitution and By-
laws are: cdll
(a)To develop well-balanced Christian personality, mission in
life, usefulness of individuals, and the promotion of unity
among Christians and understanding among peoples of
all faiths, to the end that the Brotherhood of Man under
the Fatherhood of God may be fostered in an
atmosphere of mutual respect and understanding;
(b)To promote on equal basis the physical, mental, and spiritual
welfare of the youth, with emphasis on reverence for
God, social discipline, responsibility for the common
good, respect for human dignity, and the observance of
the Golden Rule; prLL
(c)To encourage members of the Young Men's Christian
Associations in the Philippines to participate loyally in
the life of their respective churches; to bring these
churches closer together; and to participate the effort to
realize the church Universal;
(d)To strengthen and coordinate the work of the Young Men's
Christian Associations in the Philippines and to foster the
extension of the Youth Men's Christian Associations to
new areas;
(e)To help its Member Associations develop and adopt their
programs to the needs of the youth;
(f)To assist the Member Associations in developing and
maintaining a high standard of management, operation
and practice; and
(g)To undertake and sponsor national and international
programs and activities in pursuance of its purposes and
objectives. 3

Pursuant to these objectives, YMCA has continuously organized and
undertaken throughout the country various programs for the youth
through actual workshops, seminars, training, sports and summer
camps, conferences on the cultivation of Christian moral values, drug
addiction, out-of-school youth, those with handicap and physical
defects and youth alcoholism. To fulfill these multifarious projects and
attain the laudable objectives of YMCA, fund raising has become an
indispensable and integral part of the activities of the Association.
YMCA derives its funds from various sources such as membership dues,
charges on the use of facilities like bowling and billiards, lodging,
interest income, parking fees, restaurant and canteen. Since the
membership dues are very minimal, the Association derives funds from
rentals of small shops, restaurant, canteen and parking fees. For the
taxable year ending December 1980, YMCA earned gross rental income
of P676,829.00 and P44,259.00 from parking fees which became the
subject of the questioned assessment by petitioner. cdrep
The majority of this Court upheld the findings of the Court of Tax
Appeals that the leasing of petitioner's facilities to small shop owners
and to restaurant and canteen operators in addition to the operation of
a parking lot are reasonably necessary for and incidental to the
accomplishment of the objectives of YMCA. 4 In fact, these facilities are
leased to members in order to service their needs and those of their
guests. The rentals are minimal, such as, the rent of P300.00 for the
barbershop. With regard to parking space, there is no lot actually
devoted therefor and the parking is done only along the sides of the
building. The parking is primarily for members with car stickers but to
non-members, parking fee is P0.50 only. The rentals and parking fees
are just enough to cover the operation and maintenance costs of these
facilities. The earnings which YMCA derives from these rentals and
parking fees, together with the charges for lodging and use of
recreational facilities, constitute the bulk or majority of its income used
to support its programs and activities.
In its decision of 16 February 1994, the Court of Appeals thus
committed grave error in departing from the findings of the Court of
Tax Appeals by declaring that the leasing of YMCA's facilities to shop
owners and restaurant operators and the operation of a parking lot are
used for commercial purposes or for profit; which fact takes YMCA
outside the coverage of tax exemption. In later granting the motion for
reconsideration filed by respondent YMCA, the Court of Appeals
correctly reversed its earlier decision and upheld the findings of the
Court of Tax Appeals by ruling that YMCA is not designed for profit and
the little income it derives from rentals and parking fees helps maintain
its noble existence for the fulfillment of its goals for the Christian
development of the youth. LexLib
Respondent YMCA is undoubtedly exempt from corporate income tax
under the provisions of Sec. 27, pars. (g) and (h), of the National
Internal Revenue Code, to wit:
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 . . . (g) civic league or
organization not organized for profit but operated exclusively
for the promotion of social welfare; (h) club organized and
operated exclusively for pleasure, recreation and other non-
profitable purposes, no part of the net income of which inures
to the benefit of any private stockholder or member . . .
from any of their activities conducted for profit, regardless of
the disposition made of such income, shall be subject to tax
imposed under this Code. cdphil
The majority of the Court accepted petitioner's view that while the
income of organizations enumerated in Sec. 27 are exempt from income
tax, such exemption does not however extend to their income of
whatever kind or character from any of their properties real or personal
regardless of the disposition made of such income; that based on the
wording of the law which is plain and simple and does not need any
interpretation, any income of a tax exempt entity from any of its
properties is a taxable income; hence, the rental income derived by a
tax exempt organization from the lease of its properties is not therefore
exempt from income taxation even if such income is exclusively used for
the accomplishment of its objectives.
Income derived from its property by a tax exempt organization is not
absolutely taxable. Taken in solitude, a word or phrase such as, in this
case, "the income of whatever kind and character . . . from any of their
properties" might easily convey a meaning quite different from the one
actually intended and evident when a word or phrase is considered with
those with which it is associated. 5 It is a rule in statutory construction
that every part of the statute must be interpreted with reference to the
context, that every part of the statute must be considered together with
the other parts and kept subservient to the general intent of the whole
enactment. 6 A close reading of the last paragraph of Sec. 27 of the
National Internal Revenue Code, in relation to the whole section on tax
exemption of the organizations enumerated therein, shows that the
phrase "conducted for profit" in the last paragraph of Sec. 27 qualifies,
limits and describes "the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or
from any of their activities" in order to make such income taxable. It is
the exception to Sec. 27 pars. (g) and (h) providing for the tax
exemptions of the income of said organizations. Hence, if such income
from property or any other property is not conducted for profit, then it
is not taxable. LLphil
Even taken alone and understood according to its plain, simple and
literal meaning, the word "income" which is derived from property, real
or personal, provided in the last paragraph of Sec. 27 means the
amount of money coming to a person or corporation within a specified
time as profit from investment; the return in money from one's business
or capital invested. 7 Income from property also means gains and profits
derived from the sale or other disposition of capital assets; the money
which any person or corporation periodically receives either as profits
from business, or as returns from investments. 8 The word "income" as
used in tax statutes is to be taken in its ordinary sense as gain or
profit. 9
Clearly, therefore, income derived from property whether real or
personal connotes profit from business or from investment of the same.
If we are to apply the ordinary meaning of income from property as
profit to the language of the last paragraph of Sec. 27 of the NIRC, then
only those profits arising from business and investment involving
property are taxable. In the instant case, there is no question that in
leasing its facilities to small shop owners and in operating parking
spaces, YMCA does not engage in any profit-making business. Both the
Court of Tax Appeals, and the Court of Appeals in its resolution of 25
September 1995, categorically found that these activities conducted on
YMCA's property were aimed not only at fulfilling the needs and
requirements of its members as part of YMCA's youth program but,
more importantly, at raising funds to finance the multifarious projects of
the Association. cdll
As the Court has ruled in one case, the fact that an educational
institution charges tuition fees and other fees for the different services
it renders to the students does not in itself make the school a profit-
making enterprise that would place it beyond the purview of the law
exempting it from taxation. The mere realization of profits out of its
operation does not automatically result in the loss of an educational
institution's exemption from income tax as long as no part of its profits
inures to the benefit of any stockholder or individual. 10 In order to
claim exemption from income tax, a corporation or association must
show that it is organized and operated exclusively for religious,
charitable, scientific, athletic, cultural or educational purposes or for the
rehabilitation of veterans, and that no part of its income inures to the
benefit of any private stockholder or individual. 11 The main evidence of
the purpose of a corporation should be its articles of incorporation and
by-laws, for such purpose is required by statute to be stated in the
articles of incorporation, and the by-laws outline the administrative
organization of the corporation which, in turn, is supposed to insure or
facilitate the accomplishment of said purpose. 12
The foregoing principle applies to income derived by tax exempt
corporations from their property. The criterion or test in order to make
such income taxable is when it arises from purely profit-making
business. Otherwise, when the income derived from use of property is
reasonable and incidental to the charitable, benevolent, educational or
religious purpose for which the corporation or association is created,
such income should be tax-exempt.
In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held
In this connection, it should be noted that respondent therein
is a corporation organized for 'charitable, educational and
religious purposes'; that no part of its net income inures to the
benefit of any private individual; that it is exempt from paying
income tax; that it operates a hospital in which MEDICAL
assistance is given to destitute persons free of charge; that it
maintains a pharmacy department within the premises of said
hospital, to supply drugs and medicines only to charity and
paying patients confined therein; and that only the paying
patients are required to pay the medicines supplied to them,
for which they are charged the cost of the medicines, plus an
additional 10% thereof, to partly offset the cost of medicines
supplied free of charge to charity patients. Under these facts
we are of the opinion and so hold that the Hospital may not
be regarded as engaged in "business" by reason of said sale of
medicines to its paying patients . . . (W)e held that the UST
Hospital was not established for profit-making purposes,
despite the fact that it had 140 paying beds, because the same
were maintained only to partly finance the expenses of the free
wards containing 203 beds for charity patients. llcd

In YMCA of Manila v. Collector of Internal Revenue, 14 this Court
explained
It is claimed however that the institution is run as a business in
that it keeps a lodging and boarding house. It may be
admitted that there are 64 persons occupying rooms in the
main building as lodgers or roomers and that they take their
meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word.
In the first place, no profit is realized by the association in any
sense. In the second place it is undoubted, as it is undisputed,
that the purpose of the association is not primarily to obtain
the money which comes from the lodgers and boarders. The
real purpose is to keep the membership continually within the
sphere of influence of the institution; and thereby to prevent,
as far as possible, the opportunities which vice presents to
young men in foreign countries who lack home or other similar
influences.
The majority, if not all, of the income of the organizations covered by
the exemption provided in Sec. 27, pars. (g) and (h), of the NIRC are
derived from their properties, real or personal. If we are to interpret the
last paragraph of Sec. 27 to the effect that all income of whatever kind
from the properties of said organization, real or personal, are taxable,
even if not conducted for profit, then Sec. 27, pars. (g) and (h), would
be rendered ineffective and nugatory. As this Court elucidated in Jesus
Sacred Heart College v. Collector of Internal Revenue, 15 every
responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially
its regular income. It should always strive whenever possible to have a
surplus. If the benefits of the exemption would be limited to institutions
which do not hope or propose to have such surplus, then the
exemption would apply only to schools which are on the verge of
bankruptcy. Unlike the United States where a substantial number of
institutions of learning are dependent upon voluntary contributions and
still enjoy economic stability, such as Harvard, the trust fund of which
has been steadily increasing with the years, there are and there have
always been very few educational enterprises in the Philippines which
are supported by donations, and these organizations usually have a very
precarious existence. 16
Finally, the non-taxability of all income and properties of educational
institutions finds enduring support in Art. XIV, Sec. 4, par. 3, of the 1987
Constitution
(3)All revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for
educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of
such institutions. their assets shall be disposed of in the
manner provided by law. llcd
In YMCA of Manila v. Collector of Internal Revenue 17 this Court
categorically held and found YMCA to be an educational institution
exclusively devoted to educational and charitable purposes and not
operated for profit. The purposes of the Association as set forth in its
charter and constitution are "to develop the Christian character and
usefulness of its members, to improve the spiritual, intellectual, social
and physical condition of young men and to acquire, hold, mortgage
and dispose of the necessary lands, buildings and personal property for
the use of said corporation exclusively for religious, charitable and
educational purposes, and not for investment or profit." YMCA has an
educational department, the aim of which is to furnish, at much less
than cost, instructions on subjects that will greatly increase the mental
efficiency and wage-earning capacity of young men, prepare them in
special lines of business and offer them special lines of study. We ruled
therein that YMCA cannot be said to be an institution used exclusively
for religious purposes or an institution devoted exclusively for charitable
purposes or an institution devoted exclusively to educational purposes,
but it can be truthfully said that it is an institution used exclusively for
all three purposes and that, as such, it is entitled to be exempted from
taxation. Cdpr
Footnotes
1.Special Former Fourth Division composed of J . Nathanael P. de Pano, Jr.,
presiding justice and ponente; and JJ . Fidel P. Purisima (now an
associate justice of the Supreme Court) and Corona Ibay-Somera,
concurring.
2.Rollo, pp. 42-48.
3.Ibid., pp. 50-51.
4.See Memorandum of private respondent, pp. 1-10 and Memorandum of
petitioner, pp. 3-10; Rollo, pp. 149-158 and 192-199, respectively. See
also Decision of the CTA, pp. 1-21; Rollo, pp. 69-89.
5.CTA Decision, pp. 16-18 and 2-21; Rollo, pp. 84-86 and 88-89.
6.Penned by J . Asaali S. Isnani and concurred in by JJ . Nathanael P. De
Pano, Jr., chairman, and Corona Ibay-Somera of the Fourth Division.
7.Rollo, pp. 39-40.
8.CA Resolution, p. 2; Rollo, p. 43.
9.Ibid., pp. 2, 6-7; Rollo, pp. 43, 47-48.
10.The case was submitted for resolution on April 27, 1998, upon receipt by
this Court of private respondent's Reply Memorandum.
11.Petitioner's Memorandum, pp. 10-11; Rollo, pp. 199-200.
12.Ibid., p. 16; Rollo, p. 205.
13.Ibid., p. 17; Rollo, p. 206.
14.Commissioner of Internal Revenue v. Mitsubishi Metal Corp., 181 SCRA
214, 220, January 22, 1990.
15.Rollo, p. 36.
16.Ramos, et al. v. Pepsi Cola Bottling Co. of the P.I. et al., 19 SCRA 289, 292,
February 9, 1967, per Bengzon, J .; citing II Martin, Rules of Court in
the Philippines, 255 and IIBouvier's Law Dictionary, 2784.
17.Memorandum for Petitioner, pp. 21-22; Rollo, pp. 210-211.
18.See Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA
605, 613, April 18, 1997.
19.Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and
Court of Appeals, GR No. 117359, p. 15, July 23, 1998, per
Panganiban, J.
20.Justice Jose C. Vitug, Compendium of Tax Law and Jurisprudence, p. 75,
4th revised ed. (1989); and De Leon, Hector S, The National Internal
Revenue Code Annotated, p. 108, 5th ed. (1994), citing a BIR ruling
dated May 6, 1975.
21.See Ramirez v. Court of Appeals, 248 SCRA 590, 596, September 28, 1995.
22.Cooley, Thomas M., The Law of Taxation, p. 1415, Vol. II, 4th ed. (1924).
23.Reply Memorandum of private respondent, p. 10; Rollo, p. 234.
24."Charitable institutions, churches and parsonages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvementsactually, directly, and exclusively used for
religious, charitable, or educational purposes shall be exempt from
taxation." (Underlining copied from Reply Memorandum of Private
Respondent, p. 7; Rollo, p. 231)
26"Cemeteries, churches, and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements actually, directly, and
exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation."
27.Reply Memorandum of private respondent, pp. 7-8; Rollo, pp. 231-232.
28.Ibid., p. 8; Rollo, p. 232.
29.14 SCRA 292, June 16, 1965.
31.Ibid., p. 9; Rollo, p. 233.
32.Nitafan v. Commissioner of Internal Revenue, 152 SCRA 284, 291-292, July
27, 1987.
33.Record of the Constitutional Commission, Vol. Two, p. 90.
34.Bernas, Joaquin G., The 1987 Constitution of the Republic of the
Philippines: A Commentary, p. 720, 1996 ed.; citing Lladoc
v. Commissioner of Internal Revenue,supra, p. 295.
35.Vitug, supra, p. 16.
36."All revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational purposes shall
be exempt from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets shall be
disposed of in the manner provided by law."
38.See Krivenko v. Register of Deeds of Manila, 79 Phil. 461, 468 (1947).
39.Section 26, Batas Pambansa Blg. 232.
42.Exhibit B, BIR Records, pp. 54-56.
43.Exhibit C, BIR Records, pp. 27-53.
44.This is in stark contrast to its predecessor, the YMCA of Manila. In YMCA
of Manila v. Collector of Internal Revenue (33 Phil. 217, 221 [1916]),
cited by private respondent, it was noted that the said institution had
an educational department that taught courses in various subjects
such as law, commerce, social ethics, political economy and others.
45.Dizon, Amado C., Education Act of 1982 Annotated, Expanded and
Updated, p. 72 (1990).
46.84 CJS 566.
47.Kesselring v. Bonnycastle Club, 186 SW2d 402, 404 (1945).
48."By-Laws of the YMCA," p. 22; BIR Records, p. 31.
50.Supra.
51.162 SCRA 106, June 15, 1988.
52.16 SCRA 226, February 28, 1966.
53.95 SCRA 16, May 24, 1954.
BELLOSILLO, J., dissenting:
1.Commissioner of Internal Revenue v. Mitsubishi Metal Corporation,
G.R. No. 54908, 22 January 1995, 181 SCRA 2140.
2.Rollo, p, 76.
3.Rollo, pp. 76-77.
4.Rollo, p. 84.
5.Sajonas v. Court of Appeals, G.R. No. 102377, 5 July 1996, 258 SCRA 79.
6.Paras v. Commission on Elections, G.R. No. 123169, 4 November 1996, 264
SCRA 49.
7.Moreno, Federico B., Philippine Law Dictionary, Third Edition.
8.Sibal, Jose Agaton R., Philippine Legal Encyclopedia 1986 Edition.
9.Words and Phrases, Vol. 20A 1959 Ed. p. 1616.
10.Collector of Internal Revenue v. University of the Visayas, L-13554, 28
February 1961, 1 SCRA 669.
11.Ibid.
12.Jesus Sacred Heart College v. Collector of Internal Revenue, 95 Phil. 16
[1954].
13.No. 1-19371, 28 February 1966, 16 SCRA 226.
14.433 Phil. 217 [1916].
15.See Note 11.
16.Ibid.

17.See Note 13.
||| (Commr. v. Court of Appeals, G.R. No. 124043, October 14, 1998)
FIRST DIVISION
[G.R. No. 147188. September 14, 2004.]
THE ESTATE OF BENIGNO P. TODA, JR., Represented by
Special Co-administrators Lorna Kapunan and Mario
Luza Bautista, respondents.
D E C I S I O N
DAVIDE, JR., C.J p:
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. AHDcCT
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 TcHCDI
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 19871989. 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 returnP75,987,725.00
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 IncomeP175,987,725.00
per investigation

Tax Due thereof at 35%P61,595,703.75

Less: Payment already made
1.Per returnP26,595,704.00
2.Thru Capital Gains
Tax made by R.A.
Altonaga10,000,000.0036,595,704.00

Balance of tax dueP24,999,999.75
Add: 50% Surcharge12,499,999.88
25% Surcharge6,249,999.94

TotalP43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808)35,349,999.65

TOTAL AMT. DUE & COLLECTIBLEP79,099,999.22
============
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. EISCaD
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 government's
right to assess CIC prescribed on 15 April 1993. The assessment issued
on 9 January 1995 was, therefore, no longer valid. The CTA also ruled
that the mere ownership by Toda of 99.991% of the capital stock of CIC
was not in itself sufficient ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that the Estate is not liable
for deficiency income tax of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the Commissioner on 9 January
1995.
In its motion for reconsideration, 19 the Commissioner insisted that the
sale of the property owned by CIC was the result of the connivance
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," "willful," or "deliberate and not accidental"; and (3)
a course of action or failure of action which is unlawful. 24 SITCcE
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 RMI's trial balance as "other inv. Cibeles Bldg." This
would show that the real buyer of the properties was RMI, and not the
intermediary Altonaga.
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, 28Altonaga having left for the United States of America in
January 1990. Nevertheless, that Altonaga was a mere conduit finds
support in the admission of respondent Estate that the sale to him was
part of the tax planning scheme of CIC. That admission is borne by the
records. In its Memorandum, respondent Estate declared:
Petitioner, however, claims there was a "change of structure" of
the proceeds of sale. Admitted one hundred percent. But isn't
this precisely the definition of tax planning? Change the
structure of the funds and pay a lower tax. Precisely, Sec. 40 (2)
of the Tax Code exists, allowing tax free transfers of property
for stock, changing the structure of the property and the tax to
be paid. As long as it is done legally, changing the structure of
a transaction to achieve a lower tax is not against the law. It is
absolutely allowed.
Tax planning is by definition to reduce, if not eliminate
altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.29 [Emphasis
supplied].
The scheme resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to Altonaga, and then from
Altonaga to RMI cannot be considered a legitimate tax planning. Such
scheme is tainted with fraud.
Fraud in its general sense, "is deemed to comprise anything calculated
to deceive, including all acts, omissions, and concealment involving a
breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another." 30
Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonaga's sole
purpose of acquiring and transferring title of the subject properties on
the same day was to create a tax shelter. Altonaga never controlled the
property and did not enjoy the normal benefits and burdens of
ownership. The sale to him was merely a tax ploy, a sham, and without
business purpose and economic substance. Doubtless, the execution of
the two sales was calculated to mislead the BIR with the end in view of
reducing the consequent income tax liability. aTEScI
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. TSIDEa
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 [Emphasis
Supplied].
When the late Toda undertook and agreed "to hold the BUYER and
Cibeles free from any all income tax liabilities of Cibeles for the fiscal
years 1987, 1988, and 1989," he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny
liability for CIC's deficiency income tax for the year 1989 by invoking
the separate corporate personality of CIC, since its obligation arose
from Toda's contractual undertaking, as contained in the Deed of Sale
of Shares of Stock. ICESTA
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.
Footnotes
1.Rollo, 2231. Per Associate Justice Rodrigo V. Cosico, with Associate
Justices Ramon A. Barcelona and Alicia J. Santos concurring.
2.Id., 3241; CTA Records, 524533. Per Presiding Judge Ernesto D. Acosta,
with Associate Judges Ramon O. De Veyra and Amancio Q. Saga
concurring.
3.Entitled "The Estate of Benigno P. Toda, Jr., represented by Special Co-
Administrators Lorna Patajo-Kapunan and Mario Luza Bautista versus
Commissioner of Internal Revenue."
4.CA Rollo, 73.
5.CA Rollo, 7478; 8892.
6.Exh. "E," CTA Records, 306.
7.Exh. "L," CTA Records, 340.
8.Exh. "M," "M-1," "N" and "N-1," CTA Records, 316317.
9.Exh. "P," CTA Records, 357365.
10.BIR Records, 448449.
11.Id., 446447.
12.Id., 474475.
13.Exh. "H," CTA Records, 314315.
14.Exh. "G," CTA Records, 311312.
15.CTA Records, 115.
17.Id., 121128.
18.CTA Records 535540.
19.Id., 534, 539.
20.Id., 550; CA Rollo, 32.
21.CA Rollo, 720.
22.Rollo, 30.
23.Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence 44 (2nd
ed., 2000) (hereafter Vitug).
24.De Leon, Fundamentals of Taxation 53 (1988 ed.), citing Batter, Fraud
under Federal Tax Law 15 (1953 ed.).
25.Exh. "3," CTA Records, 476.
29.Respondent's Memorandum, 45; Rollo, 7879.
30.Commissioner of Internal Revenue v. Court of Appeals, 327 Phil. 1, 33
(1996).
31.See Commissioner of Internal Revenue v. Norton Harrison Co., 120 Phil.
684, 691 (1964); Commissioner of Internal Revenue v. Rufino, G.R. No.
L-33665-68, 27 February 1987, 148 SCRA 42.
32.Vitug, 138.
33.Commissioner v. Court Holding Co., 324 U.S. 334 (1945).
34.See Gregory v. Helvering, 293 U.S. 465 (1935); Frank Lyon Co. v. United
States, 435 U.S. 561 (1978); Commissioner of Internal Revenue
v. Court of Appeals, 361 Phil. 103, 126 (1999) citing Asmussen v. CIR,
36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d 330; Cohen v. U.S., 192
F Supp 216; Herman v. Comm., 283 F2d 227; Kessner v.Comm., 248
F2d 943; Comm. V. Pope, 239 F2d 881; U.S. v. Fewel, 255 F2d 396.
35.Sec. 34. Capital gains and loses.
xxx xxx xxx
(h)The provisions of paragraph (b) of this section to the contrary
notwithstanding, sales, exchanges or other dispositions of real
property classified as capital assets, including pacto-de-retro sales
and other forms of conditional sale, by individuals, including estates
and trusts, shall be taxed at the rate of 5% based on the gross selling
price or the fair market value prevailing at the time of sale, whichever
is higher.
36.Exh. "A," CTA Records, 296.
38.Atrium Management Corporation v. Court of Appeals, G.R. Nos. 109491
and 121794, 28 February 2001, 353 SCRA 23, 31, citing FCY
Construction Group Inc. v. Court of Appeals, G.R. No. 123358, 1
February 2000, 324 SCRA 270.

||| (Commr. v. Estate of Toda, Jr., G.R. No. 147188, September 14, 2004)
THIRD DIVISION
[G.R. No. 166377. November 28, 2008.]
MA. ISABEL T. SANTOS, represented by ANTONIO P.
SANTOS, petitioner, vs. SERVIER PHILIPPINES, INC. and
NATIONAL LABOR RELATIONS
COMMISSION, respondents.
D E C I S I O N
NACHURA, J p:
Before this Court is a Petition for Review on Certiorari under Rule 45 of
the Rules of Court, seeking to set aside the Court of Appeals (CA)
Decision, 1 dated August 12, 2004 and its Resolution 2 dated December
17, 2004, in CA-G.R. SP No. 75706. IHSTDE
The facts, as culled from the records, are as follows:
Petitioner Ma. Isabel T. Santos was the Human Resource Manager of
respondent Servier Philippines, Inc. since 1991 until her termination
from service in 1999. On March 26 and 27, 1998, petitioner attended a
meeting 3 of all human resource managers of respondent, held in Paris,
France. Since the last day of the meeting coincided with the graduation
of petitioner's only child, she arranged for a European vacation with her
family right after the meeting. She, thus, filed a vacation leave effective
March 30, 1998. 4
On March 29, 1998, petitioner, together with her husband Antonio P.
Santos, her son, and some friends, had dinner at Leon des Bruxelles, a
Paris restaurant known for mussels 5 as their specialty. While having
dinner, petitioner complained of stomach pain, then vomited. Eventually,
she was brought to the hospital known as Centre Chirurgical de
L'Quest where she fell into coma for 21 days; and later stayed at the
Intensive Care Unit (ICU) for 52 days. The hospital found that the
probable cause of her sudden attack was "alimentary allergy", as she
had recently ingested a meal of mussels which resulted in a
concomitant uticarial eruption. 6
During the time that petitioner was confined at the hospital, her
husband and son stayed with her in Paris. Petitioner's hospitalization
expenses, as well as those of her husband and son, were paid by
respondent. 7
In June 1998, petitioner's attending physicians gave a prognosis of the
former's condition; and, with the consent of her family, allowed her to
go back to the Philippines for the continuation of her medical
treatment. She was then confined at the St. Luke's Medical Center for
rehabilitation. 8 During the period of petitioner's rehabilitation,
respondent continued to pay the former's salaries; and to assist her in
paying her hospital bills.
In a letter dated May 14, 1999, respondent informed the petitioner that
the former had requested the latter's physician to conduct a thorough
physical and psychological evaluation of her condition, to determine her
fitness to resume her work at the company. Petitioner's physician
concluded that the former had not fully recovered mentally and
physically. Hence, respondent was constrained to terminate petitioner's
services effective August 31, 1999. 9
As a consequence of petitioner's termination from employment,
respondent offered a retirement package which consists of: TEHIaD
Retirement Plan Benefits:P1,063,841.76
Insurance Pension at P20,000.00/month
for 60 months from company-sponsored
group life policy:P1,200,000.00
Educational assistance:P465,000.00
Medical and Health Care:P200,000.00 10
Of the promised retirement benefits amounting to P1,063,841.76, only
P701,454.89 was released to petitioner's husband, the balance 11 thereof
was withheld allegedly for taxation purposes. Respondent also failed to
give the other benefits listed above. 12
Petitioner, represented by her husband, instituted the instant case for
unpaid salaries; unpaid separation pay; unpaid balance of retirement
package plus interest; insurance pension for permanent disability;
educational assistance for her son; medical assistance; reimbursement of
medical and rehabilitation expenses; moral, exemplary, and actual
damages, plus attorney's fees. The case was docketed as NLRC-NCR
(SOUTH) Case No. 30-06-02520-01.
On September 28, 2001, Labor Arbiter Aliman D. Mangandog rendered
a Decision 13 dismissing petitioner's complaint. The Labor Arbiter
stressed that respondent had been generous in giving financial
assistance to the petitioner. 14 He likewise noted that there was a
retirement plan for the benefit of the employees. In denying petitioner's
claim for separation pay, the Labor Arbiter ratiocinated that the same
had already been integrated in the retirement plan established by
respondent. Thus, petitioner could no longer collect separation pay over
and above her retirement benefits. 15 The arbiter refused to rule on the
legality of the deductions made by respondent from petitioner's total
retirement benefits for taxation purposes, as the issue was beyond the
jurisdiction of the NLRC. 16 On the matter of educational assistance, the
Labor Arbiter found that the same may be granted only upon the
submission of a certificate of enrollment. 17 Lastly, as to petitioner's
claim for damages and attorney's fees, the Labor Arbiter denied the
same as the former's dismissal was not tainted with bad faith. 18
On appeal to the National Labor Relations Commission (NLRC), the
tribunal set aside the Labor Arbiter's decision, ruling that:
WHEREFORE, premises considered, Complainant's appeal is
partly GRANTED. The Labor Arbiter's decision in the above-
entitled case is hereby SET ASIDE. Respondent is ordered to
pay Complainant's portion of her separation pay covering the
following: 1) P200,000.00 for medical and health care from
September 1999 to April 2001; and 2) P35,000.00 per year for
her son's high school (second year to fourth year) education
and P45,000.00 per semester for the latter's four-year college
education, upon presentation of any applicable certificate of
enrollment.
SO ORDERED. 19
The NLRC emphasized that petitioner was not retired from the
service pursuant to law, collective bargaining agreement (CBA) or
other employment contract; rather, she was dismissed from
employment due to a disease/disability under Article 284 20 of the
Labor Code. 21 In view of her non-entitlement to retirement benefits,
the amounts received by petitioner should then be treated as her
separation pay. 22 Though not legally obliged to give the other
benefits, i.e., educational assistance, respondent volunteered to grant
them, for humanitarian consideration. The NLRC therefore ordered
the payment of the other benefits promised by the
respondent. 23 Lastly, it sustained the denial of petitioner's claim for
damages for the latter's failure to substantiate the same. 24 SaIACT
Unsatisfied, petitioner elevated the matter to the Court of Appeals
which affirmed the NLRC decision. 25
Hence, the instant petition.
At the outset, the Court notes that initially, petitioner raised the issue of
whether she was entitled to separation pay, retirement benefits, and
damages. In support of her claim for separation pay, she cited Article
284 of the Labor Code, as amended. However, in coming to this
Court via a petition for review on certiorari, she abandoned her original
position and alleged that she was, in fact, not dismissed from
employment based on the above provision. She argued that her
situation could not be characterized as a disease; rather, she became
disabled. In short, in her petition before us, she now changes her theory
by saying that she is not entitled to separation pay but to retirement
pay pursuant to Section 4, 26 Article V of the Retirement Plan, on
disability retirement. She, thus, prayed for the full payment of her
retirement benefits by giving back to her the amount deducted for
taxation purposes.
In our Resolution 27 dated November 23, 2005 requiring the parties to
submit their respective memoranda, we specifically stated:
No new issues may be raised by a party in the Memorandum
and the issues raised in the pleadings but not included in the
Memorandum shall be deemed waived or abandoned.
Being summations of the parties' previous pleadings, the Court
may consider the Memoranda alone in deciding or resolving
this petition.
Pursuant to the above resolution, any argument raised in her petition,
but not raised in her Memorandum, 28 is deemed abandoned. 29 Hence,
the only issue proper for determination is the propriety of deducting
P362,386.87 from her total benefits, for taxation purposes. Nevertheless,
in order to resolve the legality of the deduction, it is imperative that we
settle, once and for all, the ground relied upon by respondent in
terminating the services of the petitioner, as well as the nature of the
benefits given to her after such termination. Only then can we decide
whether the amount deducted by the respondent should be paid to the
petitioner.
Respondent dismissed the petitioner from her employment based on
Article 284 of the Labor Code, as amended, which reads:
Art. 284.Disease as Ground for Termination.
An employer may terminate the services of an employee who
has been found to be suffering from any disease and whose
continued employment is prohibited by law or is prejudicial to
his health as well as to the health of his co-employees:
Provided, That he is paid separation pay equivalent to at least
one (1) month salary or to one-half (1/2) month salary for
every year of service, whichever is greater, a fraction of at least
six (6) months being considered as one (1) whole year.
As she was dismissed on the abovementioned ground, the law gives
the petitioner the right to demand separation pay. However,
respondent established a retirement plan in favor of all its employees
which specifically provides for "disability retirement", to wit:
Sec. 4.Disability Retirement.
In the event that a Member is retired by the Company due to
permanent total incapacity or disability, as determined by a
competent physician appointed by the Company, his disability
retirement benefit shall be the Full Member's Account Balance
determined as of the last valuation date. . . . . 30 cSATEH

On the basis of the above-mentioned retirement plan, respondent
offered the petitioner a retirement package which consists of retirement
plan benefits, insurance pension, and educational assistance. 31 The
amount of P1,063,841.76 represented the disability retirement benefit
provided for in the plan; while the insurance pension was to be paid by
their insurer; and the educational assistance was voluntarily undertaken
by the respondent as a gesture of compassion to the petitioner. 32
We have declared in Aquino v. National Labor Relations
Commission 33 that the receipt of retirement benefits does not bar the
retiree from receiving separation pay. Separation pay is a statutory right
designed to provide the employee with the wherewithal during the
period that he/she is looking for another employment. On the other
hand, retirement benefits are intended to help the employee enjoy the
remaining years of his life, lessening the burden of worrying about his
financial support, and are a form of reward for his loyalty and service to
the employer. 34 Hence, they are not mutually exclusive. However, this is
only true if there is no specific prohibition against the payment of both
benefits in the retirement plan and/or in the Collective Bargaining
Agreement (CBA). 35
In the instant case, the Retirement Plan bars the petitioner from
claiming additional benefits on top of that provided for in the Plan.
Section 2, Article XII of the Retirement Plan provides:
Section 2.No Duplication of Benefits.
No other benefits other than those provided under this Plan
shall be payable from the Fund. Further, in the event the
Member receives benefits under the Plan, he shall be precluded
from receiving any other benefits under the Labor Code or
under any present or future legislation under any other
contract or Collective Bargaining Agreement with the
Company. 36
There being such a provision, as held in Cruz v. Philippine Global
Communications, Inc., 37 petitioner is entitled only to either the
separation pay under the law or retirement benefits under the Plan,
and not both.
Clearly, the benefits received by petitioner from the respondent
represent her retirement benefits under the Plan. The question that now
confronts us is whether these benefits are taxable. If so, respondent
correctly made the deduction for tax purposes. Otherwise, the
deduction was illegal and respondent is still liable for the completion of
petitioner's retirement benefits. ASHICc
Respondent argues that the legality of the deduction from petitioner's
total benefits cannot be taken cognizance of by this Court since the
issue was not raised during the early stage of the proceedings. 38
We do not agree.
Records reveal that as early as in petitioner's position paper filed with
the Labor Arbiter, she already raised the legality of said
deduction, albeit designated as "unpaid balance of the retirement
package". Petitioner specifically averred that P362,386.87 was not given
to her by respondent as it was allegedly a part of the former's taxable
income. 39 This is likewise evident in the Labor Arbiter and the NLRC's
decisions although they ruled that the issue was beyond the tribunal's
jurisdiction. They even suggested that petitioner's claim for illegal
deduction could be addressed by filing a tax refund with the Bureau of
Internal Revenue. 40
Contrary to the Labor Arbiter and NLRC's conclusions, petitioner's claim
for illegal deduction falls within the tribunal's jurisdiction. It is
noteworthy that petitioner demanded the completion of her retirement
benefits, including the amount withheld by respondent for taxation
purposes. The issue of deduction for tax purposes is intertwined with
the main issue of whether or not petitioner's benefits have been fully
given her. It is, therefore, a money claim arising from the employer-
employee relationship, which clearly falls within the jurisdiction 41 of the
Labor Arbiter and the NLRC.
This is not the first time that the labor tribunal is faced with the issue of
illegal deduction. In Intercontinental Broadcasting Corporation (IBC) v.
Amarilla, 42 IBC withheld the salary differentials due its retired
employees to offset the tax due on their retirement benefits. The
retirees thus lodged a complaint with the NLRC questioning said
withholding. They averred that their retirement benefits were exempt
from income tax; and IBC had no authority to withhold their salary
differentials. The Labor Arbiter took cognizance of the case, and this
Court made a definitive ruling that retirement benefits are exempt from
income tax, provided that certain requirements are met. ScCEIA
Nothing, therefore, prevents us from deciding this main issue of
whether the retirement benefits are taxable.
We answer in the affirmative.
Section 32 (B) (6) (a) of the New National Internal Revenue Code (NIRC)
provides for the exclusion of retirement benefits from gross income,
thus:
(6)Retirement Benefits, Pensions, Gratuities, etc.
a)Retirement benefits received under Republic Act 7641 and
those received by officials and employees of private firms,
whether individual or corporate, in accordance with a
reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the
service of the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of his
retirement: Provided further, That the benefits granted under
this subparagraph shall be availed of by an official or employee
only once. . . . .
Thus, for the retirement benefits to be exempt from the withholding tax,
the taxpayer is burdened to prove the concurrence of the following
elements: (1) a reasonable private benefit plan is maintained by the
employer; (2) the retiring official or employee has been in the service of
the same employer for at least ten (10) years; (3) the retiring official or
employee is not less than fifty (50) years of age at the time of his
retirement; and (4) the benefit had been availed of only once. 43
As discussed above, petitioner was qualified for disability retirement. At
the time of such retirement, petitioner was only 41 years of age; and
had been in the service for more or less eight (8) years. As such, the
above provision is not applicable for failure to comply with the age and
length of service requirements. Therefore, respondent cannot be faulted
for deducting from petitioner's total retirement benefits the amount of
P362,386.87, for taxation purposes.
WHEREFORE, the petition is DENIED for lack of merit. The Court of
Appeals Decision dated August 12, 2004 and its Resolution dated
December 17, 2004, in CA-G.R. SP No. 75706 are AFFIRMED.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Chico-Nazario and Reyes, JJ., concur.
Footnotes
1.Penned by Associate Justice Eliezer R. De Los Santos, with Associate
Justices Delilah Vidallon-Magtolis and Arturo D. Brion (now a member
of this Court), concurring;rollo, pp. 34-42. HEaCcD
2.Rollo, p. 44.
3.The meeting was entitled "Reunion DRH Internationale".
4.Rollo, p. 35.
5.Commonly known as "tahong" in the Philippines.
6.Rollo, p. 35.
7.Id. at 36.
8.Id.
9.Petitioner's termination from employment was embodied in a letter dated
July 15, 1999; id. at 132-133.
10.Rollo, p. 134.
11.Amounting to P362,386.87.
12.Rollo, p. 37.
13.Id. at 204-213.
14.Id. at 209.
15.Id. at 210-211. CaHAcT
16.Id. at 211.
17.Id.
18.Id. at 211-212.
19.Id. at 264-265.
20.ART. 284.Disease as Ground for Termination.
An employer may terminate the services of an employee who has been
found to be suffering from any disease and whose continued
employment is prohibited by law or is prejudicial to his health as well
as to the health of his co-employees: Provided, That he is paid
separation pay equivalent to at least one (1) month salary or to one-
half (1/2) month salary for every year of service, whichever is greater,
a fraction of at least six (6) months being considered as one (1) whole
year.
21.Rollo, pp. 260-261.
22.Id. at 262.
23.Said benefits consist of the following: 1) P200,000.00 for medical and
health care; and 2) educational assistance for petitioner's son; id. at
264-265.
24.Rollo, p. 263.
25.Supra. note 1.
26.Section 4. Disability Retirement.
In the event that a Member is retired by the Company due to permanent
total incapacity or disability, as determined by a competent physician
appointed by the Company, his disability retirement benefit shall be
the Full Member's Account Balance determined as of the last
valuation date. . . .; rollo, p. 359.
27.Rollo, pp. 785-786.
28.Id. at 915-942. ETaSDc
29.Republic v. Kalaw, G.R. No. 155138, June 8, 2004, 431 SCRA 401, 406.
30.Rollo, p. 359.
31.Id. at 134.
32.Id.
33.G.R. No. 87653, February 11, 1992, 206 SCRA 118.
34.Aquino v. National labor Relations Commission, G.R. No. 87653, February
11, 1992, 206 SCRA 118, 121-122.
35.Aquino v. National Labor Relations Commission, G.R. No. 87653, February
11, 1992, 206 SCRA 118, 122; University of the East v. Minister of
Labor, No. L-74007, July 31, 1987, 152 SCRA 676; Batangas Laguna
Tayabas Bus Company v. Court of Appeals, 163 Phil. 494 (1976).
36.Rollo, p. 364.
37.G.R. No. 141868, May 28, 2004, 430 SCRA 184.
38.Rollo, p. 947.
39.Id. at 120.
40.Id. at 211, 264.
41.Article 217 of the Labor Code, as amended reads:
Article 217.Jurisdiction of Labor Arbiters and the Commission.
(a)Except as otherwise provided under this Code, the Labor Arbiters shall
have original and exclusive jurisdiction to hear and decide . . ., the
following cases involving all workers, whether agricultural or non-
agricultural:
xxx xxx xxx
6.Except claims for Employees Compensation, Social Security, Medicare and
maternity benefits, all other claims arising from employer-employee
relations . . . .

