G.R. No.

166494 June 29, 2007

CARLOS SUPERDRUG CORP., doing business under the name and style "Carlos Superdrug," ELSIE M. CANO,
doing business under the name and style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing business under the
name and style "City Pharmacy," MELVIN S. DELA SERNA, doing business under the name and style "Botica
dela Serna," and LEYTE SERV-WELL CORP., doing business under the name and style "Leyte Serv-Well
Drugstore," petitioners,

vs.

DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD), DEPARTMENT OF HEALTH (DOH),

DEPARTMENT OF FINANCE (DOF), DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR and LOCAL
GOVERNMENT (DILG), respondents.

DECISION

AZCUNA, J.:

This is a petition1 for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of
Section 4(a) of Republic Act (R.A.) No. 9257,2 otherwise known as the "Expanded Senior Citizens Act of 2003."

Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

Public respondents, on the other hand, include the Department of Social Welfare and Development (DSWD),
the Department of Health (DOH), the Department of Finance (DOF), the Department of Justice (DOJ), and the
Department of Interior and Local Government (DILG) which have been specifically tasked to monitor the
drugstores’ compliance with the law; promulgate the implementing rules and regulations for the effective
implementation of the law; and prosecute and revoke the licenses of erring drugstore establishments.

The antecedents are as follows:

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432,3 was signed into law by President Gloria
Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states:

SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in
hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for
the death of senior citizens;

...

The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.4

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No.
9257, Rule VI, Article 8 of which states:

Article 8. Tax Deduction of Establishments. – The establishment may claim the discounts granted under Rule
V, Section 4 – Discounts for Establishments;5 Section 9, Medical and Dental Services in Private Facilities[,]6 and
Sections 107 and 118 – Air, Sea and Land Transportation as tax deduction based on the net cost of the goods
sold or services rendered. Provided, That the cost of the discount shall be allowed as deduction from gross
income for the same taxable year that the discount is granted; Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended; Provided, finally, that the implementation of the tax deduction shall be subject to the
Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the Department of
Finance (DOF).9

On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through Director
IV Ma. Lourdes B. Recente, clarified as follows:

1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the
Expanded Senior Citizens Act).

1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%)
discount from all establishments relative to the utilization of transportation services, hotels and similar lodging
establishment, restaurants and recreation centers and purchase of medicines anywhere in the country, the
costs of which may be claimed by the private establishments concerned as tax credit.

Effectively, a tax credit is a peso-for-peso deduction from a taxpayer’s tax liability due to the government of
the amount of discounts such establishment has granted to a senior citizen. The establishment recovers the
full amount of discount given to a senior citizen and hence, the government shoulders 100% of the discounts
granted.

It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover this tax
payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is, therefore, inapplicable
since no tax payments have previously occurred.

1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment concerned may
claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on the net
cost of goods sold or services rendered.

Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing for
its tax liability, the amount of discounts granted to senior citizens. Effectively, the government loses in terms
of foregone revenues an amount equivalent to the marginal tax rate the said establishment is liable to pay the
government. This will be an amount equivalent to 32% of the twenty percent (20%) discounts so granted. The
establishment shoulders the remaining portion of the granted discounts.
 It may be necessary to note that while the burden on [the] government is slightly diminished in terms of its
percentage share on the discounts granted to senior citizens, the number of potential establishments that may
claim tax deductions, have however, been broadened. Aside from the establishments that may claim tax
credits under the old law, more establishments were added under the new law such as: establishments
providing medical and dental services, diagnostic and laboratory services, including professional fees of
attending doctors in all private hospitals and medical facilities, operators of domestic air and sea transport
services, public railways and skyways and bus transport services.

A simple illustration might help amplify the points discussed above, as follows:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x

Less : Cost of goods sold x x x x x x x x x x

Net Sales x x x x x x x x x x x x

Less: Operating Expenses:

Tax Deduction on Discounts x x x x --

Other deductions: x x x x x x x x

Net Taxable Income x x x x x x x x x x

Tax Due x x x x x x

Less: Tax Credit -- ______x x

Net Tax Due -- x x

As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted from Net
Sales together with other deductions which are considered as operating expenses before the Tax Due was
computed based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount of
discounts which is the tax credit item, was deducted directly from the tax due amount.10

Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise known as the "Expanded Senior Citizens
Act of 2003"11 was issued by the DOH, providing the grant of twenty percent (20%) discount in the purchase
of unbranded generic medicines from all establishments dispensing medicines for the exclusive use of the
senior citizens.

On November 12, 2004, the DOH issued Administrative Order No 17712 amending A.O. No. 171. Under A.O.
No. 177, the twenty percent discount shall not be limited to the purchase of unbranded generic medicines
only, but shall extend to both prescription and non-prescription medicines whether branded or generic. Thus,
it stated that "[t]he grant of twenty percent (20%) discount shall be provided in the purchase of medicines
from all establishments dispensing medicines for the exclusive use of the senior citizens."

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the
following grounds:13
 1) The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which provides that private
property shall not be taken for public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution which states that "no
person shall be deprived of life, liberty or property without due process of law, nor shall any person be denied
of the equal protection of the laws;" and

3) The 20% discount on medicines violates the constitutional guarantee in Article XIII, Section 11 that makes
"essential goods, health and other social services available to all people at affordable cost."14

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit

and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law
failed to provide a scheme whereby drugstores will be justly compensated for the discount.

Examining petitioners’ arguments, it is apparent that what petitioners are ultimately questioning is the
validity of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount
that they extend to senior citizens.

Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a tax-
deductible expense that is subtracted from the gross income and results in a lower taxable income. Stated
otherwise, it is an amount that is allowed by law15 to reduce the income prior to the application of the tax
rate to compute the amount of tax which is due.16 Being a tax deduction, the discount does not reduce taxes
owed on a peso for peso basis but merely offers a fractional reduction in taxes owed.

Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of the gross
sales of the private establishments, were it not for R.A. No. 9257.

The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.17 This constitutes compensable taking for which petitioners would
ordinarily become entitled to a just compensation.

Just compensation is defined as the full and fair equivalent of the property taken from its owner by the
expropriator. The measure is not the taker’s gain but the owner’s loss. The word just is used to intensify the
meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the
property to be taken shall be real, substantial, full and ample.18

A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet
the definition of just compensation.19

Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a
government program.

The Court believes so.

 The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-
building, and to grant benefits and privileges to them for their improvement and well-being as the State
considers them an integral part of our society.20

The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the
Act provides:

SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:

SECTION 1. Declaration of Policies and Objectives. – Pursuant to Article XV, Section 4 of the Constitution, it is
the duty of the family to take care of its elderly members while the State may design programs of social
security for them. In addition to this, Section 10 in the Declaration of Principles and State Policies provides:
"The State shall provide social justice in all phases of national development." Further, Article XIII, Section 11,
provides: "The State shall adopt an integrated and comprehensive approach to health development which
shall endeavor to make essential goods, health and other social services available to all the people at
affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women and
children." Consonant with these constitutional principles the following are the declared policies of this Act:

...

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens
and to actively seek their partnership.21

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and
dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea
travel; utilization of services in hotels and similar lodging establishments, restaurants and recreation centers;
and purchases of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement,
the law provides that business establishments extending the twenty percent discount to senior citizens may
claim the discount as a tax deduction.

The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an
efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits. 22
Accordingly, it has been described as "the most essential, insistent and the least limitable of powers, extending
as it does to all the great public needs."23 It is "[t]he power vested in the legislature by the constitution to
make, ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either
with penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare
of the commonwealth, and of the subjects of the same."24

For this reason, when the conditions so demand as determined by the legislature, property rights must bow
to the primacy of police power because property rights, though sheltered by due process, must yield to
general welfare.25

Police power as an attribute to promote the common good would be diluted considerably if on the mere plea
of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated.
Moreover, in the absence of evidence demonstrating the alleged confiscatory effect of the provision in
question, there is no basis for its nullification in view of the presumption of validity which every law has in its
favor.26

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and come up with
a financial report, so that they have not been able to show properly whether or not the tax deduction scheme
really works greatly to their disadvantage.27

In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to
the DOF Opinion, for every ₱1.00 senior citizen discount that petitioners would give, ₱0.68 will be shouldered
by them as only ₱0.32 will be refunded by the government by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as
an example. According to the latter, it acquires Norvasc from the distributors at ₱37.57 per tablet, and retails it
at ₱39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to
₱7.92, then it would have to sell Norvasc at ₱31.68 which translates to a loss from capital of ₱5.89 per tablet.
Even if the government will allow a tax deduction, only ₱2.53 per tablet will be refunded and not the full
amount of the discount which is ₱7.92. In short, only 32% of the 20% discount will be reimbursed to the
drugstores.28

Petitioners’ computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income,29 the amount of income derived from all sources before
deducting allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per
transaction basis, which should not be the case. An income statement, showing an accounting of petitioners’
sales, expenses, and net profit (or loss) for a given period could have accurately reflected the effect of the
discount on their income. Absent any financial statement, petitioners cannot substantiate their claim that they
will be operating at a loss should they give the discount. In addition, the computation was erroneously based
on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to be
imposed on income, not on the amount of the discount.

Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their
medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of
petitioners to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is
merely a result of this decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for
being oppressive, simply because they cannot afford to raise their prices for fear of losing their customers to
competition.

The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects property rights, petitioners must accept the
realities of business and the State, in the exercise of police power, can intervene in the operations of a
business which may result in an impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the
precept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continuously serve as a reminder that the right to property can be
relinquished upon the command of the State for the promotion of public good.30
 Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners
and the other private establishments concerned. This being the case, the means employed in invoking the
active participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably
and directly related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the
continued implementation of the same would be unconscionably detrimental to petitioners, the Court will
refrain from quashing a legislative act.31

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.

SO ORDERED

CARLOS SUPERDRUG CORP. vs. DSWD, ET. AL

GR No. 166494, June 29, 2007

FACTS:

Ÿ Petitioners, belonging to domestic corporations and proprietors operating drugstores in the Philippines,
are praying for preliminary injunction assailing the constitutionality of Section 4(a) of Republic Act (R.A.) No.
9257, otherwise known as the “Expanded Senior Citizens Act of 2003.” On February 26, 2004, R.A. No. 9257,
amending R.A. No. 7432, was signed into law by President Gloria Macapagal-Arroyo and it became effective on
March 21, 2004. Section 4(a) of the Act states:

SEC. 4. Privileges for the Senior Citizens. – The senior citizens shall be entitled to the following:

(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in
hotels and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for
the death of senior citizens;

Ÿ The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as
deduction from gross income for the same taxable year that the discount is granted. Provided, further, That
the total amount of the claimed tax deduction net of value added tax if applicable, shall be included in their
gross sales receipts for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.
 Ÿ The DSWD, on May 8, 2004, approved and adopted the Implementing Rules and Regulations of RA No.
9275, Rule VI, Article 8 which contains the proviso that the implementation of the tax deduction shall be
subject to the Revenue Regulations to be issued by the BIR and approved by the DOF. With the new law, the
Drug Stores Association of the Philippines wanted a clarification of the meaning of tax deduction. The DOF
clarified that under a tax deduction scheme, the tax deduction on discounts was subtracted from Net Sales
together with other deductions which are considered as operating expenses before the Tax Due was computed
based on the Net Taxable Income. On the other hand, under a tax credit scheme, the amount of discounts
which is the tax credit item, was deducted directly from the tax due amount.

Ÿ The DOH issued an Administrative Order that the twenty percent discount shall include both prescription
and non-prescription medicines, whether branded or generic. It stated that such discount would be provided
in the purchase of medicines from all establishments supplying medicines for the exclusive use of the senior
citizens.

Ÿ Drug store owners assail the law with the contention that granting the discount would result to loss of
profit and capital especially that such law failed to provide a scheme to justly compensate the discount.

ISSUE: WON Section 4(a) of the Expanded Senior Citizens Act is unconstitutional or not violative of Article 3
Section 9 of the Constitution which provides that private property shall not be taken for public use without just
compensation and the equal protection clause of Article 3 Section 1.

HELD:

Ÿ The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit. This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation. Just compensation is defined as the full and fair equivalent of the
property taken from its owner by the expropriator. The measure is not the taker’s gain but the owner’s loss.
The word just is used to intensify the meaning of the word compensation, and to convey the idea that the
equivalent to be rendered for the property to be taken shall be real, substantial, full and ample.

Ÿ The law grants a twenty percent discount to senior citizens for medical and dental services, and diagnostic
and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals, and other similar
places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of services in
hotels and similar lodging establishments, restaurants and recreation centers; and purchases of medicines for
the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that business
establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.

Ÿ The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled
in general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an
efficient and flexible response to conditions and circumstances, thus assuring the greatest benefits.
Accordingly, it has been described as “the most essential, insistent and the least limitable of powers, extending
as it does to all the great public needs.” It is “[t]he power vested in the legislature by the constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of
the commonwealth, and of the subjects of the same.”

Ÿ MMDA vs Bel Air Village Association

Ÿ Date: March 27, 2000

Ÿ Petitioner: Metropolitan Manila Development Authority

Ÿ Respondent: Bel Air Village Association Inc

Ÿ Ponente: Puno

Ÿ Facts: MMDA is a government agency tasked with the delivery of basic services in Metro Manila. Bel-Air
Village Association, Inc. is a non-stock, non-profit corporation whose members are homeowners in Bel-Air
Village, a private subdivision in Makati City. BAVA is the registered owner of Neptune Street, a road inside Bel-
Air Village.

Ÿ On December 30, 1995, respondent received from petitioner, through its Chairman, a notice dated
December 22, 1995 requesting respondent to open Neptune Street to public vehicular traffic starting January
2, 1996. BAVA was apprised that the perimeter wall separating the subdivision from the adjacent Kalayaan
Avenue would be demolished.

Ÿ On January 2, 1996, BAVA instituted against petitioner before the RTC a civil case for injunction.
Respondent prayed for the issuance of a TRO and preliminary injunction enjoining the opening of Neptune
Street and prohibiting the demolition of the perimeter wall. The trial court issued a temporary restraining
order the following day. After due hearing, the trial court denied the issuance of preliminary injunction.

Ÿ On appeal, the CA rendered a Decision on the merits of the case finding that the MMDA has no authority
to order the opening of Neptune Street, a private subdivision road and cause the demolition of its perimeter
walls. It held that the authority is lodged in the City Council of Makati by ordinance.

Ÿ Issue: WON the MMDA has authority to open Neptune Road to the public

Ÿ Held: No

Ÿ Ratio: MMDA claims that it has the authority to open Neptune Street to public traffic because it is
an agent of the state endowed with police power in the delivery of basic services in Metro Manila. One of
these basic services is traffic management which involves the regulation of the use of thoroughfares to insure
the safety, convenience and welfare of the general public. It is alleged that the police power of MMDA was
affirmed by this Court in the consolidated cases of Sangalang v. IAC. From the premise that it has police power,
it is now urged that there is no need for the City of Makati to enact an ordinance opening Neptune street to
the public.

Ÿ Police power is an inherent attribute of sovereignty. It has been defined as the power vested by the
Constitution in the legislature to make, ordain, and establish all manner of wholesome and reasonable laws,
statutes and ordinances, either with penalties or without, not repugnant to the Constitution, as they shall
judge to be for the good and welfare of the commonwealth, and for the subjects of the same. The power is
plenary and its scope is vast and pervasive, reaching and justifying measures for public health, public safety,
public morals, and the general welfare.

Ÿ It bears stressing that police power is lodged primarily in the National Legislature. It cannot be exercised by
any group or body of individuals not possessing legislative power. The National Legislature, however, may
delegate this power to the President and administrative boards as well as the lawmaking bodies of municipal
corporations or local government units. Once delegated, the agents can exercise only such legislative powers
as are conferred on them by the national lawmaking body.

Ÿ Metropolitan or Metro Manila is a body composed of several local government units - i.e., twelve (12)
cities and five (5) municipalities, namely, the cities of Caloocan, Manila, Mandaluyong, Makati, Pasay, Pasig,
Quezon, Muntinlupa, Las Pinas, Marikina, Paranaque and Valenzuela, and the municipalities of Malabon, ,
Navotas, , Pateros, San Juan and Taguig. With the passage of RA 7924 in 1995, Metropolitan Manila was
declared as a "special development and administrative region" and the Administration of "metro-wide" basic
services affecting the region placed under "a development authority" referred to as the MMDA.

Ÿ The implementation of the MMDA’s plans, programs and projects is undertaken by the local government
units, national government agencies, accredited people’s organizations, non-governmental organizations, and
the private sector as well as by the MMDA itself. For this purpose, the MMDA has the power to enter into
contracts, memoranda of agreement and other cooperative arrangements with these bodies for the delivery of
the required services within Metro Manila.

Ÿ Clearly, the scope of the MMDA’s function is limited to the delivery of the seven (7) basic services. One of
these is transport and traffic management which includes the formulation and monitoring of policies,
standards and projects to rationalize the existing transport operations, infrastructure requirements, the use of
thoroughfares and promotion of the safe movement of persons and goods. It also covers the mass transport
system and the institution of a system of road regulation, the administration of all traffic enforcement
operations, traffic engineering services and traffic education programs, including the institution of a single
ticketing system in Metro Manila for traffic violations. Under this service, the MMDA is expressly authorized
"to set the policies concerning traffic" and "coordinate and regulate the implementation of all traffic
management programs." In addition, the MMDA may "install and administer a single ticketing system," fix,
impose and collect fines and penalties for all traffic violations.

Ÿ It will be noted that the powers of the MMDA are limited to the following acts: formulation, coordination,
regulation, implementation, preparation, management, monitoring, setting of policies, installation of a system
and administration. There is no syllable in R. A. No. 7924 that grants the MMDA police power, let alone
legislative power. Even the Metro Manila Council has not been delegated any legislative power. Unlike the
legislative bodies of the local government units, there is no provision in R. A. No. 7924 that empowers the
MMDA or its Council to "enact ordinances, approve resolutions and appropriate funds for the general welfare"
of the inhabitants of Metro Manila. The MMDA is, as termed in the charter itself, a "development authority." It
is an agency created for the purpose of laying down policies and coordinating with the various national
government agencies, people’s organizations, non-governmental organizations and the private sector for the
efficient and expeditious delivery of basic services in the vast metropolitan area. All its functions are
administrative in nature and these are actually summed up in the charter itself

Ÿ Petitioner cannot seek refuge in the cases of Sangalang v. Intermediate Appellate Court where we upheld a
zoning ordinance issued by the Metro Manila Commission (MMC), the predecessor of the MMDA, as an
exercise of police power. The first Sangalang decision was on the merits of the petition, while the second
decision denied reconsideration of the first case and in addition discussed the case of Yabut v. Court of
Appeals.

Ÿ Contrary to petitioner’s claim, the two Sangalang cases do not apply to the case at bar. Firstly, both
involved zoning ordinances passed by the municipal council of Makati and the MMC. In the instant case, the
basis for the proposed opening of Neptune Street is contained in the notice of December 22, 1995 sent by
petitioner to respondent BAVA, through its president. The notice does not cite any ordinance or law, either by
the Sangguniang Panlungsod of Makati City or by the MMDA, as the legal basis for the proposed opening of
Neptune Street. Petitioner MMDA simply relied on its authority under its charter "to rationalize the use of
roads and/or thoroughfares for the safe and convenient movement of persons." Rationalizing the use of roads
and thoroughfares is one of the acts that fall within the scope of transport and traffic management. By no
stretch of the imagination, however, can this be interpreted as an express or implied grant of ordinance-
making power, much less police power. Misjuris

Ÿ Secondly, the MMDA is not the same entity as the MMC in Sangalang. Although the MMC is the forerunner
of the present MMDA, an examination of Presidential Decree (P. D.) No. 824, the charter of the MMC, shows
that the latter possessed greater powers which were not bestowed on the present MMDA. Jjlex

Ÿ In 1990, President Aquino issued Executive Order (E. O.) No. 392 and constituted the Metropolitan Manila
Authority (MMA). The powers and functions of the MMC were devolved to the MMA. It ought to be stressed,
however, that not all powers and functions of the MMC were passed to the MMA. The MMA’s power was
limited to the "delivery of basic urban services requiring coordination in Metropolitan Manila." The MMA’s
governing body, the Metropolitan Manila Council, although composed of the mayors of the component cities
and municipalities, was merely given the power of: (1) formulation of policies on the delivery of basic services
requiring coordination and consolidation; and (2) promulgation of resolutions and other issuances, approval of
a code of basic services and the exercise of its rule-making power.

Ÿ Under the 1987 Constitution, the local government units became primarily responsible for the governance
of their respective political subdivisions. The MMA’s jurisdiction was limited to addressing common problems
involving basic services that transcended local boundaries. It did not have legislative power. Its power was
merely to provide the local government units technical assistance in the preparation of local development
plans. Any semblance of legislative power it had was confined to a "review [of] legislation proposed by the
local legislative assemblies to ensure consistency among local governments and with the comprehensive
development plan of Metro Manila," and to "advise the local governments accordingly."

Ÿ When R.A. No. 7924 took effect, Metropolitan Manila became a "special development and administrative
region" and the MMDA a "special development authority" whose functions were "without prejudice to the
autonomy of the affected local government units." The character of the MMDA was clearly defined in the
legislative debates enacting its charter.
 Ÿ It is thus beyond doubt that the MMDA is not a local government unit or a public corporation endowed
with legislative power. It is not even a "special metropolitan political subdivision" as contemplated in Section
11, Article X of the Constitution. The creation of a "special metropolitan political subdivision" requires the
approval by a majority of the votes cast in a plebiscite in the political units directly affected. R. A. No. 7924 was
not submitted to the inhabitants of Metro Manila in a plebiscite. The Chairman of the MMDA is not an official
elected by the people, but appointed by the President with the rank and privileges of a cabinet member. In
fact, part of his function is to perform such other duties as may be assigned to him by the President, whereas
in local government units, the President merely exercises supervisory authority. This emphasizes the
administrative character of the MMDA.

Ÿ Clearly then, the MMC under P. D. No. 824 is not the same entity as the MMDA under R. A. No. 7924.
Unlike the MMC, the MMDA has no power to enact ordinances for the welfare of the community. It is the local
government units, acting through their respective legislative councils, that possess legislative power and police
power. In the case at bar, the Sangguniang Panlungsod of Makati City did not pass any ordinance or resolution
ordering the opening of Neptune Street, hence, its proposed opening by petitioner MMDA is illegal and the
respondent Court of Appeals did not err in so ruling. We desist from ruling on the other issues as they are
unnecessary. Esmso

Ÿ We stress that this decision does not make light of the MMDA’s noble efforts to solve the chaotic traffic
condition in Metro Manila. Everyday, traffic jams and traffic bottlenecks plague the metropolis. Even our once
sprawling boulevards and avenues are now crammed with cars while city streets are clogged with motorists
and pedestrians. Traffic has become a social malaise affecting our people’s productivity and the efficient
delivery of goods and services in the country. The MMDA was created to put some order in the metropolitan
transportation system but unfortunately the powers granted by its charter are limited. Its good intentions
cannot justify the opening for public use of a private street in a private subdivision without any legal warrant.
The promotion of the general welfare is not antithetical to the preservation of the rule of law.

G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

 CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the
other hand, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18, 1965,
Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day
in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the
private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of
the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4
On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and
it was only then that he accepted the warrant of distraint and levy earlier sought to be served.5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal
Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the
appeal may be made within thirty days after receipt of the decision or ruling challenged.7 It is true that as a
rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a
request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request
deemed rejected." 10 But there is a special circumstance in the case at bar that prevents application of this
accepted doctrine.
 The proven fact is that four days after the private respondent received the petitioner's notice of assessment,
it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy
was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma
and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when
it was filed, the reglementary period which started on the date the assessment was received, viz., January 14,
1965. The period started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was
not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently.
Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for
actual services rendered. The payment was in the form of promotional fees. These were collected by the
Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting
this assertion.13 In fact, as the said court found, the amount was earned through the joint efforts of the
persons among whom it was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell,
and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it.14 Ultimately, after its incorporation largely through the promotion of the said persons,
this new corporation purchased the PSEDC properties.15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax
returns and paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved.18
 The petitioner claims that these payments are fictitious because most of the payees are members of the
same family in control of Algue. It is argued that no indication was made as to how such payments were made,
whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner
suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum
but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this
was a family corporation where strict business procedures were not applied and immediate issuance of
receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee
made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20
Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the
close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00.
21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction.
The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering
that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is
in accord with the following provision of the Tax Code:

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; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred
in carrying on any trade or business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments
purely for service. This test and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is
likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in
such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment
correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely
that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they
its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to
surrender part of one's hard earned income to the taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part, is expected to respond in
the form of tangible and intangible benefits intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law
has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with
the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by
the private respondent was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

Commissioner of Internal Revenue vs Algue Inc., and Court of Tax Appeals

GR No. L-28896 February 17, 1988

Facts:

The Philippine Sugar Estate Development Company had earlier appointed Algue Inc., as its agent, authorizing
it to sell its land, factories and oil manufacturing process.As such,the corporation worked for the formation of
the Vegetable Oil Investment Corporation, until they were able to purchased the PSEDC properties. For this
sale, Algue Inc., received as agent a commission of P126, 000.00, and it was from this commission that the P75,
000.00 promotional fees were paid to Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell,
and Pablo Sanchez.

Commissioner of Internal Revenue contends that the claimed deduction is not allowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue Inc., it held that the said amount had been legitimately paid by the private respondent for actual
services rendered. The payment was in the form of promotional fees.

Issue:

Whether or not the Collector of Internal Revenue correctly disallowed the P75, 000.00 deduction claimed by
private respondent Algue Inc., as legitimate business expenses in its income tax returns.

Ruling:

No, The Supreme Court agrees with the respondent court that the amount of the promotional fees was not
excessive. The P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering
that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties.
 The claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.

Fact: The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it
was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private
respondent for actual services rendered. The payment was in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the
Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development
Company. The petitioner had Originally claimed these promotional fees to be personal holding company
income but later conformed to the decision of the respondent court rejecting this assertion. In fact, as the said
court found, the amount was earned through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as
its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O’Farell, and Pablo Sanchez, worked for the
formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it.14 Ultimately,
after its incorporation largely through the promotion of the said persons, this new corporation purchased the
PSEDC properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this
commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. The petitioner
claims that these payments are fictitious because most of the payees are members of the same family in
control of Algue. It is argued that no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a
tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

Issue: Whether the Promotional Expense Disallowed by the CIR Valid?

Held: No, the court agreed that the respondent promotional fee was a valid deductable. The total
commission paid by the Philippine Sugar Estate Development Co. according to the Tax Code, Expenses In
general are 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. The amount of P75,000.00 was 60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did practically everything, from the formation of the
Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. That the
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed.
 G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR., petitioner,

vs.

RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy
Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal
Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and
CESAR E. A. VIRATA, Minister of Finance, respondents.

215 Phil. 582

FERNANDO, C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding[1] on the
validity of Section 1 of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The
assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides
for rates of tax on citizens or resi-dents on (a) taxable compensation income, (b) taxable net income, (c)
royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual
partner in the net profits of taxable partnership, (f) adjusted gross income.[2] Petitioner[3] as taxpayer alleges
that by virtue thereof, "he would be unduly discriminated against by the impo-sition of higher rates of tax
upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed
income or salaried individual taxpayers."[4] He characterizes the above section as arbitrary amounting to class
legislation, oppressive and capricious in character.[5] For petitioner, therefore, there is a transgression of both
the equal protection and due process clauses[6] of the Constitution as well as of the rule requiring uniformity
in taxation.[7]

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from
notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was filed on May
28, 1982.[8] The facts as alleged were admitted but not the allegations which to their mind are "mere
arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in
their] Special and Affirmative Defenses."[9] The answer then affirmed: "Batas Pambansa Blg. 135 is a valid
exercise of the State's power to tax. The authorities and cases cited, while correctly quoted or paraphrased, do
not support petitioner's stand."[10] The prayer is for the dis-missal of the petition for lack of merit.
 This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope. The reason was so clearly set
forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and
initiative and which the government was called upon to enter optionally, and only 'because it was better
equipped to administer for the public welfare than is any private individual or group of individuals,' continue to
lose their well-defined boundaries and to be absorbed within activities that the government must undertake in
its sovereign capacity if it is to meet the increasing social challenges of the times."[11] Hence the need for
more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of
vital state functions. It is the source of the bulk of public funds. To paraphrase a recent decision, taxes being
the lifeblood of the government, their prompt and certain availability is of the essence.[12]

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the
strongest of all the powers of government."[13] It is, of course, to be admitted that for all its plenitude, the
power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits. Adversely
affecting as it does property rights, both the due process and equal protection clauses may properly be
invoked, as petitioner does, to invalidate in appropriate cases a revenue measure. If it were otherwise, there
would be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to
destroy."[14] In a separate opinion in Graves v. New York,[15] Justice Frankfurter, after referring to it as an
"unfortunate remark," characterized it as "a flourish of rhetoric [attributable to] the intel-lectual fashion of the
times [allowing] a free use of absolutes."[16] This is merely to emphasize that it is not and there cannot be
such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The power to tax is
not the power to destroy while this Court sits.' "[17] So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or
executive act that runs counter to it. In any case therefore where it can be demonstrated that the challenged
statutory provision - as petitioner here alleges - fails to abide by its command, then this Court must so declare
and adjudge it null. The inquiry thus is centered on the question of whether the imposition of a higher tax rate
on taxable net income derived from business or profession than on compensation is constitutionally infirm.

