Complex, the rental income from other sources were not shown

to have been actually, directly and exclusively used for

educational purposes. (Affirmed by SC)
CIR vs DE LA SALLE

G.R. No. 196596 - COMMISSIONER OF INTERNAL REVENUE

v. DE LA SALLE UNIVERSITY, INC. ISSUE #1: Whether DLSU's income and revenues proved to have
G.R. No. 198841 - DE LA SALLE UNIVERSITY INC v. been used actually, directly and exclusively for educational
COMMISSIONER OF INTERNAL REVENUE purposes are exempt from duties and taxes
G.R. No. 198941 - COMMISSIONER OF INTERNAL REVENUE CIR’s Arguments:
v. DE LA SALLE UNIVERSITY, INC. DLSU's rental income is taxable regardless of how such income
DATE: November 09, 2016 is derived, used or disposed of. Section 30 (H) of the Tax Code,
PONENTE: Brion, J. which states among others, that the income of whatever kind and
TOPIC: Exemption of non-stock, non-profit educational character of a non-stock and non-profit educational institution
institutions; and Defective Letter of Authority from any of its properties, real or personal, or from any of its
activities conducted for profit regardless of the disposition made
FACTS: of such income, shall be subject to tax. Commissioner posits that
• BIR issued to DLSU Letter of Authority (LOA) No. 2794 a tax-exempt organization like DLSU is exempt only from property
authorizing its revenue officers to examine the latter's books tax but not from income tax on the rentals earned from property.
of accounts and other accounting records for all internal DLSU’s Arguments:
revenue taxes for the period Fiscal Year Ending 2003 and Article XIV, Section 4 (3) of the Constitution is clear that all assets
Unverified Prior Years and revenues of non-stock, non-profit educational institutions
• May 19, 2004, BIR issued a Preliminary Assessment Notice used actually, directly and exclusively for educational purposes
(PAN) to DLSU. are exempt from taxes and duties.
• August 18, 2004, the BIR through a Formal Letter of
HELD: Article XIV, Section 4 (3) of the Constitution refers to 2
Demand assessed DLSU the following deficiency taxes: (1)
kinds of institutions; (1) non-stock, non-profit educational
income tax on rental earnings from restaurants/canteens
institutions and (2) proprietary educational institutions. DLSU falls
and bookstores operating within the campus;
on the first category. The difference is that The tax exemption
(2) value-added tax (VAT) on business income; and
granted to non-stock, non-profit educational institutions is
(3) documentary stamp tax (DST) on loans and lease
conditioned only on the actual, direct and exclusive use of their
contracts.
revenues and assets for educational purposes. While tax
• The BIR demanded the payment of P17,303,001.12, exemptions may also be granted to proprietary educational
inclusive of surcharge, interest and penalty for taxable institutions, these exemptions may be subject to limitations
years 2001, 2002 and 2003. imposed by Congress.
• DLSU protested the assessment. The Commissioner failed
to act on the protest; thus, DLSU filed petition for review The tax exemption granted by the Constitution to non-stock, non-
with the CTA Division profit educational institutions, unlike the exemption that may be
availed of by proprietary educational institutions, is not subject to
CTA Division and CTA En Banc: DST assessment on the loan limitations imposed by law.
transactions but retained other deficiency taxes. CTA En Banc
ruled the ff: Article XIV, Section 4 (3) does not require that the revenues and
income must have also been sourced from educational activities
Tax on rental income or activities related to the purposes of an educational institution.
DLSU was able to prove that a portion of the assessed rental The phrase all revenues is unqualified by any reference to the
income was used actually, directly and exclusively for educational source of revenues. Thus, so long as the revenues and income
purposes; hence, exempt from tax. Rental income had indeed are used actually, directly and exclusively for educational
been used to pay the loan it obtained to build the university's purposes, then said revenues and income shall be exempt
Physical Education - Sports Complex. from taxes and duties.
However, other unsubstantiated claim for exemption must be
subjected to income tax and VAT. Court laid down the requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely:
DST on loan and mortgage transactions (1) the taxpayer falls under the classification non-stock, non-
Contrary to the Commissioner's contention, DLSU proved its profit educational institution; and
remittance of the DST due on its loan and mortgage documents, (2) the income it seeks to be exempted from taxation is used
evidenced by the stamp on the documents made by a DST actually, directly and exclusively for educational purposes.
imprinting machine.
We find that unlike Article VI, Section 28 (3) of the Constitution
Admissibility of DLSU's supplemental evidence (pertaining to charitable institutions, churches, parsonages or
Supplemental pieces of documentary evidence were admissible convents, mosques, and non-profit cemeteries), which exempts
even if DLSU formally offered them upon MR. Law creating the from tax only the assets, i.e., "all lands, buildings, and
CTA provides that proceedings before it shall not be governed improvements, actually, directly, and exclusively used for
strictly by the technical rules of evidence. (Affirmed by SC) religious, charitable, or educational purposes...," Article XIV,
Section 4 (3) categorically states that "all revenues and
On the validity of the Letter of Authority assets... used actually, directly, and exclusively for educational
LOA should cover only one taxable period and that the practice purposes shall be exempt from taxes and duties."
of issuing a LOA covering audit of unverified prior years is
prohibited. If the audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA. ISSUE #2: Whether the entire assessment should be voided
In the present case, the LOA issued to DLSU is for Fiscal Year because of the defective LOA
Ending 2003 and Unverified Prior Years. Hence, the DLSU’s Argument:
assessments for deficiency income tax, VAT and DST for taxable First, RMO No. 43-90 prohibits the practice of issuing a LOA
years 2001 and 2002 are void, but the assessment for taxable with any indication of unverified prior years. An assessment
year 2003 is valid. issued based on such defective LOA must also be void.
CIR’s Argument:
On the CTA Division's appreciation of the evidence Commissioner submits that DLSU is estopped from questioning
The CTA En Banc affirmed the CTA Division's appreciation of the LOA's validity because it failed to raise this issue in both the
DLSU's evidence. It held that while DLSU successfully proved administrative and judicial proceedings.
that a portion of its rental income was transmitted and used to
pay the loan obtained to fund the construction of the Sports
HELD: The LOA issued to DLSU is not entirely void. The
assessment for taxable year 2003 is valid.

A LOA is the authority given to the appropriate revenue officer

to examine the books of account and other accounting records
of the taxpayer in order to determine the taxpayer's correct
internal revenue liabilities and for the purpose of collecting the
correct amount of tax, in accordance with Section 5 of the Tax
Code, which gives the CIR the power to obtain information, to
summon/examine, and take testimony of persons. The LOA
commences the audit process and informs the taxpayer that it is
under audit for possible deficiency tax assessment.

What this provision clearly prohibits is the practice of issuing

LOAs covering audit of unverified prior years. RMO 43-90 does
not say that a LOA which contains unverified prior years is void.
It merely prescribes that if the audit includes more than one
taxable period, the other periods or years must be specified.

In the present case, the LOA issued to DLSU is for Fiscal Year
Ending 2003 and Unverified Prior Years. The LOA does not
strictly comply with RMO 43-90 because it includes unverified
prior years. This does not mean, however, that the entire LOA is
void. As the CTA correctly held, the assessment for taxable year
2003 is valid because this taxable period is specified in the
LOA. DLSU was fully apprised that it was being audited for
taxable year 2003. Corollarily, the assessments for taxable
years 2001 and 2002 are void for having been unspecified on
separate LOAs as required under RMO No. 43-90.

Wherefore, SC denied the petition of CIR and affirmed the

ruling of CTA En Banc.