42.G.R. No. 162775, October 27, 2006, 505 SCRA 687.
43.Intercontinental Broadcasting Corporation (IBC) v. Amarilla, G.R. No.
162775, October 27, 2006, 505 SCRA 687, 699.
||| (Santos v. Servier Philippines, Inc., G.R. No. 166377, November 28,
2008)
FIRST DIVISION
[G.R. No. 162775. October 27, 2006.]
INTERCONTINENTAL BROADCASTING CORPORATION
(IBC), represented by ATTY. RENATO Q. BELLO, in his
capacity as CEO and President,petitioner, vs. NOEMI B.
AMARILLA, CORSINI R. LAGAHIT, ANATOLIO G.
OTADOY, and CANDIDO C. QUIONES, JR., respondents.
D E C I S I O N
CALLEJO, SR., J p:
Before us is a Petition for Review on Certiorari filed by petitioner
Intercontinental Broadcasting Corporation (IBC) assailing the
Decision 1 of the Court of Appeals in CA-G.R. SP No. 72414, which in
turn affirmed the Decision 2 of the National Labor Relations Commission
(NLRC) in NLRC Case No. V-000660-2000.
On various dates, petitioner employed the following persons at its Cebu
station: Candido C. Quiones, Jr.; on February 1, 1975; 3 Corsini R.
Lagahit, as Studio Technician, also on February 1, 1975; 4 Anatolio G.
Otadoy, as Collector, on April 1, 1975; 5 and Noemi Amarilla, as Traffic
Clerk, on July 1, 1975. 6 On March 1, 1986, the government sequestered
the station, including its properties, funds and other assets, and took
over its management and operations from its owner, Roberto
Benedicto. 7 However, in December 1986, the government and
Benedicto entered into a temporary agreement under which the latter
would retain its management and operation. On November 3, 1990, the
Presidential Commission on Good Government (PCGG) and Benedicto
executed a Compromise Agreement, 8 where Benedicto transferred and
assigned all his rights, shares and interests in petitioner station to the
government. The PCGG submitted the Agreement to the Sandiganbayan
in Civil Case No. 0034 entitled "Republic of the Philippines v. Roberto S.
Benedicto, et al." 9
In the meantime, the four (4) employees retired from the company and
received, on staggered basis, their retirement benefits under the 1993
Collective Bargaining Agreement (CBA) between petitioner and the
bargaining unit of its employees.
Name of EmployeeDate of RetirementRetirement Benefit
Candido C. Quiones, Jr.October 16, 1995P766,532.97
Noemi B. AmarillaApril 16, 1998P1,134,239.47
Corsini R. LagahitApril 16, 1998P1,298,879.50
Anatolio G. OtadoyFebruary 29, 1996P751,914.30
In the meantime, a P1,500.00 salary increase was given to all employees
of the company, current and retired, effective July 1994. However, when
the four retirees demanded theirs, petitioner refused and instead
informed them via a letter that their differentials would be used to
offset the tax due on their retirement benefits in accordance with the
National Internal Revenue Code (NIRC). Amarilla was informed that the
P71,480.00 of the amount due to her would be used to offset her tax
liability of P340,641.42. 10 Otadoy was also informed in a letter dated
July 5, 1999, that his salary differential of P170,250.61 would be used to
pay his tax liability which amounted to P127,987.57. Since no tax liability
was withheld from his retirement benefits, he even owed the company
P17,727.26 after the offsetting. Quiones was informed that he should
have retired compulsorily in 1992 at age 55 as provided in the CBA, and
that since he was already 58 when he retired, he was no longer entitled
to receive salary increases from 1992 to 1995. Consequently, he was
overpaid by P137,932.22 for the "extension" of his employment from
1992 to 1995, which amount he was obliged to return to the company.
In any event, his claim for salary differentials had expired pursuant to
Article 291 of the Labor Code of the Philippines.11 Lagahit's claim for
salary differential of P73,165.23 was rejected by petitioner in a letter
dated July 6, 1999, on the ground that he had a tax liability of
P396,619.03; since the amount would be used as partial payment for his
tax liability, he still owed the company P323,453.80. 12
The four (4) retirees filed separate complaints 13 against IBC TV-13 Cebu
and Station Manager Louella F. Cabaero for unfair labor practice and
non-payment of backwages before the NLRC, Regional Arbitration
Branch VII. As all of the complainants had the same causes of action,
their complaints were docketed as NLRC RAB-VII Case No. 10-1625-
99. HEacDA
The complainants averred that their retirement benefits are exempt
from income tax under Article 32 of the NIRC. Sections 28 and 72 of the
NIRC, which petitioner relied upon in withholding their differentials, do
not apply to them since these provisions deal with the applicable
income tax rates on foreign corporations and suits to recover taxes
based on false or fraudulent returns. They pointed out that, under
Article VIII of the CBA, only those employees who reached the age of
60 were considered retired, and those under 60 had the option to retire,
like Quiones and Otadoy who retired at ages 58 and 51, respectively.
They prayed that they be paid their salary differentials, as follows:
OtadoyP170,250.61
QuionesP170,250.61
LagahitP73,165.23
AmarillaP71,480.00 14
For its part, petitioner averred that under Section 21 of the NIRC, the
retirement benefits received by employees from their employers
constitute taxable income. While retirement benefits are exempt from
taxes under Section 28(b) of said Code, the law requires that such
benefits received should be in accord with a reasonable retirement plan
duly registered with the Bureau of Internal Revenue (BIR) after
compliance with the requirements therein enumerated. Since its
retirement plan in the 1993 CBA was not approved by the BIR,
complainants were liable for income tax on their retirement benefits.
Petitioner claimed that it was mandated to withhold the income tax due
from the retirement benefits of said complainants. It was not estopped
from correcting the mistakes of its former officers. Under the law,
complainants are obliged to return what had been mistakenly delivered
to them. 15
In reply, complainants averred that the claims for the retirement salary
differentials of Quiones and Otadoy had not prescribed because the
said CBA was implemented only in 1997. They pointed out that they
filed their claims with petitioner on April 3, 1999. They maintained that
they availed of the optional retirement because of petitioner's
inducement that there would be no tax deductions. Petitioner IBC did
not commit any mistake in not withholding the taxes due on their
retirement benefits as shown by the fact that the PCCG, the
Commission on Audit (COA) and the Bureau of Internal Revenue (BIR)
did not even require them to explain such mistake. They pointed out
that petitioner paid their retirement benefits on a staggered basis, and
nonetheless failed to deduct any amount as taxes. 16
Petitioner countered that the retirement benefits received by the
complainants were based on the CBA between it and its bargaining
units. Under Sections 72 and 73 of the NIRC, it is obliged to deduct and
withhold taxes determined in accordance with the rules and regulations
to be prepared by the Secretary of Finance. It was its duty to withhold
the taxes on complainants' retirement benefits, otherwise, it would be
held civilly and criminally liable under Sections 251, 254 and 255 of the
NIRC.
On February 14, 2000, the Labor Arbiter rendered judgment in favor of
the retirees. The fallo of the decision reads:
WHEREFORE, premises considered, judgment is hereby
rendered ordering the respondent Intercontinental
Broadcasting Corporation (IBC TV-13 Cebu) to pay the
complainants Noemi Amarilla and Corsini Lagahit as follows:
1.Noemi E. AmarillaP26,423.00
2.Corsino R. LagahitP26,423.00

TotalP52,846.00
The claim of complainants Anatolio Otadoy and Candido
Quiones and the case against respondent Louella F. Cabaero
are dismissed for lack of merit.
SO ORDERED. 17
The Labor Arbiter ruled that the claims of Quiones and Otadoy had
prescribed. The retirement benefits of complainants Lagahit and
Amarilla, on the other hand, were exempt from income tax under
Section 28(b) of the NIRC. However, the differentials due to the two
complainants were computed three years backwards due to the law on
prescription.
Petitioner appealed the decision of the Labor Arbiter to the NLRC,
arguing that the retirement benefits of Amarilla and Lagahit are not tax
exempt. It insisted that the Labor Arbiter erred in declaring as unlawful
the act of withholding the employees' salary differentials as payment for
the latter's tax liabilities.
Otadoy and Quiones no longer appealed the decision. DTISaH
On May 21, 2002, the NLRC rendered its decision dismissing the appeal
and affirming that of the Labor Arbiter. The fallo of the decision reads:
WHEREFORE, the Decision of the Labor Arbiter dated February
14, 2000 is hereby AFFIRMED. Respondents' appeal is dismissed
for lack of merit.
SO ORDERED. 18
The NLRC held that the benefits of the retirement plan under the CBAs
between petitioner and its union members were subject to tax as the
scheme was not approved by the BIR. However, it had also been the
practice of petitioner to give retiring employees their retirement pay
without tax deductions and there was no justifiable reason for the
respondent to deviate from such practice. The NLRC concluded that
petitioner was deemed to have assumed the tax liabilities of the
complainants on their retirement benefits, hence, had no right to
deduct taxes from their salary differentials. The NLRC thus ratiocinated:
The sole concern of the law is that tax shall be imposed on
retirement benefits. The employer assuming the payment of tax
on behalf of the retiring employee to make the retirement
attractive, does not contravene the tax law, because it is not
contrary to the law or public policy, morals and good customs.
It is significant to note that respondent did not refute the
complainants' allegations in their Position Papers, to wit:
"Complainants Amarilla and Lagahit availed themselves
of the offer of the respondent company when they were
induced and were made to believe that respondent
company's employees who avail of such early retirement
can avail of that exemption on their retirement benefits.
Were it not for the offer of no tax liability, complainants
would not have availed of such optional or early
retirement."

It is worthy to note that the retirement benefits of the
complainants did not suffer any tax deductions when they were
given at the first instance. It is only after they claimed the
salary differentials when the respondent withheld the
backwages for the payment of tax liabilities.
"From the facts it can be shown that the disbursement
of retirement benefits of the complainants were made
on staggered basis, three (3) and four (4) times. So, if
the company, as it claimed, is really vent on deducting
the alleged taxes due the complainants, they have three
or four opportunities to do so."
The respondent's history reveals that it was paying retirement
pays to its retiring employees without tax deductions as a
matter of practice. There is no justifiable reason for the
respondent to deviate from that practice now. It is deemed to
have assumed the tax liabilities of the complainants. 19
Aggrieved, petitioner elevated the decision before the CA on the
following grounds:
1.THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION
TANTAMOUNT TO LACK OF JURISDICTION WHEN IT
RULED THAT WHILE PETITIONER MAY NOT HAVE A
RETIREMENT PLAN WHOSE BENEFITS THEREFROM ARE
EXEMPTED FROM TAXES UNDER SECTION 28 OF THE
NIRC, BY VIRTUE OF ITS PREVIOUS PRACTICE THAT IT
ASSUMED THE PAYMENT OF TAX LIABILITES, IT IS
DEEMED TO HAVE ANSWERED FOR THE TAX LIABILITES
OF THE COMPLAINANTS, WHICH ULTIMATE
CONSEQUENCE, IF NOT RECTIFIED, SHALL CAUSE
IRREPARABLE DAMAGE AND INJURY TO THE PETITIONER
CORPORATION. TSIDEa
2.THE HONORABLE NLRC GRAVELY ABUSED ITS DISCRETION
TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION
IN AFFIRMING THE DECISION RENDERED BY THE LABOR
ARBITER ON FEBRUARY 14, 2000 WHICH GRANTED
RETIREMENT DIFFERENTIAL TO RESPONDENTS
AMARILLA AND LAGAHIT AS THESE ARE CONTRARY TO
THE FACTS AND RETIREMENT LAWS PARTICULARLY THE
PROVISIONS EMBODIED IN SECTIONS 21, 27, 28 OF THE
NATIONAL INTERNAL REVENUE CODE AND R.A. 7641
IMPLEMENTING ARTICLE 287 OF THE LABOR CODE AS
WELL AS SECTION 6 OF THE IMPLEMENTING RULES OF
RA 7641.
3.CONSEQUENT TO NLRC'S RULING GRANTING RETIREMENT
DIFFERENTIAL TO RESPONDENTS AMARILLA AND
LAGAHIT, THE HONORABLE NLRC GRAVELY ABUSED ITS
DISCRETION TANTAMOUNT TO LACK OR EXCESS OF
JURISDICTION IN HOLDING THAT PETITIONER'S ACT OF
WITHHOLDING COMPLAINANTS' BACKWAGES AS
PAYMENT OF THEIR TAX LIABILITIES IS ILLEGAL. 20
On December 3, 2003, the CA rendered judgment dismissing the
petition for lack of merit.
The appellate court declared that the salary differentials of the
respondents are part of their taxable gross income, considering that the
CBA was not approved, much less submitted to the BIR. However,
petitioner could not withhold the corresponding tax liabilities of
respondents due to the then existing CBA, providing that such
retirement benefits would not be subjected to any tax deduction, and
that any such taxes would be for its account. The appellate court relied
on the allegations of respondents in their Position Paper before the
Labor Arbiter which petitioner failed to refute.
Petitioner filed a motion for reconsideration, which the appellate court
denied. Hence, the present petition, where petitioner avers that:
WITH ALL DUE RESPECT, THE COURT OF APPEALS COMMITTED
REVERSIBLE ERROR WHEN IT RULED THAT SINCE IT HAS BEEN
THE PURPORTED PRACTICE OF PETITIONER IBC-13 NOT TO
WITHHOLD TAXES DUE ON THE SALARY DIFFERENTIAL AND
THE RETIREMENT BENEFITS, PETITIONER IBC-13 NECESSARILY
ASSUMED PAYMENT OF THE TAXES AND COULD NOT
THEREFORE WITHHOLD THE SAME NOTWITHSTANDING THE
SUBSEQUENT DISCOVERY THAT THE FAILURE TO WITHHOLD
THE TAXES WAS DONE DUE TO THE OMISSION, MISTAKE,
FRAUD OR IRREGULARITY COMMITTED BY PREVIOUS
MANAGEMENT.
WITH ALL DUE RESPECT, THE HONORABLE COURT OF APPEALS
GLOSSED OVER THE FACT AND COMMITTED REVERSIBLE
ERROR WHEN IT AFFIRMED THE DECISION OF THE NATIONAL
LABOR RELATIONS COMMISSION DATED MAY 21, 2002 WHICH
ORDERED PETITIONER IBC-13 TO PAY RETIREMENT
DIFFERENTIAL TO RESPONDENTS AMARILLA AND LAGAHIT AS
THESE ARE CONTRARY TO THE FACTS AND RETIREMENT LAWS
PARTICULARLY THE PROVISIONS EMBODIED IN SECTIONS 21,
27, 28 OF THE NATIONAL INTERNAL REVENUE CODE (AS
AMENDED BY PRESIDENTIAL DECREE NO. 1994) 21
Petitioner insists that respondents are liable for taxes on their
retirement benefits because the retirement plan under the CBA was not
approved by the BIR. It insisted that it failed to comply with the
requisites of Section 32 of the NIRC and Rule II, Section 6 of the Rules
Implementing the New Retirement Law which provides that retirement
pay shall be tax exempt upon compliance with the requirements under
Section 2(b) of Revenue Regulation No. 12-86 dated August 1, 1986. ESCcaT
Petitioner maintains that respondents failed to present any document as
proof that petitioner bound and obliged itself to pay the withholding
taxes on their retirement benefits. In fact, the Labor Arbiter did not
make any finding that petitioner had obliged itself to pay the
withholding taxes on respondents' retirement benefits. The NLRC's
reliance on the statements in its Position Paper that it undertook to pay
for respondents' withholding taxes is misplaced.
While petitioner admits that its "previous directors" had paid the
withholding taxes on the retirement benefits of respondents, it explains
that this practice was stopped when the new management took over.
The new management could not be expected to enforce and follow
through the illegal policy of the old management which is adverse to
the interests of the petitioner; hence, the decisions of the NLRC and the
CA affirming such undertaking should be reversed. It points out that it
is a government corporation, and as such, its officials and employees
may be held liable for violation of Section 3(a) of Republic Act Nos.
3019, and 6713. 22 Moreover, its officers and employees are mandated
to preserve the company's assets, and may, likewise be held liable for
failure to do so under Section 31 of the Corporation Code.
The issues are (1) whether the retirement benefits of respondents are
part of their gross income; and (2) whether petitioner is estopped from
reneging on its agreement with respondent to pay for the taxes on said
retirement benefits.
We agree with petitioner's contention that, under the CBA, it is not
obliged to pay for the taxes on the respondents' retirement benefits.
We have carefully reviewed the CBA and find no provision where
petitioner obliged itself to pay the taxes on the retirement benefits of
its employees.
We also agree with petitioner's contention that, under the NIRC, the
retirement benefits of respondents are part of their gross income
subject to taxes. Section 28 (b) (7) (A) of the NIRC of 1986 23 provides:
Sec. 28.Gross Income.
xxx xxx xxx
(b)Exclusions 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
(7)Retirement benefits, pensions, gratuities, etc. (A)
Retirement benefits received by officials and employees of
private firms whether individuals or corporate, in accordance
with a reasonable private benefit plan maintained by the
employer: Provided, That the retiring official or employee has
been in the service of the same employer for at least ten (10)
years and is not less than fifty years of age at the time of his
retirement: Provided, further, That the benefits granted under
this subparagraph shall be availed of by an official or employee
only once. For purposes of this subsection, the term
"reasonable private benefit plan" means a pension, gratuity,
stock bonus or profit-sharing plan maintained by an employer
for the benefit of some or all of his officials or employees,
where contributions are made by such employer for officials or
employees, or both, for the purpose of distributing to such
officials and employees the earnings and principal of the fund
thus accumulated, and wherein it is provided in said plan that
at no time shall any part of the corpus or income of the fund
be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said official and employees. CScTED
Revenue Regulation No. 12-86, the implementing rules of the foregoing
provisions, provides:
(b)Pensions, retirements and separation pay. Pensions,
retirement and separation pay constitute compensation subject
to withholding tax, except the following:
(1)Retirement benefit received by official and employees
of private firms under a reasonable private benefit plan
maintained by the employer, if the following
requirements are met:
(i)The retirement plan must be approved by the
Bureau of Internal Revenue;
(ii)The retiring official or employees must have
been in the service of the same employer for at
least ten (10) years and is not less than fifty (50)
years of age at the time of retirement; and
(iii)The retiring official or employee shall not have
previously availed of the privilege under the
retirement benefit plan of the same or another
employer.
Thus, for the retirement benefits to be exempt from the withholding tax,
the taxpayer is burdened to prove the concurrence of the following
elements: (1) a reasonable private benefit plan is maintained by the
employer; (2) the retiring official or employee has been in the service of
the same employer for at least 10 years; (3) the retiring official or
employee is not less than 50 years of age at the time of his retirement;
and (4) the benefit had been availed of only once.
Article VIII of the 1993 CBA provides for two kinds of retirement plans -
compulsory and optional. Thus:
ARTICLE VIII
RETIREMENT
Section 1:Compulsory Retirement Any employee who has
reached the age of Fifty Five (55) years shall be retired from
the COMPANY and shall be paid a retirement pay in
accordance with the following schedule:
LENGTH OF SERVICERETIREMENT BENEFITS
1 year-below 5 yrs.15 days for every year of service
5 years-9 years30 days for every year of service

20 years or more80 days for every year of service
A supervisor who reached the age of Fifty (50) may at his/her
option retire with the same retirement benefits provided
above. TSIEAD
Section 2:Optional Retirement Any covered employee,
regardless of age, who has rendered at least five (5) years of
service to the COMPANY may voluntarily retire and the
COMPANY agrees to pay Long Service Pay to said covered
employee in accordance with the following schedule:
LENGTH OF SERVICERETIREMENT BENEFITS
5-9 years15 days for every year of service
20 years or more60 days for every year of service
Section 3:Fraction of a Year In computing the retirement
under Section 1 and 2 of this Article, a fraction of at least six
(6) months shall be considered as one whole year. Moreover,
the COMPANY may exercise the option of extending the
employment of an employee.
Section 4:Severance of Employment Due to Illness When a
supervisor suffers from disease and/or permanent disability and
her/his continued employment is prohibited by law or
prejudicial to her/his health of the health of his co-employees,
the COMPANY shall not terminate the employment of the
subject supervisor unless there is a certification by a competent
public health authority that the disease is of such a nature or
at such stage that it can not be cured within a period of six (6)
months even with proper medical treatment. The supervisor
may be separated upon payment by the COMPANY of
separation pay pursuant to law, unless the supervisor falls
within the purview of either Sections 1 or 2 hereof. In which
case, the retirement benefits indicated therein shall apply,
whichever is higher.
Section 5:Loyalty Recognition The COMPANY shall recognize
the services of the supervisor/director who have reached the
following number of years upon retirement by granting
him/her a plaque of appreciation and any lasting gift:
10 years but below 15 years(P3,000.00) worth
15 years but below 20 years(P7,000.00) worth
20 years and more(P10,000.00) worth
Respondents were qualified to retire optionally from their employment
with petitioner. However, there is no evidence on record that the 1993
CBA had been approved or was ever presented to the BIR; hence, the
retirement benefits of respondents are taxable.
Under Section 80 of the NIRC, petitioner, as employer, was obliged to
withhold the taxes on said benefits and remit the same to the BIR.
Section 80.Liability for Tax.
(A)Employer. The employer shall be liable for the
withholding and remittance of the correct amount of tax
required to be deducted and withheld under this Chapter. If
the employer fails to withhold and remit the correct amount of
tax as required to be withheld under the provision of this
Chapter, such tax shall be collected from the employer
together with the penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and remit.
However, we agree with respondents' contention that petitioner did not
withhold the taxes due on their retirement benefits because it had
obliged itself to pay the taxes due thereon. This was done to induce
respondents to agree to avail of the optional retirement scheme. Thus,
in its petition in this case, petitioner averred that:
While it may indeed be conceded that the previous
dispensation of petitioner IBC-13 footed the bill for the
withholding taxes, upon discovery by the new management,
this was stopped altogether as this was grossly prejudicial to
the interest of the petitioner IBC-13. The policy of withholding
the taxes due on the differentials as a remedial measure was a
matter of sound business judgment and dictates of good
governance aimed at protecting the interests of the
government. Necessarily, the newly-appointed board and
officers of the petitioner, who learned about this grossly
disadvantageous mistake committed by the former
management of petitioner IBC-13 cannot be expected to just
follow suit blindly. An illegal act simply cannot give rise to an
obligation. Accordingly, the new officers were correct in not
honoring this highly suspect practice and it is now their duty to
rectify this anomalous occurrence, otherwise, they become
remiss in the performance of their sworn responsibilities. aCSEcA
It need not be stressed that as board members and officers of
the acquired asset of the government, they are committed to
preserve the assets thereof. Their concomitant obligations
spring not only from their fiduciary responsibility as corporate
officers but as well as public officers. 24
Respondents received their retirement benefits from the petitioner in
three staggered installments without any tax deduction for the simple
reason that petitioner had remitted the same to the BIR with the use of
its own funds conformably with its agreement with the retirees. It was
only when respondents demanded the payment of their salary
differentials that petitioner alleged, for the first time, that it had failed
to present the 1993 CBA to the BIR for approval, rendering such
retirement benefits not exempt from taxes; consequently, they were
obliged to refund to it the amounts it had remitted to the BIR in
payment of their taxes. Petitioner used this "failure" as an afterthought,
as an excuse for its refusal to remit to the respondents their salary
differentials. Patently, petitioner is estopped from doing so. It cannot
renege on its commitment to pay the taxes on respondents' retirement
benefits on the pretext that the "new management" had found the
policy disadvantageous.
It must be stressed that the parties are free to enter into any contract
stipulation provided it is not illegal or contrary to public morals. When
such agreement freely and voluntarily entered into turns out to be
advantageous to a party, the courts cannot "rescue" the other party
without violating the constitutional right to contract. Courts are not
authorized to extricate the parties from the consequences of their acts.
Thus, the fact that the contract stipulations of the parties may turn out
to be financially disadvantageous to them will not relieve them of their
obligation under the agreement. 25
An agreement to pay the taxes on the retirement benefits as an
incentive to prospective retirees and for them to avail of the optional
retirement scheme is not contrary to law or to public morals. Petitioner
had agreed to shoulder such taxes to entice them to voluntarily retire
early, on its belief that this would prove advantageous to it.
Respondents agreed and relied on the commitment of petitioner. For
petitioner to renege on its contract with respondents simply because its
new management had found the same disadvantageous would amount
to a breach of contract. There is even no evidence that any "new
management" was ever installed by petitioner after respondents'
retirement; nor is there evidence that the Board of Directors of
petitioner resolved to renege on its contract with respondents and
demand the reimbursement for the amounts remitted by it to the BIR.
The well-entrenched rule is that estoppel may arise from a making of a
promise if it was intended that the promise should be relied upon and,
in fact, was relied upon, and if a refusal to sanction the perpetration of
fraud would result to injustice. The mere omission by the promisor to
do whatever he promises to do is sufficient forbearance to give rise to a
promissory estoppel. 26
Petitioner cannot hide behind the fact that, under the compromise
agreement between the PCGG and Benedicto, the latter had assigned
and conveyed to the Republic of the Philippines his shares, interests
and rights in petitioner. Respondents retired only after the Court
affirmed the validity of the Compromise Agreement 27 and the
execution by petitioner and the union of their 1993 CBA while Civil Case
No. 0034 was still pending in the Sandiganbayan. There is no showing
that before respondents demanded the payment of their salary
differentials, petitioner had rejected its commitment to shoulder the
taxes on respondents' retirement benefits and sought its nullification
before the court; nor is there any showing that petitioner's "new
management" filed any criminal or administrative charges against the
former officers/board of directors comprising the "old management"
relative to the payment of the taxes on respondents' retirement
benefits.
IN VIEW OF ALL THE FOREGOING, the petition is DENIED for lack of
merit. The Decision of the Court of Appeals in CA-G.R. SP No. 72414 is
AFFIRMED. Costs against the petitioner. DaTHAc
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Chico-Nazario,
JJ., concur.
Footnotes
1.Penned by Associate Justice Jose Catral Mendoza, with Associate Justices
B.A. Adefuin-de la Cruz and Eliezer R. de los Santos, concurring; rollo,
pp. 35-42.
2.Penned by Presiding Commissioner Irenea E. Ceniza, with Commissioners
Edgardo M. Enerlan and Oscar S. Uy, concurring; id. at 135-139.
3.Records, p. 91.
4.Id at 93.
5.Id. at 94.
6.Id. at 95.
7.Id. at 40.
8.Id. at 30-39.
9.Benedicto v. Board of Administrators of Television Stations RPN, BBC and
IBC, G.R. No. 87710, March 31, 1992, 207 SCRA 659.
10.Records, p. 83.
11.Id. at 85.
12.Id. at 86.
13.Id. at 32-35.
14.Id. at 78.
15.Id. at 89-142.
16.Id. at 147-150.
17.Id. at 242.
18.CA rollo, p. 76.
19.Records, pp. 350-351.
20.CA rollo, pp. 11-12.
21.Rollo, pp. 19-20.
22.Otherwise known as a law establishing an "Act Establishing a Code of
Conduct and Ethical Standards for Public Officials Employees."
23.Now Section 32 (B) (6) (a) of the NIRC of 1997.
24.Rollo, p. 23 (Underscoring supplied).
25.Torres v. Court of Appeals, G.R. No. 134559, December 9, 1999, 320 SCRA
428, 437; Pryce Corporation v. Philippine Amusement and Gaming
Corporation, G.R. No. 157480, May 6, 2005, 458 SCRA 164, 175.

26.Central Bank of the Philippines v. Intermediate Appellate Court, G.R. No.
69078, December 4, 1989, 179 SCRA 752, 758.
27.Benedicto v. Board of Administrators of Television Stations RPN, BBC and
IBC, supra note 9.
||| (Intercontinental Broadcasting Corp. v. Amarilla, G.R. No. 162775,
October 27, 2006)
FIRST DIVISION
[G.R. No. L-26911. January 27, 1981.]
ATLAS CONSOLIDATED MINING & DEVELOPMENT
CORPORATION, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
[G.R. No. L-26924. January 27, 1981.]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. ATLAS CONSOLIDATED MINING
& DEVELOPMENT CORPORATION and COURT OF TAX
APPEALS, respondents.
Solicitor General Antonio P. Barredo, Assistant Solicitor General Feliciano
R. Rosete, Solicitor Lolita O. Gal-lang and Special Attorney Gamaliel
H. Mantelino for petitioner.
Gadioma and Josue for respondent.
SYNOPSIS
In an appeal, where Atlas Consolidated Mining and Development
Corporation assailed the disallowance of the transfer agent's fee;
stockholder's relation fee; U.S. listing expenses; suit expenses and
provision for contingencies, as deductible expenses from its gross
income which resulted in the deficiency income tax assessments made
by the Commissioner of Internal Revenue against Atlas, the Court of Tax
Appeals allowed said disallowed items except the stockholders relation
service fee and suit expenses. Both parties appealed by filing two
separate petitions for review, one filed by Atlas in L-26911 as to the
portion disallowed and the other by the Commissioner in L-26924, not
only raising for the first time lack of proof of payment of the expense
deducted but questioning as well the allowance of said deductible
expenses.
The Supreme Court ruled: in L-26911, that the stockholder's relation
service fee was in effect spent as a capital expenditure and should be
disallowed and in L-26924, that: (a) the Commissioner of Internal
Revenue cannot raise for the first time on appeal the fact of payment of
expense deducted; (b) the listing fee which was paid annually is
deductible as an ordinary and necessary business expense; (c) the
findings of the Court of Tax Appeal on the "provision for contingencies"
are factual in nature and in the absence of grave abuse of discretion
should not be disturbed on appeal; and (d) litigation expenses in
defense of title of property are capital in nature and not deductible.
Judgments modified as to taxable amount.
SYLLABUS
1.ADMINISTRATIVE LAW; NATIONAL INTERNAL REVENUE CODE;
INCOME TAX; ALLOWABLE DEDUCTIONS FROM GROSS INCOME. The
law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30(a) (1) of the National Internal Revenue
Code which allows a deduction of "all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any
trade or business."
2.ID.; ID.; ID.; ID.; STATUTORY TEST OF DEDUCTIBILITY. The statutory
test of deductibility imposes three conditions namely: (1) the expense
must be ordinary and necessary; (2) it must be paid or incurred within
the taxable year; and (3) it must be paid or incurred in carrying on a
trade or business.
3.ID.; ID.; ID.; ID.; ORDINARY AND NECESSARY EXPENSES GUIDING
PRINCIPLES FOR CONSIDERATION. This Court has never attempted
to define with precision the terms "ordinary and necessary." There are
however, certain guiding principles worthy of serious consideration in
the proper adjudication of conflicting claims. Ordinarily, an expense will
be considered "necessary" where the expenditure is appropriate and
helpful in the development of the taxpayers business. (Martens, Law of
Federal, Income Taxation, Volume IV, p. 315) It is "ordinary" when it
connotes a payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. (p. 316, Ibid) The term
"ordinary" does not require that the payments be habitual or normal in
the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer
affected. (Ibid.)
4.ID.; ID.; ID.; ID.; NOT HARD AND FAST RULE IN THE DETERMINATION
OF. There is no hard and fast rule on the right to a deduction which
depends in each case on the particular facts and the relation of the
payment to the type of business in which the taxpayer is engaged. The
intention of the tax-payer often may be the controlling fact in making
the determination. (Eaton vs. Comm., 81 F. (2d) 332 [CCA 9th, 1936])
Assuming that the expenditure is ordinary and necessary in the
operation of the taxpayer's business, the answer to the question as to
whether the expenditure is an allowable deduction as a business
expense must be determined from the nature of the expenditure itself,
which in turn depends on the extent and permanency of the work
accomplished by the expenditure. (Duesenberg, Inc. of Del., 31 BTA 922,
aff'd 84 F. (2d) 921 [CCA 7th, 1936] cited in Mertens, Law of Federal
Income Taxation, Vol. IV, p. 339; Illinois Central Railroad Co. vs.
Interstate Commerce Commission, 206 S. Court, 700 [1907], cited in
Simons & Hammond, 1 BTA 803. Accordingly, as found by the Court of
Tax Appeals, the stockholders relation service fee, which was in effect
spent for the acquisition of additional capital, ergo, a capital
expenditure, is not deductible from Atlas gross income in 1958 because
expenses relating to recapitalization and reorganization of the
corporation (Missouri Kansas Pipe Line v. Commissioner of Internal
Revenue, 122, F. [2d] 268, Cert. denied 314 U.S. 6961), the cost of
obtaining stock subscription (Simons Co., 8 BTA 631, promotions
expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. [2d] 74), and
commission of fees paid for the sale of stock reorganization (Protective
Finance Corp., 23 BTA 308) are capital expenditures.
5.ID.; ID.; ID.; ID.; EXPENSE INCURRED TO CREATE FAVORABLE PUBLIC
IMAGE; NOT DEDUCTIBLE AS BUSINESS EXPENSE. An expense
incurred to create a favorable image of the corporation in order to gain
or maintain the public's and its stockholder's patronage, does not make
it deductible as business expense. As held in the case of Welch
vs. Helvering, (290 U.S. 111, 78 L Ed. 212, 54S Ct. 8 [1993]) efforts to
establish reputation are a kin to acquisition of capital assets and,
therefore, expenses related thereto are not business expense but capital
expenditures.
6.ID.; ID.; ID.; ID.; STOCK LISTING FEE; WHEN DEDUCTIBLE. A listing
fee is an ordinary and necessary business expense for the privilege of
having its stock listed. In Dome Mines, Ltd. vs. Commissioner of Internal
Revenue (20 BTA 377) the stock listing fee was disallowed as a
deduction not only because the same was paid only once, and the
benefit acquired thereby continued indefinitely, whereas, in the case of
Chesapeake Corporation of Virginia vs. Commissioner of Internal
Revenue (17 T.C. 68), fee paid to the stock exchange was annual and
recurring.
7.ID.; ID, ID.; ID.; LITIGATION EXPENSES IN DEFENSE OF TITLE, NOT
DEDUCTIBLE; CASE AT BAR. In line with the decision of the U.S. Tax
Court in the case of Safety Tube Corporation vs. Commissioner of
Internal Revenue (8 T.C. 762-763, April 2, 1947 [citing Bowers vs.
Lumpkin, 104 Fed. (2d) 927; Certiorari denied, 322 U.S. 88; Jones estate
vs. Commissioner, 127 Fed. (2d) 231; Brauner vs. Burnet, 63 Fed. (2d)
129; Murphy Oil Co. vs. Burnet, 55 Fed. (2d) 17, affirmed in another
point, 287 U.S. 299], it is well settled that litigation expenses incurred in
defense or protection of title are capital in nature and not deductible,
likewise, it was ruled by the U.S. Tax Court that expenditures in defense
of title property constitute a part of the cost of the property, are not
deductible as expense. (Coughlin vs. Commissioner of Internal Revenue,
2 T.C. 422) Hence, there is no question that, as held by the Court of Tax
Appeals, the litigation expenses under consideration were incurred in
defense of Atlas title to its mining properties.
8.REMEDIAL LAW; APPEAL; COURT OF TAX APPEALS; FACT OF
PAYMENT OF DEDUCTIBLE EXPENSES CANNOT BE RAISED FOR THE
FIRST TIME ON APPEAL; CASE AT BAR. The Commissioner of Internal
Revenue on appeal cannot be allowed to adopt a theory distinct and
different from that he has previously pursued, as shown by the BIR
records and the answer to the amended petition for review. (Agoncillo
vs. Javier, 38 Phil. 424; American Express vs. Natividad, 46 Phil. 207;
Balceta, et al. vs. Espe, et al., Ca-G.R. No. 16115-R, April 5, 1957;
Commissioner of Customs vs. Valencia, 100 Phil. 172-173, October 31,
1956) As this Court said in the case of Commissioner of Customs vs.
Valencia (100 Phil. 172), such change in nature of the case may not be
made on appeal, especially when the purpose of the later is to seek a
review of the action taken by an administrative body, forming part of a
coordinate branch of all Government, such as the Executive Department.
Under all the attendant circumstances in the case at bar, substantial
justice would be served if the Commissioner be held precluded from
now attempting to raise an issue to disallow deduction of the item in
question at this stage. Failure to assert a question within a reasonable
time warrants a presumption that the party entitled to assert it either
has abandoned or declines to assert it.
9.ID.; ID.; ID.; FINDINGS OF FACT, NOT SUBJECT TO REVIEW IN THE
ABSENCE OF GROSS ERROR OR ABUSE; CASE AT BAR. The findings
of facts by the Court of Tax Appeals will not be reviewed by the
Supreme Court in the absence of showing of gross error or abuse on
the part of the Tax Court. (Coca-Cola Export vs. Commissioner of
Internal Revenue, 55 SCRA 5; Nasiad vs. Court of Tax Appeals, 61 SCRA
238) It is not within the province of this Court to resolve whether or not
the P60,000.00 representing "provision for contingencies" was in fact
added to or deducted from the taxable income. As ruled by the Court
of Tax Appeals, the said amount was in effect added to Atlas' taxable
income. The same being factual in nature and supported by substantial
evidence, such findings should not be disturbed in this appeal.
10.ID.; EVIDENCE; DISPUTABLE PRESUMPTION; ORDINARY CARE OF
PERSON OF HIS CONCERN; NOT APPLICABLE TO GOVERNMENT
OFFICIALS' NEGLECT OR OMISSION IN THE COLLECTION OF TAXES.
Taxes are the lifeblood of the Government and their prompt and certain
availability are imperious need. Upon taxation depends the
Government's ability to serve the people for whose benefit taxes are
collected. To safeguard such interest, neglect omission of government
officials entrusted with the collection of taxes should not be allowed to
bring harm or detriment to the people, in the 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 affair. 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. (G.R. No. L-31364, Vera vs.
Fernandez, March 20, 1979, 89 SCRA 199)

D E C I S I O N
DE CASTRO, * J p:
These are two (2) petitions for review from the decision of the Court of
Tax Appeals of October 25, 1966 in CTA Case No. 1312 entitled "Atlas
Consolidated Mining and Development Corporation vs. Commissioner of
Internal Revenue." One (L-26911) was filed by the Atlas Consolidated
Mining & Development Corporation, and in the other (L-26924), the
Commissioner of Internal Revenue is the petitioner. cdasia
This tax case (CTA No. 1312) arose from the 1957 and 1958 deficiency
income tax assessments made by the Commissioner of Internal
Revenue, hereinafter referred to as Commissioner, where the Atlas
Consolidated Mining and Development Corporation, hereinafter referred
to as Atlas, was assessed P546,295.16 for 1957 and P215,493.96 for
1958 deficiency income taxes.
Atlas is a corporation engaged in the mining industry registered under
the laws of the Philippines. On August 20, 1962, the Commissioner
assessed against Atlas the sum of P546,295.16 and P215,493.96 or a
total of P761,789.12 as deficiency income taxes for the years 1957 and
1958. For the year 1957, it was the opinion of the Commissioner that
Atlas is not entitled to exemption from the income tax under Section 4
of Republic Act 909 1 because same covers only gold mines, the
provision of which reads:
"New mines, and old mines which resume operation, when
certified to as such by the Secretary of Agriculture and Natural
Resources upon the recommendation of the Director of Mines,
shall be exempt from the payment of income tax during the
first three (3) years of actual commercial production. Provided
that, any such mine and/or mines making a complete return of
its capital investment at any time within the said period, shall
pay income tax from that year."
For the year 1958, the assessment of deficiency income tax of
P761,789.12 covers the disallowance of items claimed by Atlas as
deductible from gross income. llcd
On October 9, 1962, Atlas protested the assessment asking for its
reconsideration and cancellation. 2 Acting on the protest, the
Commissioner conducted a reinvestigation of the case.
On October 25, 1962, the Secretary of Finance ruled that the exemption
provided in Republic Act 909 embraces all new mines and old mines
whether gold or other minerals. 3 Accordingly, the Commissioner
recomputed Atlas deficiency income tax liabilities' in the light of the
ruling of the Secretary of Finance. On June 9, 1964, the Commissioner
issued a revised assessment entirely eliminating the assessment of
P546,295.16 for the year 1957. The assessment for 1958 was reduced
from P215,493.96 to P39,646.82 from which Atlas appealed to the Court
of Tax Appeals, assailing the disallowance of the following items
claimed as deductible from its gross income for 1958:
Transfer agent's feeP59,477.42
Stockholders relation service fee25,523.14
U.S. stock listing expenses8,326.70
Suit expenses6,666.65
Provision for contingencies60,000.00

TotalP159,993.91
After hearing, the Court of Tax Appeals rendered a decision on October
25, 1966 allowing the abovementioned disallowed items, except the
items denominated by Atlas as stockholders relation service fee and suit
expenses. 4 Pertinent portions of the decision of the Court of Tax
Appeals read as follows:
"Under the facts, circumstances and applicable law in this case,
the unallowable deduction from petitioner's gross income in
1958 amounted to P32,189.79.
Stockholders relation
service feeP25,523.14
Suit and litigation
expenses6,666.65

TotalP32,189.79
"As the exemption of petitioner from the payment of corporate
income tax under Section 4, Republic Act 909, was good only
up to the 1st quarter of 1958 ending on March 31 of the same
year, only three-fourth (3/4) of the net taxable income of
petitioner is subject to income tax, computed as follows:
1958
Total net income for 1958P1,968.898.27
Net income corresponding to
taxable period April 1 to
Dec. 31, 1958, 3/4 of P1,968.898.27P1,476.673.70
Add: 3/4 of promotion fees
of P25,523.14P 19,142.35
Litigation expenses:6,666.65

Net income per decisionP1,502.482.70
Tax due thereon412,695.00
Less: Amount already assessed405,468.00

DEFICIENCY INCOME TAX DUEP 7,227.00
Add: % monthly interest
from 6-20-59 to 6-20-62 (18%)P 1,300.89

TOTAL AMOUNT DUE & COLLECTIBLEP 8,526.22"
From the Court of Tax Appeals' decision of October 25, 1966, both
parties appealed to this Court by way of two (2) separate petitions for
review docketed as G.R. No. L-26911 (Atlas, petitioner) and G.R. No. L-
29924 (Commissioner, petitioner).
G.R. No. L-26911 Atlas appealed only that portion of the Court of
Tax Appeals' decision disallowing the deduction from gross income of
the so-called stockholders relation service fee amounting to P25,523.14,
making a lone assignment of error that
"THE COURT OF TAX APPEALS ERRED IN ITS CONCLUSION
THAT THE EXPENSE IN THE AMOUNT OF P25,523.14 PAID BY
PETITIONER IN 1958 AS ANNUAL PUBLIC RELATIONS
EXPENSES WAS INCURRED FOR ACQUISITION OF ADDITIONAL
CAPITAL, THE SAME NOT BEING SUPPORTED BY THE
EVIDENCE."
It is the contention of Atlas that the amount of P25,523.14 paid in 1958
as annual public relations expenses is a deductible expense from gross
income under Section 30(a) (1) of the National Internal Revenue Code.
Atlas claimed that it was paid for services of a public relations firm, P.K.
Macker & Co., a reputable public relations consultant in New York City,
U.S.A., hence, an ordinary and necessary business expense in order "to
compete with other corporations also interested in the investment
market in the United States." 5 It is the stand of Atlas that information
given out to the public in general and to the stockholder in particular
by the P.K. Macker & Co., concerning the operation of the Atlas was
aimed at creating a favorable image and goodwill to gain or maintain
their patronage. cdphil
The decisive question, therefore, in this particular appeal taken by Atlas
to this Court is whether or not the expenses paid for the services
rendered by a public relations firm P.K. Macker & Co. labelled as
stockholders relation service fee is an allowable deduction as business
expense under Section 30(a) (1) of the National Internal Revenue Code.
The principle is recognized that when a taxpayer claims a deduction, he
must point to some specific provision of the statute in which that
deduction is authorized and must be able to prove that he is entitled to
the deduction which the law allows. As previously adverted to, the law
allowing expenses as deduction from gross income for purposes of the
income tax is Section 30 (a) (1) of the National Internal Revenue which
allows a deduction of "all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business."
An item of expenditure, in order to be deductible under this section of
the statute must fall squarely within its language.
We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three conditions
are imposed, namely: (1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and (3) it must
be paid or incurred in carrying in a trade or business. 6 In addition, not
only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law,
otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not
justify its deduction. 7
While it is true that there is a number of decisions in the United States
delving on the interpretation of the terms "ordinary and necessary" as
used in the federal tax laws, no adequate or satisfactory definition of
those terms is possible. Similarly, this Court has never attempted to
define with precision the terms "ordinary and necessary." There are
however, certain guiding principles worthy of serious consideration in
the proper adjudication of conflicting claims. Ordinarily, an expense will
be considered "necessary" where the expenditure is appropriate and
helpful in the development of the taxpayer's business. 8 It is "ordinary"
when it connotes a payment which is normal in relation to the business
of the taxpayer and the surrounding circumstances. 9 The term
"ordinary" does not require that the payments be habitual or normal in
the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer
affected. 10
There is thus no hard and fast rule on the matter. The right to a
deduction depends in each case on the particular facts and the relation
of the payment to the type of business in which the taxpayer is
engaged. The intention of the taxpayer often may be the controlling
fact in making the determination. 11 Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's business, the
answer to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the nature
of the expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure. 12
It appears that on December 27, 1957, Atlas increased its capital stock
from P15,000,000 to P18,325,000. 13 It was claimed by Atlas that its
shares of stock worth P3,325,000 were sold in the United States because
of the services rendered by the public relations firm, P.K. Macker &
Company. The Court of Tax Appeals ruled that the information about
Atlas given out and played up in the mass communication media
resulted in full subscription of the additional shares issued by Atlas;
consequently, the questioned item, stockholders relation service fee,
was in effect spent for the acquisition of additional capital, ergo, a
capital expenditure.