4. The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here,
does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner
here would condemn such a provision as void on its face, he has not made out a case. This is merely to adhere
to the authoritative doctrine that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such persuasive character
as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.[18]
 5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it
finds no support in the Constitution. An obvious example is where it can be shown to amount to the
confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say
that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the
application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and
unreasonable, it is subject to attack on due process grounds.[19]

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this
constitutional mandate whether the assailed act is in the exercise of the police power or the power of eminent
domain is to demonstrate "that the governmental act assailed, far from being inspired by the attainment of
the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no
support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not being different, both
in the privileges conferred and the liabilities-imposed. Favoritism and undue preference cannot be allowed.
For the principle is that equal protection and security shall be given to every person under circumstances,
which if not identical are analogous. If law be looked upon in terms of burden or charges, those that fall within
a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding
on the rest."[20] That same formulation applies as well to taxation measures. The equal protection clause is of
course, inspired by the noble concept of approximating the ideal of the laws's benefits being available to all
and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of
the idea of law. There is, however, wisdom, as well as realism, in these words of Justice Frank-further: "The
equality at which the 'equal protection' clause the former deals with an eminent domain proceeding and the
latter with a suit contesting the validity of a police power measure aims is not a disembodied equality. The
Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions.
They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties,
addressed to the attainment of specific ends by the use of specific remedies. The Constitution does not require
things which are different in fact or opinion to be treated in law as though they were the same."[21] Hence the
constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a
leading case of Lutz v. Araneta,[22] this Court, through Justice J.B.L. Reyes, went so far as to hold "at any rate,
it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.'"[23]

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of
taxation shall be uniform and equitable."[24] This requirement is met according to Justice Laurel in Philippine
Trust Company v. Yatco,[25] decided in 1940, when the tax "operates with the same force and effect in every
place where the subject may be found."[26] He likewise added: "The rule of uniformity does not call for
perfect uniformity or perfect equality, because this is hardly attainable."[27] The problem of classification did
not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality
and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed
at the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation, * * *.[28] As clarified by Justice Tuason, where " the differentiation" complained of
"conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this
clause and is therefore uniform."[29] There is quite a similarity then to the standard of equal protection for all
that is required is that the tax "applies equally to all persons, firms and corporations placed in similar
situation."[30]

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the
distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable
income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers
may be classified into different categories. To repeat, it is enough that the classification must rest upon
substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas
Pambansa Blg. 135, the discernible basis of classification is the susceptibility of the income to the application
of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced
tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a
class. As there is practically no overhead expense, these taxpayers are not entitled to make deductions for
income tax, purposes because they are in the same situation more or less. On the other hand, in the case of
professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to disregard the disparities by giving all of them
zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There
is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to
compensation income, while continuing the system of net income taxation as regards professional and
business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual
foundation to show the arbitrary character of the assailed provision;[31] (2) the force of controlling doctrines
on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction
between compensation and taxable net income of professionals and businessmen -- certainly not a suspect
classification.

WHEREFORE, the petition is dismissed. Costs against petitioner.

Sison vs Ancheta

GR No. L-59431, 25 July 1984

Facts: Section 1 of BP Blg 135 amended the Tax Code and petitioner Antero M. Sison, as taxpayer, alleges that
"he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising
from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual
taxpayers. He characterizes said provision as arbitrary amounting to class legislation, oppressive and capricious
in character. It therefore violates both the equal protection and due process clauses of the Constitution as well
asof the rule requiring uniformity in taxation.
Issue: Whether or not the assailed provision violates the equal protection and due process clauses of the
Constitution while also violating the rule that taxes must be uniform and equitable.

Held: The petition is without merit.

On due process - it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of
property from abuse of power. Petitioner alleges arbitrariness but his mere allegation does not suffice and
there must be a factual foundation of such unconsitutional taint.

On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar
circumstances, both in the privileges conferred and the liabilities imposed.

On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the tax
operates with the same force and effect in every place where the subject may be found." Also, :the rule of
uniformity does not call for perfect uniformity or perfect equality, because this is hardly unattainable." When
the problem of classification became of issue, the Court said: "Equality and uniformity in taxation means that
all taxable articles or kinds of property of the same class shall be taxed the same rate. The taxing power has
the authority to make reasonable and natural classifications for purposes of taxation..." As provided by this
Court, where "the differentation" complained of "conforms to the practical dictates of justice and equity" it "is
not discriminatory within the meaning of this clause and is therefore uniform."

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

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma,
plaintiff-appellant,

vs.

J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.

Ernesto J. Gonzaga for appellant.

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

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes
imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.

Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat
to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act,
and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy
was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component
elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its
preferential position in the United States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar,
on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in
control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or
otherwise —

a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land.

According to section 6 of the law —

SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be known
as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the following
purposes or to attain any or all of the following objectives, as may be provided by law.

First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial
position of the Philippine sugar in the United States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of meeting competition in the free
markets of the world;

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

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

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

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

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

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

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public
concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its
protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject
only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law
(above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and
methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for
their prosecution and attainment. Taxation may be made the implement of the state's police power (Great Atl.
& Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch
vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint;
indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the
expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to
select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation" (Carmichael vs.
Southern Coal & Coke Co., 301 U. S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

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

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

The decision appealed from is affirmed, with costs against appellant. So ordered.

Lutz v Araneta

GR No L-7859 December 22, 1955

FACTS:

Walter Lutz, as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, sought to recover the
sum of

P14,666.40 paid by the estate as taxes from the Commissioner under Section e of Commonwealth Act 567 or
the Sugar Adjustment Act, alleging that such tax is unconstitutional as it levied for the aid and support of the
sugar industry exclusively, which is in his opinion not a public purpose.

ISSUE:

Is the tax valid?

HELD:

Yes. The tax is levied with a regulatory purpose, i.e. to provide means for the rehabilitation and stabilization of
the threatened sugar industry. The act is primarily an exercise of police power and is not a pure exercise of
taxing power.

As sugar production is one of the great industries of the Philippines and its promotion, protection and
advancement redounds greatly to the general welfare, the legislature found that the general welfare
demanded that the industry should be stabilized, and provided that the distribution of benefits had to sustain.

Further, it cannot be said that the devotion of tax money to experimental stations to seek increase of
efficiency in sugar production, utilization of by-products, etc., as well as to the improvement of living and
working conditions in sugar mills and plantations without any part of such money being channeled directly to
private persons, constitute expenditure of tax money for private purposes.

Hence, the tax is valid.

G.R. No. L-75697

VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.

VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY MAYOR and
CITY TREASURER OF MANILA, respondents.

Nelson Y. Ng for petitioner.

The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:

This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on behalf of
other videogram operators adversely affected. It assails the constitutionality of Presidential Decree No. 1987
entitled "An Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the
videogram industry (hereinafter briefly referred to as the BOARD). The Decree was promulgated on October 5,
1985 and took effect on April 10, 1986, fifteen (15) days after completion of its publication in the Official
Gazette.

On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential Decree
No. 1994 amended the National Internal Revenue Code providing, inter alia:

SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette, ready for playback,
regardless of length, an annual tax of five pesos; Provided, That locally manufactured or imported blank video
tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers, Importers and
Distributors Association of the Philippines, and Philippine Motion Pictures Producers Association, hereinafter
collectively referred to as the Intervenors, were permitted by the Court to intervene in the case, over
petitioner's opposition, upon the allegations that intervention was necessary for the complete protection of
their rights and that their "survival and very existence is threatened by the unregulated proliferation of film
piracy." The Intervenors were thereafter allowed to file their Comment in Intervention.

The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:

1. WHEREAS, the proliferation and unregulated circulation of videograms including,

among others, videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly
prejudiced the operations of moviehouses and theaters, and have caused a sharp decline in theatrical
attendance by at least forty percent (40%) and a tremendous drop in the collection of sales, contractor's
specific, amusement and other taxes, thereby resulting in substantial losses estimated at P450 Million annually
in government revenues;

2. WHEREAS, videogram(s) establishments collectively earn around P600 Million

per annum from rentals, sales and disposition of videograms, and such earnings have not been subjected to
tax, thereby depriving the Government of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have also
affected the viability of the movie industry, particularly the more than 1,200 movie houses and theaters
throughout the country, and occasioned industry-wide displacement and unemployment due to the shutdown
of numerous moviehouses and theaters;

4. "WHEREAS, in order to ensure national economic recovery, it is imperative for

the Government to create an environment conducive to growth and development of all business industries,
including the movie industry which has an accumulated investment of about P3 Billion;

5. WHEREAS, proper taxation of the activities of videogram establishments will not

only alleviate the dire financial condition of the movie industry upon which more than 75,000 families and
500,000 workers depend for their livelihood, but also provide an additional source of revenue for the
Government, and at the same time rationalize the heretofore uncontrolled distribution of videograms;

6. WHEREAS, the rampant and unregulated showing of obscene videogram

features constitutes a clear and present danger to the moral and spiritual well-being of the youth, and impairs
the mandate of the Constitution for the State to support the rearing of the youth for civic efficiency and the
development of moral character and promote their physical, intellectual, and social well-being;

7. WHEREAS, civic-minded citizens and groups have called for remedial measures
to curb these blatant malpractices which have flaunted our censorship and copyright laws;

8. WHEREAS, in the face of these grave emergencies corroding the moral values of
the people and betraying the national economic recovery program, bold emergency measures must be
adopted with dispatch; ... (Numbering of paragraphs supplied).

Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to
the local government is a RIDER and the same is not germane to the subject matter thereof;

2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint

of trade in violation of the due process clause of the Constitution;

3. There is no factual nor legal basis for the exercise by the President of the vast
powers conferred upon him by Amendment No. 6;

4. There is undue delegation of power and authority;

5. The Decree is an ex-post facto law; and

6. There is over regulation of the video industry as if it were a nuisance, which it is

not.

We shall consider the foregoing objections in seriatim.

1. The Constitutional requirement that "every bill shall embrace only one subject
which shall be expressed in the title thereof" 1 is sufficiently complied with if the title be comprehensive
enough to include the general purpose which a statute seeks to achieve. It is not necessary that the title
express each and every end that the statute wishes to accomplish. The requirement is satisfied if all the parts
of the statute are related, and are germane to the subject matter expressed in the title, or as long as they are
not inconsistent with or foreign to the general subject and title. 2 An act having a single general subject,
indicated in the title, may contain any number of provisions, no matter how diverse they may be, so long as
they are not inconsistent with or foreign to the general subject, and may be considered in furtherance of such
subject by providing for the method and means of carrying out the general object." 3 The rule also is that the
constitutional requirement as to the title of a bill should not be so narrowly construed as to cripple or impede
the power of legislation. 4 It should be given practical rather than technical construction. 5

Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is
without merit. That section reads, inter alia:

Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of law to the
contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case
may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or
audiovisual program. Fifty percent (50%) of the proceeds of the tax collected shall accrue to the province, and
the other fifty percent (50%) shall acrrue to the municipality where the tax is collected; PROVIDED, That in
Metropolitan Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila
Commission.

xxx xxx xxx

The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of, the
general object of the DECREE, which is the regulation of the video industry through the Videogram Regulatory
Board as expressed in its title. The tax provision is not inconsistent with, nor foreign to that general subject
and title. As a tool for regulation 6 it is simply one of the regulatory and control mechanisms scattered
throughout the DECREE. The express purpose of the DECREE to include taxation of the video industry in order
to regulate and rationalize the heretofore uncontrolled distribution of videograms is evident from Preambles 2
and 5, supra. Those preambles explain the motives of the lawmaker in presenting the measure. The title of the
DECREE, which is the creation of the Videogram Regulatory Board, is comprehensive enough to include the
purposes expressed in its Preamble and reasonably covers all its provisions. It is unnecessary to express all
those objectives in the title or that the latter be an index to the body of the DECREE. 7

2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and
oppressive, confiscatory, and in restraint of trade. However, it is beyond serious question that a tax does not
cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. 8 The
power to impose taxes is one so unlimited in force and so searching in extent, that the courts scarcely venture
to declare that it is subject to any restrictions whatever, except such as rest in the discretion of the authority
which exercises it. 9 In imposing a tax, the legislature acts upon its constituents. This is, in general, a sufficient
security against erroneous and oppressive taxation. 10

The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the
realization that earnings of videogram establishments of around P600 million per annum have not been
subjected to tax, thereby depriving the Government of an additional source of revenue. It is an end-user tax,
imposed on retailers for every videogram they make available for public viewing. It is similar to the 30%
amusement tax imposed or borne by the movie industry which the theater-owners pay to the government, but
which is passed on to the entire cost of the admission ticket, thus shifting the tax burden on the buying or the
viewing public. It is a tax that is imposed uniformly on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the
video industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property
rights, and the proliferation of pornographic video tapes. And while it was also an objective of the DECREE to
protect the movie industry, the tax remains a valid imposition.

The public purpose of a tax may legally exist even if the motive which impelled the legislature to impose the
tax was to favor one industry over another. 11

It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". 12 Taxation has been made the implement of the state's
police power.13

At bottom, the rate of tax is a matter better addressed to the taxing legislature.

3. Petitioner argues that there was no legal nor factual basis for the promulgation
of the DECREE by the former President under Amendment No. 6 of the 1973 Constitution providing that
"whenever in the judgment of the President ... , there exists a grave emergency or a threat or imminence
thereof, or whenever the interim Batasang Pambansa or the regular National Assembly fails or is unable to act
adequately on any matter for any reason that in his judgment requires immediate action, he may, in order to
meet the exigency, issue the necessary decrees, orders, or letters of instructions, which shall form part of the
law of the land."

In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause sufficiently
summarizes the justification in that grave emergencies corroding the moral values of the people and betraying
the national economic recovery program necessitated bold emergency measures to be adopted with dispatch.
Whatever the reasons "in the judgment" of the then President, considering that the issue of the validity of the
exercise of legislative power under the said Amendment still pends resolution in several other cases, we
reserve resolution of the question raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue

delegation of legislative power. The grant in Section 11 of the DECREE of authority to the BOARD to "solicit the
direct assistance of other agencies and units of the government and deputize, for a fixed and limited period,
the heads or personnel of such agencies and units to perform enforcement functions for the Board" is not a
delegation of the power to legislate but merely a conferment of authority or discretion as to its execution,
enforcement, and implementation. "The true distinction is between the delegation of power to make the law,
which necessarily involves a discretion as to what it shall be, and conferring authority or discretion as to its
execution to be exercised under and in pursuance of the law. The first cannot be done; to the latter, no valid
objection can be made." 14 Besides, in the very language of the decree, the authority of the BOARD to solicit
such assistance is for a "fixed and limited period" with the deputized agencies concerned being "subject to the
direction and control of the BOARD." That the grant of such authority might be the source of graft and
corruption would not stigmatize the DECREE as unconstitutional. Should the eventuality occur, the aggrieved
parties will not be without adequate remedy in law.

5. The DECREE is not violative of the ex post facto principle. An ex post facto law is,
among other categories, one which "alters the legal rules of evidence, and authorizes conviction upon less or
different testimony than the law required at the time of the commission of the offense." It is petitioner's
position that Section 15 of the DECREE in providing that:

All videogram establishments in the Philippines are hereby given a period of forty-five (45) days after the
effectivity of this Decree within which to register with and secure a permit from the BOARD to engage in the
videogram business and to register with the BOARD all their inventories of videograms, including videotapes,
discs, cassettes or other technical improvements or variations thereof, before they could be sold, leased, or
otherwise disposed of. Thereafter any videogram found in the possession of any person engaged in the
videogram business without the required proof of registration by the BOARD, shall be prima facie evidence of
violation of the Decree, whether the possession of such videogram be for private showing and/or public
exhibition.

raises immediately a prima facie evidence of violation of the DECREE when the required proof of registration
of any videogram cannot be presented and thus partakes of the nature of an ex post facto law.

The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 15

... it is now well settled that "there is no constitutional objection to the passage of a law providing that the
presumption of innocence may be overcome by a contrary presumption founded upon the experience of
human conduct, and enacting what evidence shall be sufficient to overcome such presumption of innocence"
(People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A TREATISE ON THE CONSTITUTIONAL
LIMITATIONS, 639-641). And the "legislature may enact that when certain facts have been proved that they
shall be prima facie evidence of the existence of the guilt of the accused and shift the burden of proof
provided there be a rational connection between the facts proved and the ultimate facts presumed so that the
inference of the one from proof of the others is not unreasonable and arbitrary because of lack of connection
between the two in common experience". 16

Applied to the challenged provision, there is no question that there is a rational connection between the fact
proved, which is non-registration, and the ultimate fact presumed which is violation of the DECREE, besides
the fact that the prima facie presumption of violation of the DECREE attaches only after a forty-five-day period
counted from its effectivity and is, therefore, neither retrospective in character.

6. We do not share petitioner's fears that the video industry is being over-
regulated and being eased out of existence as if it were a nuisance. Being a relatively new industry, the need
for its regulation was apparent. While the underlying objective of the DECREE is to protect the moribund
movie industry, there is no question that public welfare is at bottom of its enactment, considering "the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes containing pornographic films and films with
brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are virtually untaxed since mere payment of
Mayor's permit and municipal license fees are required to engage in business. 17

The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video industry.
On the contrary, video establishments are seen to have proliferated in many places notwithstanding the 30%
tax imposed.

In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of the DECREE.
These considerations, however, are primarily and exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis for declaring a
statute invalid. This is as it ought to be. The principle of separation of powers has in the main wisely allocated
the respective authority of each department and confined its jurisdiction to such a sphere. There would then
be intrusion not allowable under the Constitution if on a matter left to the discretion of a coordinate branch,
the judiciary would substitute its own. If there be adherence to the rule of law, as there ought to be, the last
offender should be courts of justice, to which rightly litigants submit their controversy precisely to maintain
unimpaired the supremacy of legal norms and prescriptions. The attack on the validity of the challenged
provision likewise insofar as there may be objections, even if valid and cogent on its wisdom cannot be
sustained. 18

In fine, petitioner has not overcome the presumption of validity which attaches to a challenged statute. We
find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987
as unconstitutional and void.

WHEREFORE, the instant Petition is hereby dismissed.

No costs.

SO ORDERED.

Tio vs Videogram Regulatory Commission (G.R. No. 75697)

Admin Noona

8 years ago

Facts: The case is a petition filed by petitioner on behalf of videogram operators adversely affected by
Presidential Decree No. 1987, “An Act Creating the Videogram Regulatory Board” with broad powers to
regulate and supervise the videogram industry.

A month after the promulgation of the said Presidential Decree, the amended the National Internal Revenue
Code provided that:

“SEC. 134. Video Tapes. — There shall be collected on each processed video-tape cassette, ready for playback,
regardless of length, an annual tax of five pesos; Provided, That locally manufactured or imported blank video
tapes shall be subject to sales tax.”

“Section 10. Tax on Sale, Lease or Disposition of Videograms. — Notwithstanding any provision of law to the
contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or rental rate, as the case
may be, for every sale, lease or disposition of a videogram containing a reproduction of any motion picture or
audiovisual program.”
“Fifty percent (50%) of the proceeds of the tax collected shall accrue to the province, and the other fifty
percent (50%) shall accrue to the municipality where the tax is collected; PROVIDED, That in Metropolitan
Manila, the tax shall be shared equally by the City/Municipality and the Metropolitan Manila Commission.”

The rationale behind the tax provision is to curb the proliferation and unregulated circulation of videograms
including, among others, videotapes, discs, cassettes or any technical improvement or variation thereof, have
greatly prejudiced the operations of movie houses and theaters. Such unregulated circulation have caused a
sharp decline in theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection
of sales, contractor’s specific, amusement and other taxes, thereby resulting in substantial losses estimated at
P450 Million annually in government revenues.

Videogram(s) establishments collectively earn around P600 Million per annum from rentals, sales and
disposition of videograms, and these earnings have not been subjected to tax, thereby depriving the
Government of approximately P180 Million in taxes each year.

The unregulated activities of videogram establishments have also affected the viability of the movie industry.

Issues:

(1) Whether or not tax imposed by the DECREE is a valid exercise of police power.

(2) Whether or nor the DECREE is constitutional.

Held: Taxation has been made the implement of the state’s police power. The levy of the 30% tax is for a
public purpose. It was imposed primarily to answer the need for regulating the video industry, particularly
because of the rampant film piracy, the flagrant violation of intellectual property rights, and the proliferation
of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie industry,
the tax remains a valid imposition.

We find no clear violation of the Constitution which would justify us in pronouncing Presidential Decree No.
1987 as unconstitutional and void. While the underlying objective of the DECREE is to protect the moribund
movie industry, there is no question that public welfare is at bottom of its enactment, considering “the unfair
competition posed by rampant film piracy; the erosion of the moral fiber of the viewing public brought about
by the availability of unclassified and unreviewed video tapes containing pornographic films and films with
brutally violent sequences; and losses in government revenues due to the drop in theatrical attendance, not to
mention the fact that the activities of video establishments are virtually untaxed since mere payment of
Mayor’s permit and municipal license fees are required to engage in business.”

WHEREFORE, the instant Petition is hereby dismissed. No costs.

The provision defining judicial power as including the "duty of the courts of justice ... to determine whether or
not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government" constitutes the capstone of the efforts of the Constitutional
Commission to upgrade the powers of this Court vis-a-vis the other branches of government. This provision
was dictated by our experience under martial law which taught us that a stronger and more independent
judiciary is needed to abort abuses in government. As sharply stressed by petitioner Salonga, this provision is
distinctly Filipino and its interpretation should not be depreciated by undue reliance on inapplicable foreign
jurisprudence. It is thus crystal clear that unlike other Supreme Courts, this Court has been mandated by our
new Constitution to be a more active agent in annulling acts of grave abuse of discretion committed by a
branch of government or any of its officials. This new role, however, will not compel the Court, appropriately
defined by Prof. A. Bickel as the least dangerous branch of government, to assume imperial powers and run
roughshod over the principle of separation of power for that is judicial tyranny by any language. But while
respecting the essential of the principle of separation of power, the Court is not to be restricted by its non-
essentials. Applied to the case at bench, by voiding R.A. No. 7716 on the ground that its enactment violated
the procedure imposed by the Constitution in lawmaking, the Court is not by any means wrecking the wall
separating the powers between the legislature and the judiciary. For in so doing, the Court is not engaging in
lawmaking which is the essence of legislative power. But the Court's interposition of power should not be
defeated by the conclusiveness of the enrolled bill. A resort to this fiction will result in the enactment of laws
not properly deliberated upon and passed by Congress. Certainly, the enrolled bill theory was not conceived to
cover up violations of the constitutional procedure in law making, a procedure intended to assure the passage
of good laws. The conclusiveness of the enrolled bill can, therefore, be disregarded for it is not necessary to
preserve the principle of separation of powers.

In sum, I submit that in imposing to this Court the duty to annul acts of government committed with grave
abuse of discretion, the new Constitution transformed this Court from passivity to activism. This
transformation, dictated by our distinct experience as a nation, is not merely evolutionary but revolutionary.
Under the 1935 and 1973 Constitutions, this Court approached constitutional violations by initially
determining what it cannot do; under the 1987 Constitution, there is a shift in stress - this Court is mandated
to approach constitutional violations not by finding out what it should not do but what it must do. The Court
must discharge this solemn duty by not resuscitating a past that petrifies the present.

I vote to declare R.A. No. 7716 unconstitutional.

BELLOSILLO, J.:
With a consensus already reached after due deliberations, silence perhaps should be the better part of
discretion, except to vote. The different views and opinions expressed are so persuasive and convincing; they
are more than enough to sway the pendulum for or against the subject petitions. The penetrating and
scholarly dissertations of my brethren should dispense with further arguments which may only confound and
confuse even the most learned of men.

But there is a crucial point, a constitutional issue which, I submit, has been belittled, treated lightly, if not
almost considered insignificant and purposeless. It is elementary, as much as it is fundamental. I am referring
to the word "exclusively" appearing in Sec. 24, Art. VI, of our 1987 Constitution. This is regrettable, to say the
least, as it involves a constitutional mandate which, wittingly or unwittingly, has been cast aside as trivial and
meaningless.

A comparison of the particular provision on the enactment of revenue bills in the U.S. Constitution with its
counterpart in the Philippine Constitution will help explain my position.

Under the U.S. Constitution, "[a]ll bills for raising revenue shall originate in the House of Representatives; but
the Senate may propose or concur with amendments as on other bills" (Sec. 7, par. [1], Art. I). In contrast, our
1987 Constitution reads: "All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments" (Sec. 24, Art. VI; Italics supplied).

As may be gleaned from the pertinent provision of our Constitution, all revenue bills are required to originate
"exclusively" in the House of Representatives. On the other hand, the U.S. Constitution does not use the word
"exclusively;" it merely says, "[a]ll bills for raising revenue shall originate in the House of Representatives."

Since the term "exclusively" has already been adequately defined in the various opinions, as to which there
seems to be no dispute, I shall no longer offer my own definition.

Verily, the provision in our Constitution requiring that all revenue bills shall originate exclusively from the
Lower House is mandatory. The word "exclusively" is an "exclusive word," which is indicative of an intent that
the provision is mandatory. 1 Hence, all American authorities expounding on the meaning and application of
Sec. 7, par. (1), Art. I, of the U.S. Constitution cannot be used in the interpretation of Sec. 24, Art. VI, of our
1987 Constitution which has a distinct feature of "exclusiveness" all its own. Thus, when our Constitution
absolutely requires - as it is mandatory - that a particular bill should exclusively emanate from the Lower
House, there is no alternative to the requirement that the bill to become valid law must originate exclusively
from that House.

In the interpretation of constitutions, questions frequently arise as to whether particular sections are
mandatory or directory. The courts usually hesitate to declare that a constitutional provision is directory
merely in view of the tendency of the legislature to disregard provisions which are not said to be mandatory.
Accordingly, it is the general rule to regard constitutional provisions as mandatory, and not to leave any
discretion to the will of the legislature to obey or disregard them. This presumption as to mandatory quality is
usually followed unless it is unmistakably manifest that the provisions are intended to be merely directory. So
strong is the inclination in favor of giving obligatory force to the terms of the organic law that it has even been
said that neither by the courts nor by any other department of the government may any provision of the
Constitution be regarded as merely directory, but that each and everyone of its provisions should be treated as
imperative and mandatory, without reference to the rules and distinguishing between the directory and the
mandatory statutes. 2

The framers of our 1987 Constitution could not have used the term "exclusively" if they only meant to
replicate and adopt in toto the U.S. version. By inserting "exclusively" in Sec. 24, Art. VI, of our Constitution,
their message is clear: they wanted it different, strong, stringent. There must be a compelling reason for the
inclusion of the word "exclusively," which cannot be an act of retrogression but progression, an improvement
on its precursor. Thus, "exclusively" must be given its true meaning, its purpose observed and virtue
recognized, for it could not have been conceived to be of minor consequence. That construction is to be
sought which gives effect to the whole of the statute - its every word. Ut magis valeat quam pereat.

Consequently, any reference to American authorities, decisions and opinions, however wisely and delicately
put, can only mislead in the interpretation of our own Constitution. To refer to them in defending the
constitutionality of R.A. 7716, subject of the present petitions, is to argue on a false premise, i.e., that Sec. 24,
Art. VI, of our 1987 Constitution is, or means exactly, the same as Sec. 7, par. (1), Art. I, of the U.S.
Constitution, which is not correct. Hence, only a wrong conclusion can be drawn from a wrong premise.

For example, it is argued that in the United States, from where our own legislature is patterned, the Senate
can practically substitute its own tax measure for that of the Lower House. Thus, according to the Majority,
citing an American case, "the validity of Sec. 37 which the Senate had inserted in the Tariff Act of 1909 by
imposing an ad valorem tax based on the weight of vessels, was upheld against the claim that the revenue bill
originated in the Senate in contravention of Art. I, Sec. 7, of the U.S. Constitution." 3 In an effort to be more
convincing, the Majority even quotes the footnote in Introduction to American Government by F.A. Ogg and
P.O. Ray which reads -

Thus in 1883 the upper house struck out everything after the enacting clause of a tariff bill and wrote its own
measure, which the House eventually felt obliged to accept. It likewise added 847 amendments to the Payne-
Aldrich tariff act of 1909, dictated the schedules of the emergency tariff act of 1921, rewrote an extensive tax
revision bill in the same year, and recast most of the permanent tariff bill of 1922 4 -

which in fact suggests, very clearly, that the subject revenue bill actually originated from the Lower House and
was only amended, perhaps considerably, by the Senate after it was passed by the former and transmitted to
the latter.