We sustain the ruling of the tax court that the expenditure of
P25,523.14 paid to P. K. Macker & Co. as compensation for services
carrying on the selling campaign in an effort to sell Atlas' additional
capital stock of P3,325,000 is not an ordinary expense in line with the
decision of U.S. Board of Tax Appeals in the case of Harrisburg
Hospital, Inc. vs. Commissioner of Internal Revenue. 14 Accordingly, as
found by the Court of Tax Appeals, the said expense is not deductible
from Atlas' gross income in 1958 because expenses relating to
recapitalization and reorganization of the corporation (Missouri Kansas
Pipe Line vs. Commissioner of Internal Revenue, 148 F. (2d),
460; Skenandos Rayon Corp. vs. Commissioner of Internal Revenue, 122
F. (2d) 268, Cert. denied 314 U. S. 6961), the cost of obtaining stock
subscription (Simons Co., 8 BTA 631), promotion expenses (Beneficial
Industrial Loan Corp. vs. Handy, 92 F. (2d) 74) and commission or fees
paid for the sale of stock organization (Protective Finance Corp., 23 BTA
308) are capital expenditures. cdll
That the expense in question was incurred to create a favorable image
of the corporation in order to gain or maintain the public's and its
stockholders' patronage, does not make it deductible as business
expense. As held in the case of Welch vs. Helvering, 15 efforts to
establish reputation are akin to acquisition of capital assets and,
therefore, expenses related thereto are not business expense but capital
expenditures.
We do not agree with the contention of Atlas that the conclusion of the
Court of Tax Appeals in holding that the expense of P25,523.14 was
incurred for acquisition of additional capital is not supported by the
evidence. The burden of proof that the expenses incurred are ordinary
and necessary is on the taxpayer 16 and does not rest upon the
Government. To avail of the claimed deduction under Section 30(a)(1) of
the National Internal Revenue Code, it is incumbent upon the taxpayer
to adduce substantial evidence to establish a reasonably proximate
relation between the expenses to the ordinary conduct of the business
of the taxpayer. A logical link or nexus between the expense and the
taxpayer's business must be established by the taxpayer.
G.R. No. L-26924 In his petition for review, the Commissioner of
Internal Revenue assigned as errors the following:
I
"THE COURT OF TAX APPEALS ERRED IN ALLOWING THE
DEDUCTION FROM GROSS INCOME OF THE SO-CALLED
TRANSFER AGENT'S FEES ALLEGEDLY PAID BY RESPONDENT;
II
"THE COURT OF TAX APPEALS ERRED IN ALLOWING THE
DEDUCTION FROM GROSS INCOME OF LISTING EXPENSES
ALLEGEDLY INCURRED BY RESPONDENT;
III
"THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
AMOUNT OF P60,000 REPRESENTED BY RESPONDENT AS
"PROVISION FOR CONTINGENCIES" WAS ADDED BACK BY
RESPONDENT TO ITS GROSS INCOME IN COMPUTING THE
INCOME TAX DUE FROM IT FOR 1958;
IV
"THE COURT OF TAX APPEALS ERRED IN DISALLOWING ONLY
THE AMOUNT OF P6,666.65 AS SUIT EXPENSES, THE CORRECT
AMOUNT THAT SHOULD HAVE BEEN DISALLOWED BEING
P17.499.98.
It is well to note that only in the Court of Tax Appeals did the
Commissioner raise for the first time (in his memorandum) the question
of whether or not the business expenses deducted from Atlas' gross
income in 1958 may be allowed in the absence of proof of
payments. 17 Before this Court, the Commissioner reiterated the same as
ground against deductibility when he claimed that the Court of Tax
Appeals erred in allowing the deduction of transfer agent's fee and
stock listing fee from gross income in the absence of proof of payment
thereof. LLphil
The Commissioner contended that under Section 30(a) (1) of the
National Internal Revenue Code, it is a requirement for an expense to
be deductible from gross income that it must have been "paid or
incurred during the year" for which it is claimed; that in the absence of
convincing and satisfactory evidence of payment, the deduction from
gross income for the year 1958 income tax return cannot be sustained;
and that the best evidence to prove payment, if at all any has been
made, would be the vouchers or receipts issued therefor which ATLAS
failed to present.
Atlas admitted that it failed to adduce evidence of payment of the
deduction claimed in its 1958 income tax return, but explains the failure
with the allegation that the Commissioner did not raise that question of
fact in his pleadings, or even in the report of the investigating examiner
and/or letters of demand and assessment notices of ATLAS which gave
rise to its appeal to the Court of Tax Appeal. 18 It was emphasized by
Atlas that it went to trial and finally submitted this case for decision on
the assumption that inasmuch as the fact of payment was never raised
as a vital issue by the Commissioner in his answer to the petition for
review in the Court of Tax Appeals, the issue is limited only to pure
question of law whether or not the expenses deducted by petitioner
from its gross income for 1958 are sanctioned by Section 30(a) (1) of
the National Internal Revenue Code.
On this issue of whether or not the Commissioner can raise the fact of
payment for the first time on appeal in its memorandum in the Court of
Tax Appeals, We fully agree with the ruling of the tax court that the
Commissioner on appeal cannot be allowed to adopt a theory distinct
and different from that he has previously pursued, as shown by the BIR
records and the answer to the amended petition for review. 19 As this
Court said in the case of Commissioner of Customs vs. Valencia 20 such
change in the nature of the case may not be made on appeal, specially
when the purpose of the latter is to seek a review of the action taken
by an administrative body, forming part of a coordinate branch of the
Government, such as the Executive department. In the case at bar, the
Court of Tax Appeals found that the fact of payment of the claimed
deduction from gross income was never controverted by the
Commissioner even during the initial stages of routinary administrative
scrutiny conducted by BIR examiners. 21 Specifically, in his answer to the
amended petition for review in the Court of Tax Appeals, the
Commissioner did not deny the fact of payment, merely contesting the
legitimacy of the deduction on the ground that same was not ordinary
and necessary business expenses. 22
As consistently ruled by this Court, the findings of facts by the Court of
Tax Appeals will not be reviewed in the absence of showing of gross
error or abuse. 23 We, therefore, hold that it was too late for the
Commissioner to raise the issue of fact of payment for the first time in
his memorandum in the Court of Tax Appeals and in this instant appeal
to the Supreme Court. If raised earlier, the matter ought to have been
seriously delved into by the Court of Tax Appeals. On this ground, We
are of the opinion that under all the attendant circumstances of the
case, substantial justice would be served if the Commissioner be held as
precluded from now attempting to raise an issue to disallow deduction
of the item in question at this stage. Failure to assert a question within
a reasonable time warrants a presumption that the party entitled to
assert it either has abandoned or declined to assert it. LLpr
On the second assignment of error, aside from alleging lack of proof of
payment of the expense deducted, the Commissioner contended that
such expense should be disallowed for not being ordinary and
necessary and not incurred in trade or business, as required under
Section 30, (a) (1) of the National Internal Revenue Code. He asserted
that said fees were therefore incurred not for the production of income
but for the acquisition of capital in view of the definition that an
expense is deemed to be incurred in trade or business if it was incurred
for the production of income, or in the expectation of producing
income for the business. In support of his contention, the Commissioner
cited the ruling in Dome Mines, Ltd. vs. Commissioner of Internal
Revenue 24 involving the same issue as in the case at bar where the U.S.
Board of Tax Appeal ruled that expenses for listing capital stock in the
stock exchange are not ordinary and necessary expenses incurred in
carrying on the taxpayer's business which was gold mining and selling,
which business is strikingly similar to Atlas.
On the other hand, the Court of Tax Appeals relied on the ruling in the
case of Chesapeake Corporation of Virginia vs. Commissioner of Internal
Revenue 25 where the Tax Court allowed the deduction of stock
exchange fee in dispute, which is an annually recurring cost for the
annual maintenance of the listing.
We find the Chesapeake decision controlling with the facts and
circumstances of the instant case. In Dome Mines, Ltd. case, the stock
listing fee was disallowed as a deduction not only because the
expenditure did not meet the statutory test but also because the same
was paid only once, and the benefit acquired thereby continued
indefinitely, whereas, in the Chesapeake Corporation case, fee paid to
the stock exchange was annual and recurring. In the instant case, We
deal with the stock listing fee paid annually to a stock exchange for the
privilege of having its stock listed. It must be noted that the Court of
Tax Appeals rejected the Dome Mines case, because it involves a
payment made only once, hence, it was held therein that the single
payment made to the stock exchange was a capital expenditure, as
distinguished from the instant case, where payments were made
annually. For this reason, We hold that said listing fee is an ordinary
and necessary business expense.
On the third assignment of error, the Commissioner contended that the
Court of Tax Appeals erred when it held that the amount of P60,000 as
"provisions for contingencies" was in effect added back to Atlas'
income.
On this issue, this Court has consistently ruled in several cases adverted
to earlier, that in the absence of grave abuse of discretion or error on
the part of the tax court its findings of facts may not be disturbed by
the Supreme Court. 26 It is not within the province of this Court to
resolve whether or not the P60,000 representing "provision for
contingencies" was in fact added to or deducted from the taxable
income. As ruled by the Court of Tax Appeals, the said amount was in
effect added to Atlas' taxable income. 27 The same factual in nature and
supported by substantial evidence, such findings should not be
disturbed in this appeal.

Finally, in its fourth assignment of error, the Commissioner contended
that the CTA erred in disallowing only the amount of P6,666.65 as suit
expenses instead of P17,499.98. cdphil
It appears that petitioner deducted from its 1958 gross income the
amount of P23,333.30 as attorney's fees and litigation expenses in the
defense of title to the Toledo Mining properties purchased by Atlas
from Mindanao Lode Mines Inc. in Civil Case No. 30566 of the Court of
First Instance of Manila for annulment of the sale of said mining
properties. On the ground that the litigation expense was a capital
expenditure under Section 121 of the Revenue Regulation No. 2, the
investigating revenue examiner recommended the disallowance of
P13,333.30. The Commissioner, however, reduced this amount of
P6,666.65 which later amount was affirmed by the respondent Court of
Tax Appeals on appeal.
There is no question that, as held by the Court of Tax Appeals, the
litigation expenses under consideration were incurred in defense of
Atlas' title to its mining properties. In line with the decision of the U.S.
Tax Court in the case of Safety Tube Corp. vs. Commissioner of Internal
Revenue, 28 it is well settled that litigation expenses incurred in defense
or protection of title are capital in nature and not deductible. Likewise,
it was ruled by the U.S. Tax Court that expenditures in defense of title
of property constitute a part of the cost of the property and are not
deductible as expense. 29
Surprisingly, however, the investigating revenue examiner recommended
a partial disallowance of P13,333.30 instead of the entire amount of
P23,333.30, which, upon review, was further reduced by the
Commissioner of Internal Revenue. Whether it was due to mistake,
negligence or omission of the officials concerned, the arithmetical error
committed herein should not prejudice the Government. This Court will
pass upon this particular question since there is a clear error committed
by officials concerned in the computation of the deductible amount. As
held in the case of Vera vs. Fernandez, 30 this Court emphatically said
that taxes are the lifeblood of the Government and their prompt and
certain availability are imperious need. Upon taxation depends the
Government's 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 affair. 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. 31
WHEREFORE, judgment appealed from is hereby affirmed with
modification that the amount of P17,499.98 (3/4 of P23,333.30)
representing suit expenses be disallowed as deduction instead of
P6,666.65 only. With this amount as part of the net income, the
corresponding income tax shall be paid thereon, with interest of 6% per
annum from June 20, 1959 to June 20, 1962.
SO ORDERED.
Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ ., concur.
Teehankee, J ., took no part.
Footnotes
*Mr. Justice de Castro was designated to sit with the First Division under
Special Order No. 225.
1.R.A. 909, An act to amend Sections 242, 243 and to repeal Section 244 of
Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code(Approved June 20, 1953).
2.pp. 280-307, Folder III, BIR Records.
3.p. 385, Ibid.
4.p. 33, Rollo, G. R. No. L-26911.
5.p. 11, Atlas Memorandum in the Court of Tax Appeals.
6.Collector of Internal Revenue vs. Philippine Education Co., 99 Phil. 319,
(May 30, 1956).
7.De Vera vs. Collector, CTA case No. 164, March 23, 1959; Basilan Estates,
Inc. vs. Commissioner, September 5, 1967, 21 SCRA 17.
8.Mertens, Law of Federal Income Taxation, Volume IV, p. 315.
9.p. 316, Ibid.
10.Ibid.
11.Eaton vs. Comm., 81 F. (2d) 332 (CCA 9th, 1936) cited in Mertens, supra.
12.Duesenberg, Inc. of Del. 31 BTA 922, aff'd 84 F. (2d) 921 (CCA 7th, 1936)
cited in Mertens, Law of Federal Income Taxation Vol. IV, p. 339
Illinois Central Railroad Co. vs.Interstate Commerce Commission, 206
S. Court. 700 (1907), cited in Simons & Hammond, 1 BTA 803.
13.p. 24, Rollo. G. R. No. L-26911.
14.15 BTA 1016-1017.
15.290 U.S. 111, 78 L Ed. 212, 54S Ct. 8 (1933).
16.Alhambra Cigar & Cigarette Manufacturing Co. vs. Collector of Internal
Revenue, CTA Case No. 143, July 31, 1956; De Vera vs. Collector, CTA
Case No. 164, March 23, 1959.
17.p. 158, Memorandum for Respondent (Commissioner of Internal
Revenue), CTA Records.
18.p. 18, Rollo, G. R. No. L-26911.
19.Agoncillo vs. Javier, 38 Phil. 424; American Express vs. Natividad, 46 Phil.
207; Balceta, et al. vs. Espe. et al. CA-G.R. No. 16115-R, April 5, 1957;
Commissioner of Custom vs. Valencia, 100 Phil. 172-173, October 31,
1956.
20.100 Phil. 172.
21.pp. 150-153, Folder I pp. 421, 422, Folder III, BIR Records.
22.Par. 6(b) Commissioner of Internal Revenue's Answer to the Amended
Petition for Review in CTA Case 1312, p. 57, CTA Records.
23.Coca-Cola Export Corp. vs. Commissioner of Internal Revenue, 55 SCRA 5;
Nasiad vs. Court of Tax Appeal, 61 SCRA 238.
24.20 BTA 377.
25.17 T. C. 668.
26.See Coca-Cola Export Corp. vs. Commissioner of Internal Revenue, supra.
27.See Court of Tax Appeals Decision, p. 30, Rollo, G, R. No. L-26911.
28.8 T.C. 762-763, April 2, 1947 (citing Bowers vs. Lumpkin, 140 Fed. (2d)
297; Certiorari denied, 322 U.S. 88; Jones Estate vs. Commissioner, 127
Fed. (2d) 231; Brauner vs. Burnet, 63 Fed. (2d) 129; Murphy Oil Co. vs.
Burnet, 55 Fed. (2d) 17 affirmed in another point, 287 U.S. 299.
29.Coughlin vs. Commissioner of Internal Revenue, 2 T.C. 422.
30.G.R. No. L-31364, March 20, 1979, 89 SCRA 199.
31.Ibid.

||| (Atlas Consolidated Mining & Development Corp. v. Commr., G.R. No.
L-26911, L-26924, January 27, 1981)
FIRST DIVISION
[G.R. Nos. L-28508-9. July 7, 1989.]
ESSO STANDARD EASTERN, INC., (formerly, Standard-
Vacuum Oil Company), petitioner, vs. THE
COMMISSIONER OF INTERNAL REVENUE,respondent.
Padilla Law Office for petitioner.
SYLLABUS
1.STATUTORY CONSTRUCTION; LEGISLATIVE HISTORY OF AN ACT
RESORTED TO ONLY WHERE THE LANGUAGE OF THE STATUTE IS
AMBIGUOUS. Only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become important. As
a matter of fact, there may be no resort to the legislative history of the
enactment of a statute, the language of which is plain and
unambiguous, since such legislative history may only be resorted to for
the purpose of solving doubt, not for the purpose of creating it. [50
Am. Jur. 328.]
2.TAXATION; REPUBLIC ACT NO. 2009, MARGIN FEE; NOT A TAX BUT
AN EXACTION. A margin fee is not a tax but an exaction designed to
curb the excessive demands upon our international reserve. (Caltex
[Phil.] Inc. v. Acting Commissioner of Customs, 22 SCRA 779; Chamber
of Agriculture and Natural Resources of the Philippines v. Central Bank,
14 SCRA 630).
3.ID.; ID.; AN EXERCISE OF POLICE POWER. The margin fee under
Republic Act No. 2009 was imposed by the State in the exercise of its
police power and not the power of taxation.
4.ID.; ID.; NOT A DEDUCTIBLE EXPENSE; REASON. The fees were paid
for the remittance by ESSO as part of the profits to the head office in
the United States. Such remittance was an expenditure necessary and
proper for the conduct of its corporate affairs. As stated in the Lopez
case, the margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the Philippines. They
were expenses incurred in the disposition of said incomes; expenses for
the remittance of funds after they have already been earned by
petitioner's branch in the Philippines for the disposal of its Head Office
in New York which is already another distinct and separate income
taxpayer.
5.ID.; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON
BUSINESS; CONDITIONS FOR DEDUCTIBILITY OF EXPENSE. We come,
then, to the statutory test of deductibility where it is axiomatic that to
be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be
paid or incurred within the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In addition, not only must
the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law, otherwise,
the same will be disallowed. The mere allegation of the taxpayer that an
item of expense is ordinary and necessary does not justify its deduction.
(Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 102 SCRA 246)
6.ID.; ID.; CLAIMS FOR DEDUCTIONS, A MATTER OF LEGISLATIVE GRACE
AND CONSTRUED STRICTLY AGAINST THE TAXPAYER. The paramount
rule is that claims for deductions are a matter of legislative grace and
do not turn on mere equitable considerations. . . . The taxpayer in every
instance has the burden of justifying the allowance of any deduction
claimed.
D E C I S I O N
CRUZ, J p:
On appeal before us is the decision of the Court of Tax Appeals 1
denying petitioner's claims for refund of overpaid income taxes of
P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251
and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income
for 1959, as part of its ordinary and necessary business expenses, the
amount it had spent for drilling and exploration of its petroleum
concessions. This claim was disallowed by the respondent Commissioner
of Internal Revenue on the ground that the expenses should be
capitalized and might be written off as a loss only when a "dry hole"
should result. ESSO then filed an amended return where it asked for the
refund of P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and necessary expenses
in the same return was the amount of P340,822.04, representing margin
fees it had paid to the Central Bank on its profit remittances to its New
York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax
for the year 1960, in the amount of P367,994.00, plus 18% interest
thereon of P66,238.92 for the period from April 18, 1961 to April 18,
1964, for a total of P434,232.92. The deficiency arose from the
disallowance of the margin fees of P1,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office. LibLex
ESSO settled this deficiency assessment on August 10, 1964, by
applying the tax credit of P221,033.00 representing its overpayment on
its income tax for 1959 and paying under protest the additional amount
of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94
as overpayment on the interest on its deficiency income tax. It argued
that the 18% interest should have been imposed not on the total
deficiency of P367,944.00 but only on the amount of P146,961.00, the
difference between the total deficiency and its tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18%
interest on the entire amount of the deficiency tax. On May 4, 1965, the
CIR also denied the claims of ESSO for refund of the overpayment of its
1959 and 1960 income taxes, holding that the margin fees paid to the
Central Bank could not be considered taxes or allowed as deductible
business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for
1959, contending that the margin fees were deductible from gross
income either as a tax or as an ordinary and necessary business
expense. It also claimed an overpayment of its tax by P434,232.92 in
1960, for the same reason. Additionally, ESSO argued that even if the
amount paid as margin fees were not legally deductible, there was still
an overpayment by P39,787.94 for 1960, representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00
for 1959 and P434,234.92 for 1960 but sustained its claim for
P39,787.94 as excess interest. This portion of the decision was appealed
by the CIR but was affirmed by this Court in Commissioner of Internal
Revenue v. ESSO, G.R. No. L-28502-03, promulgated on April 18, 1989.
ESSO for its part appealed the CTA decision denying its claims for the
refund of the margin fees P102,246.00 for 1959 and P434,234.92 for
1960. That is the issue now before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act
to Authorize the Central Bank of the Philippines to Establish a Margin
Over Banks' Selling Rates of Foreign Exchange, is a police measure or a
revenue measure. If it is a revenue measure, the margin fees paid by
the petitioner to the Central Bank on its profit remittances to its New
York head office should be deductible from ESSO's gross income under
Sec. 30(c) of the National Internal Revenue Code. This provides that all
taxes paid or accrued during or within the taxable year and which are
related to the taxpayer's trade, business or profession are deductible
from gross income.
The petitioner maintains that margin fees are taxes and cites the
background and legislative history of the Margin Fee Law showing
that R.A. 2609 was nothing less than a revival of the 17% excise tax on
foreign exchange imposed by R.A. 601. This was a revenue measure
formally proposed by President Carlos P. Garcia to Congress as part of,
and in order to balance, the budget for 1959-1960. It was enacted by
Congress as such and, significantly, properly originated in the House of
Representatives. During its two and a half years of existence, the
measure was one of the major sources of revenue used to finance the
ordinary operating expenditures of the government. It was, moreover,
payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting
established principles, pointed out that
We are not unmindful of the rule that opinions expressed in
debates, actual proceedings of the legislature, steps taken in
the enactment of a law, or the history of the passage of the
law through the legislature, may be resorted to as an aid in the
interpretation of a statute which is ambiguous or of doubtful
meaning. The courts may take into consideration the facts
leading up to, confident with, and in any way connected with,
the passage of the act, in order that they may properly
interpret the legislative intent. But it is also well-settled
jurisprudence that only in extremely doubtful matters of
interpretation does the legislative history of an act of Congress
become important. As a matter of fact, there may be no resort
to the legislative history of the enactment of a statute, the
language of which is plain and unambiguous, since such
legislative history may only be resorted to for the purpose of
solving doubt, not for the purpose of creating it. [50 Am. Jur.
328.]
Apart from the above consideration, there are at least two cases where
we have held that a margin fee is not a tax but an exaction designed to
curb the excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court
stated through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange
control or restriction designed to discourage imports and
encourage exports, and ultimately, `curtail any excessive
demand upon the international reserve' in order to stabilize the
currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various
purposes, such as limiting non-essential imports, protecting
domestic industry and when combined with the use of
multiple currency rates providing a source of revenue to the
government, and are in many developing countries regarded as
a more or less inevitable concomitant of their economic
development programs. The different measures of exchange
control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the
control is on the amount of foreign exchange allowable. In the
case of the margin levy, the immediate impact is on the rate of
foreign exchange; in fact, its main function is to control the
exchange rate without changing the par value of the peso as
fixed in the Bretton Woods Agreement Act. For a member
nation is not supposed to alter its exchange rate (at par value)
to correct a merely temporary disequilibrium in its balance of
payments. By its nature, the margin levy is part of the rate of
exchange as fixed by the government.

As to the contention that the margin levy is a tax on the
purchase of foreign exchange and hence should not form part
of the exchange rate, suffice it to state that We have already
held the contrary for the reason that a tax is levied to provide
revenue for government operations, while the proceeds of the
margin fee are applied to strengthen our country's
international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the
Philippines v. Central Bank, 3 the same idea was expressed, though in
connection with a different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an export
tax. A tax is a levy for the purpose of providing revenue for
government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the
Central Bank's international reserve.
We conclude then that the margin fee was imposed by the State in the
exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses
and therefore still deductible from its gross income. The fees were paid
for the remittance by ESSO as part of the profits to the head office in
the United States. Such remittance was an expenditure necessary and
proper for the conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal
Revenue Code reading as follows:
SEC. 30.Deductions from gross income. In computing net
income there shall be allowed as deductions
(a)Expenses:
(1)In general. All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; traveling
expenses while away from home in the pursuit of a trade or
business; and rentals or other payments required to be made
as a condition to the continued use or possession, for the
purpose of the trade or business, of property to which the
taxpayer has not taken or is not taking title or in which he has
no equity.
(2)Expenses allowable to non-resident alien individuals and
foreign corporations. In the case of a non-resident alien
individual or a foreign corporation, the expenses deductible are
the necessary expenses paid or incurred in carrying on any
business or trade conducted within the Philippines exclusively.
In the case of Atlas Consolidated Mining and Development Corporation
v. Commissioner of Internal Revenue, 4 the Court laid down the rules on
the deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a
deduction, he must point to some specific provision of the
statute in which that deduction is authorized and must be able
to prove that he is entitled to the deduction which the law
allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is
Section 30(a) (1) of the National Internal Revenue which allows
a deduction of 'all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business.' An item of expenditure, in order to be deductible
under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is
axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be
ordinary and necessary, (2) it must be paid or incurred within
the taxable year, and (3) it must be paid or incurred in carrying
on a trade or business. In addition, not only must the taxpayer
meet the business test, he must substantially prove by evidence
or records the deductions claimed under the law, otherwise,
the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary
does not justify its deduction.
While it is true that there is a number of decisions in the
United States delving on the interpretation of the terms
'ordinary and necessary, as used in the federal tax laws, no
adequate or satisfactory definition of those terms is possible.
Similarly, this Court has never attempted to define with
precision the terms 'ordinary and necessary.' There are
however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims.
Ordinarily, an expense will be considered `necessary, where the
expenditure is appropriate and helpful in the development of
the taxpayer's business. It is 'ordinary' when it connotes a
payment which is normal in relation to the business of the
taxpayer and the surrounding circumstances. The term
'ordinary' does not require that the payments be habitual or
normal in the sense that the same taxpayer will have to make
them often; the payment may be unique or non-recurring to
the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to
a deduction depends in each case on the particular facts and
the relation of the payment to the type of business in which
the taxpayer is engaged. The intention of the taxpayer often
may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the
operation of the taxpayer's business, the answer to the
question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the
extent and permanency of the work accomplished by the
expenditure.
In the light of the above explanation, we hold that the Court of Tax
Appeals did not err when it held on this issue as follows:
Considering the foregoing test of what constitutes an ordinary
and necessary deductible expense, it may be asked: Were the
margin fees paid by petitioner on its profit remittances to its
Head Office in New York appropriate and helpful in the
taxpayer's business in the Philippines? Were the margin fees
incurred for purposes proper to the conduct of the affairs of
petitioner's branch in the Philippines? Or were the margin fees
incurred for the purpose of realizing a profit or of minimizing a
loss in the Philippines? Obviously not. As stated in the Lopez
case, the margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the Philippines.
They were expenses incurred in the disposition of said incomes;
expenses for the remittance of funds after they have already
been earned by petitioner's branch in the Philippines for the
disposal of its Head Office in New York which is already
another distinct and separate income taxpayer.
xxx xxx xxx
Since the margin fees in question were incurred for the
remittance of finds to petitioner's Head Office in New York,
which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never
be said therefore that the margin fees were appropriate and
helpful in the development of petitioner's business in the
Philippines exclusively or were incurred for purposes proper to
the conduct of the affairs of petitioner's branch in the
Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If at all, the
margin fees were incurred for purposes proper to the conduct
of the corporate affairs of Standard Vacuum Oil Company in
New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. The
petitioner merely presumed that all corporate expenses are necessary
and appropriate in the absence of a showing that they are illegal
or ultra vires. This is error. The public respondent is correct when it
asserts that "the paramount rule is that claims for deductions are a
matter of legislative grace and do not turn on mere equitable
considerations . . . The taxpayer in every instance has the burden of
justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable
to its head office, cannot now claim this as an ordinary and necessary
expense paid or incurred in carrying on its own trade or business. cdrep
WHEREFORE, the decision of the Court of Tax Appeals denying the
petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92
for 1960, is AFFIRMED, with costs against the petitioner.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ ., concur.
Footnotes

1.Penned by Associate Judge E. Alvarez, with Presiding Judge Umali and
Associate Judge Avancea concurring.
2.22 SCRA 779.
3.14 SCRA 630.
4.102 SCRA 246.
5.Merten's, Law of Federal Income Taxation, Section 25.03.

||| (Esso Standard Eastern, Inc. v. Commr., G.R. Nos. L-28508-9, July 07,
1989)
THIRD DIVISION
[G.R. No. 143672. April 24, 2003.]
GENERAL FOODS (PHILS.), INC., respondent.
Rhodora J. Corcuera-Menzon for petitioner.
Ortega Del Castillo Bacorro Odulio Calma & Carbonell for respondent.
SYNOPSIS
Respondent corporation filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent claimed as
deduction, among other business expenses, the amount of P9,461,246
for media advertising for "Tang" one of its products. The Commissioner
disallowed 50% or P4,730,623 of the deduction claimed by respondent.
The latter filed a motion for reconsideration, but the same was denied.
Respondent appealed to the Court of Tax Appeals, but the appeal was
dismissed. Aggrieved, respondent filed a petition for review at the Court
of Appeals which rendered a decision reversing and setting aside the
decision of the Court of Tax Appeals. Hence, the present petition for
review. The Commissioner of Internal Revenue presented to the Court
the lone issue of whether or not the subject media advertising expense
for "Tang" incurred by respondent was an ordinary and necessary
expense fully deductible under the National Internal Revenue Code
(NIRC).
The Supreme Court reversed and set aside the decision of the Court of
Appeals and ordered private respondent General Foods (Phils); Inc., to
pay its deficiency income tax in the amount of P2,635,141.42, plus 25%
surcharge for late payment and 20% annual interest computed from
August 25, 1989, the date of the denial of its protest, until the same is
fully paid. The Court found the subject expense for the advertisement of
a single product to be inordinately large, and even if indeed it is
necessary, it cannot be considered an ordinary expense deductible
under Section 29 (a) (1) (A) of the NIRC. According to the Court, the
subject advertisement is one designed to stimulate the future sale of
merchandise or use of services. Said venture of respondent to protect
its brand franchise was tantamount to efforts to establish a reputation
and is akin to the acquisition of capital assets, and should not,
therefore, be considered as business expenses but as capital
expenditures which normally should be spread out over a reasonable
period of time.
SYLLABUS
1.TAXATION; INCOME TAXATION; DEDUCTIONS FROM GROSS INCOME;
DEDUCTIONS FOR INCOME TAX PURPOSES PARTAKE OF THE NATURE
OF TAX EXEMPTIONS AND ARE THEREFORE STRICTLY CONSTRUED
AGAINST THE TAXPAYER AND LIBERALLY IN FAVOR OF THE TAXING
AUTHORITY. 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 he who claims an
exemption must be able to justify his claim by the clearest grant of
organic or statute law. An exemption from the common burden cannot
be permitted to exist upon vague implications. Deductions for income
tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly
construed.
2.ID.; ID.; ID.; EXPENSES; ORDINARY AND NECESSARY TRADE BUSINESS
OR PROFESSIONAL EXPENSES; WHEN DEDUCTIBLE. To be deductible
from gross income, the subject advertising expense must comply with
the following requisites: (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.
3.ID.; ID.; ID.; ID.; FACTORS IN DETERMINING THE REASONABLENESS OF
AN ADVERTISING EXPENSE. There is yet to be a clear-cut criteria or
fixed test for determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not limited to:
the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic
conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
4.ID.; ID.; ID.; ID.; ID.; SUBJECT EXPENSE FOR THE ADVERTISEMENT OF A
SINGLE PRODUCT FOUND TO BE INORDINATELY LARGE AND CANNOT
BE CONSIDERED AS AN ORDINARY EXPENSE EVEN IF IT IS NECESSARY.
In the case at bar, the P9,461,246 claimed as media advertising
expense for "Tang" alone was almost one-half of its total claim for
"marketing expenses." Aside from that, respondent-corporation also
claimed P2,678,328 as "other advertising and promotions expense" and
another P1,548,614, for consumer promotion. Furthermore, the subject
P9,461,246 media advertising expense for "Tang" was almost double the
amount of respondent corporation's P4,640,636 general and
administrative expenses. We find the subject expense for the
advertisement of a single product to be inordinately large. Therefore,
even if it is necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC. HCTaAS
5.ID.; ID.; ID.; ID.; ID.; AN ADVERTISING TO STIMULATE THE FUTURE
SALE OF MERCHANDISE OR USE OF SERVICES IS NOT DEDUCTIBLE AS
BUSINESS EXPENSE. Advertising is generally of two kinds: (1)
advertising to stimulate the current sale of merchandise or use of
services and (2) advertising designed to stimulate the futuresale of
merchandise or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of
goodwill for the taxpayer's trade or business or for the industry or
profession of which the taxpayer is a member. If the expenditures are
for the advertising of the first kind, then, except as to the question of
the reasonableness of amount, there is no doubt such expenditures are
deductible as business expenses. If, however, the expenditures are for
advertising of the second kind, then normally they should be spread out
over a reasonable period of time. We agree with the Court of Tax
Appeals that the subject advertising expense was of the second kind.
Not only was the amount staggering; the respondent corporation itself
also admitted, in its letter protest to the Commissioner of Internal
Revenue's assessment, that the subject media expense was incurred in
order to protect respondent corporation's brand franchise, a critical
point during the period under review.
6.ID.; ID.; ID.; ID.; ID.; CORPORATION'S EXPENSE TO PROTECT ITS
BRAND FRANCHISE IS CONSIDERED AS CAPITAL EXPENDITURE; CASE
AT BAR. The protection of brand franchise is analogous to the
maintenance of goodwill or title to one's property. This is a capital
expenditure which should be spread out over a reasonable period of
time. Respondent corporation's venture to protect its brand franchise
was tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto were
not to be considered as business expenses but as capital expenditures.
True, it is the taxpayer's prerogative to determine the amount of
advertising expenses it will incur and where to apply them. Said
prerogative; however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital
outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. The second, which must be applied in harmony with the
first, relates to whether the expenditures are ordinary and necessary.
Concomitantly, for an expense to be considered ordinary, it must be
reasonable in amount. The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations. We find said
ruling to be well founded. Respondent corporation incurred the subject
advertising expense in order to protect its brand franchise. We consider
this as a capital outlay since it created goodwill for its business and/or
product. The P9,461,246 media advertising expense for the promotion
of a single product, almost one-half of petitioner corporation's entire
claim for marketing expenses for that year under review, inclusive of
other advertising and promotion expenses of P2,678,328 and P1,548,614
for consumer promotion, is doubtlessly unreasonable.
D E C I S I O N
CORONA, J p:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the
resolution 1 of the Court of Appeals reversing the decision 2 of the
Court of Tax Appeals which in turn denied the protest filed by
respondent General Foods (Phils.), Inc., regarding the assessment made
against the latter for deficiency taxes. aDHScI
The records reveal that, on June 14, 1985, respondent corporation,
which is engaged in the manufacture of beverages such as "Tang,"
"Calumet" and "Kool-Aid," filed its income tax return for the fiscal year
ending February 28, 1985. In said tax return, respondent corporation
claimed as deduction, among other business expenses, the amount of
P9,461,246 for media advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of
the deduction claimed by respondent corporation. Consequently,
respondent corporation was assessed deficiency income taxes in the
amount of P2,635,141.42. The latter filed a motion for reconsideration
but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court
of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a
singular product, which even excludes "other advertising and
promotions" expenses, we are not prepared to accept that such
amount is reasonable "to stimulate the current sale of
merchandise" regardless of Petitioner's explanation that such
expense "does not connote unreasonableness considering the
grave economic situation taking place after the Aquino
assassination characterized by capital fight, strong deterioration
of the purchasing power of the Philippine peso and the
slacking demand for consumer products" (Petitioner's
Memorandum, CTA Records, p. 273). We are not convinced
with such an explanation. The staggering expense led us to
believe that such expenditure was incurred "to create or
maintain some form of good will for the taxpayer's trade or
business or for the industry or profession of which the taxpayer
is a member." The term "good will" can hardly be said to have
any precise signification; it is generally used to denote the
benefit arising from connection and reputation (Words and
Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App.
294). As held in the case of Welch vs. Helvering, efforts to
establish reputation are akin to acquisition of capital assets
and, therefore, expenses related thereto are not business
expenses but capital expenditures. (Atlas Mining and
Development Corp. vs. Commissioner of Internal Revenue,
supra). For sure such expenditure was meant not only to
generate present sales but more for future and prospective
benefits. Hence, "abnormally large expenditures for advertising
are usually to be spread over the period of years during which
the benefits of the expenditures are received" (Mertens, supra,
citing Colonial Ice Cream Co., 7 BTA 154).

WHEREFORE, in all the foregoing, and finding no error in the
case appealed from, we hereby RESOLVE to DISMISS the
instant petition for lack of merit and ORDER the Petitioner to
pay the respondent Commissioner the assessed amount of
P2,635,141.42 representing its deficiency income tax liability for
the fiscal year ended February 28, 1985." 3
Aggrieved, respondent corporation filed a petition for review at the
Court of Appeals which rendered a decision reversing and setting aside
the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it
claimed as a deduction is excessive, the same should be
allowed.
WHEREFORE, the petition of petitioner General Foods
(Philippines), Inc. is hereby GRANTED. Accordingly, the
Decision, dated 8 February 1994 of respondent Court of Tax
Appeals is REVERSED and SET ASIDE and the letter, dated 31
May 1988 of respondent Commissioner of Internal Revenue is
CANCELLED.
SO ORDERED. 4
Thus, the instant petition, wherein the Commissioner presents for the
Court's consideration a lone issue: whether or not the subject media
advertising expense for "Tang" incurred by respondent corporation was
an ordinary and necessary expense fully deductible under the National
Internal Revenue Code (NIRC).
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; 5 and he who claims an exemption must be able
to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon
vague implications. 6
Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then
deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was
the media advertising expense for "Tang" paid or incurred by
respondent corporation for the fiscal year ending February 28, 1985
"necessary and ordinary," hence, fully deductible under the NIRC? Or
was it a capital expenditure, paid in order to create "goodwill and
reputation" for respondent corporation and/or its products, which
should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A)Expenses.
(1)Ordinary and necessary trade, business or professional
expenses.
(a)In general. There shall be allowed as deduction
from gross income all ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on, or which are directly attributable
to, the development, management, operation
and/or conduct of the trade, business or exercise
of a profession.
Simply put, to be deductible from gross income, the subject advertising
expense must comply with the following requisites: (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. 7
The parties are in agreement that the subject advertising expense was
paid or incurred within the corresponding taxable year and was incurred
in carrying on a trade or business. Hence, it was necessary. However,
their views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be necessary but
also ordinary. These two requirements must be met.
The Commissioner maintains that the subject advertising expense was
not ordinary on the ground that it failed the two conditions set by U.S.
jurisprudence: first, "reasonableness" of the amount incurred and
second, the amount incurred must not be a capital outlay to create
"goodwill" for the product and/or private respondent's business.
Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and fast
rule on the matter, the right to a deduction depends on a number of
factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention of the
taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a
proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense
for "Tang" alone was almost one-half of its total claim for "marketing
expenses." Aside from that, respondent-corporation also claimed
P2,678,328 as "other advertising and promotions expense" and another
P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for
"Tang" was almost double the amount of respondent corporation's
P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product
to be inordinately large. Therefore, even if it is necessary, it cannot be
considered an ordinary expense deductible under then Section 29 (a) (1)
(A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate
the current sale of merchandise or use of services and (2) advertising
designed to stimulate the futuresale of merchandise or use of services.
The second type involves expenditures incurred, in whole or in part, to
create or maintain some form of goodwill for the taxpayer's trade or
business or for the industry or profession of which the taxpayer is a
member. If the expenditures are for the advertising of the first kind,
then, except as to the question of the reasonableness of amount, there
is no doubt such expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of
time. CIcTAE
We agree with the Court of Tax Appeals that the subject advertising
expense was of the second kind. Not only was the amount staggering;
the respondent corporation itself also admitted, in its letter protest 8 to
the Commissioner of Internal Revenue's assessment, that the subject
media expense was incurred in order to protect respondent
corporation's brand franchise, a critical point during the period under
review.
The protection of brand franchise is analogous to the maintenance of
goodwill or title to one's property. This is a capital expenditure which
should be spread out over a reasonable period of time. 9
Respondent corporation's venture to protect its brand franchise was
tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto were
not to be considered as business expenses but as capital
expenditures. 10
True, it is the taxpayer's prerogative to determine the amount of
advertising expenses it will incur and where to apply them. 11 Said
prerogative, however, is subject to certain considerations. The first
relates to the extent to which the expenditures are actually capital
outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. 12 The second, which must be applied in harmony with
the first, relates to whether the expenditures are ordinary and necessary.
Concomitantly, for an expense to be considered ordinary, it must be
reasonable in amount. The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation
incurred the subject advertising expense in order to protect its brand
franchise. We consider this as a capital outlay since it created goodwill
for its business and/or product. The P9,461,246 media advertising
expense for the promotion of a single product, almost one-half of
petitioner corporation's entire claim for marketing expenses for that
year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is
doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect
the conclusions of quasi-judicial agencies such as the Court of Tax
Appeals, a highly specialized body specifically created for the purpose
of reviewing tax cases. The CTA, by the nature of its functions, is
dedicated exclusively to the study and consideration of tax problems. It
has necessarily developed an expertise on the subject. We extend due
consideration to its opinion unless there is an abuse or improvident
exercise of authority. 13 Since there is none in the case at bar, the Court
adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible
error when it declared the subject media advertising expense to be
deductible as an ordinary and necessary expense on the ground that "it
has not been established that the item being claimed as deduction is
excessive." It is not incumbent upon the taxing authority to prove that
the amount of items being claimed is unreasonable. The burden of
proof to establish the validity of claimed deductions is on the
taxpayer. 14 In the present case, that burden was not discharged
satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The
assailed decision of the Court of Appeals is hereby REVERSED and SET
ASIDE. Pursuant to Sections 248 and 249 of the Tax Code, respondent
General Foods (Phils.), Inc. is hereby ordered to pay its deficiency
income tax in the amount of P2,635,141.42, plus 25% surcharge for late
payment and 20% annual interest computed from August 25, 1989, the
date of the denial of its protest, until the same is fully paid.
SO ORDERED.
Puno, Panganiban, Sandoval-Gutierrez and Carpio-Morales, JJ., concur.

Footnotes
1.Penned by Associate Justice Andres B. Reyes and concurred in by
Associate Justices Quirino D. Abad Santos, Jr. and Romeo A. Brawner
of the Third Division.
2.Penned by Associate Judge Manuel K. Gruba and concurred in by
Associate Judge Ramon O. de Veyra.
3.Rollo, pp. 22-23.
4.Id., p. 24.
5.Commissioner of Internal Revenue vs. Visayan Electric Co., 23 SCRA 715
[1968].
6.Asiatic Petrolium Co. vs. Llanas, 49 Phil 466 [1926] cited in Davao Light &
Power Co. vs. Commissioner of Customs, 44 SCRA 122 [1972].
7.Zamora vs. Collector, 8 SCRA 163 [1963].
8.Dated June 14, 1988; Petition for Review, p. 8 citing BIR Records, pp. 198-
199; Rollo, p. 15.
9.Mertens, Vol. 4A 25.38 p. 190 citing Colonial Ice Cream Co., 7 BTA 154.
10.Welch vs. Helvering, 290 US 111 [1933].
11.Revenue Audit Memorandum Order No. 1-87.
12.Mertens, Vol. 4A 25.38 p. 190, citing E.H. Sheldon & Co., 19 TC 481
[1952].
13.Commissioner vs. Court of Tax Appeals & Atlas Consolidated Mining and
Development Co., 204 SCRA 182 [1991].
14.Commissioner vs. Algue, Inc., 158 SCRA 9 [1988].

||| (Commr. v. General Foods (Phils.) Inc., G.R. No. 143672, April 24, 2003)
EN BANC
[G.R. No. L-24059. November 28, 1969.]
C. M. HOSKINS & CO., INC., petitioner, vs.
Ross, Salcedo, Del Rosario, Bito & Misa for petitioner.
Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo
R. Rosete and Special Attorney Michaelina R. Balasbas for respondent.
SYLLABUS
1.TAXATION; INCOME TAX; DEDUCTIONS FROM NET INCOME;
ORDINARY AND NECESSARY EXPENSES; INORDINATELY LARGE
COMMISSIONS AND FEES PAID TO CONTROLLING STOCKHOLDER ARE
DISALLOWED AS DEDUCTIBLE EXPENSES; CASE AT BAR. Considering
that in addition to being Chairman of the board of directors of
petitioner corporation, which bears his name, Hoskins, who owned
99.6% of its total authorized capital stock while the four other officers-
stockholders of the firm owned a total of four-tenths of 1%, or one-
tenth of 1% each, with their respective nominal shareholdings of one
share each, was also salesman/broker for his company, receiving a 50%
share of the sales commissions earned by petitioner, besides his
monthly salary of P3,750.00 amounting to an annual compensation of
P45,000.00 and an annual salary bonus of P40,000.00, plus free use of
the company car and receipt of other similar allowances and benefits,
the Tax Court correctly ruled that the payment by petitioner to Hoskins
of the additional sum of P99,977.91 as his equal or 50% share of the
8% supervision fees received by petitioner as managing agents of the
real estate, subdivision projects of Paradise Farms, Inc. and Realty
Investments, Inc. was inordinately large and could not be accorded the
treatment of ordinary and necessary expenses allowed as deductible
items within the purview of Section 30(a)(i) of the Tax Code.
2.ID.; ID.; ID.; BONUSES AS DEDUCTIBLE EXPENSE. It is a general rule
that bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are
deductible, provided such payments, when added to the stipulated
salaries, do not exceed a reasonable compensation for the services
rendered.
3.ID.; ID.; ID.; ID.; NECESSARY CONDITIONS FOR SUCH DEDUCTION.
The condition precedents to the deduction of bonuses to employees
are: (1) the payment of the bonuses is in fact compensation; (2) it must
be for personal services actually rendered; and (3) the bonuses, when
added to the salaries, are reasonable . . . when measured by the
amount and quality of the services performed with relation to the
business of the particular taxpayer.
4.ID.; ID.; ID.; ID.; REASONABLENESS THEREOF TO BE SHOWN. As far
as petitioner's contention that as employer it has the right to fix the
compensation of its officers and employees and that it was in the
exercise of such right that it deemed proper to pay the bonuses in
question, all that We need say is this: that right may be conceded, but
for income tax purposes the employer cannot legally claim such
bonuses as deductible expenses unless they are shown to be
reasonable. To hold otherwise would open the gate of rampant tax
evasion.
5.ID.; ID.; CORPORATE TAX LIABILITY OF CORPORATION OF SOLE
PROPRIETORSHIP. Petitioner corporation, a sole proprietorship of
C.M. Hoskins who virtually holds 99.6% of the stocks of said corporation
is duty bound to pay the income tax imposed on corporations and may
not legally be permitted, by way of corporate resolution authorizing
payment of inordinately large commissions and fees to its controlling
stockholder, to dilute and diminish its corresponding corporate tax
liability.
D E C I S I O N
TEEHANKEE, J p:
We uphold in this taxpayer's appeal the Tax Court's ruling that
payment by the taxpayer to its controlling stockholder of 50% of its
supervision fees or the amount of P99,977.91 is not a deductible
ordinary and necessary expense and should be treated as a
distribution of earnings and profits of the taxpayer.
Petitioner, a domestic corporation engaged in the real estate business
as brokers, managing agents and administrators, filed its income tax
return for its fiscal year ending September 30, 1957 showing a net
income of P92,540.25 and a tax liability due thereon of P18,508.00,
which it paid in due course. Upon verification of its return, respondent
Commissioner of Internal Revenue, disallowed four items of deduction
in petitioner's tax returns and assessed against it an income tax
deficiency in the amount of P28,054.00 plus interests. The Court of Tax
Appeals upon reviewing the assessment at the taxpayer's petition,
upheld respondent's disallowance of the principal item of petitioner's
having paid to Mr. C. M. Hoskins, its founder and controlling
stockholder the amount of P99,977.91 representing 50% of supervision
fees earned by it and set aside respondent's disallowance of three other
minor items. The Tax Court therefore determined petitioner's tax
deficiency to be in the amount of P27,145.00 and on November 8, 1964
rendered judgment against it, as follows:
"WHEREFORE, premises considered, the decision of the
respondent is hereby modified. Petitioner is ordered to pay to
the latter or his representative the sum of P27,145.00,
representing deficiency income tax for the year 1957, plus
interest at 1/2% per month from June 20, 1959 to be
computed in accordance with the provisions of Section 51(d) of
the National Internal Revenue Code. If the deficiency tax is not
paid within thirty (30) days from the date this decision
becomes final, petitioner is also ordered to pay surcharge and
interest as provided for in Section 51(e) of the Tax Code,
without costs."
Petitioner questions in this appeal the Tax Court's findings that the
disallowed payment to Hoskins was an inordinately large one, which
bore a close relationship to the recipient's dominant stockholdings and
therefore amounted in law to a distribution of its earnings and profits.
We find no merit in petitioner's appeal.
As found by the Tax Court, "petitioner was founded by Mr. C. M.
Hoskins in 1937, with a capital stock of 1,000 shares at a par value of
P1.00 each share; that of these 1,000 shares, Mr. C. M. Hoskins owns
996 shares (the other 4 shares being held by the other four officers of
the corporation), which constitute exactly 99.6% of the total authorized
capital stock (p. 92, t.s.n.); that during the first four years of its
existence, Mr. C. M. Hoskins was the President, but during the taxable
period in question, that is, from October 1, 1956 to September 30, 1957,
he was the chairman of the Board of Directors and salesman-broker for
the company (p. 93, t.s.n.); that as chairman of the Board of Directors,
he received a salary of P3,750.00 a month, plus a salary bonus of about
P40,000 00 a year (p. 94, t.s.n.); that he was also a stockholder and
officer of the Paradise Farms, Inc. and Realty Investments, Inc., from
which petitioner derived a large portion of its income in the form of
supervision fees and commissions earned on sales of lots (pp. 97-99,
t.s.n.; Financial Statements, attached to Exhibit '1', p. 11, BIR rec.); that as
chairman of the Board of Directors of petitioner, his duties were: "To act
as a salesman; as a director, preside over meetings and to get all of the
real estate business I could for the company by negotiating sales,
purchases, making appraisals, raising funds to finance real estate
operations where that was necessary' (p. 96, t.s.n.); that he was familiar
with the contract entered into by the petitioner with the Paradise Farms,
Inc. and the Realty Investments. Inc. by the terms of which petitioner
was 'to program the development, arrange financing, plan the proposed
subdivision as outlined in the prospectus of Paradise Farms, Inc.,
arrange contract for road constructions, with the provision of water
supply to all of the lots and in general to serve as managing agents for
the Paradise Farms, Inc. and subsequently for the Realty Investment,
Inc." (pp. 96-97, t.s.n.).
Considering that in addition to being Chairman of the board of
directors of petitioner corporation, which bears his name, Hoskins, who
owned 99.6% of its total authorized capital stock while the four other
officers-stockholders of the firm owned a total of four-tenths of 1%, or
one tenth of 1% each, with their respective nominal shareholdings of
one share each, was also salesman-broker for his company, receiving a
50% share of the sales commissions earned by petitioner, besides his
monthly salary of P3,750.00 amounting to an annual compensation of
P45,000.00 and an annual salary bonus of P40,000.00, plus free use of
the company car and receipt of other similar allowances and benefits,
the Tax Court correctly ruled that the payment by petitioner to Hoskins
of the additional sum of P99,977.91 as his equal or 50% share of the
8% supervision fees received by petitioner as managing agents of the
real estate, subdivision projects of Paradise Farms, Inc. and Realty
Investments, Inc. was inordinately large and could not be accorded the
treatment of ordinary and necessary expenses allowed as deductible
items within the purview of Section 30 (a) (i) of the Tax Code.
If such payment of P99,977.91 were to be allowed as a deductible item,
then Hoskins would receive on these three items alone (salary, bonus
and supervision fee) a total of P184,977.91, which would be double the
petitioner's reported net income for the year of P92,540.25. As correctly
observed by respondent, if independently, a one-time P100,000.00-fee
to plan and lay down the rules for supervision of a subdivision project
were to be paid to an experienced realtor such as Hoskins, its fairness
and deductibility by the taxpayer could be conceded; but here 50% of
the supervision fee of petitioner was being paid by it to Hoskins every
year since 1955 up to 1963 and for as long as its contract with the
subdivision owner subsisted, regardless of whether services were
actually rendered by Hoskins, since his services to petitioner included
such planning and supervision and were already handsomely paid for
by petitioner.

The fact that such payment was authorized by a standing resolution of
petitioner's board of directors, since "Hoskins had personally conceived
and planned the project" cannot change the picture. There could be no
question that as Chairman of the board and practically an absolutely
controlling stockholder of petitioner, holding 99.6% of its stock, Hoskins
wielded tremendous power and influence in the formulation and
making of the company's policies and decisions. Even just as board
chairman, going by petitioner's own enumeration of the powers of the
office, Hoskins could exercise great power and influence within the
corporation, such as directing the policy of the corporation, delegating
powers to the president and advising the corporation in determining
executive salaries, bonus plans and pensions, dividend policies, etc. 1
Petitioner's invoking of its policy since its incorporation of sharing
equally sales commissions with its salesmen, in accordance with its
board resolution of June 18, 1946, is equally untenable. Petitioner's
Sales Regulations provide:
"Compensation of Salesmen
"8.Schedule I In the case of sales to prospects discovered
and worked by a salesman, even though the closing is done by
or with the help of the Sales Manager or other members of the
staff, the salesmen get one-half (1/2) of the total commission
received by the Company, but not exceeding five percent
(5%).In the case of subdivisions, when the office commission
covers general supervision, the 1/2-rule does not apply, the
salesman's share being stipulated in the case of each
subdivision. In most cases the salesman's share is 4%. (Exh. 'N-
1')." 2
It will be readily seen therefrom that when the petitioner's
commission covers general supervision, it is provided that the 1/2
rule of equal sharing of the sales commissions does not apply and
that the salesman's share is stipulated in the case of each
subdivision. Furthermore, what is involved here is not Hoskins'
salesman's share in the petitioner's 12% sales commission, which he
presumably collected also from petitioner without respondent's
questioning it, but a 50% share besides in petitioner's planning and
supervision fee of 8% of the gross sales, as mentioned above. This is
evident from petitioner's board's resolution of July 14, 1953 (Exhibit
7), wherein it is recited that in addition to petitioner's sales
commission of 12% of gross sales, the subdivision owners were
paying to petitioner 8% of gross sales as supervision fee, and a
collection fee of 5% of gross collections, or total fees of 25% of
gross sales.
The case before us is similar to previous cases of disallowances as
deductible items of officers' extra fees, bonuses and commissions,
upheld by this Court as not being within the purview of ordinary and
necessary expenses and not passing the test of reasonable
compensation. 3 In Kuenzle & Streiff, Inc. vs. Commissioner of Internal
Revenue decided by this Court on May 29, 1969, 4 we reaffirmed the
test of reasonableness, enunciated in the earlier 1967 case involving the
same parties, that: "It is a general rule that 'Bonuses to employees
made in good faith and as additional compensation for the services
actually rendered by the employees are deductible, provided such
payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered' (4 Mertens, Law of
Federal Income Taxation, Sec. 25.50, p. 410). The conditions precedent
to the deduction of bonuses to employees are: (1) the payment of the
bonuses is in fact compensation; (2) it must be for personal services
actually rendered; and (3) the bonuses, when added to the salaries, are
'reasonable . . . when measured by the amount and quality of the
services performed with relation to the business of the particular
taxpayer' (Idem., Sec. 25, 44, p. 395).
"There is no fixed test for determining the reasonableness of a
given bonus as compensation. This depends upon many
factors, one of them being 'the amount and quality of the
services performed with relation to the business.' Other tests
suggested are: payment must be 'made in good faith'; 'the
character of the taxpayer's business, the volume and amount of
its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation'; 'the size of the
particular business'; 'the employees' qualifications and
contributions to the business venture'; and 'general economic
conditions' (4 Mertens, Law of Federal Income Taxation, Secs.
25.44, 25.49, 25.50, 25.51, pp. 407-412). However, 'in
determining whether the particular salary or compensation
payment is reasonable, the situation must be considered as a
whole. Ordinarily, no single factor is decisive. . . . it is important
to keep in mind that it seldom happens that the application of
one test can give satisfactory answer, and that ordinarily it is
the interplay of several factors, properly weighted for the
particular case, which must furnish the final answer."
Petitioner's case fails to pass the test. On the right of the employer as
against respondent Commissioner to fix the compensation of its officers
and employees, we there held further that while the employer's right
may be conceded, the question of the allowance or disallowance
thereof as deductible expenses for income tax purposes is subject to
determination by respondent Commissioner of Internal Revenue. Thus:
"As far as petitioner's contention that as employer it has the right to fix
the compensation of its officers and employees and that it was in the
exercise of such right that it deemed proper to pay the bonuses in
question, all that We need say is this: that right may be conceded, but
for income tax purposes the employer cannot legally claim such
bonuses as deductible expenses unless they are shown to be
reasonable. To hold otherwise would open the gate of rampant tax
evasion.
"Lastly, We must not lose sight of the fact that the question of
allowing or disallowing as deductible expenses the amounts
paid to corporate officers by way of bonus is determined by
respondent exclusively for income tax purposes. Concededly, he
has no authority to fix the amounts to be paid to corporate
officers by way of basic salary, bonus or additional
remuneration a matter that lies more or less exclusively
within the sound discretion of the corporation itself. But this
right of the corporation is, of course, not absolute. It cannot
exercise it for the purpose of evading payment of taxes
legitimately due to the State."
Finally, it should be noted that we have here a case practically of a sole
proprietorship of C. M. Hoskins, who however chose to incorporate his
business with himself holding virtually absolute control thereof with
99.6% of its stock with four other nominal shareholders holding one
share each. Having chosen to use the corporate form with its legal
advantages of a separate corporate personality as distinguished from
his individual personality, the corporation so created, i.e., petitioner, is
bound to comport itself in accordance with corporate norms and
comply with its corporate obligations. Specifically, it is bound to pay the
income tax imposed by law on corporations and may not legally be
permitted, by way of corporate resolutions authorizing payment of
inordinately large commissions and fees to its controlling stockholder,
to dilute and diminish its corresponding corporate tax liability.
ACCORDINGLY, the decision appealed from is hereby affirmed, with
costs in both instances against petitioner.
Concepcion, C . J ., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,
Castro, Fernando and Barredo, JJ ., concur.
Footnotes
1.Petitioner's Reply Brief, pp. 5-6.
2.Emphasis supplied.
3.Cf. Alhambra vs. Collector, 105 Phil. 1337; Kuenzle & Streiff, Inc. vs.
Collector, 106 Phil. 355; Alhambra vs. Commissioner, 21 SCRA 1111
(1967).
4.28 SCRA 366.

||| (C. M. Hoskins & Co., Inc. v. Commr., G.R. No. L-24059, November 28,
1969)
EN BANC
[G.R. No. 125508. July 19, 2000.]
CHINA BANKING CORPORATION, petitioner, vs. COURT
OF APPEALS, COMMISSIONER OF INTERNAL REVENUE
and COURT OF TAX APPEALS,respondents.
SYNOPSIS
Petitioner China Banking Corporation made a 53% equity investment in
the First CBC Capital (Asia) Ltd., a Hongkong subsidiary engaged in
financing and investment with "deposit-taking" function. First CBC
Capital (Asia), Ltd. became insolvent. With the approval of Bangko
Sentral, petitioner wrote-off as being worthless its investment in First
CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as
a bad debt or as an ordinary loss deductible from its gross income.
Respondent Commissioner of Internal Revenue disallowed the
deduction. The Commissioner held the view that the shares should be
classified as "capital loss," and not as a bad debt expense there being
no indebtedness to speak of between petitioner and its subsidiary.
Petitioner contested the ruling of respondent Commissioner before the
Court of Tax Appeals (CTA). The tax court sustained the Commissioner.
When the decision was appealed to the Court of Appeals, the latter
upheld the CTA. Hence, the present petition. Petitioner bank assailed
the appellate court in affirming the CTA's decision.
The Supreme Court affirmed the decision of the Court of Appeals. The
Court ruled that shares of stock held by way of an investment are
considered as capital assets under the law and when said shares held by
such investor become worthless, the loss is deemed to be a loss from
the sale or exchange of capital assets under Section 29(d)(4)(B) of the
National Internal Revenue Code. In the case at bar, First CBC Capital
(Asia), Ltd., the investee corporation, is a subsidiary corporation of
petitioner bank whose shares in said investee corporation are not
intended for purchase or sale but as an investment. Unquestionably
then, any loss therefrom would be a capital loss, not an ordinary loss to
the investor. The Court also ruled that equity holdings cannot come
close to being, within the purview of "evidence of indebtedness" under
Section 33 of the NIRC. The loss of petitioner bank in its equity
investment in the Hongkong subsidiary cannot also be deductible as a
bad debt. The shares of stock in question did not constitute a loan
extended by it to its subsidiary (First CBC Capital) or a debt subject to
obligatory repayment by the latter, essential elements to constitute a
bad debt, but a long term investment made by CBC.
SYLLABUS
1.TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME
TAXATION; GROSS INCOME; DEDUCTIONS FROM GROSS INCOME;
SHARES OF STOCK HELD BY INVESTOR BECOMING WORTHLESS; NOT
DEDUCTIBLE, LOSS SUSTAINED DEEMED TO BE A LOSS FROM THE SALE
OR EXCHANGE OF CAPITAL ASSETS. An equity investment is a
capital, not ordinary, asset of the investor the sale or exchange of which
results in either a capital gain or a capital loss. The gain or the loss is
ordinary when the property sold or exchanged is not a capital asset.
Shares of stock, like the other securities defined in Section 20(t) of the
NIRC, would be ordinary assets only to a dealer in securities or a person
engaged in the purchase and sale of, or an active trader (for his own
account) in, securities. In the hands, however, of another who holds the
shares of stock by way of an investment, the shares to him would be
capital assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of capital
assets. Section 29(d)(4)(B) of the NIRC. - Provides that the loss sustained
by the holder of the securities, which are capital assets (to him), is to be
treated as a capital loss as if incurred from a sale or exchange
transaction. A capital gain or a capital loss normally requires the
concurrence of two conditions for it to result: (1) There is a sale or
exchange; and (2) the thing sold or exchanged is a capital asset. When
securities become worthless, there is strictly no sale or exchange but
the law deems the loss anyway to be "a loss from the sale or exchange
of capital assets." A similar kind of treatment is given by the NIRC on
the retirement of certificates of indebtedness with interest coupons or
in registered form, short sales and options to buy or sell property where
no sale or exchange strictly exists. In these cases, the NIRC dispenses, in
effect, with the standard requirement of a sale or exchange for the
application of the capital gain and loss provisions of the code. Capital
losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and
not from any other income of the taxpayer. In the case at bar, First CBC
Capital (Asia), Ltd., the investee corporation, is a subsidiary corporation
of petitioner bank whose shares in said investee corporation are not
intended for purchase or sale but as an investment. Unquestionably
then, any loss therefrom would be a capital loss, not an ordinary loss, to
the investor. cTCaEA
2.ID.; ID.; ID.; LOSSES IN EQUITY INVESTMENT LIKE SHARES OF STOCK
NOT DEDUCTIBLE AS BAD DEBT; EQUITY HOLDINGS SUCH AS SHARES
OF STOCK NOT WITHIN THE PURVIEW OF "EVIDENCE OF
INDEBTEDNESS" UNDER OF SECTION 33 (c) OF THE NATIONAL
INTERNAL REVENUE CODE. The exclusionary clause found in Section
33(c) of the National Internal Revenue Code does not include all forms
of securities but specifically covers only bonds, debentures, notes,
certificates or other evidence of indebtedness, with interest coupons or
in registered form, which are the instruments of credit normally dealt
with in the usual lending operations of a financial institution. Equity
holdings cannot come close to being within the purview of "evidence of
indebtedness" under the second sentence of the aforequoted
paragraph. Verily, it is for a like thesis that the loss of petitioner bank in
its equity investment in the Hongkong subsidiary cannot also be
deductible as a bad debt. The shares of stock in question do not
constitute a loan extended by it to its subsidiary (First CBC Capital) or a
debt subject to obligatory repayment by the latter, essential elements to
constitute a bad debt, but a long term investment made by CBC.
D E C I S I O N
VITUG, J p:
The Commissioner of Internal Revenue denied the deduction from gross
income of "securities becoming worthless" claimed by China Banking
Corporation ("CBC"). The Commissioner's disallowance was sustained by
the Court of Tax Appeals ("CTA"). When the ruling was appealed to the
Court of Appeals ("CA"), the appellate court upheld the CTA. The case is
now before us on a Petition for Review on Certiorari.
Sometime in 1980, petitioner China Banking Corporation made a 53%
equity investment in the First CBC Capital (Asia) Ltd., a Hongkong
subsidiary engaged in financing and investment with "deposit-taking"
function. The investment amounted to P16,227,851.80, consisting of
106,000 shares with a par value of P100 per share.
In the course of the regular examination of the financial books and
investment portfolios of petitioner conducted by Bangko Sentral in
1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as
being worthless its investment in First CBC Capital (Asia), Ltd., in its
1987 Income Tax Return and treated it as a bad debt or as an ordinary
loss deductible from its gross income.
Respondent Commissioner of Internal Revenue disallowed the
deduction and assessed petitioner for income tax deficiency in the
amount of P8,533,328.04, inclusive of surcharge, interest and
compromise penalty. The disallowance of the deduction was made on
the ground that the investment should not be classified as being
"worthless" and that, although the Hongkong Banking Commissioner
had revoked the license of First CBC Capital as a "deposit-taking"
company, the latter could still exercise, however, its financing and
investment activities. Assuming that the securities had indeed become
worthless, respondent Commissioner of Internal Revenue held the view
that they should then be classified as "capital loss," and not as a bad
debt expense there being no indebtedness to speak of between
petitioner and its subsidiary. ScEaAD
Petitioner contested the ruling of respondent Commissioner before the
CTA. The tax court sustained the Commissioner, holding that the
securities had not indeed become worthless and ordered petitioner to
pay its deficiency income tax for 1987 of P8,533,328.04 plus 20%
interest per annum until fully paid. When the decision was appealed to
the Court of Appeals, the latter upheld the CTA. In its instant petition
for review on certiorari, petitioner bank assails the CA decision.
The petition must fail.
The claim of petitioner that the shares of stock in question have
become worthless is based on a Profit and Loss Account for the Year-
End 31 December 1987, and the recommendation of Bangko
Sentral that the equity investment be written-off due to the insolvency
of the subsidiary. While the matter may not be indubitable (considering
that certain classes of intangibles, like franchises and goodwill, are not
always given corresponding values in financial statements 1 ), there may
really be no need, however, to go at length into this issue since, even to
assume the worthlessness of the shares, the deductibility thereof would
still be nil in this particular case. At all events, the Court is not prepared
to hold that both the tax court and the appellate court are utterly
devoid of substantial basis for their own factual findings.
Subject to certain exceptions, such as the compensation income of
individuals and passive income subject to final tax, as well as income of
non-resident aliens and foreign corporations not engaged in trade or
business in the Philippines, the tax on income is imposed on the net
income allowing certain specified deductions from gross income to be
claimed by the taxpayer. Among the deductible items allowed by the
National Internal Revenue Code ("NIRC") are bad debts and losses. 2

An equity investment is a capital, not ordinary, asset of the investor the
sale or exchange of which results in either a capital gain or a capital
loss. The gain or the loss isordinary when the property sold or
exchanged is not a capital asset. 3 A capital asset is defined negatively
in Section 33(1) of the NIRC; viz:
"(1) Capital assets. The term 'capital assets' means property
held by the taxpayer (whether or not connected with his trade
or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business, of
a character which is subject to the allowance for depreciation
provided in subsection (f) of section twenty-nine; or real
property used in the trade or business of the taxpayer."
Thus, shares of stock, like the other securities defined in Section
20(t) 4 of the NIRC, would be ordinary assets only to a dealer in
securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. Section 20(u) of the
NIRC defines a dealer in securities thus:
"(u)The term 'dealer in securities' means a merchant of stocks
or securities, whether an individual, partnership or corporation,
with an established place of business, regularly engaged in the
purchase of securities and their resale to customers; that is,
one who as a merchant buys securities and sells them to
customers with a view to the gains and profits that may be
derived therefrom."
In the hands, however, of another who holds the shares of stock by
way of an investment, the shares to him would be capital
assets. When the shares held by such investor become worthless, the
loss is deemed to be a loss from the sale or exchange of capital
assets. Section 29(d)(4)(B) of the NIRC states:
"(B)Securities becoming worthless. If securities as defined in
Section 20 become worthless during the taxable" year and are
capital assets, the loss resulting therefrom shall, for the
purposes of this Title, be considered as a loss from the sale or
exchange, on the last day of such taxable year, of capital
assets."
The above provision conveys that the loss sustained by the holder of
the securities, which are capital assets (to him), is to be treated
as a capital loss as if incurred from a sale or exchange transaction. A
capital gain or a capital loss normally requires the concurrence of
two conditions for it to result: (1) There is a sale or exchange; and (2)
the thing sold or exchanged is a capital asset. When securities
become worthless, there is strictly no sale or exchange but the law
deems the loss anyway to be "a loss from the sale or exchange of
capital assets. " 5 A similar kind of treatment is given, by the NIRC on
the retirement of certificates of indebtedness with interest coupons
or in registered form, short sales and options to buy or sell property
where no sale or exchange strictly exists. 6 In these cases, the NIRC
dispenses, in effect, with the standard requirement of a sale or
exchange for the application of the capital gain and loss provisions
of the code.
Capital losses are allowed to be deducted only to the extent of capital
gains, i.e., gains derived from the sale or exchange of capital assets, and
not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation,
is a subsidiary corporation of petitioner bank whose shares in said
investee corporation are not intended for purchase or sale but as an
investment. Unquestionably then, any loss therefrom would be a capital
loss, not an ordinary loss, to the investor.
Section 29(d)(4)(A), of the NIRC expresses:
"(A)Limitations. Losses from sales or exchanges of capital
assets shall be allowed only to the extent provided in Section
33."
The pertinent provisions of Section 33 of the NIRC referred to in the
aforesaid Section 29(d)(4)(A), read:
"SECTION 33.Capital gains and losses.
"xxx xxx xxx
"(c)Limitation on capital losses. Losses from sales or
exchange of capital assets shall be allowed only to the extent
of the gains from such sales or exchanges. If a bank or trust
company incorporated under the laws of the Philippines, a
substantial part of whose business is the receipt of deposits,
sells any bond, debenture, note, or certificate or other evidence
of indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof), with
interest coupons or in registered form, any loss resulting from
such sale shall not be subject to the foregoing limitation and
shall not be included in determining the applicability of such
limitation to other losses." ITADaE
The exclusionary clause found in the foregoing text of the law does not
include all forms of securities but specifically covers
only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are the
instruments of credit normally dealt with in the usual lending operations
of a financial institution. Equity holdings cannot come close to being,
within the purview of "evidence of indebtedness" under the second
sentence of the aforequoted paragraph. Verily, it is for a like thesis that
the loss of petitioner bank in its equity investment in the Hongkong
subsidiary cannot also be deductible as a bad debt. The shares of stock
in question do not constitute a loan extended by it to its subsidiary
(First CBC Capital) or a debt subject to obligatory repayment by the
latter, essential elements to constitute a bad debt, but a long term
investment made by CBC.
One other item. Section 34(c)(1) of the NIRC states that the entire
amount of the gain or loss upon the sale or exchange of property, as
the case may be, shall berecognized. The complete text reads:
"SECTION 34.Determination of amount of and recognition of
gain or loss.
"(a)Computation of gain or loss. The gain from the sale or
other disposition of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis for
determining gain and the loss shall be the excess of the basis
or adjusted basis for determining loss over the amount
realized. The amount realized from the sale or other disposition
of property shall be to sum of money received plus the fair
market value of the property (other than money) received. (As
amended by E.O. No. 37)
"(b)Basis for determining gain or loss from sale or disposition
of property. The basis of property shall be (1) The cost
thereof in the cases of property acquired on or before March 1,
1913, if such property was acquired by purchase; or
"(2)The fair market price or value as of the date of acquisition if
the same was acquired by inheritance; or
"(3)If the property was acquired by gift the basis shall be the
same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except
that if such basis is greater than the fair market value of the
property at the time of the gift, then for the purpose of
determining loss the basis shall be such fair market value; or
"(4)If the property, other than capital asset referred to in
Section 21 (e), was acquired for less than an adequate
consideration in money or money's worth, the basis of such
property is (i) the amount paid by the transferee for the
property or (ii) the transferor's adjusted basis at the time of the
transfer whichever is greater.
"(5)The basis as defined in paragraph (c) (5) of this section if
the property was acquired in a transaction where gain or loss is
not recognized under paragraph (c) (2) of this section. (As
amended by E.O. No. 37)
"(c)Exchange of property.
"(1)General rule. Except as herein provided, upon the sale or
exchange of property, the entire amount of the gain or loss, as
the case may be, shall be recognized.
"(2)Exception. No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation (a) a
corporation which is a party to a merger or consolidation
exchanges property solely for stock in a corporation which is, a
party to the merger or consolidation, (b) a shareholder
exchanges stock in a corporation which is a party to the
merger or consolidation solely for the stock in another
corporation also a party to the merger or consolidation, or (c) a
security holder of a corporation which is a party to the merger
or consolidation exchanges his securities in such corporation
solely for stock or securities in another corporation, a party to
the merger or consolidation.
"No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for stock
in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four
persons, gains control of said corporation: Provided, That
stocks issued for services shall not be considered as issued in
return of property."
The above law should be taken within context on the general subject of
the determination and recognition of gain or loss; it is not preclusive of,
let alone renders completely inconsequential, the more specific
provisions of the code. Thus, pursuant, to the same section of the law,
no such recognition shall be made if the sale or exchange is made in
pursuance of a plan of corporate merger or consolidation or, if as a
result of an exchange of property for stocks, the exchanger, alone or
together with others not exceeding four, gains control of the
corporation. 7 Then, too, how the resulting gain might be taxed, or
whether or not the loss would be deductible and how, are matters
properly dealt with elsewhere in various other sections of the NIRC. 8 At
all events, it may not be amiss to once again stress that the basic rule is
still that any capital loss can be deducted only from capital gains under
Section 33(c) of the NIRC.

In sum
(a)The equity investment in shares of stock held by CBC of
approximately 53% in its Hongkong subsidiary, the First CBC Capital
(Asia), Ltd., is not an indebtedness, and it is a capital, not an
ordinary, asset. 9
(b)Assuming that the equity investment of CBC has indeed become
"worthless," the loss sustained is a capital, not an ordinary, loss. 10
(c)The capital loss sustained by CBC can only be deducted from capital
gains if any derived by it during the same taxable year that the
securities have become "worthless." 11
WHEREFORE, the Petition is DENIED. The decision of the Court of
Appeals disallowing the claimed deduction of P16,227,851.80 is
AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Puno, Kapunan, Mendoza, Panganiban,
Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, Ynares-
Santiago, and De Leon, Jr., JJ.,concur.
Footnotes
1.Let it be stressed that referred to here are the intangibles of First CBC
Capital (Asia), Ltd., specifically its franchise and goodwill, and not of
CBC or its investments nor to any outstanding shares of stock for that
matter of either corporation which are correctly treated as equity
capital of First CBC Capital or investment of CBC, as the case may be,
and thus invariably reflected as such in financial statements.
2.See Sections 29 and 30, NIRC.
3.Section 20(z) of the NIRC provides:
"(z)The term 'ordinary income' includes any gain from the sale or exchange
of property which is not a capital asset or property described in
Section 34 (now 33) (a). Any gain from the sale or exchange of
property which is treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as from the sale or
exchange of property which is not a capital asset as defined in
Section 34 (now 33) (a). The term 'ordinary loss' includes any loss
from the sale or exchange of property which is not a capital asset.
Any loss from the sale or exchange of property which is treated or
considered, under other provisions of this Title, as 'ordinary loss' shall
be treated as loss from the sale or exchange of property which is not
a capital asset."
4."(t) The term 'securities' means shares of stock in a corporation and rights
to subscribe for or to receive such shares. The term includes bonds,
debentures, notes, or certificates, or other evidence of indebtedness,
issued by any corporation, including those issued by a government or
political subdivision thereof, with interest coupons or in registered
form."
5.Sec. 29(4)(B) of the NIRC.
6.Sec. 33(e) and (f), NIRC, provides:
xxx xxx xxx
(e)Retirement of bonds, etc. For the purposes of this Title, amounts
received by the holder upon the retirement of bonds, debentures,
notes or certificates or other evidences of indebtedness issued by any
corporation (including those issued by a government or political
subdivision thereof) with the interest coupons or in registered form,
shall be considered as amounts received in exchange therefor.
(f)Gains and losses from short sales, etc. For the purpose of this Title
(1)Gains or losses from short sales of property shall be considered as gains
or losses from sales or exchanges of capital assets; and
(2)Gains or losses attributable to the failure to exercise privileges or options
to buy or sell property shall be considered as capital gains or losses.
7.Sec. 34(c), NIRC.
8.See Sections 29, 30, 32 and 33, NIRC.
9.Sec. 33(1), NIRC.
10.Sec. 29(D)(4)(B), NIRC.
11.Sec. 33 (c), in relation to Sec. 29(d)(4)(B), NIRC; evidently, no such capital
gains have been derived by CBC during the taxable year in question.

||| (China Banking Corp. v. Court of Appeals, G.R. No. 125508, July 19,
2000)
SECOND DIVISION
[G.R. No. 118794. May 8, 1996.]
PHILIPPINE REFINING COMPANY (now known as
"UNILEVER PHILIPPINES [PRC], INC."), petitioner, vs.
COURT OF APPEALS, COURT OF TAX APPEALS, and THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
Antonio H. Garces for petitioner.
SYLLABUS
1.REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF THE COURT OF
TAX APPEALS, GENERALLY UPHELD ON APPEAL; CASE AT BENCH.
The Court of Tax Appeals is a highly specialized body specifically
created for the purpose of reviewing tax cases. Through its expertise, it
is undeniably competent to determine the issue of whether or not the
debt is deductible through the evidence presented before it. Because of
this recognized expertise, the findings of the CTA will not ordinarily be
reviewed absent a showing of gross error or abuse on its part. The
findings of fact of the CTA are binding on this Court and in the absence
of strong reasons for this Court to delve into facts, only questions of
law are open for determination. Were it not, therefore, due to the desire
of this Court to satisfy petitioner's calls for clarification and to use this
case as a vehicle for exemplification, this appeal could very well have
been summarily dismissed.
2.TAXATION; NATIONAL INTERNAL REVENUE CODE; INCOME TAX; BAD
DEBTS; REQUISITES FOR DEDUCTION. For debts to be considered as
"worthless," and thereby qualify as "bad debts" making them deductible,
the taxpayer should show that (1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year; (3) the debt must be charged off
during the taxable year; and (4) the debt must arise from the business
or trade of the taxpayer. Additionally, before a debt can be considered
worthless, the taxpayer must also show that it is indeed uncollectible
even in the future. Furthermore, there are steps outlined to be
undertaken by the taxpayer to prove that he exerted diligent efforts to
collect the debts, viz: (1) sending of statement of accounts; (2) sending
of collection letters; (3) giving the account to a lawyer for collection;
and (4) filing a collection case in court.
3.ID.; ID.; ID.; DEFICIENCY TAX ASSESSMENT; FAILURE TO PAY WITHIN
30 DAYS RENDERS TAXPAYER LIABLE FOR PAYMENT OF 25%
SURCHARGE AND 20% INTEREST. As correctly pointed out by the
Solicitor General, the deficiency tax assessment in this case, which was
the subject of the demand letter of respondent Commissioner dated
April 11, 1989, should have been paid within thirty (30) days from
receipt thereof. By reason of petitioner's default thereon, the
delinquency penalties of 25% surcharge and interest of 20% accrued
from April 11, 1989. The fact that petitioner appealed the assessment to
the CTA and that the same was modified does not relieve petitioner of
the penalties incident to delinquency. The reduced amount of
P237,381.25 is but a part of the original assessment of P1,892,584.00.
4.ID.; TAX LAWS IMPOSING PENALTIES FOR DELINQUENCIES, INTENDED
TO HASTEN PAYMENT OF TAXES. Tax laws imposing penalties for
delinquencies, so we have long held, are intended to hasten tax
payments by punishing evasions or neglect of duty in respect thereof. If
penalties could be condoned for flimsy reasons, the law imposing
penalties for delinquencies would be rendered nugatory, and the
maintenance of the Government and its multifarious activities will be
adversely affected.
5.ID.; NATIONAL INTERNAL REVENUE CODE; COLLECTION OF PENALTY
AND INTEREST IN CASE OF DELINQUENCY, MANDATORY. We have
likewise explained that it is mandatory to collect penalty and interest at
the stated rate in case of delinquency. The intention of the law is to
discourage delay in the payment of taxes due the Government and, in
this sense, the penalty and interest are not penal but compensatory for
the concomitant use of the funds by the taxpayer beyond the date
when he is supposed to have paid them to the Government.
D E C I S I O N
REGALADO, J p:
This is an appeal by certiorari from the decision of respondent
Court of Appeals 1 affirming the decision of the Court of Tax Appeals
which disallowed petitioner's claim for deduction as bad debts of
several accounts in the total sum of P395,324,27, and imposing a
25% surcharge and 20% annual delinquency interest on the alleged
deficiency income tax liability of petitioner. Cdpr
Petitioner Philippine Refining Company (PRC) was assessed by
respondent Commissioner of Internal Revenue (Commissioner) to pay
a deficiency tax for the year 1985 in the amount of P1,892,584.00,
Deficiency Income Tax

Net Income per investigationP197,502,568.00
Add: Disallowances
Bad DebtsP713,070.93
Interest ExpenseP2,666,545.49P3,379,616.00

Net Taxable IncomeP200,882,184.00

Tax Due ThereonP70,298,764.00
Less: Tax PaidP69,115,899.00
Deficiency Income TaxP1,182,865.00
Add: 20% Interest (60% max.)P709,719.00

Total Amount Due and CollectibleP1,892.584.00 2

The assessment was timely protested by petitioner on April 26, 1989, on
the ground that it was based on the erroneous disallowances of "bad
debts" and "interest expense" although the same are both allowable
and legal deductions. Respondent Commissioner, however, issued a
warrant of garnishment against the deposits of petitioner at a branch of
City Trust Bank, in Makati, Metro Manila, which action the latter
considered as a denial of its protest.
Petitioner accordingly filed a petition for review with the Court of Tax
Appeals (CTA) on the same assignment of error, that is, that the "bad
debts" and "interest expense" are legal and allowable deductions. In its
decision 3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA
modified the findings of the Commissioner by reducing the deficiency
income tax assessment to P237,381.26, with surcharge and interest
incident to delinquency. In said decision, the Tax Court reversed and set
aside the Commissioner's disallowance of the interest expense of
P2,666,545.19 but maintained the disallowance of the bad debts of
thirteen (13) debtors in the total sum of P395,324.27.
Petitioner then elevated the case to respondent Court of
Appeals which, as earlier stated, denied due course to the petition
for review and dismissed the same on August 24, 1994 in CA-G.R.
S.P. No 31190, 4 on the following ratiocination:
We agree with respondent Court of Tax Appeals:
Out of the sixteen (16) accounts alleged as bad debts,
We find that only three (3) accounts have met the
requirements of the worthlessness of the accounts, hence were
properly written off as bad debts, namely:
1.Petronila Catap
(Pet Mini Grocery)P29,098.30
2.Esther Guinto
(Esther Sari-sari Store)254,375.54
3.Manuel Orea
(Elman Gen. Mdsg.)34,272.82

TOTALP317,746.66
xxx xxx xxx
With regard to the other accounts, namely:
1.Remoblas StoreP11,961.00
2.Tomas Store16,842.79
3.AFPCES13,833.62
4.CM Variety Store10,895.82
5.U'Ren Mart Enterprise10,487.08
6.Aboitiz Shipping Corp.89,483.40
7.J. Ruiz Trucking69,640.34
8.Renato Alejandro13,550.00
9.Craig, Mostyn Pty. Ltd.23,738.00
10.C. Itoh19,272.22
11.Crocklaan B. V.77,690.00
12.Enriched Food Corp.24,158.00
13.Lucito Sta. Maria13,772.00

TOTALP395,324.27
=========
We find that said accounts have not satisfied the requirements of the
'worthlessness of a debt'. Mere testimony of the Financial Accountant
of the Petitioner explaining the worthlessness of said debts is seen by
this Court as nothing more than a self-serving exercise which lacks
probative value. There was no iota of documentary evidence (e.g.,
collection letters sent, report from investigating fieldmen, letter of
referral to their legal department, police report/affidavit that the
owners were bankrupt due to fire that engulfed their stores or that
the owner has been murdered etc.), to give support to the testimony
of an employee of the Petitioner. Mere allegations cannot prove the
worthlessness of such debts in 1985. Hence, the claim for deduction
of these thirteen (13) debts should be rejected." 5
1.This pronouncement of respondent Court of Appeals relied
on the ruling of this Court in Collector vs. Goodrich International
Rubber Co., 6 which established the rule in determining the
"worthlessness of a debt." In said case, we held that for debts to be
considered as "worthless," and thereby qualify as "bad debts" making
them deductible, the taxpayer should show that (1) there is a valid
and subsisting debt; (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt
must be charged off during the taxable year; and (4) the debt must
arise from the business or trade of the taxpayer. Additionally, before
a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the
taxpayer to prove that he exerted diligent efforts to collect the
debts, viz: (1) sending of statement of accounts; (2) sending of
collection letters; (3) giving the account to a lawyer for collection;
and (4) filing a collection case in court.
On the foregoing considerations, respondent Court of Appeals
held that petitioner did not satisfy the requirements of
"worthlessness of a debt" as to the thirteen (13) accounts disallowed
as deductions.
It appears that the only evidentiary support given by PRC for
its aforesaid claimed deductions was the explanation or justification
posited by its financial adviser or accountant, Guia D. Masagana. Her
allegations were not supported by any documentary evidence, hence,
both the Court of Appeals and the CTA ruled that said
contentions per se cannot prove that the debts were indeed
uncollectible and can be considered as bad debts as to make them
deductible. That both lower courts are correct is shown by
petitioner's own submission and the discussion thereof which we
have taken time and patience to cull from the antecedent
proceedings in this case, albeit bordering on factual settings.