In the cases cited, where the statutes passed by the U.S. Congress were upheld, the revenue bills did not
actually originate from the Senate but, in fact, from the Lower House. Thus, the Supreme Court of the United
States, speaking through Chief Justice White in Rainey v. United States 5 upheld the revenue bill passed by
Congress and adopted the ruling of the lower court that -

... the section in question is not void as a bill for raising revenue originating in the Senate and not in the House
of Representatives. It appears that the section was proposed by the Senate as an amendment to a bill for
raising revenue which originated in the House. That is sufficient.

Flint v. Stone Tracy Co., 6 on which the Solicitor General heavily leans in his Consolidated Comment as well as
in his Memorandum, does not support the thesis of the Majority since the subject bill therein actually
originated from the Lower House and not from the Senate, and the amendment merely covered a certain
provision in the House bill.
In fine, in the cases cited which were lifted from American authorities, it appears that the revenue bills in
question actually originated from the House of Representatives and were amended by the Senate only after
they were transmitted to it. Perhaps, if the factual circumstances in those cases were exactly the same as the
ones at bench, then the subject revenue or tariff bill may be upheld in this jurisdiction on the principle of
substantial compliance, as they were in the United States, except possibly in instances where the House bill
undergoes what is now referred to as "amendment by substitution," for that would be in derogation of our
Constitution which vests solely in the House of Representatives the power to initiate revenue bills. A Senate
amendment by substitution simply means that the bill in question did not in effect originate from the lower
chamber but from the upper chamber and not disguises itself as a mere amendment of the House version.

It is also theorized that in the U.S., amendment by substitution is recognized. That may be true. But the
process may be validly effective only under the U.S. Constitution. The cases before us present a totally
different factual backdrop. Several months before the Lower House could even pass HB No. 11197, P.S. Res.
No. 734 and SB No. 1129 had already been filed in the Senate. Worse, the Senate subsequently approved SB
No. 1630 "in substitution of SB No. 1129, taking into consideration P.S. Res. No. 734 and HB No. 11197," and
not HB No. 11197 itself "as amended." Here, the Senate could not have proposed or concurred with
amendments because there was nothing to concur with or amend except its own bill. It must be stressed that
the process of concurring or amending presupposes that there exists a bill upon which concurrence may be
based or amendments introduced. The Senate should have reported out HB No. 11197, as amended, even if in
the amendment it took into consideration SB No. 1630. It should not have submitted to the Bicameral
Conference Committee SB No. 1630 which, admittedly, did not originate exclusively from the Lower House.

But even assuming that in our jurisdiction a revenue bill of the Lower House may be amended by substitution
by the Senate - although I am not prepared to accept it in view of Sec. 24, Art. VI, of our Constitution - still R.A.
7716 could not have been the result of amendment by substitution since the Senate had no House bill to speak
of that it could amend when the Senate started deliberating on its own version.

Be that as it may, I cannot rest easy on the proposition that a constitutional mandate calling for the exclusive
power and prerogative of the House of Representatives may just be discarded and ignored by the Senate.
Since the Constitution is for the observance of all - the judiciary as well as the other departments of
government - and the judges are sworn to support its provisions, the courts are not at liberty to overlook or
disregard its commands. And it is not fair and just to impute to them undue interference if they look into the
validity of legislative enactments to determine whether the fundamental law has been faithfully observed in
the process. It is their duty to give effect to the existing Constitution and to obey all constitutional provisions
irrespective of their opinion as to the wisdom of such provisions.

The rule is fixed that the duty in a proper case to declare a law unconstitutional cannot be declined and must
be performed in accordance with the deliberate judgment of the tribunal before which the validity of the
enactment is directly drawn into question. When it is clear that a statute transgresses the authority vested in
the legislature by the Constitution, it is the duty of the courts to declare the act unconstitutional because they
cannot shirk from it without violating their oaths of office. This duty of the courts to maintain the Constitution
as the fundamental law of the state is imperative and unceasing; and, as Chief Justice Marshal said, whenever
a statute is in violation of the fundamental law, the courts must so adjudge and thereby give effect to the
Constitution. Any other course would lead to the destruction of the Constitution. Since the question as to the
constitutionality of a statute is a judicial matter, the courts will not decline the exercise of jurisdiction upon the
suggestion that action might be taken by political agencies in disregard of the judgment of the judicial
tribunals. 7

It is my submission that the power and authority to originate revenue bills under our Constitution is vested
exclusively in the House of Representatives. Its members being more numerous than those of the Senate,
elected more frequently, and more directly represent the people, are therefore considered better aware of
the economic life of their individual constituencies. It is just proper that revenue bills originate exclusively from
them.

In this regard, we do not have to devote much time delving into American decisions and opinions and invoke
them in the interpretation of our own Constitution which is different from the American version, particularly
on the enactment of revenue bills. We have our own Constitution couched in a language our own legislators
thought best. Insofar as revenue bills are concerned, our Constitution is not American; it is distinctively
Filipino. And no amplitude of legerdemain can detract from our constitutional requirement that all
appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and
private bills shall originate exclusively in the House of Representatives, although the Senate may propose or
concur with amendments.

In this milieu, I am left no option but to vote to grant the petitions and strike down R.A. 7716 as
unconstitutional.

Tolentino vs. Secretary of Finance G.R. No. 115455 October 30, 1995 Freedom of the Press

JANUARY 26, 2018

FACTS:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law.
Now it is contended by the Philippine Press Institute (PPI) that by removing the exemption of the press from
the VAT while maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, “even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional.”

ISSUE:

Does sales tax on bible sales violative of religious and press freedom?
RULING:

No. The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation.
Its imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right.
Hence, although its application to others, such those selling goods, is valid, its application to the press or to
religious groups, such as the Jehovah’s Witnesses, in connection with the latter’s sale of religious books and
pamphlets, is unconstitutional. As the U.S. Supreme Court put it, “it is one thing to impose a tax on income or
property of a preacher. It is quite another thing to exact a tax on him for delivering a sermon.”

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it
to general regulation is not to violate its freedom under the Constitution.

Tolentino vs. Secretary of Finance G.R. No. 115455, August 25, 1994

Facts: The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on
the sale or exchange of services. RA 7716 seeks to widen the tax base of the existing VAT system and enhance
its administration by amending the National Internal Revenue Code. There are various suits challenging the
constitutionality of RA 7716 on various grounds.

One contention is that RA 7716 did not originate exclusively in the House of Representatives as required by
Art. VI, Sec. 24 of the Constitution, because it is in fact the result of the consolidation of 2 distinct bills, H. No.
11197 and S. No. 1630. There is also a contention that S. No. 1630 did not pass 3 readings as required by the
Constitution.

Issue: Whether or not RA 7716 violates Art. VI, Secs. 24 and 26(2) of the Constitution

Held: The argument that RA 7716 did not originate exclusively in the House of Representatives as required by
Art. VI, Sec. 24 of the Constitution will not bear analysis. To begin with, it is not the law but the revenue bill
which is required by the Constitution to originate exclusively in the House of Representatives. To insist that a
revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the
law must substantially be the same as the House bill would be to deny the Senate’s power not only to concur
with amendments but also to propose amendments. Indeed, what the Constitution simply means is that the
initiative for filing revenue, tariff or tax bills, bills authorizing an increase of the public debt, private bills and
bills of local application must come from the House of Representatives on the theory that, elected as they are
from the districts, the members of the House can be expected to be more sensitive to the local needs and
problems. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the
House bill.

The next argument of the petitioners was that S. No. 1630 did not pass 3 readings on separate days as required
by the Constitution because the second and third readings were done on the same day. But this was because
the President had certified S. No. 1630 as urgent. The presidential certification dispensed with the
requirement not only of printing but also that of reading the bill on separate days. That upon the certification
of a bill by the President the requirement of 3 readings on separate days and of printing and distribution can
be dispensed with is supported by the weight of legislative practice.

Show opinions

Show as cited by other cases (16 times)

EN BANC

[ GR No. 115455, Aug 25, 1994 ]

ARTURO M. TOLENTINO v. SECRETARY OF FINANCE +

DECISION

G.R. No. 115455

MENDOZA, J.:
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the
sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods
or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services.
Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration
by amending the National Internal Revenue Code.

These are various suits for certiorari and prohibition, challenging the constitutionality of Republic Act No. 7716
on various grounds summarized in the resolution of July 6, 1994 of this Court, as follows:

I. Procedural Issues:

A. Does Republic Act No. 7716 violate Art. VI, § 24 of the Constitution?

B. Does it violate Art. VI, § 26(2) of the Constitution?

C. What is the extent of the power of the Bicameral Conference Committee?

II. Substantive Issues:

A. Does the law violate the following provi-sions in the Bill of Rights (Art. III)?

1. §1

2. §4

3. §5

4. § 10

B. Does the law violate the following other provisions of the Constitution?

1. Art. VI, § 28(1)

2. Art. VI, § 28(3)

These questions will be dealt in the order they are stated above. As will presently be explained not all of these
questions are judicially cognizable, because not all provisions of the Constitution are self executing and,
therefore, judicially enforceable. The other departments of the government are equally charged with the
enforcement of the Constitution, especially the provisions relating to them.

I. PROCEDURAL ISSUES

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-Added Tax Law,
Congress violated the Constitution because, although H. No. 11197 had originated in the House of
Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No.
1630) in the Conference Committee to produce the bill which the President signed into law. The following
provisions of the Constitution are cited in support of the proposition that because Republic Act No. 7716 was
passed in this manner, it did not originate in the House of Representatives and it has not thereby become a
law:

Art. VI, § 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.

Id., § 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills[1] were introduced in
the House of Representatives seeking to amend certain provisions of the National Internal Revenue Code
relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee
which recommended for approval a substitute measure, H. No. 11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108
AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING
SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17,
1993, it was approved by the House of Representatives after third and final reading.
It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and
Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630,
entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS
ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND
110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and
116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into
consideration P. S. Res. No. 734 and H. B. No. 11197. "

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill
and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading
by the affirmative votes of 13 of its members, with one abstention.

H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after
meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No. 11197, in consolidation
with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and
approved by the conferees."

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR
OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the
Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May
5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in
two newspapers of general circulation and, on May 28, 1994, it took effect, although its implementation was
suspended until June 30, 1994 to allow time for the registration of business entities. It would have been
enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its
members, granted a temporary restraining order on June 30, 1994.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of
Representatives as required by Art. V1, § 24 of the Constitution, because it is in fact the result of the
consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection, petitioners point out that
although Art. VI, § 24 was adopted from the American Federal Constitution,[2] it is notable in two respects: the
verb "shall originate" is qualified in the Philippine Constitution by the word "exclusively" and the phrase "as on
other bills" in the American version is omitted. This means, according to them, that to be considered as having
originated in the House, Republic Act No. 7716 must retain the essence of H. No. 11197.

This argument will not bear analysis. To begin with, it is not the law but the revenue bill which is required by
the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this,
because a bill originating in the House may undergo such extensive changes in the Senate that the result may
be a rewriting of the whole. The possibility of a third version by the conference committee will be discussed
later. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be
produced. To insist that a revenue statute and not only the bill which initiated the legislative process
culminating in the enactment of the law must substantially be the same as the House bill would be to deny the
Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to
violate the coequality of legislative power of the two houses of Congress and in fact make the House superior
to the Senate.

The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in order
to compensate for the grant to the Senate of the treaty-ratifying power[3] and thereby equalize its powers and
those of the House overlooks the fact that the powers being compared are different. We are dealing here with
the legislative power which under the Constitution is vested not in any particular chamber but in the Congress
of the Philippines, consisting of "a Senate and a House of Representatives."[4] The exercise of the treaty-
ratifying power is not the exercise of legislative power. It is the exercise of a check on the executive power.
There is, therefore, no justification for comparing the legislative powers of the House and of the Senate on the
basis of the possession of such nonlegislative power by the Senate. The possession of a similar power by the
U.S. Senate[5] has never been thought of as giving it more legislative powers than the House of
Representatives.

In the United States, the validity of a provision (§ 37) imposing an ad valorem tax based on the weight of
vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against the claim that the
provision was a revenue bill which originated in the Senate in contravention of Art. I, § 7 of the U.S.
Constitution.[6] Nor is the power to amend limited to adding a provision or two in a revenue bill emanating
from the House. The U.S. Senate has gone so far as changing the whole of bills following the enacting clause
and substituting its own versions. In 1883, for example, it struck out everything after the enacting clause of a
tariff bill and wrote in its place its own measure, and the House subsequently accepted the amendment. The
U.S. Senate likewise added 847 amendments to what later became the Payne-Aldrich Tariff Act of 1909; it
dictated the schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and
recast most of the tariff bill of 1922.[7] Given, then, the power of the Senate to propose amendments, the
Senate can propose its own version even with respect to bills which are required by the Constitution to
originate in the House.
It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another Senate
bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H. No. 11197] into
consideration" in enacting S. No. 1630. There is really no difference between the Senate preserving H. No.
11197 up to the enacting clause and then writing its own version following the enacting clause (which, it would
seem, petitioners admit is an amendment by substitution), and, on the other hand, separately presenting a bill
of its own on the same subject matter. In either case the result are two bills on the same subject.

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

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the
bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill. The
Court cannot, therefore, understand the alarm expressed over the fact that on March 1, 1993, eight months
before the House passed H. No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear
that the Senate ever considered it. It was only after the Senate had received H. No. 11197 on November 23,
1993 that the process of legislation in respect of it began with the referral to the Senate Committee on Ways
and Means of H. No. 11197 and the submission by the Committee on February 7, 1994 of S. No. 1630. For that
matter, if the question were simply the priority in the time of filing of bills, the fact is that it was in the House
that a bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had been filed
in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a substitute of those earlier
bills.

Second. Enough has been said to show that it was within the power of the Senate to propose S. No. 1630. We
now pass to the next argument of petitioners that S. No. 1630 did not pass three readings on separate days as
required by the Constitution[8] because the second and third readings were done on the same day, March 24,
1994. But this was because on February 24, 1994[9] and again on March 22, 1994,[10] the President had
certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of
printing but also that of reading the bill on separate days. The phrase "except when the President certifies to
the necessity of its immediate enactment, etc." in. Art. VI, §26(2) qualifies the two stated conditions before a
bill can become a law: (i) the bill has passed three readings on separate days and (ii) it has been printed in its
final form and distributed three days before it is finally approved.

In other words, the "unless" clause must be read in relation to the "except" clause, because the two are really
coordinate clauses of the same sentence. To construe the "except" clause as simply dispensing with the
second requirement in the "unless" clause (i.e., printing and distribution three days before final approval)
would not only violate the rules of grammar. It would also negate the very premise of the "except" clause: the
necessity of securing the immediate enactment of a bill which is certified in order to meet a public calamity or
emergency. For if it is only the printing that is dispensed with by presidential certification, the time saved
would be so negligible as to be of any use in insuring immediate enactment. It may well be doubted whether
doing away with the necessity of printing and distributing copies of the bill three days before the third reading
would insure speedy enactment of a law in the face of an emergency requiring the calling of a special election
for President and Vice-President. Under the Constitution such a law is required to be made within seven days
of the convening of Congress in emergency session.[11]

That upon the certification of a bill by the President the requirement of three readings on separate days and of
printing and distribution can be dispensed with is supported by the weight of legislative practice. For example,
the bill defining the certiorari jurisdiction of this Court which, in consolidation with the Senate version, became
Republic Act No. 5440, was passed on second and third readings in the House of Representatives on the same
day (May 14, 1968) after the bill had been certified by the President as urgent.[12]

There is, therefore, no merit in the contention that presidential certification dispenses only with the
requirement for the printing of the bill and its distribution three days before its passage but not with the
requirement of three readings on separate days, also.

It is nonetheless urged that the certification of the bill in this case was invalid because there was no
emergency, the condition stated in the certification of a "growing budget deficit" not being an unusual
condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of the
certification. To the contrary, by passing S. No. 1630 on second and third readings on March 24, 1994, the
Senate accepted the President's certification. Should such certification be now reviewed by this Court,
especially when no evidence has been shown that, because S. No. 1630 was taken up on second and third
readings on the same day, the members of the Senate were deprived of the time needed for the study of a
vital piece of legislation?

The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration of martial law
under Art. VII, § 18, or the existence of a national emergency justifying the delegation of extraordinary powers
to the President under Art. VI, § 23(2), is subject to judicial review because basic rights of individuals may be at
hazard. But the factual basis of presidential certification of bills, which involves doing away with procedural
requirements designed to insure that bills are duly considered by members of Congress, certainly should elicit
a different standard of review.
Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No. 11197. That
is because S. No. 1630 was what the Senate was considering. When the matter was before the House, the
President likewise certified H. No. 9210 then pending in the House.

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the Conference
Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that the Conference
Committee report included provisions not found in either the House bill or the Senate bill and that these
provisions were "surreptitiously" inserted by the Conference Committee. Much is made of the fact that in the
last two days of its session on April 21 and 25, 1994 the Committee met behind closed doors. We are not told,
however, whether the provisions were not the result of the give and take that often mark the proceedings of
conference committees.

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive
sessions. Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with
only the conferees present. Otherwise, no compromise is likely to be made. The Court is not about to take the
suggestion of a cabal or sinister motive attributed to the conferees on the basis solely of their "secret
meetings" on April 21 and 25, 1994, nor read anything into the incomplete remarks of the members, marked in
the transcript of stenographic notes by ellipses. The incomplete sentences are probably due to the
stenographer's own limitations or to the incoherence that sometimes characterize conversations. William
Safire noted some such lapses in recorded talks even by recent past Presidents of the United States.

In any event, in the United States conference committees had been customarily held in executive sessions with
only the conferees and their staffs in attendance.[13] Only in November 1975 was a new rule adopted
requiring open sessions. Even then a majority of either chamber's conferees may vote in public to close the
meetings.[14]

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been explained:

Under congressional rules of procedure, conference committees are not expected to make any material
change in the measure at issue, either by deleting provisions to which both houses have already agreed or by
inserting new provisions. But this is a difficult provision to enforce. Note the problem when one house amends
a proposal originating in either house by striking out everything following the enacting clause and substituting
provisions which make it an entirely new bill. The versions are now altogether different, permitting a
conference committee to draft essentially a new bill. . . .[15]

The result is a third version, which is considered an "amendment in the nature of a substitute," the only
requirement for which being that the third version be germane to the subject of the House and Senate
bills.[16]
Indeed, this Court recently held that it is within the power of a conference committee to include in its report
an entirely new provision that is not found either in the House bill or in the Senate bill.[17] If the committee
can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose
several provisions, collectively considered as an "amendment in the nature of a substitute," so long as such
amendment is germane to the subject of the bills before the committee. After all, its report was not final but
needed the approval of both houses of Congress to become valid as an act of the legislative department. The
charge that in this case the Conference Committee acted as a third legislative chamber is thus without any
basis.[18]

Nonetheless, it is argued that under the respective Rules of the Senate and the House of Representatives a
conference committee can only act on the differing provisions of a Senate bill and a House bill, and that
contrary to these Rules the Conference Committee inserted provisions not found in the bills submitted to it.
The following provisions are cited in support of this contention:

Rules of the Senate

Rule XII:

§ 26. In the event that the Senate does not agree with the House of Representatives on the provision of any
bill or joint resolution, the differences shall be settled by a conference committee of both Houses which shall
meet within ten days after their composition.

The President shall designate the members of the conference committee in accordance with subparagraph (c),
Section 3 of Rule Ill.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes
in or amendments to the subject measure, and shall be signed by the conferees.

The consideration of such report shall not be in order unless the report has been filed with the Secretary of the
Senate and copies thereof have been distributed to the Members.

(Emphasis added)

Rules of the House of Representatives

Rule XIV:

§ 85. Conference Committee Reports. - In the event that the House does not agree with the Senate on the
amendments to any bill or joint resolution, the differences may be settled by conference committees of both
Chambers.
The consideration of conference committee reports shall always be in order, except when the journal is being
read, while the roll is being called or the House is dividing on any question. Each of the pages of such reports
shall be signed by the conferees. Each report shall contain a detailed, sufficiently explicit statement of the
changes in or amendments to the subject measure.

The consideration of such report shall not be in order unless copies thereof are distributed to the Members:
Provided, That in the last fifteen days of each session period it shall be deemed sufficient that three copies of
the report, signed as above provided, are deposited in the office of the Secretary General.

(Emphasis added)

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting provisions. But
Rule XLIV, § 112 of the Rules of the Senate is cited to the effect that "If there is no Rule applicable to a specific
case the precedents of the Legislative Department of the Philippines shall be resorted to, and as a supplement
of these, the Rules contained in Jefferson's Manual." The following is then quoted from the Jefferson's
Manual:

The managers of a conference must confine themselves to the differences committed to them … and may not
include subjects not within disagreements, even though germane to a question in issue.

Note that, according to Rule XLIX, § 112, in case there is no specific rule applicable, resort must be to the
legislative practice. The Jefferson's Manual is resorted to only as supplement. It is common place in Congress
that conference committee reports include new matters which, though germane, have not been committed to
the committee. This practice was admitted by Senator Raul S. Roco, petitioner in G.R. No. 115543, during the
oral argument in these cases. Whatever, then, may be provided in the Jefferson's Manual must be considered
to have been modified by the legislative practice. If a change is desired in the practice it must be sought in
Congress since this question is not covered by any constitutional provision but is only an internal rule of each
house. Thus, Art. VI, § 16(3) of the Constitution provides that "Each House may determine the rules of its
proceedings. . . ."

This observation applies to the other contention that the Rules of the two chambers were likewise disregarded
in the preparation of the Conference Committee Report because the Report did not contain a "detailed and
sufficiently explicit statement of changes in, or amendments to, the subject measure." The Report used
brackets and capital letters to indicate the changes. This is a standard practice in bill-drafting. We cannot say
that in using these marks and symbols the Committee violated the Rules of the Senate and the House.
Moreover, this Court is not the proper forum for the enforcement of these internal Rules. To the contrary, as
we have already ruled, "parliamentary rules are merely procedural and with their observance the courts have
no concern."[19] Our concern is with the procedural requirements of the Constitution for the enactment of
laws. As far as these requirements are concerned, we are satisfied that they have been faithfully observed in
these cases.

Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house
may seek modifications of the compromise bill. The nature of the bill, therefore, requires that it be acted upon
by each house on a "take it or leave it" basis, with the only alternative that if it is not approved by both houses,
another conference committee must be appointed. But then again the result would still be a compromise
measure that may not be wholly satisfying to both houses.

Art. VI, § 26(2) must, therefore, be construed as referring only to bills introduced for the first time in either
house of Congress, not to the conference committee report. For if the purpose of requiring three readings is to
give members of Congress time to study bills, it cannot be gainsaid that H. No. 11197 was passed in the House
after three readings; that in the Senate it was considered on first reading and then referred to a committee of
that body; that although the Senate committee did not report out the House bill, it submitted a version (S. No.
1630) which it had prepared by "taking into consideration" the House bill; that for its part the Conference
Committee consolidated the two bills and prepared a compromise version; that the Conference Committee
Report was thereafter approved by the House and the Senate, presumably after appropriate study by their
members. We cannot say that, as a matter of fact, the members of Congress were not fully informed of the
provisions of the bill. The allegation that the Conference Committee usurped the legislative power of Congress
is, in our view, without warrant in fact and in law.

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in
its favor. Our cases[20] manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only
of its provisions but also of its due enactment. Not even claims that a proposed constitutional amendment was
invalid because the requisite votes for its approval had not been obtained[21] or that certain provisions of a
statute had been "smuggled" in the printing of the bill[22] have moved or persuaded us to look behind the
proceedings of a coequal branch of the government. There is no reason now to depart from this rule.

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case[23] we "went behind" an
enrolled bill and consulted the Journal to determine whether certain provisions of a statute had been
approved by the Senate in view of the fact that the President of the Senate himself, who had signed the
enrolled bill, admitted a mistake and withdrew his signature, so that in effect there was no longer an enrolled
bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not been observed have
no more basis than another allegation that the Conference Committee "surreptitiously" inserted provisions
into a bill which it had prepared, we should decline the invitation to go behind the enrolled copy of the bill. To
disregard the "enrolled bill" rule in such cases would be to disregard the respect due the other two
departments of our government.

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine Airlines,
Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, § 26(1) which provides that "Every bill passed
by Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that
neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment
of the VAT and that this was made only in the Conference Committee bill which became Republic Act No. 7716
without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE?ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING
ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

Among the provisions of the NIRC amended is § 103, which originally read:

§ 103. Exempt transactions. - The following shall be exempt from the value-added tax:

....

(q) Transactions which are exempt under special laws or international agreements to which the Philippines is a
signatory.

Among the transactions exempted from the VAT were those of PAL because it was exempted under its
franchise (P.D. No. 1590) from the payment of all "other taxes . . . now or in the near future," in consideration
of the payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, § 103 of the NIRC now provides:

§ 103. Exempt transactions. - The following shall be exempt from the value-added tax:

....

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66,
529, 972, 1491, 1590. . . .

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

The question is whether this amendment of § 103 of the NIRC is fairly embraced in the title of Republic Act No.
7716, although no mention is made therein of P.D. No. 1590 as among those which the statute amends. We
think it is, since the title states that the purpose of the statute is to expand the VAT system, and one way of
doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P.D. No.
1590 be mentioned in the title of the law, in addition to § 103 of the NIRC, in which it is specifically referred to,
would be to insist that the title of a bill should be a complete index of its content.
The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall
be expressed in its title is intended to prevent surprise upon the members of Congress and to inform the
people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar,
petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the
title but perhaps for the same reason other statutes, although published, pass unnoticed until some event
somehow calls attention to their existence. Indeed, the title of Republic Act No. 7716 is not any more general
than the title of PAL's own franchise under P.D. No. 1590, and yet no mention is made of its tax exemption.
The title of P.D. No. 1590 is:

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN
AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.

The trend in our cases is to construe the constitutional requirement in such a manner that courts do not
unduly interfere with the enactment of necessary legislation and to consider it sufficient if the title expresses
the general subject of the statute and all its provisions are germane to the general subject thus expressed.[24]

It is further contended that amendment of petitioner's franchise may only be made by special law, in view of §
24 of P.D. No. 1590 which provides:

This franchise, as amended, or any section or provision hereof may only be modified, amended, or repealed
expressly by a special law or decree that shall specifically modify, amend, or repeal this franchise or any
section or provision thereof.

This provision is evidently intended to prevent the amendment of the franchise by mere implication resulting
from the enactment of a later inconsistent statute, in consideration of the fact that a franchise is a contract
which can be altered only by consent of the parties. Thus in Manila Railroad Co. v. Rafferty,[25] it was held that
an Act of the U.S. Congress, which provided for the payment of tax on certain goods and articles imported into
the Philippines, did not amend the franchise of plaintiff, which exempted it from all taxes except those
mentioned in its franchise. It was held that a special law cannot be amended by a general law.

In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No. 1590) by
specifically excepting from the grant of exemptions from the VAT PAL's exemption under P.D. No. 1590. This is
within the power of Congress to do under Art. XII, 11 of the Constitution, which provides that the grant of a
franchise for the operation of a public utility is subject to amendment, alteration or repeal by Congress when
the common good so requires.

II. SUBSTANTIVE ISSUES

A. Claims of Press Freedom, Freedom of Thought and Religious Freedom

The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of newspaper
publishers established for the improvement of journalism in the Philippines. On the other hand, petitioner in
G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit organization engaged in the printing and
distribution of bibles and other religious articles. Both petitioners claim violations of their rights under §§ 4
and 5 of the Bill of Rights as a result of the enactment of the VAT Law.

The PPI questions the law insofar as it has withdrawn the exemption previously granted to the press under §
103 (f) of the NIRC. Although the exemption was subsequently restored by administrative regulation with
respect to the circulation income of newspapers, the PPI presses its claim because of the possibility that the
exemption may still be removed by mere revocation of the regulation of the Secretary of Finance. On the other
hand, the PBS goes so far as to question the Secretary's power to grant exemption for two reasons: (1) The
Secretary of Finance has no power to grant tax exemption because this is vested in Congress and requires for
its exercise the vote of a majority of all its members[26] and (2) the Secretary's duty is to execute the law.

§ 103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions previously
granted exemption were:

(f) Printing, publication, importation or sale of books and any newspaper, magazine, review, or bulletin which
appears at regular intervals with fixed prices for subscription and sale and which is devoted principally to the
publication of advertisements.