The accounts of Remoblas Store in the amount of P11,961.00
and CM Variety Store in the amount of P10,895.82 are uncollectible,
according to petitioner, since the stores were burned in November,
1984 and in early 1985, respectively, and there are no assets
belonging to the debtors that can be garnished by PRC. 7However,
PRC failed to show any documentary evidence for said allegations.
Not a single document was offered to show that the stores were
burned, even just a police report or an affidavit attesting to such loss
by fire. In fact, petitioner did not send even a single demand letter
to the owners of said stores.
The account of Tomas Store in the amount of P16,842.79 is
uncollectible, claims petitioner PRC, since the owner thereof was
murdered and left no visible assets which could satisfy the debt.
Withal, just like the accounts of the two other stores just mentioned,
petitioner again failed to present proof of the efforts exerted to
collect the debt, other than the aforestated asseverations of its
financial adviser.
The accounts of Aboitiz Shipping Corporation and J. Ruiz
Trucking in the amounts of P89,483.40 and P69,640.34, respectively,
both of which allegedly arose from the hijacking of their cargo and
for which they were given 30% rebates by PRC, are claimed to be
uncollectible. Again, petitioner failed to present an iota of proof, not
even a copy of the supposed policy regulation of PRC that it gives
rebates to clients in case of loss arising from fortuitous events
or force majeure, which rebates it now passes off as uncollectible
debts.
As to the account of P13,550.00 representing the balance
collectible from Renato Alejandro, a former employee who failed to
pay the judgment against him, it is petitioner's theory that the same
can no longer be collected since his whereabouts are unknown and
he has no known property which can be garnished or levied upon.
Once again, petitioner failed to prove the existence of the said case
against that debtor or to submit any documentation to show that
Alejandro was indeed bound to pay any judgment obligation.
The amount of P13,772.00 corresponding to the debt of Lucito
Sta. Maria is allegedly due to the loss of his stocks through robbery
and the account is uncollectible due to his insolvency. Petitioner
likewise failed to submit documentary evidence, not even the written
reports of the alleged investigation conducted by its agents as
testified to by its aforenamed financial adviser.
Regarding the accounts of C. Itoh in the amount of P19,272.22,
Crocklaan B.V. in the sum of P77,690.00, and Craig, Mostyn Pty. Ltd.
with a balance of P23,738.00, petitioner contends that these debtors
being foreign corporations, it can sue them only in their country of
incorporation; and since this will entail expenses more than the
amounts of the debts to be collected, petitioner did not file any
collection suit but opted to write them off as bad debts. Petitioner
was unable to show proof of its efforts to collect the debts, even by
a single demand letter therefor. While it is not required to file suit, it
is at least expected by the law to produce reasonable proof that the
debts are uncollectible although diligent efforts were exerted to
collect the same.
The account of Enriched Food Corporation in the amount of
P24,158.00 remains unpaid, although petitioner claims that it sent
several letters. This is not sufficient to sustain its position, even if
true, but even smacks of insouciance on its part. On top of that, it
was unable to show a single copy of the alleged demand letters sent
to the said corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in
the amount of P13,833.62, petitioner asserts that since the debtor is
an agency of the government, PRC did not file a collection suit
therefor. Yet, the mere fact that AFPCES is a government agency
does not preclude PRC from filing suit since said agency, while
discharging proprietary functions, does not enjoy immunity from suit.
Such pretension of petitioner cannot pass judicial muster.
No explanation is offered by petitioner as to why the unpaid
account of U'Ren Mart Enterprise in the amount of P10,487.08 was
written off as a bad debt. However, the decision of the CTA includes
this debtor in its findings on the lack of documentary evidence to
justify the deductions claimed, since the worthlessness of the debts
involved are sought to be established by the mere self-serving
testimony of its financial consultant.
The contentions of PRC that nobody is in a better position to
determine when an obligation becomes a bad debt than the creditor
itself, and that its judgment should not be substituted by that of
respondent court as it is PRC which has the facilities in ascertaining
the collectibility or uncollectibility of these debts, are presumptuous
and uncalled for. The Court of Tax Appeals is a highly specialized
body specifically created for the purpose of reviewing tax cases.
Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence
presented before it. 8
Because of this recognized expertise, the findings of the CTA
will not ordinarily be reviewed absent a showing of gross error or
abuse on its part. 9

The findings of fact of the CTA are binding on
this Court and in the absence of strong reasons for this Court to
delve into facts, only questions of law are open for
determination. 10Were it not, therefore, due to the desire of this
Court to satisfy petitioner's calls for clarification and to use this case
as a vehicle for exemplification, this appeal could very well have
been summarily dismissed.
The Court vehemently rejects the absurd thesis of petitioner
that despite the supervening delay in the tax payment, nothing is
lost on the part of the Government because in the event that these
debts are collected, the same will be returned as taxes to it in the
year of the recovery. This is an irresponsible statement which
deliberately ignores the fact that while the Government may
eventually recover revenues under that hypothesis, the delay caused
by the non-payment of taxes under such a contingency will
obviously have a disastrous effect on the revenue collections
necessary for governmental operations during the period
concerned. cdphil
2.We need not tarry at length on the second issue raised by
petitioner. It argues that the imposition of the 25% surcharge and
the 20% delinquency interest due to delay in its payment of the tax
assessed is improper and unwarranted, considering that the
assessment of the Commissioner was modified by the CTA and the
decision of said court has not yet become final and executory.
Regarding the 25% surcharge penalty, Section 248 of the Tax
Code provides:
"SECTION 248.Civil Penalties. (a) There shall be
imposed, in addition to the tax required to be paid, a penalty
equivalent to twenty-five percent (25%) of the amount due, in
the following cases:
xxx xxx xxx
(3)Failure to pay the tax within the time prescribed for its
payment."
With respect to the penalty of 20% interest, the relevant
provision is found in Section 249 of the same Code, as follows:
"SECTION 249.Interest. (a) In general. There shall
be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such
higher rate as may be prescribed by regulations, from the date
prescribed for payment until the amount is fully paid.
xxx xxx xxx
(c)Delinquency interest. In case of failure to pay:
(1)The amount of the tax due on any return required to
be filed, or
(2)The amount of the tax due for which no return is
required, or
(3)A deficiency tax, or any surcharge or interest thereon,
on the due date appearing in the notice and demand of
the Commissioner,
there shall be assessed and collected, on the unpaid amount,
interest at the rate prescribed in paragraph (a) hereof until the
amount is fully paid, which interest shall form part of the tax "
(Emphasis supplied)
xxx xxx xxx
As correctly pointed out by the Solicitor General, the deficiency
tax assessment in this case, which was the subject of the demand
letter of respondent Commissioner dated April 11, 1989, should have
been paid within thirty (30) days from receipt thereof. By reason of
petitioner's default thereon, the delinquency penalties of 25%
surcharge and interest of 20% accrued from April 11, 1989. The fact
that petitioner appealed the assessment to the CTA and that the
same was modified does not relieve petitioner of the penalties
incident to delinquency. The reduced amount of P237,381.25 is but a
part of the original assessment of P1,892.584.00.
Our attention has also been called to two of our previous
rulings and these we set out here for the benefit of petitioner and
whosoever may be minded to take the same stance it has adopted
in this case. Tax laws imposing penalties for delinquencies, so we
have long held, are intended to hasten tax payments by punishing
evasions or neglect of duty in respect thereof. If penalties could be
condoned for flimsy reasons, the law imposing penalties for
delinquencies would be rendered nugatory, and the maintenance of
the Government and its multifarious activities will be adversely
affected. 11
We have likewise explained that it is mandatory to collect
penalty and interest at the stated rate in case of delinquency. The
intention of the law is to discourage delay in the payment of taxes
due the Government and, in this sense, the penalty and interest are
not penal but compensatory for the concomitant use of the funds by
the taxpayer beyond the date when he is supposed to have paid
them to the Government. 12

Unquestionably, petitioner chose to turn
a deaf ear to these injunctions.
ACCORDINGLY, the petition at bar is DENIED and the
judgment of respondent Court of Appeals is hereby AFFIRMED, with
treble costs against petitioner.

SO ORDERED.
Romero, Puno, Mendoza and Torres, Jr., JJ., concur.
Footnotes
1.Justice Eduardo G. Montenegro, ponente, and Justices Minerva Gonzaga-
Reyes and Conrado M. Vasquez, Jr., concurring.
2.Rollo, 48.
3.Ibid., 63; penned by Associate Judge Ramon O. de Veyra, with the
concurrence of Presiding Judge Ernesto D. Acosta and Associate
Judge Manuel K. Gruba.
4.Ibid., 41-42.
5.Rollo, 42-43.
6.L-22265, December 26, 1967, 21 SCRA 1336.
7.Rollo, 58.
8Commissioner of Internal Revenue vs. Wander Philippines, Inc., et al., G.R.
No. 68375, April 15, 1988, 160 SCRA 573.
9.The Coca-Cola Export Corporation vs. Commissioner of Internal Revenue,
et al., L-23604, March 15, 1974, 56 SCRA 5; Nasiad, et al. vs. Court of
Tax Appeals, L-29318, November 29, 1974, 61 SCRA 238.
10.Commissioner of Internal Revenue vs. Tours Specialists, Inc., et al., G.R.
No. 66416, March 21, 1990, 183 SCRA 402.
11.Jamora, et al. vs. Meer, etc., et al., 74 Phil. 22 (1942).
12.Republic vs. Philippine Bank of Commerce, L-20951, July 31, 1970, 34
SCRA 361.

||| (Philippine Refining Co. v. Court of Appeals, G.R. No. 118794, May 08,
1996)
EN BANC
[G.R. No. L-22492. September 5, 1967.]
BASILAN ESTATES, INC., petitioner, vs. THE
COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
Felix A. Gulfin and Antonio S. Alano for petitioner.
SYLLABUS
1.NOTICE OF ASSESSMENT, WHEN DEEMED MADE. Under Section
331 of the Tax Code requiring 5 years within which to assess deficiency
taxes, the assessment is deemed made when notice to this effect is
released, mailed or sent by the Collector of Internal Revenue to the
taxpayer, and it is not required that the notice be received by the
taxpayer within the aforementioned 5-year period (Collector of Internal
Revenue vs. Bautista, L-12250 & L-12259, May 27, 1959)
2.ID.; DEPRECIATION; DEFINITION. Depreciation is the gradual
diminution in the useful value of tangible property resulting from wear
and tear and normal obsolescence. The term is also applied to
amortization of the value of intangible assets, the use of which in the
trade or business is definitely limited in duration (Jose Aranas,
Annotation and Jurisprudence on the National Internal Revenue Code,
as Amended, 2nd Ed., Vol. 1, p. 263).
3.ID.; ID.; WHEN DEPRECIATION COMMENCES. Depreciation
commences with the acquisition of the property and its owner is not
bound to see his property gradually waste, without making provision
out of earnings for its replacement. It is entitled to see that from
earnings the value of the property invested is kept unimpaired, so that
at the end of any given term of years, the original investment remains
as it was in the beginning. It is not only the right of a company to make
such a provision, but it is its duty to its bond and stockholders, and, in
the case of a public service corporation, at least, its plain duty to the
public (Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. Ed. 371).
Accordingly, the law permits the taxpayer to recover gradually his
capital investment in wasting assets free from income tax (Detroit
Edison Co. vs. Commissioner, 131 F 2d. 619). Precisely, Section 30(f) (1)
of the Tax Code allows a deduction from gross income for depreciation
but limits the recovery to the capital invested in the asset being
depreciated.
4.ID.; BASIS OF DEPRECIATION. The income tax law does not
authorize the depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot be claimed and
allowed. The reason is that deduction from gross income are privileges
(Palmer vs. State Commission of Revenue & Taxation, 156 Kan. 690, 135
P. 2d. 899), not matters of right (Souther Weaving Co. vs. Query, 206 SC
307, 34 SE 2d. 51). They are not created by implication but upon clear
expression in the law (Gutierrez vs. Collector of Internal Revenue, L-
19537, May 20, 1965). Moreover, the recovery, free of income tax, of an
amount more than the invested capital in an asset will transgress the
underlying purpose of a depreciation allowance. For then what the
taxpayer would recover will be, not only the acquisition cost, but also
some profit. Recovery in due time through depreciation of investment
made is the philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the underlying reason
for the allowance of a deduction for depreciation.
5.ID.; TRAVELING EXPENSES; PERIOD WITHIN WHICH TO KEEP
SUPPORTING PAPERS; CASE AT BAR. Under Section 337 of the
National Internal Revenue Code, receipts and papers supporting
traveling expenses need be kept by the taxpayer for a period of five
years from the last entry.
6.ID.; SURTAX ON UNREASONABLY ACCUMULATED PROFITS; TEST TO
DETERMINE REASONABLENESS ACCUMULATION OF PROFITS.
Persuasive jurisprudence on the matter such as those in the United
States from where our tax law was deprived (Collector of Internal
Revenue vs. Binalbagan Estate, Inc., L-12752, Jan. 30, 1965), has it that:
"In order to determine whether profits were accumulated for the
reasonable needs of the business or to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is
manifested at the time of the accumulation, not subsequently declared
intentions which are merely the products of afterthought (Jacob
Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative
Supplement, p. 213). In determining whether accumulations of earnings
or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take unto account prior accumulations,
since accumulations prior to the year involved may have been sufficient
to cover the business needs and additional accumulations during the
year involved would not reasonably be necessary. (Ibid, p. 202).
D E C I S I O N
BENGZON, J.P., J p:
A Philippine corporation engaged in coconut industry, Basilan Estate,
Inc. with principal offices in Basilan City, filed on March 24, 1954 its
income tax returns for 1953 and paid an income tax of P8,028. On
February 26, 1959, the Commissioner of Internal Revenue, per
examiner's report of February 19, 1959, assessed Basilan Estates, Inc., a
deficiency income tax of P3,912 for 1953 and P86,867.85 as 25% surtax
on unreasonably accumulated profits as of 1953 pursuant to Section 25
of the Tax Code. On non-payment of the assessed amount, a warrant of
distraint and levy was issued but the same was not executed because
Basilan Estate, Inc. succeeded in getting the Deputy Commissioner of
Internal Revenue to order the Director of the district in Zamboanga City
to hold execution and maintain constructive embargo instead. Because
of its refusal to waive the period of prescription, the corporation's
request for reinvestigation was not given due course, and on December
2, 1960, notice was served the corporation that the warrant of distraint
and levy would be executed.
On December 20, 1960, Basilan Estate, Inc. filed before the Court of Tax
Appeals a petition for review of the Commissioner's assessment,
alleging prescription of the period of assessment and collection; error in
disallowing claimed depreciations, travelling and miscellaneous expenses
and error in finding the existence of unreasonably accumulated profits
and the imposition of 25% surtax thereon. On October 31, 1963, the
Court of Tax Appeals found that there was no prescription and affirmed
the deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer,
upon the following issues:
1.Has the Commissioner's right to collect deficiency income tax
prescribed?
2.Was the disallowance of items claimed as deductible proper?
3.Have there been unreasonably accumulated profits? If so, should the
25% surtax be imposed on the balance of the entire surplus from 1947-
1953, or only for 1953?
4.Is the petitioner exempt from the penalty tax under Republic Act
1823 amending Section 25 of the Tax Code?
PRESCRIPTION
There is no dispute that the assessment of the deficiency tax was made
on February 26, 1959; but the petitioner claims that it never received
notice of such assessment or if it did, it received the notice beyond the
five-year prescriptive period. To show prescription, the annotation on
the notice (Exhibit 10, No. 52 ACR, p. 54-A of the BIR records) "No
accompanying letter 11/25/" is advanced as indicative of the fact that
receipt of the notice was after March 24, 1959, the last date of the five
year period within which to assess deficiency tax, since the original
returns were filed on March 24, 1954.
Although the evidence is not clear on this point, We cannot accept this
interpretation of the petitioner, considering the presence of
circumstances that lead Us to presume regularity in the performance of
official functions. The notice of assessment shows the assessment to
have been made on February 26, 1959, well within the five-year period.
On the right side of the notice is also stamped "Feb. 26, 1959"
denoting the date of release, according to Bureau of Internal Revenue
practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR
records) answering petitioner's request to lift the warrant of distraint
and levy, asserts that notice had been sent to petitioner. In the letter of
the Regional Director forwarding the case to the Chief of the
Investigation Division which the latter received on March 10, 1959 (p. 71
of the BIR records), notice of assessment was said to have been sent to
petitioner. Subsequently, the Chief of the Investigation Division indorsed
on March 18, 1959 (p. 24 of the BIR records) the case to the Chief of
the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official
performance of duty must necessarily prevail over petitioner's contrary
interpretation. Besides, even granting that notice had been received by
the petitioner late, as alleged, under Section 331 of the Tax Code
requiring five years within which to assess deficiency taxes, the
assessment is deemed made when notice to this effect is released,
mailed or sent by the Collector to the taxpayer and it is not required
that the notice be received by the taxpayer within the aforementioned
five-year period. 1
ASSESSMENT
The questioned assessment is as follows:
Net Income per returnP40,142.90
Add:Overclaimed deprecia-
tionP10,500.49
Mis. expenses disallowed6,759.17
Officer's travelling expenses
disallowed2,300.4019,560.06
__________________
Net Income per
InvestigationP59,702.96
_________
20% tax on P59,702.9611,940.00
Less: Tax already assessed8,028.00
________
Deficiency income taxP3,912.00
Add Additional tax of 25% on
P347,507.0186,876.75
_________
Tax Due & CollectibleP90,788.75
=========
The Commissioner disallowed:
Overclaimed depreciationP10,500.49
Miscellaneous expenses6,759.17
Officer's travelling expenses2,300.40
DEDUCTIONS
A.Depreciation. Basilan Estates, Inc. claimed deductions for the
depreciation of its assets up to 1949 on the basis of their acquisition
cost. As of January 1, 1950 it changed the depreciable value of said
assets by increasing it to conform with the increase in cost for their
replacement. Accordingly, from 1950 to 1953 it deducted from gross
income the value of depreciation computed on the reappraised value.

In 1953, the year involved in this case, taxpayer claimed the following
depreciation deduction:
Reappraised assetsP47,342.53
New assets consisting of hospital building
and equipment3,910.45
__________
Total depreciationP51,252.98
__________
Upon investigation and examination of taxpayer's books and papers,
the Commissioner of Internal Revenue found that the reappraised
assets depreciated in 1953 were the same ones upon which
depreciation was claimed in 1952. And for the year 1952, the
Commissioner had already determined, with taxpayer's concurrence,
the depreciation allowable on said assets to be P36,842.04,
computed on their acquisition cost at rates fixed by the taxpayer.
Hence, the Commissioner pegged the deductible depreciation for
1953 on the same old assets at P36,842.04 and disallowed the excess
thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be
determined on the acquisition cost or on the reappraised value of the
assets.
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. The
term is also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in
duration. 2 Depreciation commences with the acquisition of the property
and its owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to
see that from earnings the value of the property invested is kept
unimpaired, so that at the end of any given term of years, the original
investment remains as it was in the beginning. It is not only the right of
a company to make such a provision, but it is its duty to its bond and
stockholders, and, in the case of a public service corporation, at least, its
plain duty to the public. 3 Accordingly, the law permits the taxpayer to
recover gradually his capital investment in wasting assets free from
income tax. 4 Precisely, Section 30 (f) (1) which states:
"(1)In general. A reasonable allowance for deterioration of
property arising out of its use or employment in the business
or trade, or out of its not being used: Provided, that when the
allowance authorized under this subsection shall equal the
capital invested by the taxpayer . . . no further allowance shall
be made. . . ."
allows a deduction from gross income for depreciation but limits the
recovery to the capital invested in the asset being depreciated.
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above such
cost cannot be claimed and allowed. The reason is that deductions from
gross income are privileges, 5 not matters of right. 6 They are not
created by implication but upon clear expression in the law. 7
Moreover, the recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer would recover will
be, not only the acquisition cost, but also some profit. Recovery in due
time thru depreciation of investment made is the philosophy behind
depreciation allowance; the idea of profit on the investment made has
never been the underlying reason for the allowance of a deduction for
depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the
amount of P10,500.49 has no justification in the law. The determination,
therefore, of the Commissioner of Internal Revenue disallowing said
amount, affirmed by the Court of Tax Appeals, is sustained.
B.Expenses. The next item involves disallowed expenses incurred in
1953, broken as follows:
Miscellaneous expensesP6,759.17
Officer's travelling expenses2,300.40
_________
TotalP9,059.57
_________
These were disallowed on the ground that the nature of these expenses
could not be satisfactorily explained nor could the same be supported
by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 as actual
expenses credited to the account of the president of the corporation
incurred in the interest of the corporation during the president's trip to
Manila (pp. 33-34 of TSN of Dec. 5, 1962); he stated that the P2,300.40
was the president's travelling expenses to and from Manila; as to the
vouchers and receipts of these, he said the same were made but got
burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN).
Petitioner further argues that when it sent its records to Manila in
February, 1959, the papers in support of these miscellaneous and
travelling expenses were not included for the reason that by February 9,
1959, when the Bureau of Internal Revenue decided to investigate,
petitioner had no more obligation to keep the same since five years
had lapsed from the time these expenses were incurred (p. 41 of same
TSN). On this ground, the petitioner may be sustained for under Section
337 of the Tax Code, receipts and papers supporting such expenses
need be kept by the taxpayer for a period of five years from the last
entry. At the time of the investigation, said five years had lapsed.
Taxpayer's stand on this issue is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits
unreasonably accumulated, provides:
"SEC 25.Additional tax on corporations improperly
accumulating profits or suplus (a) Imposition of Tax. If
any corporation, except banks, insurance companies, or
personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate
instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax
equal to twenty-five per centum of the undistributed portion of
its accumulated profits or surplus which shall be in addition to
the tax imposed by section twenty-four, and shall be
computed, collected and paid in the same manner and subject
to the same provisions of law including penalties, as that tax."
The Commissioner found that in violation of the abovequoted section,
petitioner had unreasonably accumulated profits as of 1953 in the
amount of P347,507.01, based on the following circumstances
(Examiner's Report, pp. 62-68 of BIR records):
1.Strong financial position of the petitioner as of December 31, 1953.
Assets were P388,617.00 while the liabilities amounted to only
P61,117.31 or a ratio of 6:1.
2.As of 1953, the corporation had considerable capital adequate to
meet the reasonable needs of the business amounting to P327,499.69
(assets less liabilities).
3.The P200,000 reserved for electrification of drier and mechanization
and the P50,000 reserved for malaria control were reverted to its
surplus in 1953.
4.Withdrawal of shareholders of large sums of money as personal loans.
5.Investment of undistributed earnings in assets having no proximate
connection with the business as hospital building and equipment
worth P59,794.72.
6.In 1953, with an increase of surplus amounting to P677,232.01, the
capital stock was increased to P500,000 although there was no need for
such increase.
Petitioner tried to show that in considering the surplus, the examiner
did not take into account the possible expenses for cultivation, labor,
fertilization, drainage, irrigation, repair, etc. (pp. 235-237 of TSN of Dec.
7, 1962). As aptly answered by the examiner himself, however, they were
already included as part of the working capital (pp. 237-238 of TSN of
Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000
for electrification of driers and mechanization and P50,000 for malaria
control which were reserved way back in 1948 (p. 67 of the BIR records)
but reverted to the general fund only in 1953. If there were any plans
for these amounts to be used in further expansion through projects, it
did not appear in the records as was properly indicated in 1948 when
such amounts were reserved. Thus, while in 1948 it was already clear
that the money was intended to go to future projects, in 1953 upon
reversion to the general fund, no such intention was shown. Such
reversion therefore gave occasion for the Government to consider the
same for tax purposes. The P250,000 reverted to the general fund was
sought to be explained as later used elsewhere: "part of it in the Hilano
Industries, Inc. in building the factory site and buildings to house
technical men . . . part of it was spent in the facilities for the waterworks
system and for industrialization of the coconut industry" (p. 117 of TSN
of Dec. 6, 1962). This is not sufficient explanation. Persuasive
jurisprudence on the matter such as those in the United States from
where our tax law was derived, 8 has it that "In order to determine
whether profits were accumulated for the reasonable needs of the
business or to avoid the surtax upon shareholders, the controlling
intention of the taxpayer is that which is manifested at the time of the
accumulation, not subsequently declared intentions which are merely
the products of afterthought. 9 The reversion here was made because
the reserved amount was not enough for the projects intended, without
any intent to channel the same to some particular future projects in
mind.
Petitioner argues that since it has P560,717.44 as its expenses for the
year 1953, a surplus of P347,507.01 is not unreasonably accumulated. As
rightly contended by the Government, there is no need to have such a
large amount at the beginning of the following year because during the
year, current assets are converted into cash and with the income
realized from the business as the year goes, these expenses may well be
taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to
say that the taxpayer is entitled to retain enough liquid net assets in
amounts approximately equal to current operating needs for the year to
cover "cost of goods sold and operating expenses" for "it excludes
proper consideration of funds generated by the collection of notes
receivable as trade accounts during the course of the year. 10 In fact,
just because the total accumulations are less than 70% of the annual
operating expenses of the year, it does not mean that the
accumulations are reasonable as a matter of law." 11

Petitioner tried to show that investments were made with Basilan
Coconut Producers Cooperative Association and Basilan Hospital (pp.
103-105 of TSN of Dec. 6, 1962) totalling P59,794.72 as of December
31, 1953. This shows all the more the unreasonable accumulation. As of
December 31, 1953 already P59,794.72 was spent yet as of that date
there was still a surplus of P347,507.01.
Petitioner questions why the examiner covered the period from 1948-
1953 when the taxable year on review was 1953. The surplus of
P347,507.01 was taken by the examiner from the balance sheet of
petitioner for 1953. To check the figure arrived at, the examiner traced
the accumulation process from 1947 until 1953, and petitioner's figure
stood out to be correct. There was no error in the process applied, for
previous accumulations should be considered in determining
unreasonable accumulations for the year concerned. "In determining
whether accumulations of earnings or profits in a particular year are
within the reasonable needs of a corporation, it is necessary to take into
account prior accumulations, since accumulations prior to the year
involved may have been sufficient to cover the business needs and
additional accumulations during the year involved would not reasonably
be necessary. 12
Another factor that stands put to show unreasonable accumulation is
the fact that large amounts were withdraw by or advanced to the
stockholders. For the year 1953 alone these totalled P197,229.26. Yet
the surplus of P347,507.01 was left as of December 31, 1953. We find
unacceptable petitioner's explanation that these were advances made in
furtherance of the business purposes of the petitioner. As correctly held
by the Court of Tax Appeals, while certain expenses of the corporation
were credited against these amounts, the unspent balance was retained
by the stockholders without refunding them to petitioner at the end of
each year. These advances were in fact indirect loans to the
stockholders indicating the unreasonable accumulation of surplus
beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the
Internal Revenue Code as amended by R.A. 1823, approved June 27,
1957, whereby accumulated profits or surplus if invested in any dollar-
producing or dollar-earning industry or in the purchase of bonds issued
by the Central Bank may not be subject to the 25% surtax. We have but
to point out that the unreasonable accumulation was in 1953. The
exemption was by virtue of Republic Act 1823 which amended Sec. 25
only on June 22, 1957 more than three years after the period
covered by the assessment.
In resume, Basilan Estates Inc. is liable for the payment of deficiency
income tax and surtax for the year 1953 in the amount of P88,977.42,
Net income per returnP40,142.90
Add: Overclaimed depreciation10,500.49
_________
Net income per findingP50,643.39
__________
20% tax on P50,643.3910,128.67
Less: tax already assessed8,028.00
_________
Deficiency income tax2,100 67
Add: 25% surtax on P347,507.0186,876.75
_________
Total tax due and collectible88,977.42
_________
WHEREFORE, the judgment appealed from is modified to the extent
that petitioner is allowed its deductions for travelling and miscellaneous
expenses, but affirmed insofar as the petitioner is liable for P2,100.67 as
25% deficiency income tax for 1953 and P86,876.75 as 25% surtax on
the unreasonably accumulated profit of P347,507.01. No costs. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Ruiz
Castro, Angeles and Fernando, JJ., concur.
Footnotes
1.Collector of Internal Revenue vs. Bautista, L-12250 & L-12259, May 27,
1959.
2.Jose Araas, Annotations and Jurisprudence on the National Internal
Revenue Code, as Amended, Second Ed., Vol. 1, p. 263.
3.Knoxville vs. Knoxville Water Co., 212 U.S. 1, 53 L. ed. 371.
4.Detroit Edison Co. vs. Commissioner, 131 F (2d) 619 (CCA 6th, 1942), Aff'd
319 U.S. 98, 87 L. ed. 1286, 63 S.Ct. 902.
5.Palmer vs. State Commission of Revenue & Taxation, 156 Kan. 690, 135 P.
2d. 899.
6.Southern Weaving Co. vs. Query, 206 SC 307, 34 SE 2d 51.
7.See Gutierrez vs. Collector of Internal Revenue, L-19537, May 20, 1965.
8.Collector of Internal Revenue vs. Binalbagan Estate, Inc., L- 12752, Jan. 30,
1965.
9.Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative
Supplement, p. 213.
10.Ibid., p. 229.
11.Ibid., p. 222.
12.Ibid., p. 202.

||| (Basilan Estates, Inc. v. Commr., G.R. No. L-22492, September 05, 1967)
FIRST DIVISION
[G.R. No. 179356. December 14, 2009.]
KEPCO PHILIPPINES CORPORATION, petitioner, vs.
DECISION
CARPIO MORALES, J p:
Korea Electric Power Corporation (KEPCO) Philippines Corporation
(petitioner) is an independent power producer engaged in selling
electricity to the National Power Corporation (NPC).
After its incorporation and registration with the Securities and Exchange
Commission on June 15, 1995, petitioner forged a Rehabilitation
Operation Maintenance and Management Agreement with NPC for the
rehabilitation and operation of Malaya Power Plant Complex in Pililia,
Rizal. 1
On September 30, 1998, petitioner filed with the Commissioner of
Internal Revenue (respondent) administrative claims for tax refund in the
amounts of P4,895,858.01 representing unutilized input Value Added
Tax (VAT) payments on domestic purchases of goods and services for
the 3rd quarter of 1996 and P4,084,867.25 representing creditable VAT
withheld from payments received from NPC for the months of April and
June 1996.
Petitioner also filed a judicial claim before the Court of Tax Appeals
(CTA), docketed as CTA Case No. 5765, also based on the above-stated
amounts.
Petitioner filed before respondent on December 28, 1998 still another
claim for refund representing unutilized input VAT payments
attributable to its zero-rated sale transactions with NPC, including input
VAT payments on domestic goods and services in the amount of
P13,191,278.00 for the 4th quarter of 1996. Petitioner also filed the
same claim before the CTA on December 29, 1998, docketed as CTA
Case No. 5704. IDAaCc
The two petitions before the CTA for a refund in the total amount of
P22,172,003.26 were consolidated.
In his report, the court-commissioned auditor, Ruben R. Rubio,
concluded that the claimed amount of P20,550,953.93 was properly
substantiated for VAT purposes and subject of a valid refund.
By Decision of March 18, 2003, the CTA granted petitioner partial
refund with respect to unutilized input VAT payment on domestic
goods and services qualifying as capital goods purchased for the 3rd
and 4th quarters of 1996 in the amount of P8,325,350.35. All other
claims were disallowed.
Petitioner filed an urgent motion for reconsideration, claiming an
additional amount of P5,012,875.67.
By Resolution of July 8, 2003, 2 the CTA denied petitioner's motion, it
holding that part of the additional amount prayed for P1,557,676.13
involved purchases for the year 1997, and with respect to the
remaining amount of P3,455,199.54, it was not recorded under
depreciable asset accounts, hence, it cannot be considered as capital
goods.
Petitioner appealed under Rule 43 of the Rules of Court before the
Court of Appeals, 3 praying only for the refund of P3,455,199.54,
claiming that the purchases represented thereby were used in the
rehabilitation of the Malaya Power Plant Complex which should be
considered as capital expense to fall within the purview of capital
goods. AaSIET
The appellate court, by Decision of December 11, 2006, affirmed that of
the CTA. In arriving at its decision, the appellate court considered,
among other things, the account vouchers submitted by petitioner
which listed the purchases under inventory accounts as follows:
1)Inventory supplies/materials
2)Inventory supplies/lubricants
3)Inventory supplies/spare parts
4)Inventory supplies/supplies
5)Cost/O&M Supplies
6)Cost/O&M Uniforms and Working Clothes
7)Cost/O&M/Supplies
8)Cost/O&M/Repairs and Maintenance
9)Office Supplies
10)Repair and Maintenance/Mechanics
11)Repair and Maintenance/Common/General
12)Repair and Maintenance/Chemicals
Reconsideration of the appellate court's decision having been denied by
Resolution of August 17, 2007, the present petition for review
on certiorari was filed.
In the main, petitioner faults the appellate court for not considering the
purchases amounting to P3,455,199.54 as falling under the definition of
"capital goods."
The petition is bereft of merit.
Section 4.106-1 (b) of Revenue Regulations No. 7-95 defines capital
goods and its scope in this wise: DaACIH
xxx xxx xxx
(b)Capital Goods. Only a VAT-registered person may apply
for issuance of a tax credit certificate or refund of input taxes
paid on capital goods imported or locally purchased. The
refund shall be allowed to the extent that such input taxes
have not been applied against output taxes. The application
should be made within two (2) years after the close of the
taxable quarter when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to
the extent that such capital goods are used in VAT taxable
business. If it is also used in exempt operations, the input tax
refundable shall only be the ratable portion corresponding to
taxable operations.
"Capital goods or properties" refer to goods or properties with
estimated useful life greater that one year and which are
treated as depreciable assets under Section 29 (f), 4 used
directly or indirectly in the production or sale of taxable goods
or services. (underscoring supplied)
For petitioner's purchases of domestic goods and services to be
considered as "capital goods or properties," three requisites must
concur. First, useful life of goods or properties must exceed one
year; second, said goods or properties are treated as depreciable assets
under Section 34 (f) and; third, goods or properties must be used
directly or indirectly in the production or sale of taxable goods and
services. cHCIEA
From petitioner's evidence, the account vouchers specifically indicate
that the disallowed purchases were recorded under inventory accounts,
instead of depreciable accounts. That petitioner failed to indicate under
its fixed assets or depreciable assets account, goods and services
allegedly purchased pursuant to the rehabilitation and maintenance of
Malaya Power Plant Complex, militates against its claim for refund. As
correctly found by the CTA, the goods or properties must
be recorded andtreated as depreciable assets under Section 34 (F) of
the NIRC.
Petitioner further contends that since the disallowed items are treated
as capital goods in the general ledger and accounting records, as
testified on by its senior accountant, Karen Bulos, before the CTA, this
should have been given more significance than the account vouchers
which listed the items under inventory accounts.
A general ledger is a record of a business entity's accounts which make
up its financial statements. Information contained in a general ledger is
gathered from source documents such as account vouchers, purchase
orders and sales invoices. In case of variance between the source
document and the general ledger, the former is preferred.
The account vouchers presented by petitioner confirm that the
purchases cannot qualify as capital goods for they are held as inventory
items and not charged to any depreciable asset account. Petitioner has
proffered no explanation why the disallowed items were not listed
under depreciable asset accounts. DIcTEC
It is settled that tax refunds are in the nature of tax exemptions. Laws
granting exemptions are construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. 5 Where the taxpayer
claims a refund, the CTA as a court of record is required to conduct a
formal trial (trial de novo) to prove every minute aspect of the claim. 6
By the very nature of its functions, the CTA is dedicated exclusively to
the resolution of tax problems and has consequently developed an
expertise on the subject. Absent a showing of abuse or reckless exercise
of authority, 7 the Court appreciates no ground to disturb the appellate
court's Decision affirming that of the CTA.
IN FINE, petitioner having failed to establish that the disallowed items
should be classified as capital goods, the assailed Decision of the Court
of Appeals must be upheld.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Puno, C.J., Leonardo-de Castro, Bersamin and Villarama, Jr., JJ., concur.
Footnotes
1.Rollo, p. 241 Note 1 to Balance Sheets in petitioner's Annual Audited
Financial Statement for 1996.
2.Id. at 99-102.
3.The appeal was filed before the passage of Republic Act No. 9282,
elevating the rank of the Court of Tax Appeals to the level of the
Court of Appeals.
4.Now Section 34 (F) Depreciation.
(1) General Rule There shall be allowed as depreciation deduction a
reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade
or business. In the case of property held by one person for life with
remainder to another person, the deduction shall be computed as if
the life tenant were the absolute owner of the property and shall be
allowed to the life tenant. In case of property held in trust, the
allowable deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the pertinent
provisions of the instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income allowable to each. . .
.
5.Philippine Phosphate Fertilizer v. Commissioner of Internal Revenue, G.R.
No. 141973, June 28, 2005, 461 SCRA 369, 381.
6.Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No.
153204, August 31, 2005, 468 SCRA 571, 588-589.
7.Commissioner of Internal Revenue v. Cebu Toyo Corp., G.R. No. 149073,
February 16, 2005, 451 SCRA 447.
||| (KEPCO Phil. Corp. v. Commr., G.R. No. 179356, December 14, 2009)
FIRST DIVISION
[G.R. Nos. L-18843 & 18844. August 29, 1974.]
CONSOLIDATED MINES, INC., petitioner, vs. COURT OF
TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
[G.R. Nos. L-18853 & 18854.]
COMMISSIONER OF INTERNAL
REVENUE, petitioner, vs. CONSOLIDATED MINES,
INC., respondent.
Office of the Solicitor General for Commissioner of Internal Revenue.
Taada, Carreon & Taada for Consolidated Mines, Inc.
D E C I S I O N
MAKALINTAL, C.J p:
These are appeals from the amended decision of the Court of Tax
Appeals dated August 7, 1961, in CTA Cases No. 565 and 578, both
entitled "Consolidated Mines, Inc. vs. Commissioner of Internal
Revenue," ordering the Consolidated Mines, Inc., hereinafter referred to
as the Company, to pay the Commissioner of Internal Revenue the
amounts of P79,812.93, P51,528.24 and P71,392.82 as deficiency income
taxes for the years 1953, 1954 and 1956, respectively, or the total sum
of P202,733.99, plus 5% surcharge and 1% monthly interest from the
date of finality of the decision. aisa dc
The Company, a domestic corporation engaged in mining, had filed its
income tax returns for 1951, 1952, 1953 and 1956. In 1957 examiners of
the Bureau of Internal Revenue investigated the income tax returns filed
by the Company because on August 10, 1954, its auditor, Felipe Ollada,
claimed the refund of the sum of P107,472.00 representing alleged
overpayments of income taxes for the year 1951. After the investigation
the examiners reported that (A) for the years 1951 to 1954 (1) the
Company had not accrued as an expense the share in the company
profits of Benguet Consolidated Mines as operator of the Company's
mines, although for income tax purposes the Company had reported
income and expenses on the accrual basis; (2) depletion and
depreciation expenses had been overcharged; and (3) the claims for
audit and legal fees and miscellaneous expenses for 1953 and 1954 had
not been properly substantiated; and that (B) for the year 1956 (1) the
Company had overstated its claim for depletion; and (2) certain claims
for miscellaneous expenses were not duly supported by evidence.
In view of said reports the Commissioner of Internal Revenue sent the
Company a letter of demand requiring it to pay certain deficiency
income taxes for the years 1951 to 1954, inclusive, and for the year
1956. Deficiency income tax assessment notices for said years were also
sent to the Company.
The Company requested a reconsideration of the assessment, but the
Commissioner refused to reconsider, hence the Company appealed to
the Court of Tax Appeals. The assessments for 1951 to 1954 were
contested in CTA Case No. 565, while that for 1956 was contested in
CTA Case No. 578. Upon agreement of the parties the two cases were
heard and decided jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the
Company to pay the amounts of P107,846.56, P134,033.01 and
P71,392.82 as deficiency income taxes for the years 1953, 1954 and
1956, respectively. The Tax Court nullified the assessments for the years
1951 and 1952 on the ground that they were issued beyond the five-
year period prescribed by Section 331 of the National Internal Revenue
Code.
However, on August 7, 1961, upon motion of the Company, the Tax
Court reconsidered its decision and further reduced the deficiency
income tax liabilities of the Company to P79,812.93, P51,528.24 and
P71,382.82 for the years 1953, 1954 and 1956, respectively. In this
amended decision the Tax Court subscribed to the theory of the
Company that Benguet Consolidated Mining Company, hereafter
referred to as Benguet, had no right to share in "Accounts Receivable,"
hence one-half thereof may not be accrued as an expense of the
Company for a given year.
Both the Company and the Commissioner appealed to this Court. The
Company questions the rate of mine depletion adopted by the Court of
Tax Appeals and the disallowance of depreciation charges and certain
miscellaneous expenses (G.R. Nos. L-18843 & L-18844). The
Commissioner, on the other hand, questions what he characterizes as
the "hybrid" or "mixed" method of accounting utilized by the Company,
and approved by the Tax Court, in treating the share of Benguet in the
net profits from the operation of the mines in connection with its
income tax returns (G.R. Nos. L-18853 & L-18854).
With respect to methods of accounting, the Tax Code states:
"Sec. 38.General Rules. The net income shall be computed
upon the basis of the taxpayer's annual accounting period
(fiscal year or calendar year, as the case may be) in accordance
with the method of accounting regularly employed in keeping
the books of such taxpayer but if no such method of
accounting has been so employed or if the method employed
does not clearly reflect the income the computation shall be
made in accordance with such methods as in the opinion of
the Commissioner of Internal Revenue does clearly reflect the
income . . .
"Sec. 39.Period in which items of gross income included. The
amount of all items of gross income shall be included in the
gross income for the taxable year in which received by the
taxpayer, unless, under the methods of accounting permitted
under section 38, any such amounts are to be properly
accounted for as of a different period . . .
"Sec. 40.Period for which deductions and credits taken. The
deductions 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, unless in order to clearly
reflect the income the deductions should be taken as of a
different period . . ."
It is said that accounting methods for tax purposes 1 comprise a set of
rules for determining when and how to report income and deductions.
The U.S. Internal Revenue Code 2 allows each taxpayer to adopt the
accounting method most suitable to his business, and requires only that
taxable income generally be based on the method of accounting
regularly employed in keeping the taxpayer's books, provided that the
method clearly reflects income. 3
The Company used the accrual method of accounting in computing its
income. One of its expenses is the amount paid to Benguet as mine
operator, which amount is computed as 50% of "net income." The
Company deducts as an expense 50% of cash receipts minus
disbursements, but does not deduct at the end of each calendar year
what the Commissioner alleges is "50% of the share of Benguet" in the
"accounts receivable." However, it deducts Benguet's 50% if
and when the "accounts receivable" are actually paid. It would seem,
therefore, that the Company has been deducting a portion of this
expense (Benguet's share as mine operator) on the "cash & carry" basis.
The question is whether or not the accounting system used by the
Company justifies such a treatment of this item; and if not, whether said
method used by the Company, and characterized by the Commissioner
as a "hybrid method," may be allowed under the aforequoted provisions
of our tax code. 4
For a proper understanding of the situation the following facts are
stated: The Company has certain mining claims located in Masinloc,
Zambales. Because it wanted to relieve itself of the work and expense
necessary for developing the claims, the Company, on July 9, 1934,
entered into an agreement (Exhibit L) with Benguet, a domestic
anonymous partnership engaged in the production and marketing of
chromite, whereby the latter undertook to "explore, develop, mine,
concentrate and market" the pay ore in said mining claims.
The pertinent provisions of their agreement, as amended by the
supplemental agreements of September 14, 1939 (Exhibit L-1) and
October 2, 1941 (Exhibit L-2), are as follows:
"IV.Benguet further agrees to provide such funds from its own
resources as are in its judgment necessary for the exploration
and development of said claims and properties, for the
purchase and construction of said concentrator plant and for
the installation of the proper transportation facilities as
provided in paragraphs I, II and III hereof until such time as the
said properties are on a profit producing basis and agrees
thereafter to expand additional funds from its own resources, if
the income from the said claims is insufficient therefor, in the
exploration and development of said properties or in the
enlargement or extension of said concentration and
transportation facilities if in its judgment good mining practice
requires such additional expenditures. Such expenditures from
its own resources prior to the time the said properties are put
on a profit producing basis shall be reimbursed as provided in
paragraph VIII hereof. Expenditures from its own resources
thereafter shall be charged against the subsequent gross
income of the properties as provided in paragraph X hereof.
"VII. As soon as practicable after the close of each month
Benguet shall furnish Consolidated with a statement showing
its expenditures made and ore settlements received under this
agreement for the preceding month which statement shall be
taken as accepted by Consolidated unless exception is taken
thereto or to any item thereof within ten days in writing in
which case the dispute shall be settled by agreement or by
arbitration as provided in paragraph XXII hereof.
"VIII. While Benguet is being reimbursed for all its expenditures,
advances and disbursements hereunder as evidenced by said
statements of accounts, the net profits resulting from the
operation of the aforesaid claims or properties shall be divided
ninety per cent (90%) to Benguet and ten per cent (10%) to
Consolidated. Such division of net profits shall be based on the
receipts, and expenditures during each calendar year, and shall
continue until such time as the ninety per cent (90%) of the net
profits pertaining to Benguet hereunder shall equal the amount
of such expenditures, advances and disbursements. The net
profits shall be computed as provided in Paragraph X hereof.

"X.After Benguet has been fully reimbursed for its expenditures,
advances and disbursements as aforesaid the net profits from
the operation shall be divided between Benguet and
Consolidated share and share alike, it being understood
however, that the net profits as the term is used in this
agreement shall be computed by deducting from gross income
all operating expenses and all disbursements of any nature
whatsoever as may be made in order to carry out the terms of
this agreement.
"XIII. It is understood that Benguet shall receive no
compensation for services rendered as manager or technical
consultants in connection with the carrying out of this
agreement. It may, however, charge against the operation
actual additional expenses incurred in its Manila Office in
connection with the carrying out of the terms of this
agreement including traveling expenses of consulting staff to
the mines. Such expenses, however, shall not exceed the sum
of One Thousand Pesos (P1,000.00) per month. Otherwise, the
sole compensation of Benguet shall be its proportion of the
net profits of the operation as herein above set forth.
"XIV.All payments due Consolidated by Benguet under the
terms of this agreement with respect to expenditures made
and ore settlements received during the preceding calendar
month, shall be payable on or before the twentieth day of each
month."
There is no question with respect to the 90%-10% sharing of profits
while Benguet was being reimbursed the expenses disbursed during the
period it was trying to put the mines on a profit-producing basis. 5 It
appears that by 1953 Benguet had completely recouped said advances,
because they were then dividing the profits share and share alike.
As heretofore stated the question is: Under the arrangement between
the Company and Benguet, when did Benguet's 50% share in the
"Accounts Receivable accrue? 6
The following table (summary, Exhibit A, of examiner's report of January
28, 1967, Exh. 8) prepared for the Commissioner graphically illustrates
the effect of the inclusion of one-half of "Accounts Receivable" as
expense in the computation of the net income of the Company:
SUMMARY:1951195219531954
Original share of
Benguet1,313,640.263,521,751.942,340,624.592,622,968.58
Additional share of
Rec'bles383,829.87677,504.76577,384.66282,724.76
Total share of
Benguet1,697,470.134,199,256.702,918,009.252,905,693.34
Less: Receipts due
from prior year
operation269,619.00383,829.87677,504.76577,384.66
Share of Benguet
as adjusted1,427,851.133,815,426.832,240.504.492,328,308.68
(Acc'rd)
Less: Participation of
Benguet already
deducted1,313,640.263,521,751.942,340,624.592,622,968.58
Additional Expense
(Income)114,210.87293,674.89(100,120.10)(294,659.90)

In the aforesaid table "Additional share on Rec'bles" is one-half of
"Total Rec'bles" minus "Total Payables." It indicates, from the
Commissioner's viewpoint, that there were years when the Company
had been overstating its income (1951 and 1952) and there were years
when it had been understating its income (1953 and 1954). 7 The
Commissioner is not interested in the taxes for 1951 and 1952 (which
had prescribed anyway) when the Company had overstated its income,
but in those for 1953 and 1954, in each of which years the amount of
the "Accounts Receivable" was less than that of the previous year, and
the Company, therefore, appears to have deducted, as expense,
compensation to Benguet bigger (than what the Commissioner claims is
due) by one-half of the difference between the year's "Accounts
Receivable" and the previous year's "Accounts Receivable," thus
apparently understating its income to that extent. cdtai
According to the agreement between the Company and Benguet the
net profits "shall be computed by deducting from gross income all
operating expenses and all expenses of any nature whatsoever."
Periodically, Benguet was to furnish the Company with the statement of
accounts for a given month "as soon as practicable after the close" of
that month. The Company had ten days from receipt of the statement
to register its objections thereto. Thereafter, the statement was
considered binding on the Company. And all payments due the
Company "with respect to the expenditures made and ore settlements
received during the calendar month shall be payable on or before the
twentieth of each month."
The agreement does not say that Benguet was to share in "Accounts
Receivable." But may this be implied from the terms of the agreement?
The statement of accounts (par. VIII) and the payment (part XIV) that
Benguet 8 must make are both with respect to "expenditures made and
ore settlements received." "Expenditures" are payments of money. 9 This
is the meaning intended by the parties, considering the provision that
Benguet agreed to "provide such funds from its own resources, etc.";
and that "such expenditures from its own resources" were to be
reimbursed first as provided in par. VIII, and later as provided in par. X.
"Settlement" does not necessarily mean payment or satisfaction, though
it may mean that; it frequently means adjustment or
arrangement. 10 The term "settlement" may be used in the sense of
"payment," or it may be used in the sense of "adjustment" or
"ascertainment," or it may be used in the sense of "adjustment" or
"ascertainment of a balance between contending parties," depending
upon the circumstances under which, and the connection in which, use
of the term is made. 11 In the term "ore settlements received," the word
"settlement" was not used in the concept of "adjustment,"
"arrangement" or "ascertainment of a balance between contending
parties," since all these are "made," not "received." "Payment," then, is
the more appropriate equivalent of, and interchangeable with, the term
"settlement." Hence, "ore settlements received" means "ore payments
received," which excludes "Accounts Receivable." Thus, both par. VIII
and par. XIV refer to "payment," either received or paid by Benguet.
According to par. X, the 50-50 sharing should be on "net profits;" and
"net profits" shall be computed "by deducting from gross income all
operating expenses and all disbursements of any nature whatsoever as
may be made in order to carry out the terms of the agreement." The
term "gross profit" was not defined. In the accrual method of
accounting "gross income" would include both "cash receipts" and
"Accounts Receivable." But the term "gross income" does not carry a
definite and inflexible meaning under all circumstances, and should be
defined in such a way as to ascertain the sense in which the parties
have used it in contracting. 12 According to par. VIII 13 the "division of
net profits shall be based on the receipts and expenditures." The term
"expenditures" we have already analyzed. As used, "receipts" means
"money received." 14 The same par. VIII uses the term "expenditures,
advances and disbursements." "Disbursements" means
"payment," 15 while the word "advances" when used in a contract
ordinarily means money furnished with an expectation that it shall be
returned. 16 It is thus clear from par. VIII that in the computation of "net
profits" (to be divided on the 90%-10% sharing arrangement) only "cash
payments" received and "cash disbursements" made by Benguet were
to be considered. On the presumption that the parties were consistent
in the use of the term, the same meaning must be given to "net profits"
as used in par. X, and "gross income," accordingly, must be equated
with "cash receipts." The language used by the parties show their
intention to compute Benguet's 50% share on the excess of actual
receipts over disbursements, without considering "Accounts Receivable"
and "Accounts Payable" as factors in the computation. Benguet then did
not have a right to share in "Accounts Receivable," and,
correspondingly, the Company did not have the liability to pay Benguet
any part of that item. And a deduction cannot be accrued until an
actual liability is incurred, even if payment has not been made. 17
Here we have to distinguish between (1) the method of
accounting used by the Company in determining its net income for tax
purposes; and (2) the method of computation agreed upon between
the Company and Benguet in determining the amount of
compensation that was to be paid by the former to the latter. The
parties, being free to do so, had contracted that in the method of
computing compensation the basis were "cash receipts" and "cash
payments." Once determined in accordance with the stipulated bases
and procedure, then the amount due Benguet for each
month accrued at the end of that month, whether the Company had
made payment or not (see par. XIV of the agreement). To make the
Company deduct as an expense one-half of the "Accounts Receivable"
would, in effect, be equivalent to giving Benguet a right which it did not
have under the contract, and to substitute for the parties' choice a
mode of computation of compensation not contemplated by them. 18
Since Benguet had no right to one-half of the "Accounts Receivable,"
the Company was correct in not accruing said one-half as a deduction.
The Company was not using a hybrid method of accounting, but was
consistent in its use of the accrual method of accounting.
The first issue raised by the Company is with respect to the rate of mine
depletion used by the Court of Tax Appeals. The Tax Code provides that
in computing net income there shall be allowed as deduction, 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 is made [Sec.
30(g) (1) (B)]. 19
The formula 20 for computing the rate of depletion is:
Cost of Mine PropertyRate of Depletion Per Unit
=of product Mined and sold
Estimated Ore Deposit
The Commissioner and the Company do not agree as to the figures
corresponding to either factor that affects the rate of depletion per unit.
The figures according to the Commissioner are:

P2,646,878.44 (mine cost)
=P0.59189 (rate of depletion
4,471,892 tons (estimated per ton)
ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost)
4,156,888 tons per ton)
(estimated ore deposit)
They agree, however, that the "cost of the mine property" consists of (1)
mine cost; and (2) expenses of development before production. As to
mine cost, the parties are practically in agreement the Commissioner
says it is P2,515,000 (the Company puts it at P2,500,000). As to
expenses of development before production the Commissioner and the
Company widely differ. The Company claims it is P1,738,974.56, while
the Commissioner says it is only P131,878.44. The Company argues that
the Commissioner's figure is "a patently insignificant and inadequate
figure when one considers the tens of millions of pesos of revenue and
production that petitioner's chromite mine fields have finally produced."
As an income tax concept, depletion is wholly a creation of the
statute 21 "solely a matter of legislative grace." 22 Hence, the taxpayer
has the burden of justifying the allowance of any deduction
claimed. 23 As in connection with all other tax controversies, the burden
of proof to show that a disallowance of depletion by the Commissioner
is incorrect or that an allowance made is inadequate is upon the
taxpayer, and this is true with respect to the value of the property
constituting the basis of the deduction. 24 This burden-of-proof rule has
been frequently applied and a value claimed has been disallowed for
lack of evidence. 25
As proof that the amount spent for developing the mines was
P1,738,974.56, the Company relies on the testimony of Eligio S. Garcia
and on Exhibits I, 31 and 38.
Exhibit I is the Company's report to its stockholders for the year 1947. It
contains the Company's balance sheet as of December 31, 1946 (Exhibit
I-1). Among the assets listed is "Mines, Improvement & Dev." in the
amount of P4,238,974.57, which, according to the Company, consisted
of P2,500,000, purchase price of the mine, and P1,738,974.56, cost of
developing it. The Company also points to the statement therein that
"Benguet invested approximately P2,500,000 to put the property in
operation, the greater part of such investment being devoted to the
construction of a 25-kilometer road and the installation of port
facilities." This amount of P2,500,000 was only an estimate. The
Company has not explained in detail in what this amount or the lesser
amount of P1,738,974.56 consisted. Nor has it explained how that
bigger amount became P1,738,974.56 in the balance sheet for
December 31, 1946.
According to the Company the total sum of P4,238,974.57 as "Mines,
Improvement & Dev." was taken from its pre-war balance sheet of
December 31, 1940. As proof of this it cites the sworn certification
(Exhibit 38) executed on October 25, 1946 by R.P. Flood, in his capacity
as treasurer of the Company, and attached to other papers of the
Company filed with the Securities and Exchange Commission in
compliance with the provisions of Republic Act No. 62 (An Act to
require the presentation of proof of ownership of securities and the
reconstruction of corporate and partnership records, and for other
purposes). In said certification there are statements to the effect that
"the Statement of Assets & Liabilities of Consolidated Mines,
Incorporated, submitted to the Securities & Exchange Commission as a
requirement for the reconstitution of the records of the said
corporation, is as of September 1, 1946;" and that "the figure
P4,238,974.57 representing the value of Mines, Improvements and
Developments appearing therein, was taken from the Balance Sheet as
of December 31, 1940, which is the only available source of information
of the Corporation regarding the above and consequently the
undersigned considers the stated figure to be only an estimate of the
value of those items at the present time." This figure, the Company
claims, is based on entries made in the ordinary and regular course of
its business dating as far back as before the war. The Company places
reliance on Sec. 39, Rule 130, Revised Rules of Court (formerly Sec. 34,
Rule 123), which provides that entries made at, or near the time of the
transactions to which they refer, by a person deceased, outside of the
Philippines or unable to testify, who was in a position to know the facts
therein stated, may be received as prima facie evidence, if such person
made the entries in his professional capacity or in the performance of
duty and in the ordinary or regular course of business or duty."
Note that Exhibit 38 is not the "entries, "covered by the rule. The
Company, however, urges, unreasonably, we think, that it should be
afforded the same probative value since it is based on such "entries"
meaning the balance sheet of December 31, 1940, which was not
presented in evidence. Even with the presentation of said balance sheet
the Company would still have had to prove (1) that the person who
made the entry did so in his professional capacity or in the performance
of a duty; (2) that the entry was made in the ordinary course of
business or duty; (3) that the entry was made at or near the time of the
transaction to which it related; (4) that the one who made it was in a
position to know the facts stated in the entry; and (5) that he is dead,
outside the Philippines or unable to testify. 26
A balance sheet may not be considered as "entries made in the ordinary
course of business," which, according to Moran:
"means that the entries have been made regularly, as is usual,
in the management of the trade or business. It is essential,
therefore, that there be regularity in the entries. The entry
which is being introduced in evidence should appear to be part
of a group of regular entries. . . The regularity of the entries
may be proved by the form in which they appear in the
corresponding book." 27
A balance sheet, as that word is uniformly used by bookkeepers and
businessmen, is a paper which shows "a summation or general balance
of all accounts," but not the particular items going to make up the
several accounts; and it is therefore essentially different from a paper
embracing "a full and complete statement of all the disbursements and
receipts, showing from what sources such receipts were derived, and for
what and to whom such disbursements or payments were made, and
for what object or purpose the same were made;" but such matters may
find an appropriate place in an itemized account. 28 Neither can it be
said that a balance sheet complies with the third requisite, since the
entries therein were not made at or near the time of the transactions to
which they related.
"In order to render admissible books of account it must appear
that they are books of original entry, that the entries were
made in the ordinary course of business, contemporaneously
with the facts recorded, and by one who had knowledge of the
facts. San Francisco Teaming Co v Gray (1909) 11 CA 314, 104
P 999. See Brown v Ball (1932) 123 CA 758, 12 P2d 28, to the
effect that the books must be kept in the regular course of
business." 29
"A 'ledger' is a book of accounts in which are collected and
arranged, each under its appropriate head, the various
transactions scattered throughout the journal or daybook, and
is not a 'book of original entries,' within the rule making such
books competent evidence. First Nat. Building Co. v.
Vanderberg, 119 P 224, 227; 29 Okl. 583." 30
"Code Iowa, No. 3658, providing that 'books of account' are
receivable in evidence, etc., means a book containing charges,
and showing a continuous dealing with persons generally. A
book, to be admissible, must be kept as an account book, and
the charges made in the usual course of business. Security Co.
v. Graybeal, 52 NW 497, 85 Iowa 543, 39 Am St Rep 311." 31
Books of account may therefore be admissible under the rule. In tax
cases, however, this Court appears not to place too high a probative
value on them, considering the statement in the case of Collector of
Internal Revenue v. Reyes 32 that "books of account do not prove per
se that they are veracious; in fact they may be more consistent than
truthful." Indeed, books of account may be used to carry out a plan of
tax evasion. 33
At most, therefore, the presentation of the balance sheet of December
31, 1940 would only prove that the figure P4,238,974.57 appears therein
as corresponding to mine cost. But the Company would still need to
present proof to justify its adoption of that figure. It had burden of
establishing the components of the amount of P1,738,974.57: what were
the particular expenses made and the corresponding amount of each,
so that it may be determined whether the expenses were actually made
and whether the items are properly part of cost of mine development,
or are actually depreciable items.
In this connection we take up Exhibit 31 of the Commissioner. This is
the memorandum of BIR Examiner Cesar P. Aguirre to the Chief of the
Investigating Division of the Bureau of Internal Revenue. According to
this report "the counsel of the taxpayer alleges that the cost of
Masinloc Mine properties and improvement is P4,238,974.56 instead of
P 2,646,879.44 as taken up in this report," and that the expenses as of
1941 were as follows:
Assets subject to:
1941
1.DepletionP2,646,878.44
2.10 years depreciation1,188,987.76
3.3 years depreciation78,283.75
4.20 years depreciation9,143.63
5.10% amortization171,985.00
Less: Cost Chromite FieldP4,085,277.58
Expenses by operator2,515,000.00
P1,570,277.58
The examiner concluded that "in the light of the figures listed above,
the counsel for the taxpayer fairly stated the amount disbursed by the
operator until the mine property was put to production in 1939." The
Company capitalizes on this conclusion, completely disregarding the
examiner's other statements, as follows:

"The counsel, however, is not aware of the fact that the
expenses made by the operator are those which are
depreciable and/or amortizable instead of depletable
expenditures. The first post-war Balance Sheet (12/31/46) of the
taxpayer shows that its Mines, Improvement & Dev. is
P4,328,974.57. Considering the expenditures incurred by
Benguet Consolidated as of 1941 (P1,570,277.58); the
rehabilitation expenses in 1946 (P211,223.72); and the cost of
the Masinloc Chromite Field, the total cost would only be
P4,296,501.30. Of the total expenditure of P1,570,277.58 as of
1941, P1,438,399.14 were spent on depreciable and/or
amortizable expenses and P131,878.44 were made for the
direct improvement of the mine property.
"In as much as the expenditure of the operator as of 1941 and
the cost of the mine property were taken up in the account
Mines, Improvement & Rehabilitation in 1946, all its assets that
were rightfully subject to depletion was P2,646,878.44."
Because of the above qualification a large part of the amount spent by
the operator 34 may not be allowed for purposes of depletion
deduction, 35 depletion being different from depreciation. 36
The Company's balance sheet for December 31, 1947 lists the "mine
cost" of P2,500,000 as "development cost" and the amount of
P1,738,974.37 as "suspense account (mining properties subject to war
losses)." The Company claims that its accountant, Mr. Calpo, made these
errors, because he was then new at the job. Granting that was what had
happened, it does not affect the fact that the evidence on hand is
insufficient to prove the cost of development alleged by the Company.
Nor can we rely on the statements of Eligio S. Garcia, who was the
Company's treasurer and assistant secretary at the time he testified on
August 14, 1959. He admitted that he did not know how the figure
P4,238,974.57 was arrived at, explaining: "I only know that it is the
figure appearing on the balance sheet as of December 31, 1946 as
certified by the Company's auditors; and this we made as the basis of
the valuation of the depletable value of the mines." (p. 94, t.s.n.)
We, therefore, have to rely on the Commissioner's assertion that the
"development cost" was P131,878.44, broken down as follows:
assessment, P34,092.12; development, P61,484.63; exploration,
P13,966.62; and diamond drilling, P22,335.07.
The question as to which figure should properly correspond to "mine
cost" is one of fact. 37 The findings of fact of the Tax Court, where
reasonably supported by evidence, are conclusive upon the Supreme
Court. 38
As regards the estimated ore deposit of the Company's mines, the
Company's figure is "4,156,888 tons," while that of the Commissioner is
the larger figure "4,471,892 tons." The difference of 315,004 tons was
due to the fact that the Commissioner took into account all the ore that
could probably be removed and marketed by the Company, utilizing the
total tonnage shipped before and after the war (933,180 tons) and the
total reserve of shipping material pegged at 3,538,712 tons. On the
other hand the Company's estimate was arrived at by taking into
consideration only the quantity shipped from solid ore, namely, 733,180
tons (deducting from the total tonnage shipped before and after the
war an estimated float of 200,000 tons), and then adding the total
recoverable ore which was assessed at 3,423,708 tons.
The above-stated figures were obtained from the report 39 of geologist
Paul A. Schaeffer, who had been earlier commissioned by the Company
to conduct a study of the metallurgical possibilities of the Company's
mines. In order to have a fair understanding of how the contending
parties arrived at their respective figures, We quote a pertinent portion
of the geologist's report:
"Mining Data
Ore mined before the war336,850 tons
Ore mined after the war1,779,350 tons
Total2,116,200 tons
xOre shipped before the war337,611 tons
x xOre shipped after the war595,569 tons
Total933,180 tons
Less an estimated float of 200,000 tons
Total shipped from solid ore733,180 tons
Proportionshipped733,180
=
mined2,116,200
or approximately 35% of mine ore is shipped.
Dumps
Material on dumps now total 383,346 tons. Using the above
tonnage for ore shipped from mining (excluding float) there
should have been a total of 1,383,020 tons of waste produced
of which almost 1,000,00 tons has been removed from the
mining area of the hill. I believe that half still remains as
alluvium along the three principal intermittent creeks which
head in the mining area, and the remaining half million has
washed into the river. Of course this is pure speculation.
x much was float material, probably about one half, leaving
about 170,000 tons mined from the hill.
xx some float included.
xxx xxx xxx
Ore Reserve
The A and B ore is considered sufficiently developed by drilling
and tunnels to constitute the ore reserve. C ore must be
checked by drilling.
T o n s
A7,729,800
B1,780,500
T o t a l9,510,300
C2,212,000
Grand Total11,722,300
Therefore, the total ore reserve may be considered to be
9,510,300 tons. Based on past experience 35% is shipping ore:
With the present mill there is considerably more recovery. The
ore is mined selectively (between dikes). The results are about
as follows:
Of 1,500 tons mined, 500 tons are sorted and shipped direct,
the remaining 1,000 tons going to the mill from which 250
tons ore recovered for shipment. Thus 50% of the selectively
mined ore is recovered.
Thus for the reserve tonnage:
Total reserve9,510,300
Less 20% dike material1,902,060
7,608,240
Less 10% low grade ore760,824
6,847,416
x
.50 =
Total recoverable ore3,423,708 tons
It is probable that 30% of the dump material could be
recovered by milling. So adding to the above 115,004 ore
recoverable from the dumps, we get a total reserve of shipping
material of 3,538,712 tons. With the sink float section added to
the mill this should be increased by perhaps 20%."
On the basis of the above report the Company faults the Tax Court is
sustaining the Commissioner's estimate of the ore deposit. While the
figures corresponding to the total gross tonnage shipped before and
after the war have not been assailed as erroneous, the Company
maintains that the estimated float 40 of 200,000 tons as reported in the
geologist's study should have been deducted therefrom, such that the
combined total of the ore shipped should have been placed at a net of
733,180 tons instead of 933,180 tons. The other figure the Company
assails as having been improperly included by the Commissioner in his
statement of ore reserve refers to the "Recoverable (ore) from dump
material 115,004 tons." The Company's argument in this regard runs
thus:
". . . This apparently was included by respondent by virtue of
the geologist's report that 'it is probable that 30% of the dump
material should be recovered by milling.' Actually, however,
such recovery from dump or waste material is problematical
and is merely a contingency, and hence, the item of 115,004
tons should not be included in the statement of the ore
reserves. Taking out these two items improperly and
erroneously included in respondent Commissioner of Internal
Revenue's examiner's report, to wit, float or waste material of
200,000 tons and supposedly recoverable ore from dump
materials of 115,004 tons, totalling 315,004 tons, from the total
figure of 4,471,892 tons given by him, the figure of 4,156,888
tons results as the proper statement of the total estimated ore
reserves, as correctly used by petitioner in its statement of ore
reserves for purposes of depletion." 41
We agree with the Company's observation on this point. The geological
report appears clear enough: the estimated float of 200,000 tons
consisting of pieces of ore that had broken loose and become detached
by erosion from their original position could hardly be viewed as still
forming part of the total estimated ore deposit. Having already been
broken up into numerous small pieces and practically rendered useless
for mining purposes, the same could not appreciably increase the ore
potentials of the Company's mines. As to the 115,004 tons which
geologist Paul A. Schaeffer believed could still be recovered by milling
from the material on dumps, there are no sufficient data on which to
affirm or deny the accuracy of the said figure. It may, however, be taken
as correct, considering that it came from the Company's own
commissioned geologist and that by the Company's own
admission 42 by 1957 it had mined and sold much more than its
original estimated ore deposit of 4,156,888 tons. We think that
4,271,892 tons 43 would be a fair estimate of the ore deposit in the
Company's mines.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)

4,271,892 (estimated ore deposit)
or
P2,646 878.44 (mine cost)
4,271,892 (estimated ore deposit)per ton)
In its second assigned error, the Company questions the
disallowance by the Tax Court of the depreciation charges claimed
by the Company as deductions from its gross income 44 The items
thus disallowed consist mainly of depreciation expenses for the years
1953 and 1954 allegedly sustained as a result of the deterioration of
some of the Company's incomplete constructions.
The initial memorandum 45 of the BIR examiner assigned to verify the
income tax liabilities of the Company pursuant to the latter's claim of
having overpaid its income taxes states the basic reason why the
Company's claimed depreciation should be disallowed or readjusted,
thus: since ". . ., up to its completion (the incomplete asset) has not
been and is not capable of use in the operation, the depreciation
claimed could not, in fairness to the Government and the taxpayer, be
considered as proper deduction for income tax purposes as the said
asset is still under construction." Vis-a-vis the Commissioner's consistent
position in this regard the Company simply repeatedly requested for
time 46 in view of the alleged voluminous working sheets that had to
be re-evaluated and re-computed to justify its claimed depreciation
items within which to submit a separate memorandum in itemized
form detailing the Company's objections to the items of depreciation
adjustments or disallowances for the years involved. Strangely enough,
despite the period granted, the record is bare that the Company ever
submitted its itemized objections as proposed. Inasmuch as the
taxpayer has the burden of justifying the deductions claimed for
depreciation, the Company's failure to discharge that burden prevents
this Court from disturbing the Commissioner's computation. For
taxation purposes the phrase "out of its not being used," with reference
to depreciation allowable on assets which are idle or the use of which is
temporarily suspended, should be understood to refer only to property
that has once been used in the trade or business, not to property that
has never been actually devoted to the taxpayer's business, particularly
incomplete assets that have yet to be used.

The Company's third assigned error assails the Court of Tax Appeals in
not allowing the deduction from its gross income of certain
miscellaneous business expenditures in the course of its operation for
the years 1954 and 1956. For 1954 the deduction claimed amounted to
P38,081.20, of which the Court allowed P25,600.00 and disallowed
P13,481.20 47 "for lack of any supporting paper or evidence." For the
year 1956 the claim amounted to P20,050.00 of which the Court allowed
P2,460.00, representing the one-month salary Christmas bonus given to
some of the employees, and upheld the disallowance of P17,590.00 on
the ground that the Company "failed to prove substantially that said
expenses were actually incurred and are legally deductible expenses."
Regarding the disallowed amount of P13,481.20 for the year 1954, the
Company submits that it consisted of expenses supported by "vouchers
and cancelled checks evidencing payments of these amounts," and were
necessary and ordinary expenses of business for that year. On the
disallowance by the Tax Court of the sum of P17,590.00 out of a total
claimed deduction for miscellaneous expenses for 1956 amounting to
P20,050.00, the Company advances the same argument, namely, that
the amount consisted of normal and regular expenses for that year as
evidenced by vouchers and cancelled checks.
These vouchers and cancelled checks of the Company, however, only
show that the amounts claimed had indeed been spent, and confirm
the fact of disbursement, but do not necessarily prove that the
expenses for which they were disbursed are deductible items. In the
case of Collector of Internal Revenue vs. Goodrich International Rubber
Co. 48 this Court rejected the taxpayer's similar claim for deduction of
alleged representation expenses, based upon receipts issued not by the
entities to which the alleged expenses had been paid but by the officers
of taxpayer corporation who allegedly paid them. It was there stated:
"If the expenses had really been incurred, receipts or chits
would have been issued by the entities to which the payments
had been made, and it would have been easy for Goodrich or
its officers to produce such receipts. These receipts issued by
said officers merely attest to their claim that they had incurred
and paid said expenses. They do not establish payment of said
alleged expenses to the entities in which the same are said to
have been incurred."
In the case before Us, except for the Company's own vouchers and
cancelled checks, together with the Company treasurer's lone and
uncorroborated testimony regarding the purpose of said disbursements,
there is no other supporting evidence to show that the expenses were
legally deductible items. We therefore affirm the Tax Court's
disallowance of the same.
In resume, this Court finds:
(1)that the Company was not using a "hybrid" method of accounting in
the preparation of its income tax returns, but was consistent in its use
of the accrual method of accounting;
(2)that the rate of depletion per ton of the ore deposit mined and sold
by the Company is P0.6196 per ton, 49 not P0.59189 as contended by
the Commissioner nor P1.0197 as claimed by the Company;
(3)that the disallowance by the Tax Court of the depreciation charges
claimed by the Company is correct in view of the latter's failure to
itemize and/or substantiate with definite proof that the Commissioner's
own method of determining depreciation is unreasonable or inaccurate;
(4)that for lack of supporting evidence to show that the Company's
claimed expenses were legally deductible items, the Tax Court's
disallowance of the same is affirmed.
As recomputed then, the deficiency income taxes due from the
Company are as follows:
1953
Net income as per audited returnP5,193,716.89
Unallowable deductions & additional income
Depletion overchargedP178,477.04
Depreciation adjustment93,862.96
Total adjustments272,340.00
Net income as per investigation5,466,056.89
Income tax due thereon 50 1,522,495.92
Less amount already assessed1,446,241.00
DEFICIENCY TAX DUE76,254.92
1954
Depreciation adjustment11,878.12
Income tax due thereon970,197.56
Less amount already assessed921,686.00
1956
Income tax due thereon3,280,137.14
Less amount already assessed3,213,256.00
TOTAL DEFICIENCY TAXES DUE191,647.62
WHEREFORE, the appealed decision is hereby modified by ordering
Consolidated Mines, Inc. to pay the Commissioner of Internal Revenue
the amounts of P76,254.92, P48,511.56 and P66,881.14 as deficiency
income taxes for the years 1953, 1954 and 1956, respectively, or the
total sum of P191,647.62 under the terms specified by the Tax Court,
without pronouncement as to costs. cdasia
Castro, Makasiar, Esguerra and Muoz Palma, JJ ., concur.
Teehankee, J ., did not take part.
Footnotes
1.While taxable income is based on the method of accounting used by the
taxpayer, it will almost always differ from accounting income. This is
so because of a fundamental difference in the ends the two concepts
serve. Accounting attempts to match cost against revenue. Tax law is
aimed at collecting revenue. It is quick to treat an item as income,
slow to recognize deductions or losses. Thus, the tax law will not
recognize deductions for contingent future losses except in very
limited situations. Good accounting, on the other hand, requires their
recognition, Once this fundamental difference in approach is
accepted, income tax accounting methods can be understood more
easily. 33 Am. Jur. 2d 688.
2.The Philippine income tax law was patterned after the U.S. tax law. Limpan
Investment Corp. v. Com. of Internal Revenue, L-21570, July 26, 1966.
3.33 Am. Jur. 2d 690.
4.The 1954 Code of the United States added new provisions setting out the
methods of accounting that may be used for tax purposes. These are:
(1) the cash receipts and disbursements method; (2) an accrual
method; (3) any other method permitted by the Code provisions, such
as the completed contract method or the installment method; and (4)
any combination of these methods permitted under the Regulations
of the Treasury Department. It should be noted that these provisions
explicitly allow the use of a hybrid method of accounting in
accordance with regulations to be issued by the Treasury Department.
2 Mertens, The Law of Federal Income Taxation, 1961 ed., Chapter 12,
pp. 18-19.
For the exact wording of the U.S. Tax Code, see Sec. 446 IRC, 26 USCA 446,
p. 398. The Philippine Tax Code does not have a provision similar
thereto.
5.It appears from Clause VIII that the 90-10 sharing arrangement was
computed on an annual basis, whereas the 50-50 sharing thereafter
was determined on a monthly basis.
6.That is, if Benguet shares in the "accounts receivable."
7.As may be seen from the table, the Company appears to be exaggerating
income when the "Accounts Receivable" is bigger than the "Accounts
Receivable" of the preceding year, and seems to be underestimating
income when the present year's "Accounts Receivable" is smaller than
the "Accounts Receivable" of the previous year. This is so because the
alleged 1/2 share of Benguet in the "Accounts Receivable" for the
previous year is subtracted from the total share (that is, 1/2 of "Cash
Receipts" plus "Accounts Receivable") it should supposedly receive for
the year, in order that it may not receive the same income twice,
once when it accrued, and secondly when it was paid.
8.While from the agreement it was Benguet that was to receive the income
and pay the Company its 50% share, actually the income accrued to
the Company, all the expenses disbursed by Benguet were for the
account of the Company, and the 50% share retained by Benguet was
an expense of the Company.
9.In its ordinary meaning "expenditure" means payment. 15A Words &
Phrases 414, citing People v. Kane 61 N.Y.S. 195, 43 App Div 472.
The word "expenditure" has been defined as the spending of money; the act
of expending; disbursement expense; money expended; a laying out
of money; payment. 15A Words & Phrases 414, citing Crow v Board
of Sup'rs of Stanislaus County, 27 P2d 655, 135 Cal App 451.
10.39 Words & Phrases, 41, citing Beall v. Hudson County Water Co., 185 F
179, 182.
11.41 Words & Phrases 41, citing Michael v. Donohue 102 SE 803, 805, 86
W Va 34.
12.18A Words and Phrases 490-491, citing Marlton Operating Corp. v. Local
Textile Mills, 137 N.Y.S. 2d 438 440.
13.Par. VIII had been amended by the agreement of Sept. 14, 1939 (Exhibit
L-1). The original is as follows: Benguet shall be entitled to retain all
proceeds resulting from the operation of the aforesaid claim or
properties under this agreement until such time as the net profit
therefrom shall equal the amount of the expenditures, advances and
disbursements made by Benguet hereunder as evidenced by said
statements of account.
The word "proceeds" is one of equivocal import, and of great generality. It
does not necessarily mean money, its meaning in each case
depending very much upon the connection in which it is employed
and the subject-matter to which it is applied. Phelps v Harris, 101 US
370, 25 L Ed 855; Appeal of Thompson, 89 Pa 36; Dow v Whetten, NY
8 Wend 160; Haven v Gray, 12 Mass 71, 76; Wheeler & Wilson Mfg
Co v Winnett, 91 NW 514, 514, 3 Neb unof, 293. Strictly speaking, it
implies something that arises out of or from another thing, and in its
ordinary acceptation, when applied to the income to be derived from
real estate, it embraces the idea of issues, rents, profits, or produce. In
a commercial sense it means the sum, amount, or value of goods or
things sold and converted into money. Hunt v. Williams 26 NE 177,
126 Ind 493, 494. 34 Words & Phrases 208.