Republic Act No. 7716 amended § 103 by deleting ¶ (f) with the result that print media became subject to the
VAT with respect to all aspects of their operations. Later, however, based on a memorandum of the Secretary
of Justice, respondent Secretary of Finance issued Revenue Regulations No. 11-94, dated June 27, 1994,
exempting the "circulation income of print media pursuant to § 4 Article III of the 1987 Philippine Constitution
guaranteeing against abridgment of freedom of the press, among others." The exemption of "circulation
income" has left income from advertisements still subject to the VAT.

It is unnecessary to pass upon the contention that the exemption granted is beyond the authority of the
Secretary of Finance to give, in view of PPI's contention that even with the exemption of the circulation
revenue of print media there is still an unconstitutional abridgment of press freedom because of the
imposition of the VAT on the gross receipts of newspapers from advertisements and on their acquisition of
paper, ink and services for publication. Even on the assumption that no exemption has effectively been
granted to print media transactions, we find no violation of press freedom in these cases.
To be sure, we are not dealing here with a statute that on its face operates in the area of press freedom. The
PPI's claim is simply that, as applied to newspapers, the law abridges press freedom. Even with due recognition
of its high estate and its importance in a democratic society, however, the press is not immune from general
regulation by the State. It has been held:

The publisher of a newspaper has no immunity from the application of general laws. He has no special
privilege to invade the rights and liberties of others. He must answer for libel. He may be punished for
contempt of court. . . . Like others, he must pay equitable and nondiscriminatory taxes on his business. . . .[27]

The PPI does not dispute this point, either.

What it contends is that by withdrawing the exemption previously granted to print media transactions
involving printing, publication, importation or sale of newspapers, Republic Act No. 7716 has singled out the
press for discriminatory treatment and that within the class of mass media the law discriminates against print
media by giving broadcast media favored treatment. We have carefully examined this argument, but we are
unable to find a differential treatment of the press by the law, much less any censorial motivation for its
enactment. If the press is now required to pay a value-added tax on its transactions, it is not because it is being
singled out, much less targeted, for special treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption is all that is involved in these cases. Other
transactions, likewise previously granted exemption, have been delisted as part of the scheme to expand the
base and the scope of the VAT system. The law would perhaps be open to the charge of discriminatory
treatment if the only privilege withdrawn had been that granted to the press. But that is not the case.

The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its claim that
Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited, the discriminatory
purpose was clear either from the background of the law or from its operation. For example, in Grosjean v.
American Press Co.,[28] the law imposed a license tax equivalent to 2% of the gross receipts derived from
advertisements only on newspapers which had a circulation of more than 20,000 copies per week. Because the
tax was not based on the volume of advertisement alone but was measured by the extent of its circulation as
well, the law applied only to the thirteen large newspapers in Louisiana, leaving untaxed four papers with
circulation of only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious
competition with the thirteen newspapers in question. It was well known that the thirteen newspapers had
been critical of Senator Huey Long, and the Long?dominated legislature of Louisiana responded by taxing what
Long described as the "lying newspapers" by imposing on them "a tax on lying." The effect of the tax was to
curtail both their revenue and their circulation. As the U.S. Supreme Court noted, the tax was "a deliberate and
calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in
virtue of the constitutional guaranties."[29] The case is a classic illustration of the warning that the power to
tax is the power to destroy.
In the other case[30] invoked by the PPI, the press was also found to have been singled out because everything
was exempt from the "use tax" on ink and paper, except the press. Minnesota imposed a tax on the sales of
goods in that state. To protect the sales tax, it enacted a complementary tax on the privilege of "using, storing
or consuming in that state tangible personal property" by eliminating the residents' incentive to get goods
from outside states where the sales tax might be lower. The Minnesota Star Tribune was exempted from both
taxes from 1967 to 1971. In 1971, however, the state legislature amended the tax scheme by imposing the
"use tax" on the cost of paper and ink used for publication. The law was held to have singled out the press
because (1) there was no reason for imposing the "use tax" since the press was exempt from the sales tax and
(2) the "use tax" was laid on an "intermediate transaction rather than the ultimate retail sale." Minnesota had
a heavy burden of justifying the differential treatment and it failed to do so. In addition, the U.S. Supreme
Court found the law to be discriminatory because the legislature, by again amending the law so as to exempt
the first $100,000 of paper and ink used, further narrowed the coverage of the tax so that "only a handful of
publishers pay any tax at all and even fewer pay any significant amount of tax."[31] The discriminatory purpose
was thus very clear.

More recently, in Arkansas Writers' Project, Inc. v. Ragland,[32] it was held that a law which taxed general
interest magazines but not newspapers and religious, professional, trade and sports journals was
discriminatory because while the tax did not single out the press as a whole, it targeted a small group within
the press. What is more, by differentiating on the basis of contents (i.e., between general interest and special
interests such as religion or sports) the law became "entirely incompatible with the First Amendment's
guarantee of freedom of the press."

These cases come down to this: that unless justified, the differential treatment of the press creates risks of
suppression of expression. In contrast, in the cases at bar, the statute applies to a wide range of goods and
services. The argument that, by imposing the VAT only on print media whose gross sales exceeds P480,000 but
not more than P750,000, the law discriminates[33] is without merit since it has not been shown that as a result
the class subject to tax has been unreasonably narrowed. The fact is that this limitation does not apply to the
press alone but to all sales. Nor is impermissible motive shown by the fact that print media and broadcast
media are treated differently. The press is taxed on its transactions involving printing and publication, which
are different from the transactions of broadcast media. There is thus a reasonable basis for the classification.

The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are immune
from any forms of ordinary taxation." The license tax in the Grosjean case was declared invalid because it was
"one single in kind, with a long history of hostile misuse against the freedom of the press."[34] On the other
hand, Minneapolis Star acknowledged that "The First Amendment does not prohibit all regulation of the press
[and that] the States and the Federal Government can subject newspapers to generally applicable economic
regulations without creating constitutional problems."[35]

What has been said above also disposes of the allegations of the PBS that the removal of the exemption of
printing, publication or importation of books and religious articles, as well as their printing and publication,
likewise violates freedom of thought and of conscience. For as the U.S. Supreme Court unanimously held in
Jimmy Swaggart Ministries v. Board of Equalization,[36] the Free Exercise of Religion Clause does not prohibit
imposing a generally applicable sales and use tax on the sale of religious materials by a religious organization.

This brings us to the question whether the registration provision of the law,[37] although of general
applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on its essential
freedom. The case of American Bible Society v. City of Manila[38] is cited by both the PBS and the PPI in
support of their contention that the law imposes censorship. There, this Court held that an ordinance of the
City of Manila, which imposed a license fee on those engaged in the business of general merchandise, could
not be applied to the appellant's sale of bibles and other religious literature. This Court relied on Murdock v.
Pennsylvania,[39] in which it was held that, as a license fee is fixed in amount and unrelated to the receipts of
the taxpayer, the license fee, when applied to a religious sect, was actually being imposed as a condition for
the exercise of the sect's right under the Constitution. For that reason, it was held, the license fee "restrains in
advance those constitutional liberties of press and religion and inevitably tends to suppress their exercise."[40]

But, in this case, the fee in § 107, although a fixed amount (P1,000), is not imposed for the exercise of a
privilege but only for the purpose of defraying part of the cost of registration. The registration requirement is a
central feature of the VAT system. It is designed to provide a record of tax credits because any person who is
subject to the payment of the VAT pays an input tax, even as he collects an output tax on sales made or
services rendered. The registration fee is thus a mere administrative fee, one not imposed on the exercise of a
privilege, much less a constitutional right.

For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it offends the free
speech, press and freedom of religion guarantees of the Constitution to be without merit. For the same
reasons, we find the claim of the Philippine Educational Publishers Association (PEPA) in G.R. No. 115931 that
the increase in the price of books and other educational materials as a result of the VAT would violate the
constitutional mandate to the government to give priority to education, science and technology (Art. II,§17) to
be untenable.

B. Claims of Regressivity, Denial of Due Process, Equal Protection, and Impairment of Contracts

There is basis for passing upon claims that on its face the statute violates the guarantees of freedom of speech,
press and religion. The possible "chilling effect" which it may have on the essential freedom of the mind and
conscience and the need to assure that the channels of communication are open and operating importunately
demand the exercise of this Court's power of review.

There is, however, no justification for passing upon the claims that the law also violates the rule that taxation
must be progressive and that it denies petitioners' right to due process and the equal protection of the laws.
The reason for this different treatment has been cogently stated by an eminent authority on constitutional law
thus: "[W]hen freedom of the mind is imperiled by law, it is freedom that commands a momentum of respect;
when property is imperiled it is the lawmakers' judgment that commands respect. This dual standard may not
precisely reverse the presumption of constitutionality in civil liberties cases, but obviously it does set up a
hierarchy of values within the due process clause."[41]

Indeed, the absence of threat of immediate harm makes the need for judicial intervention less evident and
underscores the essential nature of petitioners' attack on the law on the grounds of regressivity, denial of due
process and equal protection and impairment of contracts as a mere academic discussion of the merits of the
law. For the fact is that there have even been no notices of assessments issued to petitioners and no
determinations at the administrative levels of their claims so as to illuminate the actual operation of the law
and enable us to reach sound judgment regarding so fundamental questions as those raised in these suits.

Thus, the broad argument against the VAT is that it is regressive and that it violates the requirement that "The
rule of taxation shall be uniform and equitable [and] Congress shall evolve a progressive system of
taxation."[42] Petitioners in G.R. No. 115781 quote from a paper, entitled "VAT Policy Issues: Structure,
Regressivity, Inflation and Exports" by Alan A. Tait of the International Monetary Fund, that "VAT payment by
low-income households will be a higher proportion of their incomes (and expenditures) than payments by
higher-income households. That is, the VAT will be regressive." Petitioners contend that as a result of the
uniform 10% VAT, the tax on consumption goods of those who are in the higher-income bracket, which before
were taxed at a rate higher than 10%, has been reduced, while basic commodities, which before were taxed at
rates ranging from 3% to 5%, are now taxed at a higher rate.

Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by respondents that
in fact it distributes the tax burden to as many goods and services as possible particularly to those which are
within the reach of higher?income groups, even as the law exempts basic goods and services. It is thus
equitable. The goods and properties subject to the VAT are those used or consumed by higher-income groups.
These include real properties held primarily for sale to customers or held for lease in the ordinary course of
business, the right or privilege to use industrial, commercial or scientific equipment, hotels, restaurants and
similar places, tourist buses, and the like. On the other hand, small business establishments, with annual gross
sales of less than P500,000, are exempted. This, according to respondents, removes from the coverage of the
law some 30,000 business establishments. On the other hand, an occasional paper[43] of the Center for
Research and Communication cites a NEDA study that the VAT has minimal impact on inflation and income
distribution and that while additional expenditure of the lowest income class is only P301 or 1.49% a year, that
for a family earning P500,000 a year or more is P8,340 or 2.2%.

Lacking empirical data on which to base any conclusion regarding these arguments, any discussion whether
the VAT is regressive in the sense that it will hit the "poor" and middle-income group in society harder than it
will the "rich," as the Cooperative Union of the Philippines (CUP) claims in G.R. No. 115873, is largely an
academic exercise. On the other hand, the CUP's contention that Congress' withdrawal of exemption of
producers cooperatives, marketing cooperatives, and service cooperatives, while maintaining that granted to
electric cooperatives, not only goes against the constitutional policy to promote cooperatives as instruments
of social justice (Art. XII, § 15) but also denies such cooperatives the equal protection of the law is actually a
policy argument. The legislature is not required to adhere to a policy of "all or none" in choosing the subject of
taxation.[44]

Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner in G.R.
115754, that the VAT will reduce the mark up of its members by as much as 85% to 90% any more concrete. It
is a mere allegation. On the other hand, the claim of the Philippine Press Institute, petitioner in G.R. No.
115544, that the VAT will drive some of its members out of circulation because their profits from
advertisements will not be enough to pay for their tax liability, while purporting to be based on the financial
statements of the newspapers in question, still falls short of the establishment of facts by evidence so
necessary for adjudicating the question whether the tax is oppressive and confiscatory.

Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by the
Constitution to do is to "evolve a progressive system of taxation." This is a directive to Congress, just like the
directive to it to give priority to the enactment of laws for the enhancement of human dignity and the
reduction of social, economic and political inequalities (Art. XIII, § 1), or for the promotion of the right to
"quality education" (Art. XIV, § 1). These provisions are put in the Constitution as moral incentives to
legislation, not as judicially enforceable rights.

At all events, our 1988 decision in Kapatiran[45] should have laid to rest the questions now raised against the
VAT. There similar arguments made against the original VAT Law (Executive Order No. 273) were held to be
hypothetical, with no more basis than newspaper articles which this Court found to be "hearsay and [without]
evidentiary value." As Republic Act No. 7716 merely expands the base of the VAT system and its coverage as
provided in the original VAT Law, further debate on the desirability and wisdom of the law should have shifted
to Congress.

Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the imposition of the
VAT on the sales and leases of real estate by virtue of contracts entered into prior to the effectivity of the law
would violate the constitutional provision that "No law impairing the obligation of contracts shall be passed." It
is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter
the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix
obligations as between parties, but the reservation of essential attributes of sovereign power is also read into
contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure the peace and
good order of society.[46]
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's power of
taxation save only where a tax exemption has been granted for a valid consideration.[47] Such is not the case
of PAL in G.R. No. 115852, and we do not understand it to make this claim. Rather, its position, as discussed
above, is that the removal of its tax exemption cannot be made by a general, but only by a specific, law.

The substantive issues raised in some of the cases are presented in abstract, hypothetical form because of the
lack of a concrete record. We accept that this Court does not only adjudicate private cases; that public actions
by "non-Hohfeldian"[48] or ideological plaintiffs are now cognizable provided they meet the standing
requirement of the Constitution; that under Art. VIII, § 1, ¶ 2 the Court has a "special function" of vindicating
constitutional rights. Nonetheless the feeling cannot be escaped that we do not have before us in these cases
a fully developed factual record that alone can impart to our adjudication the impact of actuality[49] to insure
that decision-making is informed and well grounded. Needless to say, we do not have power to render
advisory opinions or even jurisdiction over petitions for declaratory judgment. In effect we are being asked to
do what the Conference Committee is precisely accused of having done in these cases to sit as a third
legislative chamber to review legislation.

We are told, however, that the power of judicial review is not so much power as it is duty imposed on this
Court by the Constitution and that we would be remiss in the performance of that duty if we decline to look
behind the barriers set by the principle of separation of powers. Art. VIII, § I, ¶ 2 is cited in support of this
view:

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has been a grave abuse of
discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government.

To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in 1803, to justify
the assertion of this power in Marbury v. Madison:

It is emphatically the province and duty of the judicial department to say what the law is. Those who apply the
rule to particular cases must of necessity expound and interpret that rule. If two laws conflict with each other,
the courts must decide on the operation of each.[50]

Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

And when the judiciary mediates to allocate constitutional boundaries, it does not assert any superiority over
the other departments; it does not in reality nullify or invalidate an act of the legislature, but only asserts the
solemn and sacred obligation assigned to it by the Constitution to determine conflicting claims of authority
under the Constitution and to establish for the parties in an actual controversy the rights which that
instrument secures and guarantees to them.[51]
This conception of the judicial power has been affirmed in several cases[52] of this Court following Angara.

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is
essentially a case that at best is not ripe for adjudication. That duty must still be performed in the context of a
concrete case or controversy, as Art. VIII, § 5(2) clearly defines our jurisdiction in terms of "cases," and nothing
but "cases." That the other departments of the government may have committed a grave abuse of discretion is
not an independent ground for exercising our power. Disregard of the essential limits imposed by the case and
controversy requirement can in the long run only result in undermining our authority as a court of law. For, as
judges, what we are called upon to render is judgment according to law, not according to what may appear to
be the opinion of the day.

_____________________________________________

In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act No. 7716 in
its formal and substantive aspects as this has been raised in the various cases before us. To sum up, we hold:

(1) That the procedural requirements of the Constitution have been complied with by Congress in the
enactment of the statute;

(2) That judicial inquiry whether the formal requirements for the enactment of statutes beyond those
prescribed by the Constitution have been observed is precluded by the principle of separation of powers;

(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the free
exercise of religion, nor deny to any of the parties the right to an education; and

(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive, oppressive
and confiscatory and that it violates vested rights protected under the Contract Clause are prematurely raised
and do not justify the grant of prospective relief by writ of prohibition.

WHEREFORE, the petitions in these cases are DISMISSED.

G.R. No. 195909 September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.

ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.

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

G.R. No. 195960

ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,

vs.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

DECISION

CARPIO, J.:

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-à-vis Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC),
on the income tax treatment of proprietary non-profit hospitals.

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;

xxxx3
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's deficiency taxes amounting to
₱76,063,116.06 for 1998, comprised of deficiency income tax, value-added tax, withholding tax on
compensation and expanded withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in
the 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 x x
x." 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 ₱1,730,367,965 or approximately ₱1.73 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 ₱218,187,498 or 65.20% of its 1998 operating income (i.e., total revenues less operating expenses) of
₱334,642,615. 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 ₱57,659,981.19 as deficiency income and expanded withholding tax for 1998 with surcharges and interest
for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment 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:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY GRANTED. Accordingly, the
1998 deficiency VAT assessment issued by respondent against petitioner in the amount of ₱110,000.00 is
hereby CANCELLED and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency income tax
and deficiency expanded withholding tax for the taxable year 1998 in the respective amounts of ₱5,496,963.54
and ₱778,406.84 or in the sum of ₱6,275,370.38, x x x.

xxxx

In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency interest on the total
amount of ₱6,275,370.38 counted from October 15, 2003 until full payment thereof, pursuant to Section
249(C)(3) of the NIRC of 1997.

SO ORDERED. 13

The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid, arose from the failure of
St. Luke's to prove that part of its income in 1998 (declared as "Other Income-Net") 14 came from charitable
activities. The CTA cancelled the remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the
10% tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not 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 x x x." 19 The generation of income from paying patients
does not per se destroy the charitable nature of St. Luke's.

Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal 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 x x x 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' x x x." 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] x x x." 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 ₱6,275,370.38 in the
dispositive portion of the CTA First Division Decision includes only deficiency interest under Section 249(A) and
(B) of the NIRC and not delinquency 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-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress intended to remove the
exemption that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977, which is now
substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:

SEC. 27. Rates of Income Tax on Domestic Corporations. -

xxxx

(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational institutions and hospitals
which are non-profit shall pay a tax of ten percent (10%) on their taxable income except those covered by
Subsection (D) hereof: Provided, That if the gross income from unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from
all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade, business or other activity' means any trade, business or
other activity, the conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function. A 'proprietary educational institution' is
any private school maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. (Emphasis supplied)

St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that it is a charitable
institution and an organization promoting social welfare. The arguments of St. Luke's focus on the wording of
Section 30(E) exempting from income 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:

xxxx

(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific person;

xxxx

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;

xxxx

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
(Emphasis supplied)

The Court partly grants the petition of the BIR but on a different ground. We hold that Section 27(B) of the
NIRC does not remove the income tax exemption of proprietary non-profit hospitals under Section 30(E) and
(G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed together
without the removal of such tax exemption. The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific institutions, namely, proprietary non-profit 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

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 40 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 [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.

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

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)

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 x x x charitable x x x purposes x x x." 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 ₱1,730,367,965 from services to paying patients. It cannot be
disputed that a hospital which receives approximately ₱1.73 billion from paying patients is not an institution
"operated exclusively" for charitable purposes. Clearly, revenues from paying patients are income received
from "activities conducted for profit." 52 Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to Patients" in contrast to its "Free
Services" expenditure of ₱218,187,498. 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 ₱1,730,367,965.00

OPERATING EXPENSES

Professional care of patients ₱1,016,608,394.00

Administrative 287,319,334.00

Household and Property 91,797,622.00

₱1,395,725,350.00

INCOME FROM OPERATIONS ₱334,642,615.00 100%

Free Services -218,187,498.00 -65.20%

INCOME FROM OPERATIONS, Net of FREE SERVICES ₱116,455,117.00 34.80%

OTHER INCOME 17,482,304.00

EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00

In Lung Center, this Court declared:

"[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." x x x 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 ₱1.73 billion total revenues from paying
patients is not even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying patients.

St. Luke's claims that its charity expenditure of ₱218,187,498 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."

P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no cree Vd. que es una
actividad esencial dicho hospital para el funcionamiento del colegio de medicina de dicha universidad?

xxxx

R. Si el hospital se limita a recibir enformos pobres, mi contestación seria afirmativa; pero considerando que el
hospital tiene cuartos de pago, y a los mismos generalmente van enfermos de buena posición social
económica, lo que se paga por estos enfermos debe estar sujeto a 'income tax', y es una de las razones que
hemos 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).

A tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared
from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable
institutions should therefore be limited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.1âwphi1

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely tax exempt
from all its income. However, it remains a proprietary non-profit hospital under Section 27(B) of the NIRC as
long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its
corporate purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of
10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St.
Luke's has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St. Luke's is "a
corporation for purely charitable 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

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.

Commissioner of Internal Revenue vs. St Luke's Medical Center

Facts:

St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit corporation. St.
Luke’s accepts both paying and non-paying patients. The BIR assessed St. Luke’s deficiency taxes for 1998
comprised of deficiency income tax, value-added tax, and withholding tax. The BIR claimed that St. Luke’s
should be liable for income tax at a preferential rate of 10% as provided for by Section 27(B). Further, 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.

On the other hand, St. Luke’s maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes exempt from income tax 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.

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.

Ruling:

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.
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, 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. The club was non-profit because of its
purpose and there was no evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable. The Court defined
“charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their minds and hearts
under the influence of education or religion, by assisting them to establish themselves in life or [by] otherwise
lessening the burden of government.” 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
Sec. 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

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.

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.

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.

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%.

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).

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” and thus exempt from income tax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.”

WHEREFORE, 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(8) 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.
Issue: 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.

Ruling:

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the
NIRC of 1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare
institutions. The 10% income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals.

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 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).

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.”

The Court defined “charity” in Lung Center of the Philippines v. Quezon City as “a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to establish themselves in life
or by otherwise lessening the burden of government.”

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.

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.

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 requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes necessary for the existence of the
government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable institution for the
purpose of exemption from real property taxes. This ruling uses the same premise as Hospital de San Juan and
Jesus Sacred Heart College which says that receiving income from paying patients does not destroy the
charitable nature of a hospital.

For real property taxes, the incidental generation of income is permissible because the test of exemption is the
use of the property. 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.

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:

A non-stock corporation or association;

Organized exclusively for charitable purposes;

Operated exclusively for charitable purposes;

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” and that any profit “obtained 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.”

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.

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.” 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.
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. 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.

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.

Issues:

whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying
patients are concerned

Ruling:

SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as its revenues from paying patients
are concerned.

a 10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hos

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.

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.
However,... 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.

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.'

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.'

To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997
NIRC requires said institution to operate exclusively for charitable or social welfare purpose. But in case an
exempt institution under Section 30(E) or (G) of the said Code earns income from its for-profit activities, it will
not lose its tax exemption. However, its income from for- profit activities will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.

G.R. No. 144104 June 29, 2004

LUNG CENTER OF THE PHILIPPINES, petitioner,

vs.

QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon City, respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the Decision1
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 ₱4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax Declaration Nos. C-021-
01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.4 On August 25, 1993, the petitioner filed a Claim for Exemption5 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-BAA9 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 ₱20,000
a month, when the monthly rental should be ₱357,000 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 ₱24,000. 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.

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;lavvph!l.net

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;lavvphil.net

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.

...

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:

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for
religious, charitable or educational purposes.35

We note that under the 1935 Constitution, "... all lands, buildings, and improvements used ‘exclusively’ for …
charitable … purposes shall be exempt from taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be considered exempt,
the same should not only be "exclusively" used for charitable purposes; it is required that such property be
used "actually" and "directly" for such purposes.37

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in
Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before
the 1973 and 1987 Constitutions took effect.38 As this Court held in Province of Abra v. Hernando:39

… Under the 1935 Constitution: "Cemeteries, churches, and parsonages or convents appurtenant thereto, and
all lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall
be exempt from taxation." The present Constitution added "charitable institutions, mosques, and non-profit
cemeteries" and required that for the exemption of "lands, buildings, and improvements," they should not
only be "exclusively" but also "actually" and "directly" used for religious or charitable purposes. The
Constitution is worded differently. The change should not be ignored. It must be duly taken into consideration.
Reliance on past decisions would have sufficed were the words "actually" as well as "directly" not added.
There must be proof therefore of the actual and direct use of the lands, buildings, and improvements for
religious or charitable purposes to be exempt from taxation. …

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined
as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively."40 If real property is used
for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to
taxation.41 The words "dominant use" or "principal use" cannot be substituted for the words "used
exclusively" without doing violence to the Constitutions and the law.42 Solely is synonymous with
exclusively.43

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property
is used for tax-exempt purposes.44

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly
and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of
patients and the dispensation of medical services to them, whether paying or non-paying, other portions
thereof are being leased to private individuals for their clinics and a canteen. Further, a portion of the land is
being leased to a private individual for her business enterprise under the business name "Elliptical Orchids and
Garden Center." Indeed, the petitioner’s evidence shows that it collected ₱1,136,483.45 as rentals in 1991 and
₱1,679,999.28 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.

LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY AND CONSTANTINO P. ROSAS, IN HIS CAPACITY AS CITY
ASSESSOR OF QUEZON CITY

G.R. No. 144104, June 29, 2004

Facts:

The petitioner Lung Center is a non-stock and non-profit entity.

It is the registered owner of a parcel of land. Erected in the middle 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, 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.

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.

The petitioner filed a Claim for Exemption from real property taxes with the City Assessor, predicated on its
claim that it is a charitable institution. The petitioner’s request was denied,

Issues
Whether the petitioner is a charitable institution

Whether the real properties of the petitioner are exempt from real property taxes

Ruling

First issue: 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.

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.
The word “charitable” is not restricted to relief of the poor or sick. The test of a charity and a charitable
organization are in law the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for gain, profit, or private
advantage.

Under P.D. No. 1823, the petitioner 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.

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.

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.

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from
the government for its patients and for the operation of the hospital. It even incurred a net loss in 1991 and
1992 from its operations.
Second Issue: 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.

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the
petitioner shall enjoy the tax exemptions and privileges: 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.

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.

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus: 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.
The tax exemption under this constitutional provision covers property taxes only. 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.”

In light of the 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.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes.

“Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” If real
property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes
but is subject to taxation.

The words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without
doing violence to the Constitutions and the law. Solely is synonymous with exclusively.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property
is used for tax-exempt purposes

Accordingly, 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. 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.

Issue:

Whether or not petitioner is a charitable institution within the context of PD 1823 and the 1973 and 1987
Constitution and Section 234(b) of RA 7160.

Whether or not petitioner is exempted from real property taxes.

Discussion:

The Court ruled that the petitioner is a charitable institution within the context of the 1973 and 1987
Constitution. Under PD 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 with the Ministry of Health and
the Ministry of Human Settlements. The purpose for which it was created was to render medical services to
the public in general including those who are poor and also the rich, and become a subject of charity. Under
Presidential Decree No. 1823, petitioner is entitled to receive donations, even if the gift or donation is in the
form of subsidies granted by the government.

Partly No. Under PD No. 1823, the petitioner does not enjoy any property tax exemption privileges for its real
properties as well as the building constructed thereon.The property tax exemption under Section 28(3), Article
VI of the Constitution is for the property taxes only. This provision was implanted by Sec.243 (b) of RA No.
7160 which provides that in order to be entitled to the exemption, the petitioner must be able to prove that: it
is a charitable institution and; its real properties are actually, directly and exclusively used for charitable
purpose. Accordingly, the portions occupied by the hospital used for its patients are exempt from real property
taxes while those leased to private entities are not exempt from such taxes.

Held:

The petition was partly granted. The respondent Quezon City Assessor was directed to determine 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.
ISSUES: (1) 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 (2) whether the real
properties of the petitioner are exempt from real property taxes.

RULING: (1) Yes. The Court held that the petitioner is a charitable institution within the context of the 1973
and 1987 Constitutions.

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. Hence, the Lung Center was
organized for the welfare and benefit of the Filipino people.

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, so long as the money received is devoted to charitable
objects and no money inures to the private benefit of the persons managing or operating the institution. As
well as the reason of donation in the form of subsidies granted by the government.

(2) No. 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 petitioner failed 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.

Hence, 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. 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.

G.R. No. 168056 October 18, 2005

Agenda for Item No. 45

G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon. Executive Secretary
Eduardo R. Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et al. vs. Executive Secretary Eduardo R. Ermita,
et al.); G.R. No. 168461 (Association of Pilipinas Shell Dealers, Inc., et al. vs. Cesar V. Purisima, et al.); G.R. No.
168463 (Francis Joseph G. Escudero vs. Cesar V. Purisima, et al); and G.R. No. 168730 (Bataan Governor
Enrique T. Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)

RESOLUTION

For resolution are the following motions for reconsideration of the Court’s Decision dated September 1, 2005
upholding the constitutionality of Republic Act No. 9337 or the VAT Reform Act1:

1) Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al., on the following
grounds:

A. THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE OF PETROLEUM PRODUCTS AND POWER
GENERATION SERVICES CONSTITUTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION ON THE PART OF THE BICAMERAL CONFERENCE COMMITTEE.

B. REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL IMPERATIVE ON EXCLUSIVE
ORIGINATION OF REVENUE BILLS UNDER §24, ARTICLE VI, 1987 PHILIPPINE CONSTITUTION.

C. REPUBLIC ACT NO. 9337’S STAND-BY AUTHORITY TO THE EXECUTIVE TO INCREASE THE VAT RATE,
ESPECIALLY ON ACCOUNT OF THE EFFECTIVE RECOMMENDATORY POWER GRANTED TO THE SECRETARY OF
FINANCE, CONSTITUTES UNDUE DELEGATION OF LEGISLATIVE AUTHORITY.

2) Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor Enrique T. Garcia, Jr., with
the argument that burdening the consumers with significantly higher prices under a VAT regime vis-à-vis a 3%
gross tax renders the law unconstitutional for being arbitrary, oppressive and inequitable.

and

3) Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc. in G.R. No. 168461, on
the grounds that:
I. This Honorable Court erred in upholding the constitutionality of Section 110(A)(2) and Section 110(B) of the
NIRC, as amended by the EVAT Law, imposing limitations on the amount of input VAT that may be claimed as a
credit against output VAT, as well as Section 114(C) of the NIRC, as amended by the EVAT Law, requiring the
government or any of its instrumentalities to withhold a 5% final withholding VAT on their gross payments on
purchases of goods and services, and finding that the questioned provisions:

A. are not arbitrary, oppressive and consfiscatory as to amount to a deprivation of property without due
process of law in violation of Article III, Section 1 of the 1987 Philippine Constitution;

B. do not violate the equal protection clause prescribed under Article III, Section 1 of the 1987 Philippine
Constitution; and

C. apply uniformly to all those belonging to the same class and do not violate Article VI, Section 28(1) of the
1987 Philippine Constitution.

II. This Honorable Court erred in upholding the constitutionality of Section 110(B) of the NIRC, as amended by
the EVAT Law, imposing a limitation on the amount of input VAT that may be claimed as a credit against
output VAT notwithstanding the finding that the tax is not progressive as exhorted by Article VI, Section 28(1)
of the 1987 Philippine Constitution.

Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.

Petitioners Escudero, et al., insist that the bicameral conference committee should not even have acted on the
no pass-on provisions since there is no disagreement between House Bill Nos. 3705 and 3555 on the one hand,
and Senate Bill No. 1950 on the other, with regard to the no pass-on provision for the sale of service for power
generation because both the Senate and the House were in agreement that the VAT burden for the sale of
such service shall not be passed on to the end-consumer. As to the no pass-on provision for sale of petroleum
products, petitioners argue that the fact that the presence of such a no pass-on provision in the House version
and the absence thereof in the Senate Bill means there is no conflict because "a House provision cannot be in
conflict with something that does not exist."

Such argument is flawed. Note that the rules of both houses of Congress provide that a conference committee
shall settle the "differences" in the respective bills of each house. Verily, the fact that a no pass-on provision is
present in one version but absent in the other, and one version intends two industries, i.e., power generation
companies and petroleum sellers, to bear the burden of the tax, while the other version intended only the
industry of power generation, transmission and distribution to be saddled with such burden, clearly shows that
there are indeed differences between the bills coming from each house, which differences should be acted
upon by the bicameral conference committee. It is incorrect to conclude that there is no clash between two
opposing forces with regard to the no pass-on provision for VAT on the sale of petroleum products merely
because such provision exists in the House version while it is absent in the Senate version. It is precisely the
absence of such provision in the Senate bill and the presence thereof in the House bills that causes the conflict.
The absence of the provision in the Senate bill shows the Senate’s disagreement to the intention of the House
of Representatives make the sellers of petroleum bear the burden of the VAT. Thus, there are indeed two
opposing forces: on one side, the House of Representatives which wants petroleum dealers to be saddled with
the burden of paying VAT and on the other, the Senate which does not see it proper to make that particular
industry bear said burden. Clearly, such conflicts and differences between the no pass-on provisions in the
Senate and House bills had to be acted upon by the bicameral conference committee as mandated by the rules
of both houses of Congress.

Moreover, the deletion of the no pass-on provision made the present VAT law more in consonance with the
very nature of VAT which, as stated in the Decision promulgated on September 1, 2005, is a tax on spending or
consumption, thus, the burden thereof is ultimately borne by the end-consumer.

Escudero, et al., then claim that there had been changes introduced in the Rules of the House of
Representatives regarding the conduct of the House panel in a bicameral conference committee, since the
time of Tolentino vs. Secretary of Finance2 to act as safeguards against possible abuse of authority by the
House members of the bicameral conference committee. Even assuming that the rule requiring the House
panel to report back to the House if there are substantial differences in the House and Senate bills had indeed
been introduced after Tolentino, the Court stands by its ruling that the issue of whether or not the House
panel in the bicameral conference committee complied with said internal rule cannot be inquired into by the
Court. To reiterate, "mere failure to conform to parliamentary usage will not invalidate the action (taken by a
deliberative body) when the requisite number of members have agreed to a particular measure."3

Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional imperative on
exclusive origination of revenue bills under Section 24 of Article VI of the Constitution when the Senate
introduced amendments not connected with VAT.

The Court is not persuaded.

Article VI, Section 24 of the Constitution provides:

Sec. 24 All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives, but the Senate may
propose or concur with amendments.
Section 24 speaks of origination of certain bills from the House of Representatives which has been interpreted
in the Tolentino case as follows:

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

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

...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House
of Representatives on the theory that, elected as they are from the districts, the members of the House can be
expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are
elected at large, are expected to approach the same problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws.4

Clearly, after the House bills as approved on third reading are duly transmitted to the Senate, the Constitution
states that the latter can propose or concur with amendments. The Court finds that the subject provisions
found in the Senate bill are within the purview of such constitutional provision as declared in the Tolentino
case.

The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was to solve the
country’s serious financial problems. It was stated in the respective explanatory notes that there is a need for
the government to make significant expenditure savings and a credible package of revenue measures. These
measures include improvement of tax administration and control and leakages in revenues from income taxes
and value added tax. It is also stated that one opportunity that could be beneficial to the overall status of our
economy is to review existing tax rates, evaluating the relevance given our present conditions. Thus, with
these purposes in mind and to accomplish these purposes for which the house bills were filed, i.e., to raise
revenues for the government, the Senate introduced amendments on income taxes, which as admitted by
Senator Ralph Recto, would yield about ₱10.5 billion a year.

Moreover, since the objective of these house bills is to raise revenues, the increase in corporate income taxes
would be a great help and would also soften the impact of VAT measure on the consumers by distributing the
burden across all sectors instead of putting it entirely on the shoulders of the consumers.

As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No. 1950, i.e.,
percentage taxes, franchise taxes, amusement and excise taxes, these provisions are needed so as to cushion
the effects of VAT on consumers. As we said in our decision, certain goods and services which were subject to
percentage tax and excise tax would no longer be VAT exempt, thus, the consumer would be burdened more
as they would be paying the VAT in addition to these taxes. Thus, there is a need to amend these sections to
soften the impact of VAT. The Court finds no reason to reverse the earlier ruling that the Senate introduced
amendments that are germane to the subject matter and purposes of the house bills.

Petitioners Escudero, et al., also reiterate that R.A. No. 9337’s stand- by authority to the Executive to increase
the VAT rate, especially on account of the recommendatory power granted to the Secretary of Finance,
constitutes undue delegation of legislative power. They submit that the recommendatory power given to the
Secretary of Finance in regard to the occurrence of either of two events using the Gross Domestic Product
(GDP) as a benchmark necessarily and inherently required extended analysis and evaluation, as well as policy
making.

There is no merit in this contention. The Court reiterates that in making his recommendation to the President
on the existence of either of the two conditions, the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. He is acting as the agent of the legislative department, to determine and
declare the event upon which its expressed will is to take effect. The Secretary of Finance becomes the means
or tool by which legislative policy is determined and implemented, considering that he possesses all the
facilities to gather data and information and has a much broader perspective to properly evaluate them. His
function is to gather and collate statistical data and other pertinent information and verify if any of the two
conditions laid out by Congress is present. Congress granted the Secretary of Finance the authority to ascertain
the existence of a fact, namely, whether by December 31, 2005, the value-added tax collection as a percentage
of GDP of the previous year exceeds two and four-fifth percent (24/5%) or the national government deficit as a
percentage of GDP of the previous year exceeds one and one-half percent (1½%). If either of these two
instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the President effective January 1, 2006. Congress does
not abdicate its functions or unduly delegate power when it describes what job must be done, who must do it,
and what is the scope of his authority; in our complex economy that is frequently the only way in which the
legislative process can go forward. There is no undue delegation of legislative power but only of the discretion
as to the execution of a law. This is constitutionally permissible. Congress did not delegate the power to tax
but the mere implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That Congress chose to use
the GDP as a benchmark to determine economic growth is not within the province of the Court to inquire into,
its task being to interpret the law.

With regard to petitioner Garcia’s arguments, the Court also finds the same to be without merit. As stated in
the assailed Decision, the Court recognizes the burden that the consumers will be bearing with the passage of
R.A. No. 9337. But as was also stated by the Court, it cannot strike down the law as unconstitutional simply
because of its yokes. The legislature has spoken and the only role that the Court plays in the picture is to
determine whether the law was passed with due regard to the mandates of the Constitution. Inasmuch as the
Court finds that there are no constitutional infirmities with its passage, the validity of the law must therefore
be upheld.

Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in the petition, citing
this time, the dissertation of Associate Justice Dante O. Tinga in his Dissenting Opinion.

The glitch in petitioners’ arguments is that it presents figures based on an event that is yet to happen. Their
illustration of the possible effects of the 70% limitation, while seemingly concrete, still remains theoretical.
Theories have no place in this case as the Court must only deal with an existing case or controversy that is
appropriate or ripe for judicial determination, not one that is conjectural or merely anticipatory.5 The Court
will not intervene absent an actual and substantial controversy admitting of specific relief through a decree
conclusive in nature, as distinguished from an opinion advising what the law would be upon a hypothetical
state of facts.6

The impact of the 70% limitation on the creditable input tax will ultimately depend on how one manages and
operates its business. Market forces, strategy and acumen will dictate their moves. With or without these VAT
provisions, an entrepreneur who does not have the ken to adapt to economic variables will surely perish in the
competition. The arguments posed are within the realm of business, and the solution lies also in business.

Petitioners also reiterate their argument that the input tax is a property or a property right. In the same
breath, the Court reiterates its finding that it is not a property or a property right, and a VAT-registered
person’s entitlement to the creditable input tax is a mere statutory privilege.

Petitioners also contend that even if the right to credit the input VAT is merely a statutory privilege, it has
already evolved into a vested right that the State cannot remove.
As the Court stated in its Decision, the right to credit the input tax is a mere creation of law. Prior to the
enactment of multi-stage sales taxation, the sales taxes paid at every level of distribution are not recoverable
from the taxes payable. With the advent of Executive Order No. 273 imposing a 10% multi-stage tax on all
sales, it was only then that the crediting of the input tax paid on purchase or importation of goods and services
by VAT-registered persons against the output tax was established. This continued with the Expanded VAT Law
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input tax as against the
output tax is clearly a privilege created by law, a privilege that also the law can limit. It should be stressed that
a person has no vested right in statutory privileges.7

The concept of "vested right" is a consequence of the constitutional guaranty of due process that expresses a
present fixed interest which in right reason and natural justice is protected against arbitrary state action; it
includes not only legal or equitable title to the enforcement of a demand but also exemptions from new
obligations created after the right has become vested. Rights are considered vested when the right to
enjoyment is a present interest, absolute, unconditional, and perfect or fixed and irrefutable.8 As adeptly
stated by Associate Justice Minita V. Chico-Nazario in her Concurring Opinion, which the Court adopts,
petitioners’ right to the input VAT credits has not yet vested, thus –

It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers’ input VAT credits were
inexistent – they were unrecognized and disallowed by law. The petroleum dealers had no such property
called input VAT credits. It is only rational, therefore, that they cannot acquire vested rights to the use of such
input VAT credits when they were never entitled to such credits in the first place, at least, not until Rep. Act
No. 9337.

My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is that petroleum dealers’
right to use their input VAT as credit against their output VAT unlimitedly has not vested, being a mere
expectancy of a future benefit and being contingent on the continuance of Section 110 of the National Internal
Revenue Code of 1997, prior to its amendment by Rep. Act No. 9337.

The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to wit:

Moreover, there is no vested right in generally accepted accounting principles. These refer to accounting
concepts, measurement techniques, and standards of presentation in a company’s financial statements, and
are not rooted in laws of nature, as are the laws of physical science, for these are merely developed and
continually modified by local and international regulatory accounting bodies. To state otherwise and recognize
such asset account as a vested right is to limit the taxing power of the State. Unlimited, plenary,
comprehensive and supreme, this power cannot be unduly restricted by mere creations of the State.
More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy and wisdom. So
long as there is a public end for which R.A. No. 9337 was passed, the means through which such end shall be
accomplished is for the legislature to choose so long as it is within constitutional bounds. As stated in
Carmichael vs. Southern Coal & Coke Co.:

If the question were ours to decide, we could not say that the legislature, in adopting the present scheme
rather than another, had no basis for its choice, or was arbitrary or unreasonable in its action. But, as the state
is free to distribute the burden of a tax without regard to the particular purpose for which it is to be used,
there is no warrant in the Constitution for setting the tax aside because a court thinks that it could have
distributed the burden more wisely. Those are functions reserved for the legislature.9

WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The temporary restraining
order issued by the Court is LIFTED.

SO ORDERED.

(The Justices who filed their respective concurring and dissenting opinions maintain their respective positions.
Justice Dante O. Tinga filed a dissenting opinion to the present Resolution; while Justice Consuelo Ynares-
Santiago joins him in his dissenting opinion.)

Footnotes

1 Also referred to as the EVAT Law.

2 G.R. Nos. 115455, 115525, 115543, 115544, 115754, 115781, 115852, 115873 and 115931, August 25, 1994,
235 SCRA 630.

3 Fariñas vs. The Executive Secretary, G.R. No. 147387, December 10, 2003, 417 SCRA 503, 530.

4 Supra, note no. 2, pp. 661-663.

5 Velarde vs. Social Justice Society, G.R. No. 159357, April 28, 2004, 428 SCRA 283.
6 Information Technology Foundation of the Phils. vs. COMELEC, G.R. No. 159139, June 15, 2005.

7 Lahom vs. Sibulo, G.R. No. 143989, July 14, 2003, 406 SCRA 135.

8 Ibid.

9 301 U.S. 495.

The Lawphil Project - Arellano Law Foundation

GR No. 168056 - (ABAKADA GURO PARTY LIST (Formerly AASJAS) OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO v. THE HON. EXECUTIVE SECRETARY EDUARDO ERMITA, ET AL.)

GR No. 168207 – (AQUILINO Q. PIMENTEL, JR., ET. AL. v. EXECUTIVE SECRETARY EDUARDO R. ERMITA, ET. AL.)

GR No. 168461 – ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. represented by its President, ROSARIO
ANTONIO, ET AL. v. CESAR V. PURISIMA, in his capacity as Secretary of the Department of Finance and
GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue.

GR No. 168463 – FRANCIS JOSEPH G. ESCUDERO, ET AL. v. CESAR V. PURISIMA, in his capacity as Secretary of
Finance, GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive Secretary.

GR. No. 168730 – BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. v. HON. EDUARDO R. ERMITA, in his capacity as
the Executive Secretary; HON. MARGARITO TEVES, in his capacity as Secretary of Finance; HON. JOSE MARIO
BUNAG, in his capacity as the OIC Commissioner of the Bureau of Customs.

x-------------------------------------------------------------------x
DISSENTING OPINION

Tinga, J.:

Once again, the majority has refused to engage and refute in any meaningful fashion the arguments raised by
the petitioners in G.R. No. 168461. The de minimis appreciation exhibited by the majority of the issues of 70%
cap, the 60-month amortization period, and 5% withholding VAT on transactions made with the national
government is regrettable, with ruinous consequences for the nation. I see no reason to turn back from any of
the views expressed in my Dissenting Opinion, and I accordingly dissent from the denial of the Motion for
Reconsideration filed by the petitioners in G.R. No. 168461.1

The reasons for my vote have been comprehensively discussed in my previous Dissenting Opinion, and I do not
see the need to replicate them herein. However, I wish to stress a few points.

Tax Statutes May Be Invalidated

If They Pose a Clear and Present Danger

To the Deprivation of Life, Liberty and

Property Without Due Process of Law

The majority again dismisses the arguments of the petitioners as "theoretical", "conjectural" or merely
"anticipatory," notwithstanding that the injury to the taxpayers resulting from Section 8 and 12 of the E-VAT
Law is ascertainable with mathematical certainty. In support of this view, the majority cites the Court’s
Resolution dated 15 June 2005 in Information Technology Foundation v. COMELEC,2 one of the rulings issued
in that case subsequent to the main Decision rendered on 13 January 2004. The reference is grievously ironic,
considering that in the 13 January 2004 Decision, the Court, over vigorous dissents, chose anyway to intervene
and grant the petition despite the fact that the petitioners therein did not allege any violation of any
constitutional provision or letter of statute.3 In this case, the petitioners have squarely invoked the violation of
the Bill of Rights of the Constitution, and yet the majority is suddenly timid, unlike in Infotech.

Still, the formulation of the majority unfortunately leaves the impression that any statute, taxing or otherwise,
is beyond judicial attack prior to its implementation. If the tax measure in question provided that the taxpayer
shall remit all income earned to the government beginning 1 January 2008, would this mean that the Court can
take cognizance of the legal challenge only starting 2 January 2008?

I do not share the majority’s penchant for awaiting the blood spurts before taking action even when the knife’s
edge already dangles. As I maintained in my Dissenting Opinion, a tax measure may be validly challenged and
stricken down even before its implementation if it poses a clear and present danger to the deprivation of life,
liberty or property of the taxpayer without due process of law. This is the expectation of every citizen who
wishes to maintain trust in all the branches of government. In the enforcement of the constitutional rights of
all persons, the commonsense expectation is that the Court, as guardian of these rights, is empowered to step
in even before the prospective violation takes place. Hence, the evolution of the "clear and present danger"
doctrine and other analogous principles, without which, the Court would be seen as inutile in the face of
constitutional violation.

Of course, not every anticipatory threat to constitutional liberties can be assailed prior to implementation,
hence the employment of the "clear and present danger" standard to separate the wheat from the chaff. Still,
the Court should not be so readily dismissive of the petitioners’ posture herein merely because it is
anticipatory. There should have been a meaningful engagement by the majority of the facts and formulae
presented by the petitioners before the reasonable conclusion could have been reached on the maturity of the
claim. That the majority has not bothered to do so is ultimately of tragic consequence.

70% Input VAT Credit

An Impaired Asset

The ponencia, joined by Justices Panganiban and Chico-Nazario, express the belief that no property rights
attach to the input VAT paid by the taxpayer. This is a bizarre view that assumes that all income earned by
private persons preternaturally belongs to the government, and whatever is retained by the person after taxes
is acquired as a matter of privilege. This is the sort of thinking that has fermented revolutions throughout
history, such as the American Revolution of 1776.

I pointed out in my Dissenting Opinion that under current accepted international accounting standards, the
30% prepaid input VAT would be recorded as a loss in the accounting books, since the possibility of its
recovery is improbable, considering that the E-VAT Law allows its recovery only after the business has ceased
to exist. Even the Bureau of Internal Revenue itself has long recognized the unutilized input VAT as an asset.

The majority fails to realize that even under the new E-VAT Law, the State recognizes that the persons who
pre-pay that input VAT, usually the dealers or retailers, are not the persons who are liable to pay for the tax.
The VAT system, as implemented through the previous VAT law and the new E-VAT Law, squarely holds the
end consumer as the taxpayer liable to shoulder the input VAT. Nonetheless, under the mechanism foisted in
the new E-VAT Law, the dealer or retailer who pre-pays the input VAT is virtually precluded from recovering
the pre-paid input VAT, since the law only allows such recovery upon the cessation of the business. Indeed, the
only way said class of taxpayers can recover this pre-paid input VAT was if it were to cease operations at the
end of every quarter.

The illusion that blinds the majority to this state of affairs is the claim that the pre-paid input VAT may anyway
be carried over into the succeeding quarter, a chimera enhanced by the grossly misleading presentation of the
Office of the Solicitor General. What this deception fosters, and what the majority fails to realize, is that since
the taxpayer is perpetually obliged to remit the 30% input VAT every quarter, there would be a continuous
accumulation of excess input VAT. It is not true then that the input VAT prepaid for the first quarter can be
recovered in the second, third or fourth quarter of that year, or at any time in the next year for that matter
since the amount of prepaid input VAT accumulates with every succeeding prepayment of input VAT.
Moreover, the accumulation of the prepaid input VAT diminishes the actual value of the refundable amounts,
considering the established principle of "time-value of money", as explained in my Dissenting Opinion.

Thus, the pre-paid input VAT, for which the petitioners and other similarly situated taxpayers are not even
ultimately liable in the first place, represents in tangible terms an actual loss. To put it more succinctly, when
the taxpayer prepays the 30% input VAT, there is no chance for its recovery except until after the taxpayer
ceases to be such. This point is crucial, as it goes in the heart of the constitutional challenge raised by the
petitioners. A recognition that the input VAT is a property asset places it squarely in the ambit of the due
process clause.

The majority now stresses that prior to Executive Order No. 273 sales taxes paid by the retailer or dealers were
not recoverable. The nature of a sales tax precisely is that it is shouldered by the seller, not the consumer. In
that case, the clear legislative intent is to encumber the retailer with the end tax. Under the VAT system, as
enshrined under Rep. Act No. 9337, the new E-VAT Law, there is precisely a legislative recognition that it is the
end user, not the seller, who shoulders the E-VAT. The problem with the new E-VAT law is that it
correspondingly imposes a defeatist mechanism that obviates this entitlement of the seller by forcibly
withholding in perpetua this pre-paid input VAT.

The majority cites with approval Justice Chico-Nazario’s argument, as expressed in her concurring opinion, that
prior to the new E-VAT Law, the petroleum dealers in particular had no input VAT credits to speak of, and
therefore, could not assert any property rights to the input VAT credits under the new law. Of course the
petroleum dealers had no input VAT credits prior to the E-VAT Law because precisely they were not covered by
the VAT system in the first place. What would now be classified as "input VAT credits" was, in real terms, profit
obtainable by the petroleum dealers prior to the new E-VAT Law. The E-VAT Law stands to diminish such
profit, not by outright taking perhaps, but by ad infinitum confiscation with the illusory promise of eventual
return. Obviously, there is a deprivation of property in such case; yet is it seriously contended that such
deprivation is ipso facto sheltered if it is not classified as a taking, but instead reclassified as a "credit"?

It is highly distressful that the Court, in its haste to decree petitioners as bereft of any vested property rights,
rejects the notion that a person has a vested right to the earnings and profits incurred in business. Before, no
legal basis could be found to prop up such a palpably outlandish claim; but the Decision, as affirmed by the
majority’s Resolution, now enshrines a temerarious proposition with doctrinal status.

In the Decision, and also in Justice Panganiban’s Separate Opinion therein, the case of United Paracale Mining
Co. v. De la Rosa4 was cited in support of the proposition that there is no vested right to the input VAT credit.
Justice Panganiban went as far as to cite that case to support the contention that "[t]here is no vested right in
a deferred input tax account; it is a mere statutory privilege." Reliance on the case is quite misplaced. First, as
pointed out in my Dissenting Opinion, it does not even pertain to tax credits involving as it does, questions on
the jurisdiction of the Bureau of Mines.5 Second, the putative vested rights therein pertained to mining claims,
yet all mineral resources indisputably belong to the State. Herein, the rights pertain to profit incurred by
private enterprise, and certainly the majority cannot contend that such profits actually belong to the State.

As stated in my Dissenting Opinion, the Constitution itself recognizes a right to income and profit when it
recognizes "the right of enterprises to reasonable returns on investments, and to expansion and growth."6
Section 20, Article II of the Constitution further mandates that the State recognize the indispensable role of
the private sector, the encouragement of private enterprise, and the provision of incentives to needed
investments.7 Indeed, there is a fundamental recognition in any form of democratic government that
recognizes a capitalist economy that the enterprise has a right to its profits. Today, the Court instead affirms
that there is no such right. Should capital flight ensue, the phenomenom should not be blamed on investors in
view of our judicial system’s rejection of capitalism’s fundamental precept.

Mainstream Denunciation of 70% Cap

The fact that petitioners are dealers of petroleum products may have left the impression that the 70% cap
singularly affects the petroleum industry; or that other classes of dealers or retailers do not pose the same
objections to these "innovations" in the E-VAT law. This is far from the truth.

In fact, the clamor against the 70% cap has been widespread among the players and components in the
financial mainstream. Denunciations have been registered by the Philippine Chamber of Commerce and
Industry8, the Joint Foreign Chambers of the Philippines (comprising of the American Chamber of Commerce
in the Philippines, the Australian-New Zealand Chamber Commerce of the Philippines, Inc., the Canadian
Chamber of Commerce of the Philippines, Inc., the European Chamber of Commerce of the Philippines, Inc.,
the Japanese Chamber of Commerce of the Philippines, Inc., the Korean Chamber of Commerce and Industry
of the Philippines, and the Philippine Association of Multinational Companies Regional Headquarters, Inc.),9
the Filipino-Chinese Chamber of Commerce and Industry,10 the Federation of Philippine Industries,11 the
Consumer and Oil Price Watch,12 the Association of Certified Public Accountants in Public Practice,13 the
Philippine Tobacco Institute,14 and the auditing firm of PricewaterhouseCooper.15

Even newly installed Finance Secretary Margarito Teves has expressed concern that the 70% input VAT "may
not work across all industries because of varying profit margins".16 Other experts who have voiced concerns
on the 70% input VAT are former NEDA Directors Cielito Habito17 and Solita Monsod,18 Peter Wallace of the
Wallace Business Forum,19 and Paul R. Cooper, director of PricewaterhouseCooper.

In fact, Mr. Cooper published in the Philippine Daily Inquirer a lengthy disquisition on the problems
surrounding the 70% cap, portions of which I replicate below:

Policy concerns on the cap

When the idea of putting a cap was originally introduced on the floor of the Senate. The idea was to address to
some extent the under-reporting of output VAT by non-complaint taxpayers. The original suggestion was a 90
percent cap, or effectively a 1-percent minimum VAT. At that level, the rule should not impact adversely on
complaint taxpayers, but would result in non-complaint taxpayers having to account for closer to their true tax
liability.

As a general policy consideration, one should question why our legislators are penalizing complaint taxpayers
when the fundamental issue is at the apparent inability of the Bureau of Internal Revenue (BIR) to implement
tax law effectively.

At a 90-percent cap, the measure might still have been defensible as a rough proxy for VAT. However,
somewhere in the bicameral process, the rule has become even more punitive with a 70-percent cap. As with
most amendments introduced at the bicameral stage, there is no public indication about what lawmakers
were thinking when they put the travesty in place.

xxx

One of the arguments in Senate debates for taxing the power and petroleum sectors was that if it was good
enough for mom-and-pop stores to have to account for the VAT, it was good enough for the biggest
companies in the country to do the same. A similar argument here is that if small businesses have to pay a
minimum 3-percent tax, why should larger VAT-registered persons get away with paying less?

The problem with this thinking is threefold:

· The percentage tax applies to small businesses in the hard-to-tax sector and a few believe the BIR collects
close to what it should from this. Nor should we be overly concerned if this is the case—the revenues are
small, and the BIR’s efforts would be a lot better focused on larger taxpayers where more significant revenues
will be at issue.

· VAT-registered persons incur compliance costs. The 3-percent tax might be better conceived as a slightly
more expensive option to allow taxpayers to opt out of the VAT, rather than a punitive rule for small
businesses. (If the percentage tax is considered unduly punitive, why is it not just repealed?)

· Ironically, one of the new measures in the Senate bill was to allow taxpayers with turnovers below, the
registration threshold to register voluntarily for VAT if they believe the 3-percent tax imposition to be
excessive. Without the minimum VAT, smaller taxpayers might have been encouraged to enter the more
formalized VAT sector.