The term "proceeds" was apparently used in the commercial sense,
considering that the provision refers to the "statement of account,"
which as we have said, is based on "expenditures made and ore
settlements received."
14.36 Words and Phrases 701, citing Wright's Adm'rs v. Wilkerson, 41 Ala
267, 272.
15.12A Words and Phrases 241, citing Woodford v. US 77, F2d 861.
16.2A Words & Phrases 112, citing Linderman v. Carmin 164 SW 614.
17.Under the accrual system income is accruable in the year in which the
taxpayer's right thereto becomes fixed and definite, even though it
may not be actually received until a later year, while a deduction for a
liability is to be accrued and taken when the liability becomes fixed
and certain, even though it may not be paid until a later year.
Commissioner of Internal Revenue v. Blaine, 141 F2d 201.
It has been held that the basis of the accrual system of accounting is that
obligations incurred in the normal course of business will be
discharged in due course; that the deductions have been "paid or
accrued" or "paid and incurred;" but in order to be accruable in the
taxable year, a valid obligation upon which the profit (or loss, in the
case of a deduction) is to be determined must have existed in the
year in which the obligation became binding pr enforceable. The date
of the accrued right to receive income, or the obligation to pay or
expend money constituting a deductible loss, is the date that fixes
liability. Gain or loss may not said to be fixed or accrued when the
obligation is contingent upon the happening of a future event. No
duty or liability to pay an income tax upon a transaction arises until
the taxable year in which the event constituting the condition
precedent occurs under any system of accounting. Utah Idaho Sugar
Co v Stage Tax Commission, 73 P 2d 974.
In the case of Republic v. De la Rama, L-21106, November 29, 1966, the
Supreme Court, in denying the imposition of the income tax, quoted
with approval the finding of the lower court that there is no showing
that income in the form of said dividend had really been received
which is the verb used in Sec. 21 of the National Internal Revenue
Code, by The Estate, whether actually or constructively.
18.The situation may thus be likened to that where a company and its sales
agent agreed that the latter's salary for each year was to be a given
per cent of his "cash collections," and because the company was
keeping its books in accordance with the accrual method, it is made
to compute the agent's salary on the accrual basis.
19.In American law, the statutory concept of taxable income involves the
allowance of some deductions based on the theory that production of
income may necessitate exhaustion of capital assets employed in that
production. Typical of such deductions are depreciation,
obsolescence, depletion and losses. The exhaustion of capital may be
slow or rapid, sudden or gradual. The rate of exhaustion is in essence
immaterial, but what is important is that something valuable is
dissipated by the very act of producing that income which becomes
subject to tax. Mertens, Law of Federal Income Taxation, 1966
Revision of Volume 4, Chapter 24, pp. 4-5.
Under the American Tax Code, there are three kinds of depletion: (1) cost
depletion which is based upon the cost or March 1, 1913 value of the
particular deposit to the taxpayer; (2) discovery depletion, the concept
of which is that of a reward to the taxpayer for discovering a hitherto
unknown oil, gas, or mineral deposit and is usually based upon the
fair market value of the particular natural resource in question within
30 days after the date of its discovery; and (3) percentage depletion,
which represent a legislative attempt to avoid many problems arising
in connection with the computation of cost and discovery depletion.
It was included in the Code as a substitute for discovery depletion,
although it is not based on discovery. In practice, it is based upon a
fixed percentage of the income realized during the taxable year from
the particular property. The percentages are strictly arbitrary and vary
with the different resources. Id, Chapter 24, pp. 9-10.
20.In determining the amount of cost depletion allowable the following
three facts are essential, namely, (1) the basis of the property, (2) the
estimated total recoverable units in the property; and (3) the number
of units recovered during the taxable year in question. As used as an
element in cost depletion, basis means the dollar amount of the
taxpayer's capital or investment in the property which he is entitled to
recover tax free during the period he is removing the mineral in the
deposit. Id, Chapter 24, p. 139.
21.In that regard it is different from the economic or geological concept of
depletion. Were Congress to discontinue the allowance of a
deduction for depletion, there is little doubt such disallowance would
be safe from attacks on its constitutionality. Id, Chapter 24, p. 5.
22.Comm. v. Southwest Exploration Co., 350 US 308, 100 L Ed 347, 76 S. Ct
395 (1956); Parsons v. Smith, 359 US 215, 3 L Ed 2d 747, 79 S. Ct 656
(1959).
23.White v. US, 305 US 281, 83 L Ed 172, 59 S. Ct 179 (1938); Deputy v. Du
Pont, 308 US 488, 493, 84 L Ed 416, 80 S. Ct 363, 366 (1940); E & J
Gallo Winery v. Comm., 227 F2d 699.
24.Mertens, Law of Federal Income Taxation, 1966 Revision of Volume 4,
Chapter 24, p. 44, citing Reinecke v Spalding, 280 US 227, 74 L ED
385, 50 S. CT 96 (1930); Thompson Land & Charcoal Co., TC Memo
Op, Dkt 26495 (Aug. 15, 1951); and Marion Slade Townsend, TC
Memo Op, Dkt 42647 (1954).
25.Id., Chapter 24, p. 44, citing Mapel-Sterling Coal Co., 22 BTA 817 (mines
among others).
26.5 Moran, Comments on the Rules of Court, 1963 ed., p. 353.
27.Id., p. 354.
28.Eyre v Harmon, 28 P 779.
29.Deering's California Codes Annotated, Civil Procedure, Evidence, No.
1953f, p. 515.
30.5 Words & Phrases 690.
31.Id., p. 689.
32.L-11534 & L-11558, Nov. 25, 1958.
33.In the confession, defendant admitted that at least after 1925 he had
kept two sets of books, one secret "true book" and another a "false
book"; that he had used this system of bookkeeping for the purpose
of evading his income tax. Wiggins v. US, 64 F 2d 950.
34.In this connection, the Commissioner claims that there is one important
reason why we should not sustain the Company's stand that the sum
of P2,500,000 or the lesser amount of P1,738,974.57, allegedly spent
by Benguet should be considered part of the depletable cost: Since
Benguet "is first to be 'fully reimbursed for its expenditures, advances
and disbursements' before any profit can be distributed between
them, there is no reason for including the amount so spent by
Benguet, as it has a right to reimbursement anyway." The
Commissioner's claim is not correct. Assuming that Benguet had
indeed spent P1,738,974.57 in developing the mine, the fact having
been established by adequate proof, and Benguet had been
reimbursed by the Company, the Commissioner's assertion would
have been correct with respect to Benguet it would not have been
entitled to claim the amount as a depletion deduction. But the
Company, which would have reimbursed Benguet, would have a right
to the deduction, because it would have been the one, in effect,
which had incurred the development expense.
35.The amount recoverable through depreciation and through deductions
other than depletion must, of course, be eliminated in order to arrive
at the basis for the mineral deposit alone. Mertens, Law of Federal
Income Taxation, 1966 Revision of Volume 4, Chapter 24, p. 140.
36.Both depletion and depreciation are predicated on the same basic
premise of avoiding a tax on capital. The allowance for depletion is
based on the theory that the extraction of minerals gradually exhausts
the capital investment in the mineral deposit. The purpose of the
depletion deduction is to permit the owner of a capital interest in
mineral in place to make a tax-free recovery of that depleting capital
asset. A depletion is based upon the concept of the exhaustion of a
natural resource whereas depreciation is based upon the concept of
the exhaustion of the property, not otherwise a natural resource, used
in a trade or business or held for the production of income. Thus,
depletion and depreciation are made applicable to different types of
assets. And a taxpayer may not deduct that which the Code allows as
a deduction of another. Id., Chapter 24, pp. 6-7.
37.For a question to be one of law it must involve no examination of the
probative value of the evidence presented by the litigants or any of
them. And the distinction is well-known: There 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 the falsehood of alleged facts.
Ramos v. Pepsi-Cola Bottling Co. of the Phil., L-22533, Feb. 9, 1967.
38.Philippine Guaranty Co. v. Comm., L-22074, Sept. 6, 1965; Limpan
Investment Corporation v. Com. of Int. Revenue, supra; Yupangco
Steel v. Comm., L-22259, Jan. 19, 1966; Butuan Sawmill v. CTA, L-
20601, Feb. 28, 1966; Tan Guan v. CTA, L-23676, Apr. 27, 1967;
Republic v. Razon, L-17462, May 29, 1967.
39.Exhibit J. The survey of the mining area was begun in June 1949 and
completed about the middle of July 1949. The report should be
considered to show the configuration of the subject mines as of July
1, 1949.
40.This float material consists of stone and waste which does not contain
ore.
41.Petitioner Consolidated's brief in G.R. Nos. L-18843 & L-18844, p. 33.
42.See: Exh. "Q-10", p. 8. Of course, the Company insists that the increased
output was due to modernized mining and processing methods which
have no bearing on the estimated ore reserves at the time of
acquisition. This reasoning, while acceptable, however fails to consider
that the estimated ore deposit, particularly after the original
estimated ore deposit should be proved inaccurate by subsequent
mining ventures which were able to produce much more than
expected, is simply the product of an educated guess and does not
operate to prevent a re-estimation of the nearest actual estimated ore
deposit on the basis of newly-acquired data which would accurately
reflect the ore potentials of the Company's mines.

43.This figure is arrived at by adding to the total recoverable ore (3,423,708
tons) the total tons of ore shipped from solid ore (733,180 tons) and
the total ore recoverable from the material on dumps (30% of
383,346 tons of materials on dumps, or 115,004 tons).
44.Section 30 (f), par. 1 of the Tax Code permits the taxpayer, in computing
the net income, to deduct from the gross income "(A) reasonable
allowance for deterioration of property arising out of its use or
employment in the business or trade, or out of its not being used:
Provided . . .."
45.Exhibit "8".
46.See: Exhibit "13" Memorandum of the Company dated March 11, 1957
embodying its objections to the BIR investigation report dated
January 26, 1957; Exhibit "29" Memorandum of the Company
dated December 14, 1957 in answer to the Commissioner's formal
notification dated November 22, 1957 regarding the discrepancies
found in the income tax returns of the Company. It is noticeable that
even the Company's petition for review filed with the Tax Court
(Cases Nos. 565 & 578) did not make mention nor place in issue the
depreciation adjustments or disallowances ordered by the
Commissioner. In fact, it was only in the Company's memorandum in
support of its petition that the Company discussed for the first time
depreciation adjustments as a contentious issue before the Tax
Court."
47.As gathered from the schedule of disallowance for the year 1954 (Exh.
"N" for Consolidated; Exh. "8-A" for the Commissioner), the bulk of
these expenses in the itemized sums of P8,065.00, P4,916.20, P500.00
and P2,000.00, totalling P13,481.20, respectively consisted of expenses
simply identified as disbursements by the Company president from
his discretionary fund, Christmas time expenses alleged incurred by
way of compensation or gifts to deserving persons who had rendered
valuable services or promoted the interests of the Company, expenses
allegedly incurred by the Company vice-president in his periodic trip
to the Company mines at Masinloc and contribution to the Base
Metal Association of the Philippines of which the Company was a
ranking member of.
48.G.R. No. L-22255, December 22, 1967; 21 SCRA 1336.
49.With the rate of depletion per unit of the chrome ore mined and sold by
the Company pegged at P0.6196, the task of determining the amount
of depletion allowance for the years concerned should be of little
problem. In 1953 the 468,549 tons of chrome ore mined and sold by
the Company were valued at P14,056,470.00. In 1954 the 388,790 tons
of chrome ore shipped by the Company were valued at
P11,660,220.00 while in 1956 the 581,685 tons of chrome ore shipped
realized the amount of P20,332,880.00. The rate of depletion per unit
having been established to be P0.6196, the amounts of P290,312.96,
P240,894.28 and P360,412.02 would correspond to the mine depletion
allowances for the years 1953, 1954 and 1956, respectively.
Since the Company had been consistently charging a depletion rate of P1.00
per ton of ore shipped by it, or P468,790.00, P388,790.00 and
P581,685.00 for the years 1953, 1954 and 1956, respectively, there
really appears to be a depletion overcharge obtained by getting
the difference between the amounts charged by the Company as
depletion allowances and the correct amount as determined in this
decision of P178,477.04 for 1953, P147,895.72 for 1954 and
P221,272.98 for 1956.
50.At the time (1958) the Commissioner assessed the alleged deficiency
income taxes from the Company, the rate of taxes on domestic
corporations upon their income were as follows: 20% on net income
not exceeding P100,000.00 and 28% on net income exceeding
P100,000.00 (section 24(a) of the Tax Code). (As amended, however,
the rate of taxes has been increased to 25% on net income not
exceeding P100,000.00 and 35% on net income exceeding
P100,000.00).

||| (Consolidated Mines, Inc. v. CTA, G.R. Nos. L-18843 & 18844, August
29, 1974)
EN BANC
[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.
D E C I S I O N
CALLEJO, SR., J p:
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. 4On
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 petitioner's 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-LBAA's 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 hospital's 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 petitioner's 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 Court's 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. TDCcAE

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 d'etre 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. Mark's 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 the 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.
xxx xxx xxx
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 one's 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:
xxx xxx xxx
(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." 36However, 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. 41The 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 petitioner's 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. cCAIES
Davide, Jr., C .J ., Puno, Panganiban, Quisumbing, Sandoval-Gutierrez,
Carpio, Corona, Carpio-Morales, Azcuna and Tinga, JJ ., concur.
Vitug, J ., is on official leave.
Ynares-Santiago and Austria-Martinez, JJ ., are on leave.
Footnotes
1.Penned by Associate Justice Remedios A. Salazar-Fernando, with Associate
Justices Fermin A. Martin, Jr. and Salvador J. Valdez, Jr. concurring.
2.SECTION 1. CREATION OF THE LUNG CENTER OF THE PHILIPPINES.
There is hereby created a trust, under the name and style of Lung
Center of the Philippines, which, subject to the provisions of this
Decree, shall be administered, according to the Articles of
Incorporation, By-Laws and Objectives of the Lung Center of the
Philippines, Inc., duly registered (reg. No. 85886) with the Securities
and Exchange Commission of the Republic of the Philippines, by the
Office of the President, in coordination with the Ministry of Human
Settlements and the Ministry of Health.
3.Annex "C," Rollo, p. 49.
4.Annexes "2" & "2-A," id. at 9394.
5.Annex "D," id. at 5052.
6.Annex "E," id. at 5355.
7.Annexes "4" & "5," id. at 100109.
8.Annex "A," id. at 3341.
9.3 SCRA 187 (1961).
10.Rollo, pp. 8384.
11.See Workmen's Circle Educational Center of Springfield v. Board of
Assessors of City of Springfield, 51 N.E.2d 313 (1943).
12.Congregational Sunday School & Publishing Society v. Board of Review,
125 N.E. 7 (1919), citing Jackson v. Philipps, 14 Allen (Mass.) 539.
13.Bader Realty & Investment Co. v. St. Louis Housing Authority, 217 S.W.2d
489 (1949).
14.Board of Assessors of Boston v. Garland School of Homemaking, 6 N.E.2d
379.
15.Rollo, pp. 119120.
16.Id. at 123125.
17.Scripps Memorial Hospital v. California Employment Commission, 24
Cal.2d 669, 151 P.2d 109 (1944).
18.Sisters of Third Order of St. Frances v. Board of Review of Peoria County,
83 N.E. 272.
19.See note 12.
20.Id. at 10.
21.167 N.W. 148 (1918), citing State v. Powers, 10 Mo. App. 263, 74 Mo. 476.
22.Id. at 149.
23.See O'brien v. Physicians' Hospital Association, 116 N.E. 975 (1917).
24.714 P.2d 653 (1986).
25.Id. at 660661.
26.Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83
(1998).
27.188 S.W.2d. 826 (1945).
28.Id. at 829.
29.Rollo, p. 120. (Emphasis supplied.)
30.Malinias v. COMELEC, 390 SCRA 480 (2002).
31.St. Louis Young Men's Christian Association v. Gehner, 47 S.W.2d 776
(1932).
33.Commissioner of Internal Revenue v. Court of Appeals, supra.
34.Ibid. Citing II RECORDS OF THE CONSTITUTIONAL COMMISSION 90.
36.Article VI, Section 22, par. (3) of the 1935 Constitution provides that,
"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."
37.Article VIII, Section 17, par. (3) of the 1973 Constitution provides that,
"Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings,
and improvements actually, directly, and exclusively used for religious
or charitable purposes shall be exempt from taxation."
38.3 SCRA 186 (1961).
39.107 SCRA 105 (1981).
40.Young Men's Christian Association of Omaha v. Douglas County, 83 N.W.
924 (1900).
41.St. Louis Young Men's Christian Association v. Gehner, supra.
42.See State ex rel Koeln v. St. Louis Y.M.C.A., 168 S.W. 589 (1914).
43.Lodge v. Nashville, 154 S.W. 141.
44.Christian Business College v. Kalamanzoo, 131 N.W. 553.
45.See Young Men's Christian Association of Omaha v. Douglas County,
supra; Martin v. City of New Orleans, 58 Am. 194 (1886).

||| (Lung Center of the Phil. v. Quezon City, G.R. No. 144104, June 29,
2004)
SECOND DIVISION
[G.R. No. L-26284. October 9, 1986.]
OMAS CALASANZ, ET AL., petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE and the
COURT OF TAX APPEALS, respondents.
San Juan, Africa, Gonzales & San Agustin Law Office for petitioners.
D E C I S I O N
FERNAN, J p:
Appeal taken by Spouses Tomas and Ursula Calasanz from the decision
of the Court of Tax Appeals in CTA No. 1275 dated June 7, 1966,
holding them liable for the payment of P3,561.24 as deficiency income
tax and interest for the calendar year 1957 and P150.00 as real estate
dealer's fixed tax.
Petitioner Ursula Calasanz inherited from her father Mariano de Torres
an agricultural land located in Cainta, Rizal, containing a total area of
1,678,000 square meters. In order to liquidate her inheritance, Ursula
Calasanz had the land surveyed and subdivided into lots. Improvements,
such as good roads, concrete gutters, drainage and lighting system,
were introduced to make the lots saleable. Soon after, the lots were
sold to the public at a profit. cda
In their joint income tax return for the year 1957 filed with the Bureau
of Internal Revenue on March 31, 1958, petitioners disclosed a profit of
P31,060.06 realized from the sale of the subdivided lots, and reported
fifty per centum thereof or P15,530.03 as taxable capital gains.
Upon an audit and review of the return this filed, the Revenue Examiner
adjudged petitioners engaged in business as real estate dealers, as
defined in Section 194 [s] 1 of the National Internal Revenue Code,
required them to pay the real estate dealer's tax
2
and assessed a
deficiency income tax on profits derived from the sale of the lots based
on the rates for ordinary income.
On September 29, 1962, petitioners received from respondent
Commissioner of Internal Revenue:
a.Demand No. 90-B-032293-57 in the amount of P160.00
representing real estate dealer's fixed tax of P150.00 and
P10.00 compromise penalty for late payment; and
b.Assessment No. 90-5-35699 in the amount of P3,561.24 as
deficiency income tax on ordinary gain of P3,018.00 plus
interest of P543.24.
On October 17, 1962, petitioners filed with the Court of Tax Appeals a
petition for review contesting the aforementioned assessments.
On June 7, 1966, the Tax Court upheld the respondent Commissioner
except for that portion of the assessment regarding the compromise
penalty of P10.00 for the reason that in this jurisdiction, the same
cannot be collected in the absence of a valid and binding compromise
agreement. LLjur
Hence, the present appeal.
The issues for consideration are:
a.Whether or not petitioners are real estate dealers liable for
real estate dealer's fixed tax; and
b.Whether the gains realized from the sale of the lots are
taxable in full as ordinary income or capital gains taxable at
capital gain rates.
The issues are closely interrelated and will be taken jointly.
Petitioners assail their liabilities as "real estate dealers" and seek to
bring the profits from the sale of the lots under Section 34 [b] [2] 3 of
the Tax Code.
The theory advanced by the petitioners is that inherited land is a capital
asset within the meaning of Section 34[a] [1] of the Tax Code and that
an heir who liquidated his inheritance cannot be said to have engaged
in the real estate business and may not be denied the preferential tax
treatment given to gains from sale of capital assets, merely because he
disposed of it in the only possible and advantageous way.
Petitioners averred that the tract of land subject of the controversy was
sold because of their intention to effect a liquidation. They claimed that
it was parcelled out into smaller lots because its size proved difficult, if
not impossible, of disposition in one single transaction. They pointed
out that once subdivided, certainly, the lots cannot be sold in one
isolated transaction, Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4
On the other hand, respondent Commissioner maintained that the
imposition of the taxes in question is in accordance with law since
petitioners are deemed to be in the real estate business for having
been involved in a series of real estate transactions pursued for profit.
Respondent argued that property acquired by inheritance may be
converted from an investment property to a business property if, as in
the present case, it was subdivided, improved, and subsequently sold
and the number, continuity and frequency of the sales were such as to
constitute "doing business." Respondent likewise contended that
inherited property is by itself neutral and the fact that the ultimate
purpose is to liquidate is of no moment for the important inquiry is
what the taxpayer did with the property. Respondent concluded that
since the lots are ordinary assets, the profits realized therefrom are
ordinary gains, hence taxable in full.
We agree with the respondent.
The assets of a taxpayer are classified for income tax purposes into
ordinary assets and capital assets. Section 34]a] [1] of the National
Internal Revenue Code broadly defines capital assets as follows: LLjur
"[1]Capital assets. The term 'capital assets' means property
held by the taxpayer [whether or not connected with his trade
or business], but does not include, stock in trade of the
taxpayer or other property of a kind which would properly be
included, in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his
trade or business, or property used in the trade or business of
a character which is subject to the allowance for depreciation
provided in subsection [f] of section thirty; or real property
used in the trade or business of the taxpayer."
The statutory definition of capital assets is negative in nature. 5 If the
asset is not among the exceptions, it is a capital asset; conversely, assets
falling within the exceptions are ordinary assets. And necessarily, any
gain resulting from the sale or exchange of an asset is a capital gain or
an ordinary gain depending on the kind of asset involved in the
transaction.
However, there is no rigid rule or fixed formula by which it can be
determined with finality whether property sold by a taxpayer was held
primarily for sale to customers in the ordinary course of his trade or
business or whether it was sold as a capital asset. 6 Although several
factors or indices 7 have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the
absence of these factors conclusive. Each case must in the last analysis
rest upon its own peculiar facts and circumstances. 8
Also a property initially classified as a capital asset may thereafter be
treated as an ordinary asset if a combination of the factors indubitably
tend to show that the activity was in furtherance of or in the course of
the taxpayer's trade or business. Thus, a sale of inherited real property
usually gives capital gain or loss even though the property has to be
subdivided or improved or both to make it salable. However, if the
inherited property is substantially improved or very actively sold or both
it may be treated as held primarily for sale to customers in the ordinary
course of the heir's business. 9
Upon an examination of the facts on record, We are convinced that the
activities of petitioners are indistinguishable from those invariably
employed by one engaged in the business of selling real estate.
One strong factor against petitioners' contention is the business
element of development which is very much in evidence. Petitioners did
not sell the land in the condition in which they acquired it. While the
land was originally devoted to rice and fruit trees, 10 it was subdivided
into small lots and in the process converted into a residential
subdivision and given the name Don Mariano Subdivision. Extensive
improvements like the laying out of streets, construction of concrete
gutters and installation of lighting system and drainage facilities, among
others, were undertaken to enhance the value of the lots and make
them more attractive to prospective buyers. The audited financial
statements 11 submitted together with the tax return in question
disclosed that a considerable amount was expended to cover the cost
of improvements. As a matter of fact, the estimated improvements of
the lots sold reached P170,028.60 whereas the cost of the land is only
P4,742.66. There is authority that a property ceases to be a capital asset
if the amount expended to improve it is double its original cost, for the
extensive improvement indicates that the seller held the property
primarily for sale to customers in the ordinary course of his business. 12
Another distinctive feature of the real estate business discernible from
the records is the existence of contracts receivables, which stood at
P395,693.35 as of the year ended December 31, 1957. The sizable
amount of receivables in comparison with the sales volume of
P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of
the sales. Also of significance is the circumstance that the lots were
advertised 13 for sale to the public and that sales and collection
commissions were paid out during the period in question.
Petitioners, likewise, urge that the lots were sold solely for the purpose
of liquidation.
In Ehrman vs. Commissioner, 14 the American court in clear and
categorical terms rejected the liquidation test in determining whether or
not a taxpayer is carrying on a trade or business. The court observed
that the fact that property is sold for purposes of liquidation does not
foreclose a determination that a "trade or business" is being conducted
by the seller. The court enunciated further: LLphil
"We fail to see that the reasons behind a person's entering into
a business whether it is to make money or whether it is to
liquidate should be determinative of the question of
whether or not the gains resulting from the sales are ordinary
gains or capital gains. The sole question is were the
taxpayers in the business of subdividing real estate? If they
were, then it seems indisputable that the property sold falls
within the exception in the definition of capital assets primarily
for sale to customers in the ordinary course of his trade or
business.'"

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court
articulated on the matter in this wise:
"One may, of course, liquidate a capital asset. To do so, it is
necessary to sell. The sale may be conducted in the most
advantageous manner to the seller and he will not lose the
benefits of the capital gain provision of the statute unless he
enters the real estate business and carries on the sale in the
manner in which such a business is ordinarily conducted. In
that event, the liquidation constitutes a business and a sale in
the ordinary course of such a business and the preferred tax
status is lost." cda
In view of the foregoing, We hold that in the course of selling the
subdivided lots, petitioners engaged in the real estate business and
accordingly, the gains from the sale of the lots are ordinary income
taxable in full.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No
costs.
SO ORDERED.
Feria, Alampay, Gutierrez, Jr. and Paras, JJ ., concur.
Footnotes
1."Real estate dealer" includes any person engaged in the business of
buying, selling, exchanging, leasing, or renting property as principal
and holding himself out as a full or part-time dealer in real estate or
as an owner of rental property or properties rented or offered to rent
for an aggregate amount of four thousand pesos or more a year."
2.Section 182[3] [s] of the National Internal Revenue Code which prescribes
an annual fixed tax on real estate dealers.
3."Sec. 34[b] Percentage taken into account. In case of a taxpayer, other
than a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be
taken into account in computing net capital gain, net capital loss, and
net income:
[1]One hundred per centum if the capital asset has been held for nor more
than twelve months;[2] Fifty per centum if the capital asset has been
held for more than twelve months."
4.P. 6. Brief for Petitioners-Appellants, p. 48, Rollo.
5.Nolledo, Commentaries and Jurisprudence on the National Internal
Revenue Code of the Philippines, 1973 ed., p. 314.
6.Victory Housing No. 2 vs. Commissioner, 205 F. 2d 371.
7.Tuason, Jr. vs. Lingad, 58 SCRA 170 citing Klarkowski, TCM 1965-328. Aff'd
385 F[2d] 398 [Ca-7, 1967] "which held that in determining the
correct boundary between these two types of assets the following
must be considered:
[1]the purpose for which the property was initially acquired;
[2]the purpose for which the property was subsequently held;
[3]the extent to which improvements, if any, were made to the property by
the taxpayer;
[4]the frequency, number and continuity of sales;
[5]the extent and nature of the transactions involved;
[6]the ordinary business of the taxpayer;
[7]the extent of advertising, promotion, or other activities used in soliciting
buyers for the sale of the property;
[8]the listing of property with brokers; and
[9]the purpose for which the property was held at the time of sale."
8.Victory Housing No. 2 vs. Commissioner, Supra; Mauldin vs. Commissioner,
195 F. 2d 714.
9.34 Am Jur 2d., p. 92.
10.P. 26, BIR Records.
11.PP. 3-4, BIR Records.
12.34 Am Jur 2d., p. 89.
13.P. 35, BIR Records.
14.9 Cir., 120 F. 2d 607. Also see Richards vs. Commissioner, 9 Cir., 81 F. 2d
369, and Commissioner vs. Boeing, 106 F. 2d 305.
15.212 F. 2d 637.

||| (Calasanz v. Commr., G.R. No. L-26284, October 09, 1986)
EN BANC
[G.R. No. 144516. February 11, 2004.]
DEVELOPMENT BANK OF THE
PHILIPPINES, petitioner, vs. COMMISSION ON
AUDIT, respondent.
D E C I S I O N
CARPIO, J p:
The Case
In this special civil action for certiorari, 1 the Development Bank of the
Philippines ("DBP") seeks to set aside COA Decision No. 98-403 2 dated
6 October 1998 ("COA Decision") and COA Resolution No. 2000-
212 3 dated 1 August 2000 issued by the Commission on Audit ("COA").
The COA affirmed Audit Observation Memorandum ("AOM") No. 93-
2, 4 which disallowed in audit the dividends distributed under the
Special Loan Program ("SLP") to the members of the DBP Gratuity Plan.
Antecedent Facts
The DBP is a government financial institution with an original
charter, Executive Order No. 81, 5 as amended by Republic Act No.
8523 6 ("DBP Charter"). The COA is a constitutional body with the
mandate to examine and audit all government instrumentalities and
investment of public funds. 7
The COA Decision sets forth the undisputed facts of this case as follows:
. . . [O]n February 20, 1980, the Development Bank of the
Philippines (DBP) Board of Governors adopted Resolution No.
794 creating the DBP Gratuity Plan and authorizing the setting
up of a retirement fund to cover the benefits due to DBP
retiring officials and employees under Commonwealth Act No.
186, as amended. The Gratuity Plan was made effective on June
17, 1967 and covered all employees of the Bank as of May 31,
1977.
On February 26, 1980, a Trust Indenture was entered into by
and between the DBP and the Board of Trustees of the Gratuity
Plan Fund, vesting in the latter the control and administration
of the Fund. The trustee, subsequently, appointed the DBP
Trust Services Department (DBP-TSD) as the investment
manager thru an Investment Management Agreement, with the
end in view of making the income and principal of the Fund
sufficient to meet the liabilities of DBP under the Gratuity Plan.
In 1983, the Bank established a Special Loan Program availed
thru the facilities of the DBP Provident Fund and funded by
placements from the Gratuity Plan Fund. This Special Loan
Program was adopted as "part of the benefit program of the
Bank to provide financial assistance to qualified members to
enhance and protect the value of their gratuity benefits"
because "Philippine retirement laws and the Gratuity Plan do
not allow partial payment of retirement benefits." The program
was suspended in 1986 but was revived in 1991 thru DBP
Board Resolution No. 066 dated January 5, 1991.
Under the Special Loan Program, a prospective retiree is
allowed the option to utilize in the form of a loan a portion of
his "outstanding equity" in the gratuity fund and to invest it in
a profitable investment or undertaking. The earnings of the
investment shall then be applied to pay for the interest due on
the gratuity loan which was initially set at 9% per annum
subject to the minimum investment rate resulting from the
updated actuarial study. The excess or balance of the interest
earnings shall then be distributed to the investor-members.
Pursuant to the investment scheme, DBP-TSD paid to the
investor members a total of P11,626,414.25 representing the
net earnings of the investments for the years 1991 and 1992.
The payments were disallowed by the Auditor under Audit
Observation Memorandum No. 93-2 dated March 1, 1993, on
the ground that the distribution of income of the Gratuity Plan
Fund (GPF) to future retirees of DBP is irregular and constituted
the use of public funds for private purposes which is
specifically proscribed under Section 4 of P.D. 1445. 8
AOM No. 93-2 did "not question the authority of the Bank to set-up the
[Gratuity Plan] Fund and have it invested in the Trust Services
Department of the Bank." 9 Apart from requiring the recipients of the
P11,626,414.25 to refund their dividends, the Auditor recommended
that the DBP record in its books as miscellaneous income the income of
the Gratuity Plan Fund ("Fund"). The Auditor reasoned that "the Fund is
still owned by the Bank, the Board of Trustees is a mere administrator
of the Fund in the same way that the Trust Services Department where
the fund was invested was a mere investor and neither can the
employees, who have still an inchoate interest [i]n the Fund be
considered as rightful owner of the Fund." 10
In a letter dated 29 July 1996, 11 former DBP Chairman Alfredo C.
Antonio requested then COA Chairman Celso D. Gangan to reconsider
AOM No. 93-2. Chairman Antonio alleged that the express trust created
for the benefit of qualified DBP employees under the Trust
Agreement 12 ("Agreement") dated 26 February 1980 gave the Fund a
separate legal personality. The Agreement transferred legal title over the
Fund to the Board of Trustees and all earnings of the Fund accrue only
to the Fund. Thus, Chairman Antonio contended that the income of the
Fund is not the income of DBP.
Chairman Antonio also asked COA to lift the disallowance of the
P11,626,414.25 distributed as dividends under the SLP on the ground
that the latter was simply a normal loan transaction. He compared the
SLP to loans granted by other gratuity and retirement funds, like the
GSIS, SSS and DBP Provident Fund.
The Ruling of the Commission on Audit
On 6 October 1998, the COA en banc affirmed AOM No. 93-2, as
follows:
The Gratuity Plan Fund is supposed to be accorded separate
personality under the administration of the Board of Trustees
but that concept has been effectively eliminated when the
Special Loan Program was adopted. . . .
The Special Loan Program earns for the GPF an interest of 9%
per annum, subject to adjustment after actuarial valuation. The
investment scheme managed by the TSD accumulated more
than that as evidenced by the payment of P4,568,971.84 in
1991 and P7,057,442.41 in 1992, to the member-borrowers. In
effect, the program is grossly disadvantageous to the
government because it deprived the GPF of higher investment
earnings by the unwarranted entanglement of its resources
under the loan program in the guise of giving financial
assistance to the availing employees. . . .
Retirement benefits may only be availed of upon retirement. It
can only be demanded and enjoyed when the employee shall
have met the last requisite, that is, actual retirement under the
Gratuity Plan. During employment, the prospective retiree shall
only have an inchoate right over the benefits. There can be no
partial payment or enjoyment of the benefits, in whatever
guise, before actual retirement. . . .
PREMISES CONSIDERED, the instant request for reconsideration
of the disallowance amounting to P11,626,414.25 has to be, as
it is hereby, denied. 13
In its Resolution of 1 August 2000, the COA also denied DBP's second
motion for reconsideration. Citing the Court's ruling in Conte v.
COA, 14 the COA concluded that the SLP was actually a supplementary
retirement benefit in the guise of "financial assistance," thus:
At any rate, the Special Loan Program is not just an ordinary
and regular transaction of the Gratuity Plan Fund, as the Bank
innocently represents. . . . It is a systematic investment mix
conveniently implemented in a special loan program with the
least participation of the beneficiaries, by merely filing an
application and then wait for the distribution of net earnings.
The real objective, of course, is to give financial assistance to
augment the value of the gratuity benefits, and this has the
same effect as the proscribed supplementary
pension/retirement plan under Section 28 (b) of
C(ommonwealth) A(ct) 186.
This Commission may now draw authority from the case
of Conte, et al v. Commission on Audit (264 SCRA 19 [1996])
where the Supreme Court declared that "financial assistance"
granted to retiring employees constitute supplementary
retirement or pension benefits. It was there stated:
". . . Said Sec. 28 (b) as amended by R.A. 4968 in no
uncertain terms bars the creation of any insurance or
retirement plan other than the GSIS for
government officers and employees, in order to prevent
the undue and iniquitous proliferation of such plans. It is
beyond cavil that Res. 56 contravenes the said provision
of law and is therefore, invalid, void and of no effect. To
ignore this and rule otherwise would be tantamount to
permitting every other government office or agency to
put up its own supplementary retirement benefit plan
under the guise of such "financial assistance." 15
Hence, the instant petition filed by DBP.
The Issues
The DBP invokes justice and equity on behalf of its employees because
of prevailing economic conditions. The DBP reiterates that the income
of the Fund should be treated and recorded as separate from the
income of DBP itself, and charges that COA committed grave abuse of
discretion:
1.IN CONCLUDING THAT THE ADOPTION OF THE SPECIAL
LOAN PROGRAM CONSTITUTES A CIRCUMVENTION OF
PHILIPPINE RETIREMENT LAWS;
2.IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM IS
GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT;
3.IN CONCLUDING THAT THE SPECIAL LOAN PROGRAM
CONSTITUTES A SUPPLEMENTARY RETIREMENT
BENEFIT. 16
The Office of the Solicitor General ("OSG"), arguing on behalf of the
COA, questions the standing of the DBP to file the instant petition. The
OSG claims that the trustees of the Fund or the DBP employees
themselves should pursue this certiorari proceeding since they would be
the ones to return the dividends and not DBP.
The central issues for resolution are: (1) whether DBP has the requisite
standing to file the instant petition for certiorari; (2) whether the income
of the Fund is income of DBP; and (3) whether the distribution of
dividends under the SLP is valid.
The Ruling of the Court
The petition is partly meritorious.
The standing of DBP to file this petition for certiorari
As DBP correctly argued, the COA en banc implicitly recognized DBP's
standing when it ruled on DBP's request for reconsideration from AOM
No. 93-2 and motion for reconsideration from the Decision of 6
October 1998. The supposed lack of standing of the DBP was not even
an issue in the COA Decision or in the Resolution of 1 August 2000.