Potential consequences of the cap

The minimum VAT will distort the way taxpayers conduct business. A 3-percent minimum VAT is more likely to
impact on sellers of goods than on sellers of services, as their proportion of taxable inputs are lower (there is
no VAT paid when using labor, but there is VAT on the purchase of goods). Consequently, there will be a bias
toward consuming services over goods. Businesses may have an incentive to obtain goods from the informal
(and potentially tax-evading) sector as there will be no input tax paid for the purchase—in other words, the bill
may actively encourage less tax complaint behavior. Business structures may change; expect buy-sell
distributors to convent into commission agents, as this reduces the risk that they will need to pay more than
should be paid under a VAT system to cover the 3-percent minimum VAT.20

These objections are voiced by members of the sensible center, and not those reflexively against VAT or any
tax imposition of the current administration. These objections are raised by the people who stand to be
directly affected on a daily punitive basis by the imposition of the 70% cap, the 60-month amortization period
and the 5% withholding VAT. Indeed, Justice Chico-Nazario has expressed her disbelief over, or at least has
asserted as unproven, the claimed impact of the input VAT on the petroleum dealers.21 Of course there can
be no tangible gauge as of yet on the impact of these changes in the VAT law, since they have yet to be
implemented. However, the prevalent adverse reaction within the business sector should be sufficiently
expressive of the actual fears of the people who should know better. It is sad that the majority, by maintaining
a blithely naïve view of the input VAT, perpetuates the disconnect between the Court and the business sector,
unnecessarily considering that in this instance, the concerns of the financial community can be translated into
a viable constitutional challenge.

Reliance on Legislative Amendments

An Abdication of the Court’s Constitutional Duty

Justice Panganiban has already expressed the view that the remedy to the inequities caused by the new input
VAT system would be amending the law, and not an outright declaration of unconstitutionality. I can only
hazard a guess on how many members of the Court or the legal community are similarly reliant on that
remedy as a means of assuaging their fears on the impact of the input VAT innovations.

As I stated in my Dissenting Opinion, it is this Court, and not the legislature, which has the duty to strike down
unconstitutional laws. Congress may amend unconstitutional laws to remedy such legal infirmities, but it is
under no constitutional or legal obligation to do so. The same does not hold true with this Court. The essence
of judicial review mandates that the Court strike down unconstitutional laws.

Another corollary prospect has also arisen, that the Executive Department itself will mitigate the
implementation of the 70% cap by not fully implementing the law.

This prospect of course is speculative, the sort of speculation that is wholly dependent on the whim of the
officials of the executive branch and one that cannot be quantified by mathematical formula. This cannot be
the basis for any judicial action or vote. Moreover, such resort may actually be illegal.

For one, Article 239 of the Revised Penal Code imposes the penalty of prision correccional on public officers
"who shall encroach upon the powers of the legislative branch of the Government, either by making general
rules or regulations beyond the scope of his authority, or by attempting to repeal a law or suspending the
execution thereof." Certainly, the remedy to the inequities of the E-VAT Law cannot be left to administrative
pussy-footing, considering that these officials may be jailed for refusing to implement the law, or obfuscating
the legislative will.

Second, it is a cardinal rule that an administrative agency such as the Bureau of Internal Revenue or even the
Department of Finance cannot amend an act of Congress. Whatever administrative regulations they may adopt
under legislative authority must be in harmony with the provisions of the law they are intended to carry into
effect. They cannot widen or diminish its scope.22

Finally, it must be remembered that one of the central doctrines enforced in the disposition of the joint
petitions is that the power to tax belongs solely to the legislative branch of government. If the legislative will
were to be frustrated by haphazard implementation by the executive branch, all our disquisitions on this
matter, as well as the key constitutional principle on the inherent, non-delegable nature of the legislative
power of taxation, will be for naught.

Indeed, I truly fear the scenario when, after the deluge, the executive branch of government suspends the
implementation of the 70% cap, or increases the cap to a higher amount such as 90%. Any taxpayer will have
standing to attack such remedial measure, considering that the net effect would be to diminish the
government’s collection of cash at hand. Following the law, the proper judicial action would be to uphold the
clear legislative intent over the reengineering of the taxing provisions by the executive branch of government.
Yet if the courts instead uphold the power of the executive branch of government to reinvent the tax statute,
then the end concession would be that the power to enact tax laws ultimately belongs to the executive branch
of government.

I hesitate to say this, but there will be confusion, instability, and multiple fatalities within the business sector
with the enforcement of the amendments of Section 8 and 12 of the E-VAT Law. It could have been stopped
through the allowance of the petition in G.R. No. 168461, but regrettably the Court did not act.

I respectfully dissent.

ABAKADA Guro Party List vs. Ermita

G.R. No. 168056 September 1, 2005

Facts:

ABAKADA GURO Party List, et al., filed a petition for prohibition o questioning the constitutionality of Sections
4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National Internal
Revenue Code (NIRC).

Section 4 imposes a 10% VAT on sale of goods and properties;

Section 5 imposes a 10% VAT on importation of goods; and

Section 6 imposes a 10% VAT on sale of services and use or lease of properties;
These provisions contain a provision which authorizing the President, upon recommendation of the Secretary
of Finance, to raise the VAT rate to 12%, effective January 1, 2006, after specified conditions have been
satisfied.

Issues:

Whether or not there is a violation of Article VI, Section 24 of the Constitution.

Whether or not there is undue delegation of legislative power in violation of Article VI Sec 28(2) of the
Constitution.

Whether or not there is a violation of the due process and equal protection of the Constitution.

Ruling:

No, the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No.
1950 amending corporate income taxes, percentage, and excise and franchise taxes.

No, there is no undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward. In this case, it is not a
delegation of legislative power but a delegation of ascertainment of facts upon which enforcement and
administration of the increased rate under the law is contingent.

No, the power of the State to make reasonable and natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation, the kind of property, the rates to be levied, or
the amounts to be raised, the methods of assessment, valuation and collection, the State’s power is entitled to
presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear showing of
unreasonableness, discrimination, or arbitrariness.

Issues:
Whether or not R.A. No. 9337 has violated the provisions in Article VI, Section 24, and Article VI, Section 26 (2)
of the Constitution.

Whether or not there was an undue delegation of legislative power in violation of Article VI Sec 28 Par 1 and 2
of the Constitution.

Whether or not there was a violation of the due process and equal protection under Article III Sec. 1 of the
Constitution.

Discussions:

Basing from the ruling of Tolentino case, it is not the law, but the revenue bill which is required by the
Constitution to “originate exclusively” in the House of Representatives, but Senate has the power not only to
propose amendments, but also to propose its own version even with respect to bills which are required by the
Constitution to originate in the House. the Constitution simply means is that the initiative for filing revenue,
tariff or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that, elected as they are from the districts, the
members of the House can be expected to be more sensitive to the local needs and problems. On the other
hand, the senators, who are elected at large, are expected to approach the same problems from the national
perspective. Both views are thereby made to bear on the enactment of such laws.

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

The equal protection clause under the Constitution means that “no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place
and in like circumstances.”

Rulings:
R.A. No. 9337 has not violated the provisions. The revenue bill exclusively originated in the House of
Representatives, the Senate was acting within its constitutional power to introduce amendments to the House
bill when it included provisions in Senate Bill No. 1950 amending corporate income taxes, percentage, excise
and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or
limitation on the extent of the amendments that may be introduced by the Senate to the House revenue bill.

There is no undue delegation of legislative power but only of the discretion as to the execution of a law. This is
constitutionally permissible. Congress does not abdicate its functions or unduly delegate power when it
describes what job must be done, who must do it, and what is the scope of his authority; in our complex
economy that is frequently the only way in which the legislative process can go forward.

Supreme Court held no decision on this matter. The power of the State to make reasonable and natural
classifications for the purposes of taxation has long been established. Whether it relates to the subject of
taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment,
valuation and collection, the State’s power is entitled to presumption of validity. As a rule, the judiciary will not
interfere with such power absent a clear showing of unreasonableness, discrimination, or arbitrariness.

ISSUE:

Whether RA 9337 is constitutional

RULING:

Yes. Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full value-added tax benefits ... these are the reasons
why Republic Act No. 9337 (R.A. No. 9337) was enacted. Reasons, the wisdom of which, the Court even with its
extensive constitutional power of review, cannot probe.

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is neither blind nor is it turning a deaf ear on the
plight of the masses. But it does not have the panacea for the malady that the law seeks to remedy. As in other
cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.
G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,

vs.

THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax
purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28,
1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold
by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by
petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale
made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in
1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for
the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section
24, both of the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate
income tax as distinguished from profits derived from the partnership by them which is subject to individual
income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No.
3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision
and action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact
formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed
on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances
of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate
basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for
corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent
court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE

RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP
SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID
DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own
personal funds they used in buying several real properties. They appointed their brother to manage their
properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or
leased to various tenants for several years and they gained net profits from the rental income. Thus, the
Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from
them.

In resolving the issue, this Court held as follows:

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 the 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 (companies collectives), 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 participation), associations or insurance companies, but does not
include duly registered general co-partnerships (companies 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 P18,000.00. 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 transcations 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 habituality peculiar 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 Evangelists, 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
Evangelists 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. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money,
property or industry to a common fund, and that they intended to divide the profits among themselves.
Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis
of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing
that the purpose was not limited to the conservation or preservation of the common fund or even the
properties acquired by them. The character of habituality peculiar to business transactions engaged in for the
purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only
1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase.
The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of
habituality peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years. The business was under the
management of one of the partners. Such condition existed for over fifteen (15) years. None of the
circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

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 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 Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership 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 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 plaintiffs commission, 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
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 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they
may use it for the 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.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein
have a joint or common right or interest in the property. There must be a clear intent to form a partnership,
the existence of a juridical personality different from the individual partners, and the freedom of each party to
transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate
basis to support the proposition that they thereby formed an unregistered partnership. The two isolated
transactions whereby they purchased properties and sold the same a few years thereafter did not thereby
make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their
net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent
commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership with a distinct personality nor with assets that can be
held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners
for this unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability
arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of
March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving
petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED.

FACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of land.
Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the
said years. However, the Acting BIR Commissioner assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested
the said assessment asserting that they had availed of tax amnesties way back in 1974. In a reply, respondent
Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real
estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section
20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal
Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from
profits derived from the partnership by them which is subject to individual income tax; and that the availment
of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes
of income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.

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 (Art. 1767, Civil Code
of the Philippines). In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the profits among
themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the freedom of
each party to transfer or assign the whole property. Hence, there is no adequate basis to support the
proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of
the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

ACTS:

Petitioners bought two (2) parcels of land and a year after, they bought another three (3) parcels of land.
Petitioners subsequently sold the said lots in 1968 and 1970, and realized net profits. The corresponding
capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the
said years. However, the Acting BIR Commissioner assessed and required Petitioners to pay a total amount of
P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners protested
the said assessment asserting that they had availed of tax amnesties way back in 1974. In a reply, respondent
Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real
estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section
20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal
Revenue Code that the unregistered partnership was subject to corporate income tax as distinguished from
profits derived from the partnership by them which is subject to individual income tax; and that the availment
of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income
tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the
petitioners were required to pay the deficiency income tax assessed.

ISSUE:

Whether the Petitioners should be treated as an unregistered partnership or a co-ownership for the purposes
of income tax.

RULING:

The Petitioners are simply under the regime of co-ownership and not under unregistered partnership.
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 (Art. 1767, Civil Code
of the Philippines). In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the profits among
themselves. The sharing of returns does not in itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. There must be a clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and the freedom of
each party to transfer or assign the whole property. Hence, there is no adequate basis to support the
proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby
they purchased properties and sold the same a few years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of
the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered
partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters,
petitioners

vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they
had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124
and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four
children, the petitioners, to enable them to build their residences. The company sold the two lots to
petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to
them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City
Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from
the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and
paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of
Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in
addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax,
P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in
full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes
aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on
their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or
joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs.
Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin
dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the
Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and
divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive
taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should
be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners
were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to
build their residences on the lots because of the high cost of construction, then they had no choice but to
resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution
of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or
later. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad
presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin
ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la
indivision es solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho
positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato
de sociedad, la moderna orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion
aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados:
lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil
Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived". There must be an unmistakable intention to form a partnership or joint
venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons
contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would
divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an
unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus,
in Oña vs.
** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the De
Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in question pro-indiviso from
their deceased parents; they did not contribute or invest additional ' capital to increase or expand the
inherited properties; they merely continued dedicating the property to the use to which it had been put by
their forebears; they individually reported in their tax returns their corresponding shares in the income and
expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as
conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual
relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31,
1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which
produce income should not automatically be considered partners of an unregistered partnership, or a
corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of
all

co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce
an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the
income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax
Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial
settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce
profits for themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son
purchased a lot and building, entrusted the administration of the building to an administrator and divided
equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three
Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals
therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two
lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging
this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No
costs.

SO ORDERED.

Facts:

In 1973, Jose Obillos completed payment on two lots located in Greenhills, San Juan. The next day, he
transferred his rights to his four children for them to build their own residences. The Torrens title would show
that they were co-owners of the two lots. However, the petitioners resold them to Walled City Securities
Corporation and Olga Cruz Canda for P313k or P33k for each of them. They treated the profit as capital gains
and paid an income tax of P16,792.00

The CIR requested the petitioners to pay the corporate income tax of their shares, as this entire assessment is
based on the alleged partnership under Article 1767 of the Civil Code; simply because they contributed each to
buy the lots, resold them and divided the profits among them.

But as testified by Obillos, they have no intention to form the partnership and that it was merely incidental
since they sold the said lots due to high demand of construction. Naturally, when they sell them as co-
partners, it will result to the share of profits. Further, their intention was to divide the lots for residential
purposes.

Issue:

Was there a partnership, hence, they are subject to corporate income taxes?

Court Ruling:

Not necessarily. As Article 1769 (3) of the Civil Code provides: the sharing of gross returns does not in 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. There must be an unmistakeable intention to form a
partnership or joint venture.
In this case, the Commissioner should have investigated if the father paid donor's tax to establish the fact that
there was really no partnership.

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.

Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor
Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

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
petitioner 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 P59,1400.00 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 from 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 P130,000.00; this property has
an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of
4,353 sq. m. including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq.
m. including improvements thereon for P237,234.34. 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 tenants; 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 leases to various tenants;

8. That from the month of March, 1945 up to an 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 on 1946, they realized a gross rental income of in the sum of P24,786.30,
out of which amount was deducted in 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 assessment made by said officer, as follows:

INCOME TAXES

1945

14.84

1946

1,144.71

1947

10.34

1948

1,912.30

1949

1,575.90

Total including surcharge and compromise

P6,157.09
REAL ESTATE DEALER'S FIXED TAX

1946

P37.50

1947

150.00

1948

150.00

1949

150.00

Total including penalty

P527.00

RESIDENCE TAXES OF CORPORATION

1945

P38.75
1946

38.75

1947

38.75

1948

38.75

1949

38.75

Total including surcharge

P193.75

TOTAL TAXES DUE

P6,878.34.

Said letter of demand and 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 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 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 section 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 (compañias 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. (compañias 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, properly, or
industry to a common fund, with the intention of dividing the profits among themselves.

Pursuant to the 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 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 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 P18,000.00. 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 the
petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to
business transactions engaged in the purpose 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 and 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 are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code
exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized." This qualifying expression
clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in 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 participation)" 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 copartnerships" — 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 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 provisions 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 designed
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
interinsuarance 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 Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).
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
organizations which carries on any business financial operation, or venture, and which is not, within the
meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789;
emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization,
through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law
of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .

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 of 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. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 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 June 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. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the
petitioners herein. It is so ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

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 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 purchase 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state 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 aforementioned common fund or even of the property acquired by the petitioner in February, 1943, In
other words, we cannot but perceive a character of habitually peculiar to business transactions engaged in for
purposes of gain.

I wish however to make 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 partnership, whether or
not the person 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 shared or do not share
any profits made by the use of 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 judicial 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 venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does not
agreement to share the profits and loses 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 reality, 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 parties, whatever relation may have
been as to third parties. (Magee vs. Magee, 123 N. E. 6763, 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."

Facts:

This is a petition, filed by Eufemia Evangelista

, Manuela Evangelista and Francisca Evangelista,... for review of a decision of the Court of Tax Appeals,... 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... in the total amount of P6,878.34,... It apears from the stipulation submitted by the parties:...
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,... 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;... after having
bought the above-mentioned real properties, the petitioners had the same rented or leased to various
tenants... respondent Collector of Internal Revenue demanded the payment, of income tax... letter of demand
and the corresponding assessments were delivered to petitioners

, 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... be reversed, and that they be absolved from the payment
of the taxes in question

Court of Tax Appeals rendered... 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.

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.

Issues:

whether petitioners are subject to the tax on corporations provided for in section 24 of

National Internal Revenue Code

Ruling:

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 dividing1 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... created... purposely. What is more they jointly borrowed a substantial portion
thereof in order to... establish said common fund.

They invested the same, not merely in one transaction, but in a series of transactions.

s strongly indicative of a pattern or common design that was not limited to... the conservation and
preservation of the aforementioned common fund

. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged
in for... purposes of gain.

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... properties have been under the management of
one person, namely, Simeon Evangelista

Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit.

as defined in section 84(6) 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 couid be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section
84(6), the term "corporation"... includes, among other, "joint accounts, (cuentas en participation)" and
"associations", none of which his 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 copartnerships"
which are possessed of the aforementioned personality have been expressly excluded by law (sections 24 and
84 [6]) 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.
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.

Wherefore, the appealed decision of the Court of Tax Appeals is hereby affirmed

Evangelista, et al. v. CIR, GR No. L-9996, October 15, 1957

Facts:

Herein petitioners seek a review of CTA’s decision holding them liable for income tax, real estate
dealer’s tax and residence tax. As stipulated, petitioners borrowed from their father a certain sum for the
purpose of buying real properties. Within February 1943 to April 1994, they have bought parcels of land from
different persons, the management of said properties was charged to their brother Simeon evidenced by a
document. These properties were then leased or rented to various tenants.

On September 1954, CIR demanded the payment of income tax on corporations, real estate dealer’s
fixed tax, and corporation residence tax to which the petitioners seek to be absolved from such payment.

Issue: Whether petitioners are subject to the tax on corporations.

Ruling:

The Court ruled that with respect to the tax on corporations, the issue hinges on the meaning of the
terms “corporation” and “partnership” as used in Section 24 (provides that a tax shall be levied on every
corporation no matter how created or organized except general co-partnerships) and 84 (provides that the
term corporation includes among others, partnership) of the NIRC. Pursuant to Article 1767, NCC (provides for
the concept of partnership), its essential elements are: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits among the contracting parties.

It is of the opinion of the Court that the first element is undoubtedly present for petitioners have agreed to,
and did, contribute money and property to a common fund. As to the second element, the Court fully satisfied
that their purpose was to engage in real estate transactions for monetary gain and then divide the same
among themselves as indicated by the following circumstances:
1. The common fund was not something they found already in existence nor a property inherited by them
pro indiviso. It was created purposely, jointly borrowing 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. The number of lots
acquired and transactions undertake 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.
In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in
the purpose of gain;

3. Said properties were not devoted to residential purposes, or to other personal uses, of petitioners but
were leased separately to several persons;

4. They were under the management of one person where the affairs relative to said properties have been
handled as if the same belonged to a corporation or business and enterprise operated for profit;

5. Existed for more than ten years, or, to be exact, over fifteen years, since the first property was acquired,
and over twelve 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.

The collective effect of these circumstances is such as to leave no room for doubt on the existence of said
intent in petitioners herein.

Also, petitioners’ argument that their being mere co-owners did not create a separate legal entity was
rejected because, according to the Court, the tax in question is one imposed upon "corporations", which,
strictly speaking, are distinct and different from "partnerships". When the NIRC includes "partnerships" among
the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are
not necessarily "partnerships", in the technical sense of the term. The qualifying expression found in Section
24 and 84(b) 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. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. For purposes of
the tax on corporations, NIRC includes these partnerships - with the exception only of duly registered general
co partnerships - within the purview of the term "corporation." It is, therefore, clear 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 of tax for corporations (Section 2 of CA No. 465), it is analogous to that of section 24
and 84 (b) of the NIRC. 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.

Finally, on the issues of being liable for real estate dealer’s tax, they are also liable for the same because the
records show that they have habitually engaged in leasing said properties whose yearly gross rentals exceeds
P3,000.00 a year.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,

vs.

RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES,
ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,

vs.

RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as
COMMISSIONER OF INTERNAL REVENUE, respondents.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:
 These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation
Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, in

G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents
pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory
legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any
person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have
filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer
or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed

and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue
Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now
amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

 (f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged
in the Practice of Profession. — A tax is hereby imposed upon the taxable net income as determined in Section
27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d)
and (e) of this section by every individual whether

a citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his
profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to tax
under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified
in paragraphs (a) to (i) of this section: Provided, however, That in computing taxable income subject to tax
under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following
direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant

to the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for
the rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from
accredited financial institutions which must be proven to have been incurred in connection with the conduct
of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per
cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional
expenses as the case may be.
 On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having still
retained the net income, taxation scheme. The allowance for deductible items, it is true, may have significantly
been reduced by the questioned law in comparison with that which has prevailed prior to the amendment;
limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net
income tax concept. The fact of the matter is still that various deductions, which are by no means
inconsequential, continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation
intended to unite the members of the legislature who favor any one of unrelated subjects in support of the
whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people,
through such publications of its proceedings as are usually made, of the subjects of legislation.1 The above
objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to
require a virtual compendium of the law which could not have been the intendment of the constitutional
mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation
"shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and
professionals differently from the manner it imposes the tax on corporations and partnerships. The contention
clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to
Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or
objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna
Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards
that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the
legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4)
the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24
SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach2 in the income taxation of individual
taxpayers and to maintain, by and large, the present global treatment3 on taxable corporations. We certainly
do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he
believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who
are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. This court cannot freely delve into those
matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure
becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to
strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This
stage, however, has not been demonstrated to have been reached within any appreciable distance in this
controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being
violative of due process must perforce fail. The due process clause may correctly be invoked only when there is
a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such
transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not public
respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry
out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership (GPP)

and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the
partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the
expenses paid or incurred by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his
gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that
would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations
in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez,
minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on
the questioned implementing regulation of public respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of
individuals who are earning, I mean, who earn through business enterprises and therefore, should file an
income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to
increase collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is
categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to
individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and partners in
general professional partnerships. The fact of the matter is that a general professional partnership, unlike an
ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the
corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on
their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all
by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in their individual
capacity, and the share in the net profits of the general professional partnership to which any taxable partner
would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in
accordance with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each
partner —

(1) Shall take into account separately his distributive share of the partnership's
income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession
alone or individually and one who does it through partnership (whether registered or not) with others in the
exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system all individuals deriving income from any
source whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No.
7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily
become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to,
the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To
elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it
practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders citizens, regardless of
residence, and resident aliens subject to income tax liability on their income from all sources) and of the
generally accepted and internationally recognized income taxable base (that can subject non-resident aliens
and foreign corporations to income tax on their income from Philippine sources). In the process, the Code
classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial
Settlement and (4) Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable
partnerships") which, for purposes of the above categorization, are by law assimilated to be within the context
of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical
persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships
which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered
as independent taxable entities for income tax purposes. A general professional partnership is such an
example.4 Here, the partners themselves, not the partnership (although it is still obligated to file an income
tax return [mainly for administration and data]), are liable for the payment of income tax in their individual
capacity computed on their respective and distributive shares of profits. In the determination of the tax
liability, a partner does so as an individual, and there is no choice on the matter. In fine, under the Tax Code on
income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a
flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act

No. 7496 on basically the extent of allowable deductions applicable to all individual income taxpayers on
their non-compensation income. There is no evident intention of the law, either before or after the
amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of
professionals who practice their respective professions individually and of those who do it through a general
professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and
Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave.

#Footnotes

1 Justice Isagani A. Cruz on Philippine Political Law 1993 edition, pp. 146-147,
citing with approval Cooley on Constitutional Limitations.

2 A system employed where the income tax treatment varies and made to depend
on the kind or category of taxable income of the taxpayer.

3 A system where the tax treatment views indifferently the tax base and generally
treats in common all categories of taxable income of the taxpayer.

4 A general professional partnership, in this context, must be formed for the sole
purpose of exercising a common profession, no part of the income of which is derived from its engaging in any
trade business; otherwise, it is subject to tax as an ordinary business partnership or, which is to say, as a
corporation and thereby subject to the corporate income tax. The only other exempt partnership is a joint
venture for undertaking construction projects or engaging in petroleum operations pursuant to an operating
agreement under a service contract with the government (see Sections 20, 23 and 24, National Internal
Revenue Code).

ThRUFINO R. TAN v. RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE G.R. No. 109289. October 3, 1994

FACTS:

The consolidated cases questions the constitutionality of RA 7496 or the Simplified Net Income Taxation
Scheme. Petitioners claim to be taxpayers adversely affected by the continued implementation of the
amendatory legislation. Petitioners also assailed Section 6 of Revenue Regulations No. 2-93: that public
respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General agrees with the public respondents.

ISSUE: Whether RA 7496 and RR Nos. 2-93 are unconstitutional.

RULING:

No. RA 7496 does not impose tax on single proprietorships and professionals differently from the manner it
imposes the tax on corporations and partnerships. Such system of income taxation has long been the
prevailing rule even prior to RA 7496. Uniformity of taxation merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities.

Also, the Court clarifies that a general professional partnership is not itself an income taxpayer. The income
tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in
their individual capacity computed on their distributive shares of partnership profits as provided in Section 23
of the Tax Code.

There is no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership with others in the exercise of a common profession.
Under the present income tax system all individuals deriving income from any source whatsoever are treated
in almost invariably the same manner and under a common set of rules.
 The phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all
persons who derive taxable income. Partnerships no matter how created or organized, are subject to income
tax which, for purposes of the above categorization, are by law assimilated to be within the context of, and so
legally contemplated as, corporations.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as
now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable to all
individual income taxpayers on their non-compensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of those who
do it through a general professional partnership.

Tan v. Del Rosario Digest

Tan v Del Rosario

Facts:

1. Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income Taxation Scheme
("SNIT"), which amended certain provisions of the NIRC, as well as the Rules and Regulations promulgated by
public respondents pursuant to said law.

2. Petitioners posit that RA 7496 is unconstitutional as it allegedly violates the following provisions of the
Constitution:

-Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only one subject which shall be
expressed in the title thereof.

- Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation.

- Article III, Section 1 — No person shall be deprived of . . . property without due process of law, nor shall any
person be denied the equal protection of the laws.
 3. Petitioners contended that public respondents exceeded their rule-making authority in applying SNIT to
general professional partnerships. Petitioner contends that the title of HB 34314, progenitor of RA 7496, is
deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and
Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289) when the full text of the
title actually reads,

'An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals
Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue
Code,' as amended. Petitioners also contend it violated due process.

5. The Solicitor General espouses the position taken by public respondents.

6. The Court has given due course to both petitions.

ISSUE: Whether or not the tax law is unconstitutional for violating due process

NO. The due process clause may correctly be invoked only when there is a clear contravention of inherent or
constitutional limitations in the exercise of the tax power. No such transgression is so evident in herein case.

1. Uniformity of taxation, like the concept of equal protection, merely requires that all subjects or objects of
taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not violate
classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the
categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to the same
class.

2. What is apparent from the amendatory law is the legislative intent to increasingly shift the income tax
system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and
large, the present global treatment on taxable corporations. The Court does not view this classification to be
arbitrary and inappropriate.

ISSUE 2: Whether or not public respondents exceeded their authority in promulgating the RR

No. There is no evident intention of the law, either before or after the amendatory legislation, to place in an
unequal footing or in significant variance the income tax treatment of professionals who practice their
respective professions individually and of those who do it through a general professional partnership.
[ GR No. 112675, Jan 25, 1999 ]

AFISCO INSURANCE CORPORATION v. CA +

DECISION

361 Phil. 671

PANGANIBAN, J.:

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?

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 return

P3,737,370.00

===========

Income tax due thereon P1,298,080.00

Add: 14% Int. fr. 4/15/76 to 4/15/79

545,193.60

TOTAL AMOUNT DUE &COLLECTIBLE

P1,843,273.60

===========

Dividend paid to Munich Reinsurance Company

P3,728,412.00

===========
35% withholding tax at source due thereon

P1,304,944.20

Add: 25% surcharge 326,236.05

14% interest from 1/25/76 to 1/25/79

137,019.14

Compromise penalty-non-filing of return

300.00

late payment 300.00

TOTAL AMOUNT DUE & COLLECTIBLE

P1,768,799.39

===========

Dividend paid to Pool Members

P 655,636.00

===========

10% withholding tax at source due thereon

P 65,563.60

Add: 25% surcharge 16,390.90

14% interest from 1/25/76 to 1/25/79

6,884.18

Compromise penalty-non-filing of return

300.00
late payment 300.00

TOTAL AMOUNT DUE & COLLECTIBLE

P 89,438.68

==========="[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 (compañias colectivas), general professional partnerships, private
educational institutions, and building and loan associations xxx."