The OSG nevertheless contends that the DBP cannot question the
decisions of the COA en banc since DBP is a government
instrumentality. Citing Section 2, Article IX-D of the Constitution, 17 the
OSG argued that:
Petitioner may ask the lifting of the disallowance by COA, since
COA had not yet made a definitive and final ruling on the
matter in issue. But after COA denied with finality the motion
for reconsideration of petitioner, petitioner, being a
government instrumentality, should accept COA's ruling and
leave the matter of questioning COA's decision with the
concerned investor-members. 18
These arguments do not persuade us.
Section 2, Article IX-D of the Constitution does not bar government
instrumentalities from questioning decisions of the COA. Government
agencies and government-owned and controlled corporations have long
resorted to petitions for certiorari to question rulings of the
COA. 19 These government entities filed their petitions with this Court
pursuant to Section 7, Article IX of the Constitution, which mandates
that aggrieved parties may bring decisions of the COA to the Court
on certiorari. 20Likewise, the Government Auditing Code expressly
provides that a government agency aggrieved by a COA decision, order
or ruling may raise the controversy to the Supreme Court
on certiorari "in the manner provided by law and the Rules of
Court." 21 Rule 64 of the Rules of Court now embodies this procedure,
to wit: TICDSc
SEC. 2.Mode of review. A judgment or final order or
resolution of the Commission on Elections and the Commission
on Audit may be brought by the aggrieved party to the
Supreme Court on certiorari under Rule 65, except as
hereinafter provided.
The novel theory advanced by the OSG would necessarily require
persons not parties to the present case the DBP employees who are
members of the Plan or the trustees of the Fund to avail
of certiorari under Rule 65. The petition for certiorari under Rule 65,
however, is not available to any person who feels injured by the
decision of a tribunal, board or officer exercising judicial or quasi
judicial functions. The "person aggrieved" under Section 1 of Rule 65
who can avail of the special civil action of certiorari pertains only to one
who was a party in the proceedings before the court a quo, 22 or in this
case, before the COA. To hold otherwise would open the courts to
numerous and endless litigations. 23 Since DBP was the sole party in the
proceedings before the COA, DBP is the proper party to avail of the
remedy ofcertiorari.
The real party in interest who stands to benefit or suffer from the
judgment in the suit must prosecute or defend an action. 24 We have
held that "interest" means material interest, an interest in issue that the
decision will affect, as distinguished from mere interest in the question
involved, or a mere incidental interest. 25
As a party to the Agreement and a trustor of the Fund, DBP has a
material interest in the implementation of the Agreement, and in the
operation of the Gratuity Plan and the Fund as prescribed in the
Agreement. The DBP also possesses a real interest in upholding the
legitimacy of the policies and programs approved by its Board of
Directors for the benefit of DBP employees. This includes the SLP and
its implementing rules, which the DBP Board of Directors confirmed.
The income of the Gratuity Plan Fund
The COA alleges that DBP is the actual owner of the Fund and its
income, on the following grounds: (1) DBP made the contributions to
the Fund; (2) the trustees of the Fund are merely administrators; and (3)
DBP employees only have an inchoate right to the Fund.
The DBP counters that the Fund is the subject of a trust, and that the
Agreement transferred legal title over the Fund to the trustees. The
income of the Fund does not accrue to DBP. Thus, such income should
not be recorded in DBP's books of account. 26
A trust is a "fiduciary relationship with respect to property which
involves the existence of equitable duties imposed upon the holder of
the title to the property to deal with it for the benefit of another." 27 A
trust is either express or implied. Express trusts are those which the
direct and positive acts of the parties create, by some writing or deed,
or will, or by words evincing an intention to create a trust. 28
In the present case, the DBP Board of Governors' (now Board of
Directors) Resolution No. 794 and the Agreement executed by former
DBP Chairman Rafael Sison and the trustees of the Plan created an
express trust, specifically, an employees' trust. An employees' trust is a
trust maintained by an employer to provide retirement, pension or
other benefits to its employees. 29 It is a separate taxable
entity 30 established for the exclusive benefit of the employees. 31
Resolution No. 794 shows that DBP intended to establish a trust fund to
cover the retirement benefits of certain employees under Republic Act
No. 1616 32 ("RA 1616"). The principal and income of the Fund would
be separate and distinct from the funds of DBP. We quote the salient
portions of Resolution No. 794, as follows:
2.Trust Agreement designed for in-house trustees of three
(3) to be appointed by the Board of Governors and vested with
control and administration of the funds appropriated annually
by the Board to be invested in selective investments so
that the income and principal of said contributions would be
sufficient to meet the required payments of benefits as officials
and employees of the Bank retire under the Gratuity Plan; . . .
The proposed funding of the gratuity plan has decided
advantages on the part of the Bank over the present
procedure, where the Bank provides payment only when an
employee retires or on "pay as you go" basis:
1.It is a definite written program, permanent and continuing
whereby the Bank provides contributions to a separate trust
fund, which shall be exclusively used to meet its liabilities to
retiring officials and employees; and
2.Since the gratuity plan will be tax qualified under the
National Internal Revenue Code and RA 4917, the Bank's
periodic contributions thereto shall be deductible for tax
purposes and the earnings therefrom tax free. 33 (Emphasis
supplied)
In a trust, one person has an equitable ownership in the property while
another person owns the legal title to such property, the equitable
ownership of the former entitling him to the performance of certain
duties and the exercise of certain powers by the latter. 34 A person who
establishes a trust is the trustor. One in whom confidence is reposed as
regards property for the benefit of another is the trustee. The person
for whose benefit the trust is created is the beneficiary. 35
In the present case, DBP, as the trustor, vested in the trustees of the
Fund legal title over the Fund as well as control over the investment of
the money and assets of the Fund. The powers and duties granted to
the trustees of the Fund under the Agreement were plainly more than
just administrative, to wit:
1.The BANK hereby vests the control and administration of the
Fund in the TRUSTEES for the accomplishment of the purposes
for which said Fund is intended in defraying the benefits of the
PLAN in accordance with its provisions, and the TRUSTEES
hereby accept the trust . . .
2.The TRUSTEES shall receive and hold legal title to the money
and/or property comprising the Fund, and shall hold the same
in trust for its beneficiaries, in accordance with, and for the
uses and purposes stated in the provisions of the PLAN.
3.Without in any sense limiting the general powers of
management and administration given to TRUSTEES by our
laws and as supplementary thereto, the TRUSTEES shall
manage, administer, and maintain the Fund with full power and
authority:
xxx xxx xxx
b.To invest and reinvest at any time all or any part of the
Fund in any real estate (situated within the
Philippines), housing project, stocks, bonds,
mortgages, notes, other securities or property
which the said TRUSTEES may deem safe and
proper, and to collect and receive all income and
profits existing therefrom;
c.To keep and maintain accurate books of account
and/or records of the Fund . . ..
d.To pay all costs, expenses, and charges incurred in
connection with the administration, preservation,
maintenance and protection of the Fund . . . to
employ or appoint such agents or employees . . ..
e.To promulgate, from time to time, such rules not
inconsistent with the conditions of this Agreement
. . ..
f.To do all acts which, in their judgment, are needful or
desirable for the proper and advantageous control
and management of the Fund . . .. 36(Emphasis
supplied)
Clearly, the trustees received and collected any income and profit
derived from the Fund, and they maintained separate books of account
for this purpose. The principal and income of the Fund will not revert to
DBP even if the trust is subsequently modified or terminated. The
Agreement states that the principal and income must be used to satisfy
all of the liabilities to the beneficiary officials and employees under the
Gratuity Plan, as follows:
5.The BANK reserves the right at any time and from time to
time (1) to modify or amend in whole or in part by written
directions to the TRUSTEES, any and all of the provisions of this
Trust Agreement, or (2) to terminate this Trust Agreement
upon thirty (30) days' prior notice in writing to the TRUSTEES;
provided, however, that no modification or amendment which
affects the rights, duties, or responsibilities of the TRUSTEES
may be made without the TRUSTEES' consent; and provided,
that such termination, modification, or amendment prior to the
satisfaction of all liabilities with respect to eligible employees
and their beneficiaries, does not permit any part of the corpus
or income of the Fund to be used for, or diverted to, purposes
other than for the exclusive benefit of eligible employees and
workers as provided for in the PLAN. In the event of
termination of this Trust Agreement, all cash, securities, and
other property then constituting the Fund less any amounts
constituting accrued benefits to the eligible employees,
charges, and expenses payable from the Fund, shall be paid
over or delivered by the TRUSTEES to the members in
proportion to their accrued benefits. 37 (Emphasis supplied)

The resumption of the SLP did not eliminate the trust or terminate the
transfer of legal title to the Fund's trustees. The records show that the
Fund's Board of Trustees approved the SLP upon the request of the
DBP Career Officials Association. 38 The DBP Board of Directors only
confirmed the approval of the SLP by the Fund's trustees.
The beneficiaries or cestui que trust of the Fund are the DBP officials
and employees who will retire under Commonwealth Act No.
186 39 ("CA 186"), as amended by RA 1616. RA 1616 requires the
employer agency or government instrumentality to pay for the
retirement gratuity of its employees who rendered service for the
required number of years. 40 The Government Service Insurance System
Act of 1997 41 still allows retirement under RA 1616 for certain
employees.
As COA correctly observed, the right of the employees to claim their
gratuities from the Fund is still inchoate. RA 1616 does not allow
employees to receive their gratuities until they retire. However, this
does not invalidate the trust created by DBP or the concomitant transfer
of legal title to the trustees. As far back as inGovernment v.
Abadilla, 42 the Court held that "it is not always necessary that the cestui
que trust should be named, or even be in esse at the time the trust is
created in his favor." It is enough that the beneficiaries are sufficiently
certain or identifiable. 43
In this case, the GSIS Act of 1997 extended the option to retire
under RA 1616 only to employees who had entered government service
before 1 June 1977. 44 The DBP employees who were in the service
before this date are easily identifiable. As of the time DBP filed the
instant petition, DBP estimated that 530 of its employees could still
retire under RA 1616. At least 60 DBP employees had already received
their gratuities under the Fund. 45
The Agreement indisputably transferred legal title over the income and
properties of the Fund to the Fund's trustees. Thus, COA's directive to
record the income of the Fund in DBP's books of account as the
miscellaneous income of DBP constitutes grave abuse of discretion. The
income of the Fund does not form part of the revenues or profits of
DBP, and DBP may not use such income for its own benefit. The
principal and income of the Fund together constitute the res or subject
matter of the trust. The Agreement established the Fund precisely so
that it would eventually be sufficient to pay for the retirement benefits
of DBP employees under RA 1616 without additional outlay from DBP.
COA itself acknowledged the authority of DBP to set up the Fund.
However, COA's subsequent directive would divest the Fund of income,
and defeat the purpose for the Fund's creation.
The validity of the Special Loan Program
and the disallowance of P11,626,414.25
In disallowing the P11,626,414.25 distributed as dividends under the
SLP, the COA relied primarily on Republic Act No. 4968 ("RA 4968")
which took effect on 17 June 1967. RA 4968 added the following
paragraph to Section 28 of CA 186, thus:
(b)Hereafter no insurance or retirement plan for officers or
employees shall be created by any employer. All supplementary
retirement or pension plans heretofore in force in any
government office, agency, or instrumentality or corporation
owned or control by the government, are hereby declared
inoperative or abolished: Provided, That the rights of those
who are already eligible to retire thereunder shall not be
affected.
Even assuming, however, that the SLP constitutes a supplementary
retirement plan, RA 4968 does not apply to the case at bar. The DBP
Charter, which took effect on 14 February 1986, expressly authorizes
supplementary retirement plans "adopted by and effective in" DBP, thus:
SEC. 34.Separation Benefits. All those who shall retire from
the service or are separated therefrom on account of the
reorganization of the Bank under the provisions of this
Charter shall be entitled to all gratuities and benefits provided
for under existing laws and/or supplementary retirement plans
adopted by and effective in the Bank: Provided, that any
separation benefits and incentives which may be granted by
the Bank subsequent to June 1, 1986, which may be in addition
to those provided under existing laws and previous retirement
programs of the Bank prior to the said date, for those
personnel referred to in this section shall be funded by the
National Government; Provided, further, that, any
supplementary retirement plan adopted by the Bank after the
effectivity of this Chapter shall require the prior approval of the
Minister of Finance.
xxx xxx xxx.
SEC. 37.Repealing Clause. All acts, executive orders,
administrative orders, proclamations, rules and regulations or
parts thereof inconsistent with any of the provisions of this
charter are hereby repealed or modified
accordingly. 46 (Emphasis supplied)
Being a special and later law, the DBP Charter 47 prevails over RA 4968.
The DBP originally adopted the SLP in 1983. The Court cannot strike
down the SLP now based onRA 4968 in view of the subsequent DBP
Charter authorizing the SLP.
Nevertheless, the Court upholds the COA's disallowance of the
P11,626,414.25 in dividends distributed under the SLP.
According to DBP Board Resolution No. 0036 dated 25 January 1991,
the "SLP allows a prospective retiree to utilize in the form of a loan, a
portion of their outstanding equity in the Gratuity Plan Fund and to
invest [the] proceeds in a profitable investment or undertaking." 48 The
basis of the loanable amount was an employee's gratuity fund
credit, 49 that is to say, what an employee would receive if he retired at
the time he availed of the loan.
In his letter dated 26 October 1983 proposing the confirmation of the
SLP, then DBP Chairman Cesar B. Zalamea stated that:
The primary objective of this proposal therefore is to
counteract the unavoidable decrease in the value of the said
retirement benefits through the following scheme:
I.To allow a prospective retiree the option to utilize in the form
of a loan, a portion of his standing equity in the Gratuity
Fund and to invest it in a profitable investment or
undertaking. The income or appreciation in value will be
for his own account and should provide him the desired
hedge against inflation or erosion in the value of the
peso. This is being proposed since Philippine retirement
laws and the Gratuity Plan do not allow partial payment
of retirement benefits, even the portion already earned,
ahead of actual retirement. 50 (Emphasis supplied)
As Chairman Zalamea himself noted, neither the Gratuity Plan nor our
laws on retirement allow the partial payment of retirement benefits
ahead of actual retirement. It appears that DBP sought to circumvent
these restrictions through the SLP, which released a portion of an
employee's retirement benefits to him in the form of a loan. Certainly,
the DBP did this for laudable reasons, to address the concerns of DBP
employees on the devaluation of their retirement benefits. The
remaining question is whether RA 1616 and the Gratuity Plan allow this
scheme.
We rule that it is not allowed.
The right to retirement benefits accrues only upon certain prerequisites.
First, the conditions imposed by the applicable law in this case, RA
1616 must be fulfilled.51 Second, there must be actual
retirement. 52 Retirement means there is "a bilateral act of the parties, a
voluntary agreement between the employer and the employees
whereby the latter after reaching a certain age agrees and/or consents
to severe his employment with the former." 53
Severance of employment is a condition sine qua non for the release of
retirement benefits. Retirement benefits are not meant to recompense
employees who are still in the employ of the government. That is the
function of salaries and other emoluments. 54 Retirement benefits are in
the nature of a reward granted by the State to a government employee
who has given the best years of his life to the service of his country. 55
The Gratuity Plan likewise provides that the gratuity benefit of a
qualified DBP employee shall only be released "upon retirement under
th(e) Plan." 56 As the COA correctly pointed out, this means that
retirement benefits "can only be demanded and enjoyed when the
employee shall have met the last requisite, that is, actual retirement
under the Gratuity Plan." 57
There was thus no basis for the loans granted to DBP employees under
the SLP. The rights of the recipient DBP employees to their retirement
gratuities were still inchoate, if not a mere expectancy, when they
availed of the SLP. No portion of their retirement benefits could be
considered as "actually earned" or "outstanding" before retirement. Prior
to retirement, an employee who has served the requisite number of
years is only eligible for, but not yet entitled to, retirement benefits.
The DBP contends that the SLP is merely a normal loan transaction, akin
to the loans granted by the GSIS, SSS and the DBP Provident Fund.
The records show otherwise.
In a loan transaction or mutuum, the borrower or debtor acquires
ownership of the amount borrowed. 58 As the owner, the debtor is then
free to dispose of or to utilize the sum he loaned, 59 subject to the
condition that he should later return the amount with the stipulated
interest to the creditor. 60
In contrast, the amount borrowed by a qualified employee under the
SLP was not even released to him. The implementing rules of the SLP
state that:
The loan shall be available strictly for the purpose of
investment in the following investment instruments:
a.182 or 364-day term Time deposits with DBP
b.182 or 364-day T-bills/CB Bills
c.182 or 364-day term DBP Blue Chip Fund
The investment shall be registered in the name of DBP-TSD in
trust for availee-investor for his sole risk and account. Choice
of eligible terms shall be at the option of availee-
investor. Investments shall be commingled by TSD and
Participation Certificates shall be issued to each availee-
investor.

xxx xxx xxx
IV.LOANABLE TERMS
xxx xxx xxx
e.Allowable Investment Instruments Time Deposit DBP
T-Bills/CB Bills and DBP Blue Chip Fund. TSD shall purchase
new securities and/or allocate existing securities portfolio of
GPF depending on liquidity position of the Fund . . . .
xxx xxx xxx
g.Security The loan shall be secured by GS, Certificate of
Time Deposit and/or BCF Certificate of Participation which shall
be registered in the name of DBP-TSD in trust for name of
availee-investor and shall be surrendered to the TSD for
safekeeping. 61 (Emphasis supplied)
In the present case, the Fund allowed the debtor-employee to "borrow"
a portion of his gratuity fund credit solely for the purpose of investing
it in certain instruments specified by DBP. The debtor-employee could
not dispose of or utilize the loan in any other way. These instruments
were, incidentally, some of the same securities where the Fund placed
its investments. At the same time the Fund obligated the debtor-
employee to assign immediately his loan to DBP-TSD so that the
amount could be commingled with the loans of other employees. The
DBP-TSD the same department which handled and had custody of
the Fund's accounts then purchased orre-allocated existing
securities in the portfolio of the Fund to correspond to the employees'
loans.
Simply put, the amount ostensibly loaned from the Fund stayed in the
Fund, and remained under the control and custody of the DBP-TSD. The
debtor-employee never had any control or custody over the amount he
supposedly borrowed. However, DBP-TSD listed new or existing
investments of the Fund corresponding to the "loan" in the name of the
debtor-employee, so that the latter could collect the interest earned
from the investments.
In sum, the SLP enabled certain DBP employees to utilize and even earn
from their retirement gratuities even before they retired. This constitutes
a partial release of their retirement benefits, which is contrary to RA
1616 and the Gratuity Plan. As we have discussed, the latter authorizes
the release of gratuities from the earnings and principal of the Fund
only upon retirement.
The Gratuity Plan will lose its tax-exempt status if the retirement
benefits are released prior to the retirement of the employees. The trust
funds of employees other than those of private employers are qualified
for certain tax exemptions pursuant to Section 60(B) formerly Section
53(b) of the National Internal Revenue Code.62 Section 60(B)
provides:
Section 60.Imposition of Tax.
(A)Application of Tax. The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind
of property held in trust, including:
xxx xxx xxx
(B)Exception. The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or
all of his employees (1) if contributions are made to the trust
by such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of
the fund accumulated by the trust in accordance with such
plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or
income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his
employees: . . . (Emphasis supplied) EcDTIH
The Gratuity Plan provides that the gratuity benefits of a qualified DBP
employee shall be released only "upon retirement under th(e) Plan." If
the earnings and principal of the Fund are distributed to DBP
employees prior to their retirement, the Gratuity Plan will no longer
qualify for exemption under Section 60(B). To recall, DBP Resolution No.
794 creating the Gratuity Plan expressly provides that "since the gratuity
plan will be tax qualified under the National Internal Revenue Code . . .,
the Bank's periodic contributions thereto shall be deductible for tax
purposes and the earnings therefrom tax free." If DBP insists that its
employees may receive the P11,626,414.25 dividends, the necessary
consequence will be the non-qualification of the Gratuity Plan as a tax-
exempt plan.
Finally, DBP invokes justice and equity on behalf of its affected
employees. Equity cannot supplant or contravene the law. 63 Further, as
evidenced by the letter of former DBP Chairman Zalamea, the DBP
Board of Directors was well aware of the proscription against the partial
release of retirement benefits when it confirmed the SLP. If DBP wants
"to enhance and protect the value of . . . (the) gratuity benefits" of its
employees, DBP must do so by investing the money of the Fund in the
proper and sound investments, and not by circumventing restrictions
imposed by law and the Gratuity Plan itself.
We nevertheless urge the DBP and COA to provide equitable terms and
a sufficient period within which the affected DBP employees may refund
the dividends they received under the SLP. Since most of the DBP
employees were eligible to retire within a few years when they availed
of the SLP, the refunds may be deducted from their retirement benefits,
at least for those who have not received their retirement benefits.
WHEREFORE, COA Decision No. 98-403 dated 6 October 1998 and COA
Resolution No. 2000-212 dated 1 August 2000 are AFFIRMED with
MODIFICATION. The income of the Gratuity Plan Fund, held in trust for
the benefit of DBP employees eligible to retire under RA 1616, should
not be recorded in the books of account of DBP as the income of the
latter.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago,
Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-Morales, Callejo,
Sr., Azcuna and Tinga, JJ.,concur.
Footnotes
1.Under Rule 65 of the Rules of Court.
2.Signed by Chairman Celso D. Gangan, Commissioners Sofronio B. Ursal
and Emmanuel M. Dalman.
3.Commissioner Raul C. Flores replaced Commissioner Ursal.
4.Signed by Director Bernarda C. Lavisores, the corporate auditor assigned
to DBP.
5."Providing for the 1986 Revised Charter of the Development Bank of the
Philippines."
6."An Act Strengthening the Development Bank of the Philippines,
Amending for the Purpose Executive Order No. 81."
7.CONST. art. IX-D, sec. 2; Presidential Decree No. 1455, "Government
Auditing Code of the Philippines."
8.Rollo, p. 20.
9.Ibid., p. 68.
10.Ibid.
11.Ibid., p. 82.
12.Ibid., p. 34.
13.Supra, see note 8.
14.332 Phil. 20 (1996).
15.Rollo, p. 24.
16.Ibid., p. 163.
17.Section 2, Article IX-D of the 1987 Constitution states:
(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, inexpensive, extravagant, or unconscionable
expenditures, or uses of government funds and properties.
18.Rollo, p. 197
19.For instance, in Philippine International Trading Corporation v. COA, 368
Phil. 478 (1999); National Center For Mental Health Management v.
COA, G.R. No. 114864, 6 December 1996, 265 SCRA 390; Philippine
Ports Authority v. COA, G.R. No. 100773, 16 October 1992, 214 SCRA
653.
20.Article IX, Section 7 of the 1987 Constitution states:
Each Commission shall decide by a majority vote of all its Members any case
or matter brought before it within sixty days from the date of its
submission for decision or resolution. A case or matter is deemed
submitted for decision or resolution upon the filing of the last
pleading, brief, or memorandum required by the rules of the
Commission or by the Commission itself. Unless otherwise provided
by this Constitution or by law, any decision, order, or ruling of each
Commission may be brought to the Supreme Court on certiorari by
the aggrieved party within thirty days from receipt of a copy
thereof. (Emphasis supplied)
21.Section 50 of P.D. No. 1445 states:
SECTION 50. Appeal from decisions of the Commission. The party
aggrieved by any decision, order or ruling of the Commission may
within thirty days from his receipt of a copy thereof appeal
on certiorari to the Supreme Court in the manner provided by law
and the Rules of Court. When the decision, order, or ruling adversely
affects the interest of any government agency, the appeal may be
taken by the proper head of that agency.
22.Tang v. Court of Appeals, 382 Phil. 277 (2000).
23.Ibid.
24.Rule 3, Section 2 of the Rules of Court.
25.Ortigas & Co. Ltd. v. Court of Appeals, G.R. No. 126102, 4 December
2000, 346 SCRA 748.
26.Rollo, p. 3.
27.Tala Realty Services Corporation v. Banco Filipino Savings and Mortgage
Bank, G.R. No. 137533, 22 November 2002; Huang v. CA, G.R. No.
108525, 236 SCRA 420 (1994) citing A. TOLENTINO, COMMENTARIES
AND JURISPRUDENCE ON THE CIVIL CODE OF THE PHILIPPINES, Vol.
IV, 669 (1991).
28.Heirs of Yap v. Court of Appeals, 371 Phil. 523 (1999).
29.Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 95022; 22
March 1992, 207 SCRA 487; Commissioner of Internal Revenue v.
Visayan Electric Co., 132 Phil. 203 (1968).
30.Commissioner of Internal Revenue v. Visayan Electric Co., 132 Phil. 203
(1968). Employees' trusts are also exempted from certain taxes under
Section 60 (B) of the National Internal Revenue Code, as amended.
31.Commissioner of Internal Revenue v. Court of Appeals, supra, see note
29.
32."An Act Further Amending Section Twelve of Commonwealth Act
Numbered One Hundred Eighty-Six, as Amended, by Prescribing Two
Other Modes of Retirement and for Other Purposes."
33.Rollo, p. 27.

34.Spouses Rosario v. Court of Appeals, 369 Phil. 729 (1999), citing
Tolentino, see note 22.
35.Civil Code, art. 1440.
36.Rollo, p. 34.
37.Ibid.
38.Ibid., p. 60.
39."The Government Service Insurance Act" (1936).
40.Section 12 (c) of Commonwealth Act No. 186, as amended by RA 1616,
was further amended by Republic Act No. 3096 (1961) and Republic
Act No. 4968 (1967) to read:
(c)Retirement is likewise allowed to any official or employee, appointive or
elective, regardless of age and employment status, who has rendered
a total of twenty years of service, the last three years of which are
continuous. The benefit shall, in addition to the return of his personal
contributions with interest compounded monthly and the payment of
the corresponding employer's premiums described in subsection (a)
of Section five hereof, without interest, be only a gratuity equivalent
to one month's salary for every year of the first twenty years of
service, plus one and one-half month's salary for every year of service
over twenty but below thirty years and two months' salary for every
year of service over thirty years in case of employees based on the
highest rate received and in case of elected officials on the rates of
pay as provided by law. This gratuity is payable by the employer or
office concerned which is hereby authorized to provide the necessary
appropriation or pay the same from any unexpended items of
appropriation or savings in its appropriation. (Emphasis supplied)
41.Section 49 (b) of Republic Act No. 8291 (1997) provides:
(b)The GSIS shall discontinue the processing and adjudication of retirement
claims under R.A. No. 1616 except refund of retirement premium
and R.A. No. 910. Instead, all agencies concerned shall process and
pay the gratuities of their employees. The Board shall adopt the
proper rules and procedures for the implementation of this provision.
(Emphasis supplied)
42.46 Phil. 642 (1924).
43.Rizal Surety & Insurance Company v. Court of Appeals, G.R. No. 96727,
28 August 1996, 261 SCRA 69.
44.Section 2.4.2(5) of the Rules and Regulations Implementing the GSIS Act
of 1997 states: "Retirement Benefit Those in the service before
June 1, 1977 shall have the option to choose among the modes of
retirement under R.A. 660, R.A. 1616 or P.D. 1146."
45.Rollo, p. 163.
46.E.O. No. 81, as amended.
47.See notes 5 and 6.
48.Rollo., p. 55.
49.Ibid.
50.Ibid., p. 50
51.See note 40.
52.The pertinent portions of Sections 11 and 12 of CA 186, as amended
state:
Sec. 11.(a) Amount of Annuity. Upon retirement after faithful and
satisfactory service a member shall be automatically entitled to a life
annuity . . .
Sec. 12.Conditions for Retirement. (a) . . .
(b). . .
(c)Retirement is likewise allowed to any official or employee,
appointive or elective, regardless of age and employment status, who
has rendered a total of at least twenty years of service, the last three
years of which are continuous. . . .
More recently, RA 8291 ("The Government Service Insurance System Act of
1997") provides:
Sec. 13-A.Conditions for Entitlement. A member who retires from
the service shall be entitled to the benefits enumerated in paragraph
(a) of Section 13 hereof: Provided That:
(1)he has rendered at least fifteen (15) years of service;
(2)he is at least sixty (60) years of age at the time of retirement; and
(3)he is not receiving a monthly pension benefit from permanent total
disability. (Emphasis supplied)
53.Pantranco North Express, Inc. v. NLRC, G.R. No. 95940, 24 July 1996, 259
SCRA 161, citing Soberano v. Clave, Nos. L-43753-56 and L-50991, 29
August 1980, 99 SCRA 549.
54.In Santos v. Court of Appeals, G.R. No. 139792, 22 November 2000, 345
SCRA 553, this Court held that retirement benefits do not constitute
compensation. A person who has retired but is later appointed to
another position may continue receiving his retirement annuity and a
salary for his new appointment. This is not double compensation.
55.Ibid.
56.Article V of the DBP Gratuity Plan Rules and Regulations states:
Upon retirement under this Plan, an Employee-shall receive, in addition to
the return of personal contributions to the GSIS, with interest
compounded monthly and the payment of the Bank's premiums on
his behalf to the GSIS, without interest, a gratuity benefit equivalent
to one month's Salary for every year of the first twenty years of
Service . . . (Emphasis supplied).
57.Rollo, p. 20.
58.Article 1953 of the Civil Code. A person who receives a loan of money
or any other fungible thing acquires the ownership thereof, and is
bound to pay to the creditor an equal amount of the same kind and
quality.
59.Tanzo v. Drilon, 385 Phil. 790 (2000), citing Yam vs. Malik, No. L-50550-
52, 31 October 1979, 94 SCRA 30.
60.Article 1953 in relation to Article 1933 of the Civil Code which states in
part that a "[s]imple loan may be gratuitous or with a stipulation to
pay interest."
61.Rollo, p. 38.
62.BIR Revenue Memorandum Order No. 9-93 (15 October 1992) states:
Other employees' trust funds adverted to in this Order shall refer to the
trust funds of employees other than those of private
employers/companies, the tax exempt qualification of which had been
determined/adjudicated by the BIR under then Section 56(b) [now
Section 53(b)] of the Tax Code and not under RA 4917 or Section
28(b) (7) (A) of the Tax Code, e.g., PNB Provident Fund, CB Provident
Fund, Land Bank of the Philippines Provident Fund, GSIS Provident
Fund, NPC Employees' Savings & Welfare Plan, NHA Provident Fund, .
. . . (Emphasis provided by BIR)
63.Tankiko v. Cezar, 362 Phil. 184 (1999).

||| (Development Bank of the Phil. v. Commission on Audit, G.R. No.
144516, February 11, 2004)
THIRD DIVISION
[G.R. No. 159991. November 16, 2006.]
CARMELINO F. PANSACOLA, petitioner, vs.
D E C I S I O N
QUISUMBING, J p:
For review on certiorari is the Decision 1 dated June 5, 2003 of the
Court of Appeals in CA-G.R. S.P. No. 60475. The appellate court denied
petitioner's availment of the increased amounts of personal and
additional exemptions under Republic Act No. 8424, the National
Internal Revenue Code of 1997 2 (NIRC), which took effect on January 1,
1998. Also assailed is the appellate court's Resolution 3 dated
September 11, 2003, denying the motion for reconsideration.
The facts are undisputed.
On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax
return for the taxable year 1997 that reflected an overpayment of
P5,950. In it he claimed the increased amounts of personal and
additional exemptions under Section 35 4 of the NIRC, although his
certificate of income tax withheld on compensation indicated the lesser
allowed amounts 5 on these exemptions. He claimed a refund of P5,950
with the Bureau of Internal Revenue, which was denied. Later, the Court
of Tax Appeals also denied his claim because according to the tax court,
"it would be absurd for the law to allow the deduction from a
taxpayer's gross income earned on a certain year of exemptions availing
on a different taxable year. . ." 6 Petitioner sought reconsideration, but
the same was denied. 7
On appeal, the Court of Appeals denied his petition for lack of merit.
The appellate court ruled that Umali v. Estanislao, 8 relied upon by
petitioner, was inapplicable to his case. It further ruled that the NIRC
took effect on January 1, 1998, thus the increased exemptions were
effective only to cover taxable year 1998 and cannot be applied
retroactively.
Petitioner, before us, raises a single issue:
. . . [W]hether or not the increased personal and additional
exemptions under [the NIRC] can be availed of by the
[p]etitioner for purposes of computing his income tax liability
for the taxable year 1997 and thus be entitled to the refund. 9
Simply stated, the issue is: Could the exemptions under Section 35 of
the NIRC, which took effect on January 1, 1998, be availed of for the
taxable year 1997? ASIDTa
Petitioner argues that the personal and additional exemptions are of a
fixed character based on Section 35 (A) and (B) of the NIRC 10 and as
ruled by this Court in Umali, these personal and additional exemptions
are fixed amounts to which an individual taxpayer is entitled. He
contends that unlike other allowable deductions, the availability of these
exemptions does not depend on the taxpayer's profession, trade or
business for a particular taxable period. Relying again in Umali,
petitioner alleges that the Court of Appeals erred in ruling that the
increased exemptions were meant to be applied beginning taxable year
1998 and were to be reflected in the taxpayers' returns to be filed on or
before April 15, 1999. Petitioner reasons that such ruling would
postpone the availability of the increased exemptions and literally defer
the effectivity of the NIRC to January 1, 1999. Petitioner insists that the
increased exemptions were already available on April 15, 1998, the
deadline for filing income tax returns for taxable year 1997, because the
NIRC was already effective.
Respondent, through the Office of the Solicitor General, counters that
the increased exemptions were not yet available for taxable year 1997
because all provisions of the NIRC took effect on January 1, 1998 only;
that the fixed character of personal and additional exemptions does not
necessarily mean that these were not time bound; and petitioner's
proposition was contrary to Section 35 (C) 11 of the NIRC. It further
stated that petitioner's exemptions were determined as of December 31,
1997 and the effectivity of the NIRC during the period of January 1 to
April 15, 1998 did not affect his tax liabilities within the taxable year
1997; and the inclusive period from January 1 to April 15, 1998, the
filing dates and deadline for administrative purposes, was outside of the
taxable year 1997. Respondent also maintains that Umaliis not
applicable to this case.
Prefatorily, personal and additional exemptions under Section 35 of the
NIRC are fixed amounts to which certain individual taxpayers (citizens,
resident aliens) 12 are entitled. Personal exemptions are the theoretical
personal, living and family expenses of an individual allowed to be
deducted from the gross or net income of an individual taxpayer. These
are arbitrary amounts which have been calculated by our lawmakers to
be roughly equivalent to the minimum of subsistence, 13 taking into
account the personal status and additional qualified dependents of the
taxpayer. They are fixed amounts in the sense that the amounts have
been predetermined by our lawmakers as provided under Section 35 (A)
and (B). Unless and until our lawmakers make new adjustments on
these personal exemptions, the amounts allowed to be deducted by a
taxpayer are fixed as predetermined by Congress.
A careful scrutiny of the provisions 14 of the NIRC specifically shows that
Section 79 (D) 15 provides that the personal and additional exemptions
shall be determined in accordance with the main provisions in Title II of
the NIRC. Its main provisions pertain to Section 35 (A) and (B) which
state,
SEC. 35.Allowance of Personal Exemption for Individual
Taxpayer.
(A)In General. For purposes of determining the tax
provided in Section 24(A) of this Title, 16 there shall be
allowed a basic personal exemption as follows:
xxx xxx xxx
For each married individual P32,000
xxx xxx xxx
(B)Additional Exemption for Dependents. There shall
be allowed an additional exemption of Eight thousand
pesos (P8,000) for each dependent not exceeding four
(4). (Emphasis ours.) cIECaS
Section 35 (A) and (B) allow the basic personal and additional
exemptions as deductions from gross or net income, as the case maybe,
to arrive at the correct taxable income of certain individual taxpayers.
Section 24 (A) (1) (a) imposed income tax on a resident citizen's taxable
income derived for each taxable year. It provides as follows:
SEC. 24.Income Tax Rates.
(A)Rates of Income Tax on Individual Citizen . . .
(1)An income tax is hereby imposed:
(a)On the taxable income defined in Section 31
of this Code, other than income subject to
tax under Subsections (B), 17 (C), 18 and
(D) 19 of this Section, derived for each
taxable year from all sources within and
without the Philippines by every individual
citizen of the Philippines residing therein;
(Emphasis ours.)
Section 31 defines "taxable income" as the pertinent items of gross
income specified in the NIRC, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by
the NIRC or other special laws. As defined in Section 22 (P), 20 "taxable
year" means the calendar year, upon the basis of which the net income
is computed under Title II of the NIRC. Section 43 21 also supports the
rule that the taxable income of an individual shall be computed on the
basis of the calendar year. In addition, Section 45 22 provides that the
deductions provided for under Title II of the NIRC shall be taken for
the taxable year in which they are "paid or accrued" or "paid or
incurred."
Moreover, Section 79 (H) 23 requires the employer to determine, on or
before the end of the calendar year but prior to the payment of the
compensation for the last payroll period, the tax due from each
employee's taxable compensation income for the entire taxable year in
accordance with Section 24 (A). This is for the purpose of either
withholding from the employee's December salary, or refunding to him
not later than January 25 of the succeeding year, the difference
between the tax due and the tax withheld.
Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31
and 22 (P) and Sections 43, 45 and 79 (H) of the NIRC, the income
subject to income tax is the taxpayer's income as derived and
computed during the calendar year, his taxable year.
Clearly from the abovequoted provisions, what the law should consider
for the purpose of determining the tax due from an individual taxpayer
is his status and qualified dependents at the close of the taxable
year and not at the time the return is filed and the tax due thereon is
paid. Now comes Section 35 (C) of the NIRC which provides,
Sec. 35.Allowance of Personal Exemption for Individual
Taxpayer.
xxx xxx xxx
(C)Change of Status. If the taxpayer marries or should have
additional dependent(s) as defined above during the
taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such
year.
If the taxpayer dies during the taxable year, his estate
may still claim the personal and additional exemptions
for himself and his dependent(s) as if he died at the
close of such year. DaTICc
If the spouse or any of the dependents dies or if any of
such dependents marries, becomes twenty-one (21)
years old or becomes gainfully employed during the
taxable year, the taxpayer may still claim the same
exemptions as if the spouse or any of the dependents
died, or as if such dependents married, became twenty-
one (21) years old or became gainfully employed at the
close of such year.
Emphasis must be made that Section 35 (C) of the NIRC allows a
taxpayer to still claim the corresponding full amount of exemption for a
taxable year, e.g. if he marries; have additional dependents; he, his
spouse, or any of his dependents die; and if any of his dependents
marry, turn 21 years old; or become gainfully employed. It is as if the
changes in his or his dependents' status took place at the close of the
taxable year.

Consequently, his correct taxable income and his corresponding
allowable deductions e.g. personal and additional deductions, if any,
had already been determined as of the end of the calendar year.
In the case of petitioner, the availability of the aforementioned
deductions if he is thus entitled, would be reflected on his tax return
filed on or before the 15th day of April 1999 as mandated by Section
51 (C) (1). 24 Since the NIRC took effect on January 1, 1998, the
increased amounts of personal and additional exemptions under Section
35, can only be allowed as deductions from the individual taxpayer's
gross or net income, as the case maybe, for the taxable year 1998 to be
filed in 1999. The NIRC made no reference that the personal and
additional exemptions shall apply on income earned before January 1,
1998.
Thus, petitioner's reliance in Umali is misplaced.
In Umali, we noted that despite being given authority by Section 29 (1)
(4) 25 of the National Internal Revenue Code of 1977 to adjust these
exemptions, no adjustments were made to cover 1989. Note that Rep.
Act No. 7167 is entitled "An Act Adjusting the Basic Personal and
Additional Exemptions Allowable to Individuals for Income Tax Purposes
to the Poverty Threshold Level, Amending for the Purpose Section 29,
Paragraph (L), Items (1) and (2) (A), of the National Internal Revenue
Code, As Amended, and For Other Purposes." Thus, we said in Umali,
that the adjustment provided by Rep. Act No. 7167 effective 1992,
should consider the poverty threshold level in 1991, the time it was
enacted. And we observed therein that since the exemptions would
especially benefit lower and middle-income taxpayers, the exemption
should be made to cover the past year 1991. To such an extent, Rep.
Act No. 7167 was a social legislation intended to remedy the non-
adjustment in 1989. And as cited in Umali, this legislative intent is also
clear in the records of the House of Representatives' Journal.
This is not so in the case at bar. There is nothing in the NIRC that
expresses any such intent. The policy declarations in its enactment do
not indicate it was a social legislation that adjusted personal and
additional exemptions according to the poverty threshold level nor is
there any indication that its application should retroact. At the time
petitioner filed his 1997 return and paid the tax due thereon in April
1998, the increased amounts of personal and additional exemptions in
Section 35 were not yet available. It has not yet accrued as of
December 31, 1997, the last day of his taxable year. Petitioner's taxable
income covers his income for the calendar year 1997. The law cannot
be given retroactive effect. It is established that tax laws are prospective
in application, unless it is expressly provided to apply retroactively. 26 In
the NIRC, we note, there is no specific mention that the increased
amounts of personal and additional exemptions under Section 35 shall
be given retroactive effect. Conformably too, personal and additional
exemptions are considered as deductions from gross income.
Deductions for income tax purposes partake of the nature of tax
exemptions, hence strictly construed 27 against the taxpayer 28 and
cannot be allowed unless granted in the most explicit and categorical
language 29 too plain to be mistaken. 30 They cannot be extended by
mere implication or inference. 31 And, where a provision of law speaks
categorically, the need for interpretation is obviated, no plausible
pretense being entertained to justify non-compliance. All that has to be
done is to apply it in every case that falls within its terms. 32
Accordingly, the Court of Appeals and the Court of Tax Appeals were
correct in denying petitioner's claim for refund. IcADSE
WHEREFORE, the petition is DENIED for lack of merit. The Decision
dated June 5, 2003 and the Resolution dated September 11, 2003 of the
Court of Appeals in CA-G.R. S.P. No. 60475 are hereby AFFIRMED.
SO ORDERED.
Carpio, Carpio Morales, Tinga and Velasco, Jr., JJ., concur.
Footnotes
1.Rollo, pp. 18-28.
2.Rep. Act No. 8424 entitled "AN ACT AMENDING THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES."
3.Rollo, p. 43.
4.SEC. 35. Allowance of Personal Exemption for Individual Taxpayer.
(A)In General. For purposes of determining the tax provided in Section 24
(A) of this Title, there shall be allowed a basic personal exemption as
follows:
xxx xxx xxx
For each married individual P32,000
xxx xxx xxx
(B)Additional Exemption for Dependents. There shall be allowed an
additional exemption of Eight thousand pesos (P8,000) for each
dependent not exceeding four (4).
xxx xxx xxx (Emphasis supplied.)
5.Under Section 29 (l) (1) and (2) of the National Internal Revenue Code of
1977, as amended, the personal exemption for each married
individual is P18,000and the additional exemption for each
dependent is P5,000. (Emphasis supplied.)
6.Rollo, p. 25.
7.Id. at 18-20.
8.G.R. Nos. 104037 and 104069, May 29, 1992, 209 SCRA 446.
9.Rollo, p. 80.
10.Supra note 4.
11.SEC. 35. Allowance of Personal Exemption for Individual Taxpayer.
xxx xxx xxx
(C)Change of Status. If the taxpayer marries or should have additional
dependent(s) as defined above during the taxable year, the taxpayer
may claim the corresponding additional exemption, as the case may
be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the
personal and additional exemptions for himself and his dependent(s)
as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents
marries, becomes twenty-one (21) years old or becomes gainfully
employed during the taxable year, the taxpayer may still claim the
same exemptions as if the spouse or any of the dependents died, or
as if such dependents married, became twenty-one (21) years old or
became gainfully employed at the close of such year.
xxx xxx xxx
12.NIRC, Sections 35 and 24 (A) (1) (a), (b) and (c). See Section 35 (D) for the
personal exemption allowable to nonresident alien individual.
13.See also Madrigal and Paterno v. Rafferty and Concepcion, 38 Phil. 414,
418 (1918).
14.Sections 35, 24 (A), 31, 22 (P), 43, 45, 51 (C) (1), and 79 (D) and (H).
15.SEC. 79. Income Tax Collected at Source.
xxx xxx xxx
(D)Personal Exemptions
(1)In General. Unless otherwise provided by this Chapter, the personal
and additional exemptions applicable under this Chapter shall be
determined in accordance with the main provisions of this Title.
16.Title II of the NIRC.
17.Rate of Tax on Certain Passive Income.
18.Capital Gains from Sale of Shares of Stock Not Traded in the Stock
Exchange.
19.Capital Gains from Sale of Real Property.
20.The term "taxable year" means the calendar year, or the fiscal year
ending during such calendar year, upon the basis of which the net
income is computed under this Title. . . .
21.SEC. 43. General Rule. The taxable income shall be computed upon the
basis of the taxpayer's annual accounting period (fiscal year or
calendar year, as the case may be) . . . if the taxpayer is an individual,
the taxable income shall be computed on the basis of the calendar
year.
22.SEC. 45. Period for which Deductions and Credits Taken. The
deductions 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. . .
23.SEC. 79. Income Tax Collected at Source.
xxx xxx xxx
(H)Year-end Adjustment. On or before the end of the calendar year but
prior to the payment of compensation for the last payroll period, the
employer shall determine the tax due from each employee on taxable
compensation income for the entire taxable year in accordance with
Section 24(A). The difference between the tax due from the employee
for the entire year and the sum of taxes from January to November
shall either be withheld from his salary in December of the current
calendar year or refunded to the employee not later than January 25
of the succeeding year.
24.SEC. 51. Individual Return.
xxx xxx xxx
(C)When to File
(1)The return of any individual . . . shall be filed on or before the fifteenth
(15th) day of April of each year covering income for the preceding
taxable year.
25.SEC. 29. Deductions from gross income. . . .
xxx xxx xxx
(l)Personal exemptions allowable to individuals. . . .
xxx xxx xxx
(4)Allowances for adjustment. Upon the recommendation of the Secretary
of Finance, the President shall automatically adjust not more often
than once every three years, the personal and additional exemptions
taking into account, among others, the movement in consumer price
indices, levels of minimum wages, and bare subsistence levels.
26.See also Hydro Resources Contractors Corp. v. Court of Tax Appeals, G.R.
No. 80276, December 21, 1990, 192 SCRA 604.
27.Commissioner of Internal Revenue v. General Foods (Phils.) Inc., G.R. No.
143672, April 24, 2003, 401 SCRA 545, 550.
28.Sea-land Service, Inc. v. Court of Appeals, G.R. No. 122605, April 30,
2001, 357 SCRA 441, 444.
29.Insular Lumber Co. v. Court of Tax Appeals, No. L-31057, May 29, 1981,
104 SCRA 710, 719-720.
30.Davao Gulf Lumber Corporation v. Commissioner of Internal
Revenue, G.R. No. 117359, July 23, 1998, 293 SCRA 76, 88; Philippine
Long Distance Telephone Company, Inc, v. City of Davao, G.R. No.
143867, August 22, 2001, 363 SCRA 522, 529.

31.Philippine Long Distance Telephone Company, Inc. v. City of Davao, G.R.
No. 143867, March 25, 2003, 399 SCRA 442, 453.
32.Allied Brokerage Corporation v. Commissioner of Customs, No. L-27641,
August 31, 1971, 40 SCRA 555, 559-560.

||| (Pansacola v. Commr., G.R. No. 159991, November 16, 2006)

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FIRST DIVISION

[G.R. No. L-9996. October 15, 1957.]

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