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 xxx."

"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.

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]

"xxx 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 x x x 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:

"xxx 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. x x x 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 Issue:

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, "xxx 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 "xxx be paid upon reinsurance by any company
that has already paid the tax xxx." 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.

SO ORDERED.

Romero, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

[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; citing Misamis 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]22 102 Phil. 140, (1957).22

[23] Supra, pp. 146-147; cited in Justice Jose C. Vitug, Compendium of Tax Law and Jurisprudence, p. 52, 2nd
revised ed. (1989).

[24] Decision of the Court of Appeals, p. 5; rollo, p. 61.

[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 Goyonechea, 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. Commissioner, 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. xxx."

[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' xxx."

[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. xxx."

[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: 1946-1982, 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: x x x."

[58] Decision of the Court of Appeals, p. 11; rollo, p. 67.

AFISCO INSURANCE CORP. et al. vs. COURT OF APPEALS

[G.R. No. 112675. January 25, 1999]

DOCTRINE:

Unregistered Partnerships and associations are considered as corporations for tax purposes – Under the old
internal revenue code, “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, xxx.” Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered partnerships and associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a corporation – In the case
at bar, petitioners-insurance companies formed 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 is considered a partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same person twice by
the same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable entity distince
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 companies. There is no double taxation.

FACTS:
The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance policies for
machines. The petitioners in 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 pool, which they complied
with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an “Information Return of
Organization Exempt from Income Tax” for 1975. On the basis of this, the CIR assessed a deficiency 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.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed their appeal.

The CA ruled in 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.

ISSUE/S:

Whether or not the pool is taxable as a corporation.

Whether or not there is double taxation.

HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: 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. Hence, the
pool did not act or earn income as a reinsurer. 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.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“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 (compañias colectivas), general professional partnerships, private
educational institutions, and building and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those entities that resembled
them such as unregistered partnerships and associations. Interestingly, the NIRC’s inclusion of such entities in
the tax on corporations was made even clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec.
22 reads:

“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 xxx.”

“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.

Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered these unregistered
partnerships and even associations or joint accounts, which had no legal personalities apart from their
individual members.

Furthermore, 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 may be considered a
partnership because it contains the following elements: (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) While, the pool itself is not a reinsurer and does not issue any policies; 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 pursuant to the agreement with Munich.
Profit motive or business is, therefore, the primordial reason for the pool’s formation.
2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are not dividends
subject to tax. Imposing a tax “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.” Furthermore, even if such remittances
were treated as dividends, they would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC ,
as well as Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by the same jurisdiction
for the same thing.” In the instant case, the insurance pool is a taxable entity distince 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 companies. There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax exemption construed
strictly against the taxpayer - 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. 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.

AFISCO INSURANCE CORP. V CA 302 SCRA 1 (January 25, 1999)

Facts: AFISCO and 40 other non-life insurance companies entered into a Quota Share Reinsurance Treaties
with Munich, a non-resident foreign insurance corporation, to cover for All Risk Insurance Policies over
machinery erection, breakdown and boiler explosion. The treaties required petitioners to form a pool, to
which AFISCO and the others complied. 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
1975, on the basis of which, it was assessed by the commissioner of Internal Revenue deficiency corporate
taxes. A protest was filed but denied by the CIR.

Petitioners contend that they cannot be taxed as a corporation, because (a) the reinsurance policies were
written by them individually and separately, (b) their liability was limited to the extent of their allocated share
in the original risks insured and not solidary, (c) there was no common fund, (d) the executive board of the
pool did not exercise control and management of its funds, unlike the board of a corporation, (e) 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. They further contend that remittances to Munich are not dividends and to
subject it to tax would be tantamount to an illegal double taxation, as it would result to taxing the same
premium income twice in the hands of the same taxpayer. Finally, petitioners argue that the government’s
right to assess and collect 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 prescriptive period then
provided in the NIRC had already lapsed, and that the internal revenue commissioner was already barred by
prescription from making an assessment.

Held: A pool is considered a corporation for taxation purposes. Citing the case of Evangelista v. CIR, the court
held that Sec. 24 of the NIRC covered these unregistered partnerships and even associations or joint accounts,
which had no legal personalities apart from individual members. Further, the pool is a partnership as evidence
by a common fund, the existence of executive board and the fact that while the pool is not in itself, a reinsurer
and does not issue any insurance policy, 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.

As to the claim of double taxation, 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.

As to the argument on prescription, the prescriptive period was totaled under the 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. Further, the law clearly states that the prescriptive period
will be suspended only if the taxpayer informs the CIR of any change in the address.

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.

FERNAN, C.J.:

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:

1981

FIRST QUARTER (three months ended 3.31.81) (In Pesos)

THIRD QUARTER (three months ended 9.30.81)

TOTAL OF FIRST and THIRD quarters

Cash Dividends Paid

849,720.44

849,720.00

1,699,440.00

10% Dividend Tax Withheld

84,972.00

84,972.00

169,944.00

Cash Dividend net of 10% Dividend Tax Withheld

764,748.00

764,748.00

1,529,496.00

15% Branch Profit Remittance Tax Withheld

114,712.20
114,712.20

229,424.40 3

Net Amount Remitted to Petitioner

650,035.80

650,035.80

1,300,071.60

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 infused 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) Non-resident 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:
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.
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) Non-resident 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 paid ................P1,699,440.00

less 15% under Sec. 24

(b) (1) (iii ) .........................................254,916.00

------------------

Cash dividend net of 15 % tax

due petitioner ...............................P1,444.524.00

less net amount

actually remitted .............................1,300,071.60

-------------------
Amount to be refunded to petitioner

representing overpayment of

taxes on dividends remitted ..............P 144 452.40

===========

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.

Records show that petitioner received notice of the Court of Tax Appeals'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.

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency
income, branch profit remittance and contractor’s taxes from Marubeni Corp after finding the latter to have
properly availed of the tax amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction,
is duly registered in the Philippines with Manila branch office. CIR examined the Manila branch’s books of
accounts for fiscal year ending March 1985, and found that respondent had undeclared income from contracts
with NDC and Philphos for construction of a wharf/port complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims
that the income respondent derived were income from Philippine sources, hence subject to internal revenue
taxes. On Sept 1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency
income, branch profit remittance and contractor’s tax assessments and second questioned the deficiency
commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who
wished to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.

On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business
tax under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who
already availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni
filed a supplemental tax amnesty return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA
affirmed on appeal.

Issue:

W/N Marubeni is exempted from paying tax

Held:

Yes.

1. On date of effectivity

CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO
41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx b)
Those with income tax cases already filed in Court as of the effectivity hereof;”

Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already
been filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the
point of reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been
made before and as of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26,
1986. When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception
and is thus, not disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit
remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s
availment of the amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on Nov 17,
1986, it did not provide for exceptions to the coverage of the amnesty for business, estate and donor’s taxes.
Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with
this amendatory Executive Order shall remain in full force and effect.”

Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The
general rule is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it
is so provided expressly or by necessary implication and no vested right or obligations of contract are thereby
impaired.

2. On situs of taxation

Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency
tax because the income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”.
It claims all materials and equipment in the contract under the “Offshore Portion” were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.

(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and
financed either by OECF or by supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign
Offshore Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine
Onshore Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services
to the client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the
Philippines, and the materials provided and services rendered were all done and completed within the
territorial jurisdiction of the Philippines. Accordingly, respondent’s entire receipts from the contracts, including
its receipts from the Offshore Portion, constitute income from Philippine sources. The total gross receipts
covering both labor and materials should be subjected to contractor’s tax (a tax on the exercise of a privilege
of selling services or labor rather than a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions
of the contracts. All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered
outside Philippines’ taxing jurisdiction and are therefore not subject to contractor’s tax. Petition denied.

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Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.
MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside
petitioner's assessment of deficiency income taxes against respondent British Overseas Airways Corporation
(BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18
November, 1983 denying reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United
Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air
Transport Association (IATA). As such it operates air transportation service and sells transportation tickets over
the routes of the other airline members. During the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in the Philippines by the Civil Aeronautics Board
(CAB), except for a nine-month period, partly in 1961 and partly in 1962, when it was granted a temporary
landing permit by the CAB. Consequently, it did not carry passengers and/or cargo to or from the Philippines,
although during the period covered by the assessments, it maintained a general sales agent in the Philippines
— Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC
tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate
amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by
BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the
years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by
the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax
Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years
1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00
and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns)
penalized under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter,
dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case but
also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to
1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before
the Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held
that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and
later by Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources
"since no service of carriage of passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The CTA position was that income from
transportation is income from services so that the place where services are rendered determines the source.
Thus, in the dispositive portion of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of
P858,307.79, and to cancel the deficiency income tax assessments against BOAC in the amount of P534,132.08
for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

1. Whether or not the revenue derived by private respondent British Overseas

Airways Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporation doing business in the Philippines or has an office or place of business in the Philippines.

3. In the alternative that private respondent may not be considered a resident

foreign corporation but a non-resident foreign corporation, then it is liable to Philippine income tax at the rate
of thirty-five per cent (35%) of its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign corporation not
engaged in trade or business within the Philippines and not having any office or place of business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its
peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and
object of the business organization. 2 "In order that a foreign corporation may be regarded as doing business
within a State, there must be continuity of conduct and intention to establish a continuous business, such as
the appointment of a local agent, and not one of a temporary character. 3

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." 4 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. Accordingly, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. — ...

(b) Tax on foreign corporations. — ...

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, except a foreign fife insurance company, engaged in trade or business within
the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received
in the preceding taxable year from all sources within the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries, wages or compensation for personal
service of whatever kind and in whatever form paid, or from profession, vocations, trades, business,
commerce, sales, or dealings in property, whether real or personal, growing out of the ownership or use of or
interest in such property; also from interests, rents, dividends, securities, or the transactions of any business
carried on for gain or profile, or gains, profits, and income derived from any source whatever (Sec. 29[3];
Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted
within the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the
amount of money coming to a person within a specific time ...; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow
of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted
to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 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 site 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. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property,
and (6) sale of personal property, does not mention income from the sale of tickets for international
transportation. However, that does not render it less an income from sources within the Philippines. Section
37, by its language, does not intend the enumeration to be exclusive. It merely directs that the types of income
listed therein be treated as income from sources within the Philippines. A cursory reading of the section will
show that it does not state that it is an all-inclusive enumeration, and that no other kind of income may be so
considered. " 10

BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of income or
the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this
case. The test of taxability is the "source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the
revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if
the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot
alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys
one essential idea, that of origin, and the origin of the income herein is the Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered
by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-
71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are
now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross Philippine
billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein, whether for
passenger, excess baggage or mail provided the cargo or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippine sources.
The 2-½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage
tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal
in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the
present case. The ruling by the Tax Court in that case was to the effect that the mere sale of tickets,
unaccompanied by the physical act of carriage of transportation, does not render the taxpayer therein subject
to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's tax is an excise
tax, being a tax on the activity of transporting, conveying or removing passengers and cargo from one place to
another. It purports to tax the business of transportation. 14 Being an excise tax, the same can be levied by the
State only when the acts, privileges or businesses are done or performed within the jurisdiction of the
Philippines. The subject matter of the case under consideration is income tax, a direct tax on the income of
persons and other entities "of whatever kind and in whatever form derived from any source." Since the two
cases treat of a different subject matter, the decision in one cannot be res judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent,
the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as
deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from
April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for
refund in the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales
agent in the Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the
rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant
source of substantial conflict between the two opinions as to the present 2-½% tax on their gross Philippine
billings charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases
Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation
(BOAC), a foreign airline company which does not maintain any flight operations 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.
1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident
foreign corporation doing business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC
to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
having an office or place of business in the Philippines is subject to Philippine income taxation only in respect
of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue
CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August
1969, read as follows:

(2) Resident corporations. — A foreign corporation engaged in trade or business

with in the Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within
the Philippines by every corporation organized, authorized, or existing under the laws of any foreign country:
... . (Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once
more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. — A corporation, organized, authorized or existing under

the laws of any foreign counrty, except foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in
the preceding taxable year from all sources within the Philippines. (Emphasis supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be

levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon
the amount received by every foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative annual or periodical gains,
profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident
foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation,
it is liable to income tax only to the extent that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of
its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not
imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for
present purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to
the "property, activity or service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal
Revenue, 3 the court dealt with the issue of the applicable source rule relating to reinsurance premiums paid
by a local insurance company to a foreign reinsurance company in respect of risks located in the Philippines.
The Court said:

The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, 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. — [T]he reinsurance, 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. —4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was the indemnification of the local insurance company. Such indemnification could take place only in the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums paid
by the local insurance companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916,
and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful
to refer to a standard U.S. text on federal income taxation:

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 "source 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
(services) the place where the labor is done should be decisive; if it is done in this counrty, the income should
be from "source 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 "source 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. 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 . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue 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. 5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of
personal property.

Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of
our Tax Code reads as follows:
Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of
gross income shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal services performed in the

Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines
in the following manner:

(c) Gross income from sources without the Philippines. — The following items of
gross income shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines;
... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a
juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and
Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items
of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation or
other services rendered partly within and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced
(in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax
Code which "was based upon a recognition that transportation was a service and that the source of the
income derived therefrom was to be treated as being the place where the service of transportation was
rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2
(implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from sources
within the Philippines includes compensation for labor or personal services within the Philippines regardless of
the residence of the payer, of the place in which the contract for services was made, or of the place of
payment — (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular
species of foreign transportation companies — i.e., foreign steamship companies deriving income from
sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship companies
whose vessels touch parts of the Philippines should include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it
and the gross income from all ports, both within and without the Philippines of all vessels, whether touching of
the Philippines or not, should be determined as the basis upon which allowable deductions may be computed,
— . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. — A foreign corporation carrying on the business
of transmission of telegraph or cable messages between points in the Philippines and points outside the
Philippines derives income partly form source within and partly from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give rise to
income wholly from sources outside the Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to
the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the
place where the sale of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or manufactured and sold
outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale of the
property takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines. In other words,
the income (and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may be
usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains,
profits and income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the
Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the
Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains,
profits and income derived from the purchase of personal property within and its sale without the Philippines
or from the purchase of personal property without and its sale within the Philippines, shall be treated as
derived entirely from sources within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The word "sold" includes
"exchange." The "country" in which "sold" ordinarily means the place where the property is marketed. This
Section does not apply to income from the sale personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the

transactions entered into by BOAC in the Philippines. Those transactions may be characterized either as sales
of personal property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of
service or carriage. The applicable "source of income" rules differ depending upon which characterization is
given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of
the ticket lies wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC
and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does
not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different
from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is
BOAC properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next
sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" — its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term
than service and including the activity of selling) or from the here involved is income taxation, and not a sales
tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceeding taxable year
from all sources within the Philippines: Provided, however, That international carriers shall pay a tax of two
and one-half per cent on their gross Philippine billings. "Gross Philippines of passage documents sold therein,
whether for passenger, excess baggege or mail, provide the cargo or mail originates from the Philippines. The
gross revenue realized from the said cargo or mail shall include the gross freight charge up to final destination.
Gross revenues from chartered flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the passage documents. For purposes of
determining the taxability to revenues from chartered flights, the term "originating from the Philippines" shall
include flight of passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from
the Philippines). Under this new approach, international carriers who service port or points in the Philippines
are treated in exactly the same way as international carriers not serving any port or point in the Philippines.
Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered
partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed on the basis of billings
in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2-½ per cent tax is effectively a tax on gross receipts or an excise or
privilege tax and not a tax on income. Thereby, the Government has done away with the difficulties attending
the allocation of income and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here — that of contracts of air carriage rather than sales of
airline tickets — entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority
opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by
respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales
agent in the Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment
through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the
rate of income tax on foreign corporations, international carriers such as respondent BOAC, have since then
been taxed at a reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant
source of substantial conflict between the two opinions as to the present 2-½% tax on their gross Philippine
billings charged against such international carriers as herein respondent foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases
Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation
(BOAC), a foreign airline company which does not maintain any flight operations 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.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident
foreign corporation doing business in the Philippines or [had] an office or place of business in the Philippines.

It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC
to Philippine income taxation in respect of such income depends, not on BOAC's status as a "resident foreign
corporation" or alternatively, as a "non-resident foreign corporation," but rather on whether or not such
income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
having an office or place of business in the Philippines is subject to Philippine income taxation only in respect
of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue
CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August
1969, read as follows:

(2) Resident corporations. — A foreign corporation engaged in trade or business

with in the Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied, collected,
and paid annually upon the total net income received in the preceeding taxable year from all sources within
the Philippines by every corporation organized, authorized, or existing under the laws of any foreign country:
... . (Emphasis supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once
more Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized or existing under
the laws of any foreign counrty, except foreign life insurance company, engaged in trade or business within the
Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in
the preceding taxable year from all sources within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:

(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be

levied, collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph upon
the amount received by every foreign corporation not engaged in trade or business within the Philippines,
from all sources within the Philippines, as interest, dividends, rents, salaries, wages, premium, annuities,
compensations, remunerations, emoluments, or other fixed or determinative annual or periodical gains,
profits and income a tax equal to thirty per centum of such amount: provided, however, that premiums shall
not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident
foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation,
it is liable to income tax only to the extent that it derives income from sources within the Philippines. The
circumtances that a foreign corporation is resident in the Philippines yields no inference that all or any part of
its income is Philippine source income. Similarly, the non-resident status of a foreign corporation does not
imply that it has no Philippine source income. Conversely, the receipt of Philippine source income creates no
presumption that the recipient foreign corporation is a resident of the Philippines. The critical issue, for
present purposes, is therefore whether of not BOAC is deriving income from sources within the Philippines.

2. For purposes of income taxation, it is well to bear in mind that the "source of
income" relates not to the physical sourcing of a flow of money or the physical situs of payment but rather to
the "property, activity or service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal
Revenue, 3 the court dealt with the issue of the applicable source rule relating to reinsurance premiums paid
by a local insurance company to a foreign reinsurance company in respect of risks located in the Philippines.
The Court said:

The source of an income is the property, activity or services that produced the income. The reinsurance
premiums remitted to appellants by virtue of the reinsurance contract, 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. — [T]he reinsurance, 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. —4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was the indemnification of the local insurance company. Such indemnification could take place only in the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums paid
by the local insurance companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916,
and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful
to refer to a standard U.S. text on federal income taxation:

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 "source 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
(services) the place where the labor is done should be decisive; if it is done in this counrty, the income should
be from "source 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 "source 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. 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 . . . . Thus, if income is to taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issue 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. 5

3. We turn now to the question what is the source of income rule applicable in the
instant case. There are two possibly relevant source of income rules that must be confronted; (a) the source
rule applicable in respect of contracts of service; and (b) the source rule applicable in respect of sales of
personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of
our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. — The following items of
gross income shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. — Compensation for labor or personal services performed in the

Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines
in the following manner:

(c) Gross income from sources without the Philippines. — The following items of
gross income shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines;
... (Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a
juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and
Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:

(e) Income form sources partly within and partly without the Philippines. — Items
of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance. ... Gains, profits, and income from (1) transportation or
other services rendered partly within and partly without the Philippines, or (2) from the sale of personnel
property produced (in whole or in part) by the taxpayer within and sold without the Philippines, or produced
(in whole or in part) by the taxpayer without and sold within the Philippines, shall be treated as derived partly
from sources within and partly from sources without the Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax
Code which "was based upon a recognition that transportation was a service and that the source of the
income derived therefrom was to be treated as being the place where the service of transportation was
rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2
(implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. — Gross income from sources
within the Philippines includes compensation for labor or personal services within the Philippines regardless of
the residence of the payer, of the place in which the contract for services was made, or of the place of
payment — (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular
species of foreign transportation companies — i.e., foreign steamship companies deriving income from
sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. — The return of foreign steamship companies
whose vessels touch parts of the Philippines should include as gross income, the total receipts of all out-going
business whether freight or passengers. With the gross income thus ascertained, the ratio existing between it
and the gross income from all ports, both within and without the Philippines of all vessels, whether touching of
the Philippines or not, should be determined as the basis upon which allowable deductions may be computed,
— . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. — A foreign corporation carrying on the business
of transmission of telegraph or cable messages between points in the Philippines and points outside the
Philippines derives income partly form source within and partly from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give rise to
income wholly from sources outside the Philippines, and therefore not subject to Philippine income taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to
the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the
place where the sale of such personal property occurs; and (b) the place where such personal property was
produced or manufactured. If the personal property involved was both produced or manufactured and sold
outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale of the
property takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines. In other words,
the income (and the related expenses, losses and deductions) will be allocated between sources within and
sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted above, may be
usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains,
profits and income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and
sold without the Philippines, or produced (in whole or in part) by the taxpayer without and sold within the
Philippines, shall be treated as derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)

In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the
Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the
Tax Code provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains,
profits and income derived from the purchase of personal property within and its sale without the Philippines
or from the purchase of personal property without and its sale within the Philippines, shall be treated as
derived entirely from sources within the country in which sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The word "sold" includes
"exchange." The "country" in which "sold" ordinarily means the place where the property is marketed. This
Section does not apply to income from the sale personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines or produced (in whole or in part) by the taxpayer without and
sold within the Philippines. (See Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the

transactions entered into by BOAC in the Philippines. Those transactions may be characterized either as sales
of personal property (i. e., "sales of airline tickets") or as entering into a lease of services or a contract of
service or carriage. The applicable "source of income" rules differ depending upon which characterization is
given to the BOAC transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a
matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of
the ticket lies wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from
BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point to another
outside the Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC
and the passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does
not receive undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different
from the purchase price of a physical good or commodity such as a pair of shoes of a refrigerator or an
automobile; it is really the compensation paid for the undertaking of BOAC to transport the passenger or cargo
outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is
BOAC properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly,
BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines. Consider next
sales: can BOAC be regarded as "selling" personal property produced or manufactured by it? In a popular or
journalistic sense, BOAC might be described as "selling" "a product" — its service. However, for the technical
purposes of the law on income taxation, BOAC is in fact entering into contracts of service or carriage. The very
existance of "source rules" specifically and precisely applicable to the rendition of services must preclude the
application here of "source rules" applying generally to sales, and purchases and sales, of personal property
which can be invoked only by the grace of popular language. On a slighty more abstract level, BOAC's income is
more appropriately characterized as derived from a "service", rather than from an "activity" (a broader term
than service and including the activity of selling) or from the here involved is income taxation, and not a sales
tax or an excise or privilege tax.

5. The taxation of international carriers is today effected under Section 24 (b) (2) of
the Tax Code, as amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by
Presidential Decree No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. — A corporation organized, authorized, or existing under

the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceeding taxable year
from all sources within the Philippines: Provided, however, That international carriers shall pay a tax of two
and one-half per cent on their gross Philippine billings. "Gross Philippines of passage documents sold therein,
whether for passenger, excess baggege or mail, provide the cargo or mail originates from the Philippines. The
gross revenue realized from the said cargo or mail shall include the gross freight charge up to final destination.
Gross revenues from chartered flights originating from the Philippines shall likewise form part of "gross
Philippine billings" regardless of the place of sale or payment of the passage documents. For purposes of
determining the taxability to revenues from chartered flights, the term "originating from the Philippines" shall
include flight of passsengers who stay in the Philippines for more than forty-eight (48) hours prior to
embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from
the Philippines). Under this new approach, international carriers who service port or points in the Philippines
are treated in exactly the same way as international carriers not serving any port or point in the Philippines.
Thus, the source of income rule applicable, as above discussed, to transportation or other services rendered
partly within and partly without the Philippines, or wholly without the Philippines, has been set aside. in place
of Philippine income taxation, the Tax Code now imposes this 2½ per cent tax computed on the basis of billings
in respect of passengers and cargo originating from the Philippines regardless of where embarkation and
debarkation would be taking place. This 2-½ per cent tax is effectively a tax on gross receipts or an excise or
privilege tax and not a tax on income. Thereby, the Government has done away with the difficulties attending
the allocation of income and related expenses, losses and deductions. Because taxes are the very lifeblood of
government, the resulting potential "loss" or "gain" in the amount of taxes collectible by the state is
sometimes, with varying degrees of consciousness, considered in choosing from among competing possible
characterizations under or interpretation of tax statutes. It is hence perhaps useful to point out that the
determination of the appropriate characterization here — that of contracts of air carriage rather than sales of
airline tickets — entails no down-the-road loss of income tax revenues to the Government. In lieu thereof, the
Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or receipts of
international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

FACTS:

British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in international airlines
business. From 1959to 1972, it has no loading rights for traffic purposes in the Philippines but maintained a
general sales agent in the Philippines which was responsible for selling, BOAC tickets covering passengers and
cargoes the CIR assessed deficiency income taxes against.

ISSUE:

Is BOAC liable to pay taxes?

RULING:

Yes. The source of income is the property, activity of service that produces the income. For the source of
income to be considered coming from the Philippines, it is sufficient that the income is derived from the
activity coming from the Philippines. The tax code provides that for revenue to be taxable, it must constitute
income from Philippine sources. In this case, the sale of tickets is the source of income. The situs of the source
of payments is the Philippines.
COMMISSIONER vs. BOAC

149 SCRA 395

GR No. L-65773-74 April 30, 1987

"The source of an income is the property, activity or service that produced the income. For such source to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines."

FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of deficiency
income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to
1971. BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom, and is engaged in the international airline business. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the Philippines.
Consequently, it did not carry passengers and/or cargo to or from the Philippines, although during the period
covered by the assessments, it maintained a general sales agent in the Philippines — Wamer Barnes and
Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets covering passengers
and cargoes. The CTA sided with BOAC citing that the proceeds of sales of BOAC tickets do not constitute BOAC
income from Philippine sources since no service of carriage of passengers or freight was performed by BOAC
within the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA position was
that income from transportation is income from services so that the place where services are rendered
determines the source.

ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no landing
rights here, constitute income of BOAC from Philippine sources, and accordingly, taxable?

HELD: Yes. 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 site 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.

January 11, 2016

G.R. No. 169507

AIR CANADA, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a
resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(l), and
not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which
the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air
Canada may only be imposed a maximum tax of 1 ½% of its gross revenues earned from the sale of its tickets
in the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc,
which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax
Appeals First Division denying Air Canada’s claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On April 24, 2000, it
was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain
conditions, which authority would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have
flights originating from or coming to the Philippines [and does not] operate any airplane [in] the
Philippines[.]"7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in
the Philippines.8 Aerotel "sells [Air Canada’s] passage documents in the Philippines."9

For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through
Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in
the total amount of ₱5,185,676.77,10 detailed as follows:
1âwphi1

Applicable Quarter[/]Year Date Filed/Paid Amount of Tax

3rd Qtr 2000 November 29, 2000 P 395,165.00

Annual ITR 2000 April 16, 2001 381,893.59

1st Qtr 2001 May 30, 2001 522,465.39

2nd Qtr 2001 August 29, 2001 1,033,423.34

3rd Qtr 2001 November 29, 2001 765,021.28

Annual ITR 2001 April 15, 2002 328,193.93

1st Qtr 2002 May 30, 2002 594,850.13

2nd Qtr 2002 August 29, 2002 1,164,664.11

TOTAL P 5,185,676.77 11

On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes
amounting to ₱5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office No. 47-East
Makati.13 It found basis from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of
the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and
onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of
Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16

On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for
Review and, hence, the claim for refund.17 It found that Air Canada was engaged in business in the Philippines
through a local agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign
corporation at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First Division, Air
Canada was deemed to have established a "permanent establishment"19 in the Philippines under Article
V(2)(i) of the Republic of the Philippines-Canada Tax Treaty20 by the appointment of the local sales agent, "in
which [the] petitioner uses its premises as an outlet where sales of [airline] tickets are made[.]"21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax
Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.22 The First Division held that while Air
Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable
to pay the 32% corporate income tax on income derived from the sale of airline tickets within the Philippines
pursuant to Section 28(A)(1).23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was docketed as CTA
EB No. 86.25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the First
Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation doing business
in the Philippines since it sold airline tickets in the Philippines.27 The Court of Tax Appeals En Banc disposed
thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and accordingly,
DISMISSED for lack of merit.28

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a
general sales agent in the Philippines, is a resident foreign corporation within the meaning of Section 28(A)(1)
of the 1997 National Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to
Section 28(A)(3). If not, whether an offline international carrier selling passage documents through a general
sales agent can be subject to the regular corporate income tax of 32%30 on taxable income pursuant to
Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies, specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of
"permanent establishment" under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining allegedly to
erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter of 2002.

Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign
corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code does not apply to
"international carriers,"31 which are especially classified and taxed under Section 28(A)(3).32 It adds that the
fact that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals
Decision "does not render it ipso facto subject to 32% income tax on taxable income as a resident foreign
corporation."33 Petitioner argues that to impose the 32% regular corporate income tax on its income would
violate the Philippine government’s covenant under Article VIII of the Republic of the Philippines-Canada Tax
Treaty not to impose a tax higher than 1½% of the carrier’s gross revenue derived from sources within the
Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line international
air carriers[.]"35

Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income
from services and not income from sales of personal property.36 Petitioner cites the deliberations of the
Bicameral Conference Committee on House Bill No. 9077 (which eventually became the 1997 National Internal
Revenue Code), particularly Senator Juan Ponce Enrile’s statement,37 to reveal the "legislative intent to treat
the revenue derived from air carriage as income from services, and that the carriage of passenger or cargo as
the activity that generates the income."38 Accordingly, applying the principle on the situs of taxation in
taxation of services, petitioner claims that its income derived "from services rendered outside the Philippines
[was] not subject to Philippine income taxation."39

Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be
considered to have a "permanent establishment"40 in the Philippines pursuant to Article V(6) of the Republic
of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that
acts as such for . . . other international airline companies in the ordinary course of its business."42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its services.43 Petitioner states that even
the Bureau of Internal Revenue—through VAT Ruling No. 003-04 dated February 14, 2004—has conceded that
an offline international air carrier, having no flight operations to and from the Philippines, is not deemed
engaged in business in the Philippines by merely appointing a general sales agent.44 Finally, petitioner
maintains that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the
ground that [it] is subject to income tax under Section 28 (A) (1)"45 since it has not been assessed at all by the
Bureau of Internal Revenue for any income tax liability.46

On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a
resident foreign corporation doing business in the Philippines. Petitioner’s total payment of ₱5,185,676.77
allegedly shows that petitioner was earning a sizable income from the sale of its plane tickets within the
Philippines during the relevant period.47 Respondent further points out that this court in Commissioner of
Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases involving the British Overseas
Airways Corporation and Air India, had already settled that "foreign airline companies which sold tickets in the
Philippines through their local agents . . . [are] considered resident foreign corporations engaged in trade or
business in the country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined the
phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines by offline
international airlines either by themselves or through their agents."50

Respondent further contends that petitioner is not entitled to its claim for refund because the amount of
₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still short of the
32% income tax due for the period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right
amount of tax since the National Internal Revenue Code became operative on January 1, 1998 and by 2000,
petitioner should have already been aware of the implications of Section 28(A)(3) and the decided cases of this
court’s ruling on the taxability of offline international carriers selling passage tickets in the Philippines.52

At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international carrier with
no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the
1997 National Internal Revenue Code:
SEC. 28. Rates of Income Tax on Foreign Corporations. –

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and
one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from
carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage
document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and
mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage
documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings
tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within
the definition of resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue
Code, thus, it may be subject to 32%53 tax on its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to
an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable
year from all sources within 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%54). (Emphasis supplied)

The definition of "resident foreign corporation" has not substantially changed throughout the amendments of
the National Internal Revenue Code. All versions refer to "a foreign corporation engaged in trade or business
within the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939,
defined "resident foreign corporation" as applying to "a foreign corporation engaged in trade or business
within the Philippines or having an office or place of business therein."55

Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on
August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. — . . .

(b) Tax on foreign corporations. — . . .

(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign
country, except a foreign life insurance company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in the preceding
taxable year from all sources within the Philippines.56 (Emphasis supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National
Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but it still provides
that "[a] corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade
or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total
net income received in the preceding taxable year from all sources within the Philippines[.]"57
As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation58
declared British Overseas Airways Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the Philippines through its local sales
agent that sold and issued tickets for the airline company.59 This court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each
case must be judged in the light of its peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or
the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain
or for the purpose and object of the business organization. "In order that a foreign corporation may be
regarded as doing business within a State, there must be continuity of conduct and intention to establish a
continuous business, such as the appointment of a local agent, and not one of a temporary character.["]

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. Accordingly, it is a resident foreign corporation subject to tax upon its
total net income received in the preceding taxable year from all sources within the Philippines.60 (Emphasis
supplied, citations omitted)

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of
"doing business" with regard to foreign corporations. Section 3(d) of the law enumerates the activities that
constitute doing business:

d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called
"liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in
any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm, entity or corporation
in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of acts or works, or the exercise of some of the functions
normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the
business organization: Provided, however, That the phrase "doing business" shall not be deemed to include
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business,
and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its
interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which
transacts business in its own name and for its own account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines
which transacts business in its own name and for its own account" is not considered as "doing business," the
Implementing Rules and Regulations of Republic Act No. 7042 clarifies that "doing business" includes
"appointing representatives or distributors, operating under full control of the foreign corporation, domiciled
in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred
eighty (180) days or more[.]"62

An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains
office or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by
solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such
transportation."63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board
for such authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly report
containing information on the tickets sold, such as the origin and destination of the passengers, carriers
involved, and commissions received.65

Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of
petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner.66 There is nothing
on record to show that Aerotel solicited orders alone and for its own account and without interference from,
let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of
[petitioner Air Canada] without the express written consent of [the latter,]"67 and it must perform its
functions according to the standards required by petitioner.68 Through Aerotel, petitioner is able to engage in
an economic activity in the Philippines.

Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the
Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.69
Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources
within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is income realized from
the pursuit of its business activities in the Philippines.

III

However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal
Revenue Code must consider the existence of an effective tax treaty between the Philippines and the home
country of the foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section
28(A)(3)(a) does not categorically exempt all international air carriers from the coverage of Section 28(A)(1).
Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not
apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax
under Section 28(A)(1).71

This court in South African Airways declared that the correct interpretation of these provisions is that:
"international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be taxed at the rate of
2½% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be
taxed at the rate of 32% of such [taxable] income."72

In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double
taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and
according fair and equitable tax treatment to foreign residents or nationals."73 Commissioner of Internal
Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely,
the tax conventions are drafted with a view towards the elimination of international juridical double taxation,
which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect
of the same subject matter and for identical periods.
The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services
and the movement of capital, technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in creating such a
climate.75 (Emphasis in the original, citations omitted)

Observance of any treaty obligation binding upon the government of the Philippines is anchored on the
constitutional provision that the Philippines "adopts the generally accepted principles of international law as
part of the law of the land[.]"76 Pacta sunt servanda is a fundamental international law principle that requires
agreeing parties to comply with their treaty obligations in good faith.77

Hence, the application of the provisions of the National Internal Revenue Code must be subject to the
provisions of tax treaties entered into by the Philippines with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the binding
effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with [Revenue
Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the benefit of a tax treaty."80
Upholding the tax treaty over the administrative issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of international law as part of the law of the
land. The time-honored international principle of pacta sunt servanda demands the performance in good faith
of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding
upon the parties, and obligations under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn,
help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc.
further clarifies that "tax conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing
away with double taxation is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment
climate and the protection

:
G.R. No. 143672 April 24, 2003

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

GENERAL FOODS (PHILS.), INC., respondent.

CORONA, J.:

Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution1 of the Court of Appeals
reversing the decision2 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.

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 future sale 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 protest8 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.

Facts:

Respondent corporation General Foods (Phils), which is engaged in the manufacture of “Tang”, “Calumet” and
“Kool-Aid”, filed its income tax return for the fiscal year ending February 1985 and claimed as deduction,
among other business expenses, P9,461,246 for media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed deficiency income taxes of
P2,635,141.42 against General Foods, prompting the latter to file an MR which was denied.

General Foods later on filed a petition for review at CA, which reversed and set aside an earlier decision by CTA
dismissing the company’s appeal.

Issue:

W/N the subject media advertising expense for “Tang” was ordinary and necessary expense fully deductible
under the NIRC

Held:
No. Tax exemptions must be construed in stricissimi 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. Deductions for income taxes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.

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.

While the subject advertising expense was paid or incurred within the corresponding taxable year and was
incurred in carrying on a trade or business, hence necessary, the parties’ views conflict as to whether or not it
was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary.

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.

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.

The Court finds 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 future sale 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.

The company’s media advertising expense for the promotion of a single product is doubtlessly unreasonable
considering it comprises almost one-half of the company’s entire claim for marketing expenses for that year
under review. Petition granted, judgment reversed and set aside.

With respect, however, to the amount spent for breakfast with a prospective client, the same is deductible
from gross income of SPRC. The expense complies with the requirements for deductibility, namely: (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 (CIR v. General Foods (Phils.), Inc, GR No: 143672,
April 4, 2003, 401 SCRA 545, 553).

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-18840 May 29, 1969

KUENZLE & STREIFF, INC., petitioner,

vs.

THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Angel S. Gamboa for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Jose P. Alejandro and Special
Attorney Virgilio C. Saldajeno for respondent.
DIZON, J.:

Petition filed by Kuenzle & Streiff Inc. for the review of the decision of the Court of Tax Appeals in C.T.A. Case
No. 551 sustaining the assessments of the respondent issued against it, for deficiency income taxes for the
years 1953, 1954 and 1955 in the amounts of P40,455.00, P11,248.00 and P16,228.00, respectively, arising
from the disallowance, as deductible expenses, of the bonuses paid by petitioner to its officers, upon the
ground that they were not ordinary, nor necessary, nor reasonable expenses within the purview of Section
30(a) (1) of the National Internal Revenue Code.

Petitioner, a domestic corporation, filed its income tax returns for the taxable years 1953, 1954 and 1955,
declaring net losses of P2,085.84, P4,953.91 and P9,246.07 respectively. Upon a verification thereof, the
respondent, on September 9, 1957, assessed against it the deficiency income taxes in question, arrived at as
follows:

For the year 1953, by disallowing as deductions all amounts paid that year by the petitioner as bonus to its
officers and staff-members in the aggregate sum of P175,140.00, this resulting in a net taxable income of
petitioner amounting to P173,054.16; for the taxable years 1954 and 1955, the similar disallowance as
deductions of a portion of the bonuses paid by petitioner in said years to its officers and staff-members in the
aggregate sums of P88,193.33 for 1954 and P90,385.00 for 1955, resulted likewise in a net taxable income for
petitioner in the sum of P83,239.42 for 1954 and P81,138.93 for 1955.

On July 9, 1958 petitioner filed with the Court of Tax Appeals a petition for review contesting the
aforementioned assessments (C.T.A. Case No. 551), and on April 28, 1961, said Court rendered judgment as
follows:

"FOR THE FOREGOING CONSIDERATIONS, the decision appealed from is hereby affirmed with respect to
deficiency assessment for the years 1953 and 1955. As regards the deficiency assessment for the year 1954,
the same is hereby modified in the sense that the amount due from petitioner is P11,248.00, instead of
P16,648.00. Accordingly, petitioner is ordered to pay within thirty days from the date this decision becomes
final the sums of P40,455.00 and P16,228.00, plus 5% surcharge and 1% monthly interest from October 1, 1957
until paid. It is likewise ordered to pay the sum of P11,248.00 within the same period, and, if not so paid, there
shall be added thereto 5% surcharge and 1% monthly interest from the date of delinquency to the date of
payment. With costs against petitioner."

Petitioner moved for a reconsideration of the abovequoted decision, and on August 21, 1961, the court
amended the same to include the following at the end thereof:
... In both cases, the maximum amount of interest shall not exceed the amount corresponding to a period of
three years, pursuant to Section 51(e) (2) of the National Internal Revenue Code, as amended by Section 8 of
Republic Act No. 2343. With costs against petitioner.

Having found that the bonuses in question were paid for services actually rendered by the recipients thereof,
the tax court proceeded to consider the question of "whether or not they are reasonable". In this connection it
construed Section 30(a) (1) of the Revenue Code as allowing the deduction from gross income of all the
ordinary and necessary expenses incurred during the taxable year in carrying on the trade or business of the
taxpayer, including a reasonable allowance for salaries or other compensation for personal services actually
rendered. We agree with the view thus expressed, as well as with court's conclusion that the bonuses in
question were not reasonable considering all material and relevant factors.

Petitioner contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary manner", and
erred in not considering individually the total compensation paid to each of petitioner's officers and staff
members in determining the reasonableness of the bonuses in question, and that it erred likewise in holding
that there was nothing in the record indicating that the actuation of the respondent was unreasonable or
unjust.

It is not true, as petitioner claims to support its view, that the respondent and the tax court based their ruling
exclusively upon the fact that petitioner had suffered net losses in its business operations during the years
when the bonuses in question were paid. The truth appears to be that, in arriving at such conclusion, the
respondent and the tax court gave due consideration to all the material factors that led this Court to decide an
earlier case of petitioner itself involving the same issue and where the test for determining the reasonableness
of bonuses and additional compensation for services actually rendered were laid down by Us as follows:

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 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) 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). Here it is admitted that the bonuses are in fact compensation and were paid for services
actually rendered. The only question is whether the payment of said bonuses is reasonable.

There plaintiff 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.lawphi1.ñet 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 a satisfactory answer, and that ordinarily it is the interplay of
several factors, properly weighted for the particular case, which must furnish the final answer (Idem)." Kuenzle
& Streiff v. Coll. of Int. Rev., G. R. Nos. L-12010 & L-12113, Oct. 20, 1959.)

Making a distinction between petitioner's previous case and the present, the tax court said that while it is true
that in the former (C.T.A. No. 169, December 29, 1956, G.R. Nos. L-12010 and L-12113, October 20, 1959,
involving taxable years 1950 to 1952 (We allowed — and considered deductible — bonuses in amounts bigger
than the ones allowed by respondent in the case at bar, that was due to the fact that petitioner had earned
huge profits during the years 1950-52. So much so that, the payment of such bonuses notwithstanding,
petitioner still had substantial net profits distributable as dividends among its stockholders. In the present
case, on the other hand, it is clear that the ultimate and inevitable result of the payment of the questioned
bonuses would be net losses for petitioner during the taxable years in which they were paid.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia, the
following factors:

In the first place, for the years 1953, 1954 and 1955 the petitioner paid to its following top officers: A. P.
Kuenzle, H. A. Streiff, A. Jung, G. Gattaneo, A. Schatzmann, F. E. Rein, M. Klinger, A. Huber, S. Meili, M. Triaca,
J. Ortiz, H. Vogt, W. Ramp, W. Strehler, H. R. Jung, K. Schedler, P. C. Curtis, R. Oefeli, substantial amounts as
salaries and bonuses ranging from P9,000.00 yearly as a minimum (except in the case) and P50,000.00 as
maximum. All these officials headed various departments of petitioner's business. While it must be assumed,
on the one hand, in the absence of evidence to the contrary, that they were competent, on the other the
record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted with
some special talent, or had undergone some extraordinary training, or had accomplished any particular task,
that contributed materially to the success of petitioner's business during the taxable years in question.

In the second place, working under the above-named officials and constituting what we might call the staff of
petitioner's working personnel, were a good number of other employees — mostly Filipinos (T.s.n., pp. 222-
223) — all of whom, according to the record (Idem. 223), received no pay increase at all during the same years.

In the third place, the above salaries and bonuses were paid to petitioner's top officials mentioned heretofore,
in spite of the fact that according to its income tax returns for the relevant years, it had suffered net losses as
follows: P2,085.84, P4,953.91, P9,246.07 for the years 1953, 1954 and 1955, respectively. In fact, petitioner's
financial statements further show that its gross assets suffered a gradual decrease for the same years (Exh. B-
1, p. 58, B.I.R., records, Exh. D-1, p. 36 id., Exh. F-1, p. 14 id.), and that a similar downward trend took place in
its surplus and capital position during the same period of time.

That the charge of arbitrariness against respondent is without merit is further shown by the following
considerations:

Petitioner admits that the amounts it paid to its top officers in 1953 as bonus or "additional remuneration"
were taken either from operating funds, that is, funds from the year's business operations, or from its general
reserve. Normally, the amounts taken from the first source should have constituted profits of the corporation
distributable as dividends amongst its shareholders. Instead it would appear that they were diverted from this
purpose and used to pay the bonuses for the year 1953. In the case of the amounts taken from the general
reserve it seems clear that the company had to resort to the use of such reserve funds because the item of
expense to be met could not be considered as ordinary or necessary — and was therefore beyond the purview
of the provisions of Section 30(a) (1) of the National Internal Revenue Code. This being so, We cannot see our
way clear to holding that the respondent acted arbitrarily in disallowing as deductible expenses the amounts
thus paid as bonus or "additional remuneration".

Neither does the total disallowance of the bonuses paid to some officers and the partial disallowance of those
paid to others show that respondent acted unjustly and unreasonably. The record sufficiently shows that the
total disallowance was more or less due to the fact that the affected officers had previously received
substantial increases in their basic salaries.

Petitioner justifies payment of these bonuses to its top officials by saying that its general salary policy was to
give a low salary but to grant substantial bonuses at the end of each year, so that its officers may receive
considerable lump sums with which to purchase whatever expensive objects or items they might need. While
We are not prepared to hold that such policy is unreasonable, still We believe that its application should not
result in producing a net loss for the employer at the end of the year, for if that were to be the case, the
scheme may be utilized to freely achieve some other purpose — evade payment of taxes.

The authority relied upon by petitioner (Mertens Law of Federal Income Taxation, Vol. IV, p. 418) does not
apply to the present case, because it refers to the salary paid to an employee, which may be claimed as a
deductible amount. In the case before Us the respondent does not question the basic salaries paid by
petitioner to the officers and employees, but disallowed only the bonuses paid to petitioner's top officers at
the end of the taxable years in question.
In further support of its appeal petitioner claims that the amounts disallowed by the respondent should be
considered as legitimate business expenses as their payment was made in good faith. In bringing up this point,
petitioner treads on dangerous ground. In the first place, good faith cannot decide whether a business is
reasonable or unreasonable for purposes of income tax deduction. In the second place, petitioner's good faith
in the matter at issue is not overly manifest, considering that the questioned bonuses were fixed and paid at
the end the years in question — at a time, therefore, when petitioner fully knew that it was going to suffer a
net loss in its business operations.

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 bonus in question, all
that We need say is this: that right maybe 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 to 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.

WHEREFORE, the appealed decision being in accordance with law, the same is hereby affirmed, with costs.

G.R. No. L-18840 May 29, 1969

KUENZLE & STREIFF, INC., petitioner,

vs.

THE COMMISSIONER OF INTERNAL

REVENUE, respondent.

Topic: Deductions

FACTS:
Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its

income tax return, declaring losses.

CIR filed for deficiency of income taxes against Kuenzle &

Streiff Inc. for the said years in the amounts of P40,455.00,

P11,248.00 and P16,228.00, respectively, arising from the

disallowance, as deductible expenses, of the bonuses paid by

the corporation to its officers, upon the ground that they

were not ordinary, nor necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the
National

Internal Revenue Code.

The corporation filed with the Court of Tax Appeals a petition

for review contesting the assessments. CTA favored the CIR,

however lowered the tax due on 1954. The corporation

moved for reconsideration, but still lost.

The Corporation contends that the tax court, in arriving at its

conclusion, acted "in a purely arbitrary manner", and erred in

not considering individually the total compensation paid to

each of petitioner's officers and staff members in

determining the reasonableness of the bonuses in question,

and that it erred likewise in holding that there was nothing in

the record indicating that the actuation of the respondent

was unreasonable or unjust.

ISSUE: Whether or not the bonuses in question was

reasonable and just to be allowed as a deduction?

HELD: No.

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.

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) 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. Here it is admitted that the bonuses are

in fact compensation and were paid for services actually

rendered. The only question is whether the payment of said

bonuses is reasonable.

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. However, 'in determining whether the

particular salary or compensation payment is reasonable, the

situation must be considered as a whole.

It seems clear from the record that, in arriving at its main

conclusion, the tax court considered, inter alia, the

following factors:

1) The paid officers, in the absence of evidence to the

contrary, that they were competent, on the other the record

discloses no evidence nor has petitioner ever made the claim

that all or some of them were gifted with some special talent, or had undergone some extraordinary training,
or had

accomplished any particular task, that contributed materially

to the success of petitioner's business during the taxable

years in question.

2) All the other employees received no pay increase in the

said years.

3) The above salaries and bonuses were paid to petitioner's

top officials mentioned heretofore, in spite of the fact that

according to its income tax returns for the relevant years, it

had suffered net losses. In fact, petitioner's financial

statements further show that its gross assets suffered a

gradual decrease for the same years.), and that a similar

downward trend took place in its surplus and capital position

during the same period of time.

Petitioner admits that the amounts it paid to its top officers

in 1953 as bonus or "additional remuneration" were taken

either from operating funds, that is, funds from the year's

business operations, or from its general reserve. Normally,

the amounts taken from the first source should have

constituted profits of the corporation distributable as

dividends amongst its shareholders. Instead it would appear

that they were diverted from this purpose and used to pay

the bonuses for the year 1953. In the case of the amounts

taken from the general reserve it seems clear that the

company had to resort to the use of such reserve funds

because the item of expense to be met could not be

considered as ordinary or necessary — and was therefore

beyond the purview of the provisions of Section 30(a) (1) of

the National Internal Revenue Code. This being so, We cannot

see our way clear to holding that the respondent acted

arbitrarily in disallowing as deductible expenses the amounts

thus paid as bonus or "additional remuneration".

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.

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) 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. Here it is admitted that the bonuses are in fact compensation and
were paid for services actually rendered.

FACTS:

1. Kuenzle & Streiff for the years 1953, 1954 and 1955 filed its income tax return, declaring losses.

2. CIR filed for deficiency of income taxes against Kuenzle & Streiff Inc. for the said years in the amounts of
P40,455.00, P11,248.00 and P16,228.00, respectively, arising from the disallowance, as deductible expenses, of
the bonuses paid by the corporation to its officers, upon the ground that they were not ordinary, nor
necessary, nor reasonable expenses within the purview of Section 30(a) (1) of the National Internal Revenue
Code.
3. The corporation filed with the Court of Tax Appeals a petition for review contesting the assessments. CTA
favored the CIR, however lowered the tax due on 1954. The corporation moved for reconsideration, but still
lost.

4. The Corporation contends that the tax court, in arriving at its conclusion, acted "in a purely arbitrary
manner", and erred in not considering individually the total compensation paid to each of petitioner's officers
and staff members in determining the reasonableness of the bonuses in question, and that it erred likewise in
holding that there was nothing in the record indicating that the actuation of the respondent was unreasonable
or unjust.

ISSUE: Whether or not the bonuses in question was reasonable and just to be allowed as a deduction?

HELD: No.

RATIO: 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. 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) 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. Here it is admitted that the bonuses are in fact compensation and
were paid for services actually rendered. The only question is whether the payment of said bonuses is
reasonable.

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. However, 'in determining whether
the particular salary or compensation payment is reasonable, the situation must be considered as a whole.

It seems clear from the record that, in arriving at its main conclusion, the tax court considered, inter alia, the
following factors:

1) The paid officers, in the absence of evidence to the contrary, that they were competent, on the other the
record discloses no evidence nor has petitioner ever made the claim that all or some of them were gifted with
some special talent, or had undergone some extraordinary training, or had accomplished any particular task,
that contributed materially to the success of petitioner's business during the taxable years in question.

2) All the other employees received no pay increase in the said years.

3) The bonuses were paid despite the fact that it had suffered net losses for 3 years. Furthermore the
corporation cannot use the excuse that it is 'salary paid' to an employee because the CIR does not question the
basic salaries paid by petitioner to the officers and employees, but disallowed only the bonuses paid to
petitioner's top officers at the end of the taxable years in question.

Republic of the Philippines

SUPREME COURT

Manila

THIRD DIVISION

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.

ISABELA CULTURAL CORPORATION, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court of
Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax Appeals (CTA) in
CTA Case No. 5211, which cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against respondent Isabela Cultural
Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment
Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive
of surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and security services billed to
and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31, 1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and 1985.5

(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May
1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes due from Realty
Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due
to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for
security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it
received a final notice before seizure demanding payment of the amounts stated in the said notices. Hence, it
brought the case to the CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was reversed by the Court of Appeals
holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision
on the protested assessment and may therefore be questioned before the CTA. This conclusion was sustained
by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further
proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued
against ICC. It held that the claimed deductions for professional and security services were properly claimed by
ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence,
even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the
same as deduction for the said years as the amount thereof could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found
that it was the BIR which made an overstatement of said income when it compounded the interest income
receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in
the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of
contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for
security services as shown by the various payment orders and confirmation receipts it presented as evidence.
The dispositive portion of the CTA’s Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income
tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year
1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision,10 holding
that although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985,
the cost of the services was not yet determinable at that time, hence, it could be considered as deductible
expenses only in 1986 when ICC received the billing statements for said services. It further ruled that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc., and that ICC properly
withheld and remitted taxes on the payments for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since
ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984
and 1985, should have been declared as deductions from income during the said years and the failure of ICC to
do so bars it from claiming said expenses as deduction for the taxable year 1986. As to the alleged deficiency
interest income and failure to withhold expanded withholding tax assessment, petitioner invoked the
presumption that the assessment notices issued by the BIR are valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses
for professional and security services from ICC’s gross income; and (2) held that ICC did not understate its
interest income from the promissory notes of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must
have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent
papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45
of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall
be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of
accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income
and deductions.12 In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.13

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves
in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to
pay; and (2) the availability of the reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy. However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if
its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable year.[16] Accrual method of accounting presents
largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an
item of income or deduction.17

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris
against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be
able to justify the same by the clearest grant of organic or statute law. An exemption from the common
burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must also be strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its
counsel since the 1960’s.19 From the nature of the claimed deductions and the span of time during which the
firm was retained, ICC can be expected to have reasonably known the retainer fees charged by the firm as well
as the compensation for its legal services. The failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity
with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the
burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As to
when the firm’s performance of its services in connection with the 1984 tax problems were completed, or
whether ICC exercised reasonable diligence to inquire about the amount of its liability, or whether it does or
does not possess the information necessary to compute the amount of said liability with reasonable accuracy,
are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the firm
and the company, which under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year
1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present
evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV &
Co. in the year 1985, it cannot determine the professional fees which said company would charge for its
services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional
services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order
No. 1-2000, they cannot be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in 198620
and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc.,
we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only
simple interest computation and not a compounded one should have been applied by the BIR. There is indeed
no stipulation between the latter and ICC on the application of compounded interest.21 Under Article 1959 of
the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax
from its claimed deductions for security services and remitted the same to the BIR is supported by payment
order and confirmation receipts.22 Hence, the Assessment Notice for deficiency expanded withholding tax was
properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax
should be cancelled and set aside but only insofar as the claimed deductions of ICC for security services. Said
Assessment is valid as to the BIR’s disallowance of ICC’s expenses for professional services. The Court of
Appeal’s cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency
expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of Appeals in
CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680,
which disallowed the expense deduction of Isabela Cultural Corporation for professional and security services,
is declared valid only insofar as the expenses for the professional fees of SGV & Co. and of the law firm,
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other
respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.

CONSUELO YNARES-SANTIAGO

Associate Justice

WE CONCUR:

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice
ROMEO J. CALLEJO, SR.

Associate Justice MINITA V. CHICO-NAZARIO

Asscociate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

I attest that the conclusions in the above decision were reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO

Associate Justice

Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, it is hereby
certified that the conclusions in the above Decision were reached in consultation before the case was assigned
to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO

Chief Justice

Footnotes

1 Rollo, pp. 48-59. Penned by Associate Justice Delilah Vidallon-Magtolis and concurred in by Associate Justices
Bienvenido L. Reyes and Josefina Guevara-Salonga.
2 Id. at 165-181.

3 Sycip, Gorres, Velayo & Co.

4 Exhibits "O" to "T," records, pp. 128-133.

5 Exhibits "U" to "DD," id. at 134-143.

6 Exhibits "EE" to "II," id. at 144-148.

7 Rollo, p. 56.

The following is an itemized schedule of ICC’s deficiency assessment:

Taxable income (loss) per return

Add: Additional Taxable Income P(114,345.00)

(1) Interest income P429,187.47

(2) Other income

Rent income 9,169.64

Investment service income 23,725.36

(3) Disallowance of prior year’s expenses

(a) Professional fees (1985) 496,409.77

(b) Security services (1985) 41,814.00

1,000,306.24

Net Taxable Income per investigation P885,961.24

Tax due thereon P310,086.43

Less: Tax Paid 143,488.00

Balance P166,598.43

Add: 25% Surcharge 41,649.61

Sub-total P208,248.04

Add: 60% Interest 124,948.82

Total Amount Due and Collectible P333,196.86

Expanded Withholding Tax

Security Services P2,448.90

Add: 25% Surcharge 612.22

Sub-total P3,061.12

Add: 60% Interest 1, 836.67

Total Amount Due and Collectible P4,897.79

(CTA Decision, Rollo, p. 174)

8 Commissioner of Internal Revenue v. Isabela Cultural Corporation, 413 Phil. 376.

9 Rollo, p. 181.

10 The dispositive portion of the Court of Appeal’s Decision, states:

WHEREFORE, the petition is hereby DISMISSED for lack of merit and the decision appealed from is hereby
AFFIRMED.

SO ORDERED. (Id. at 59)

11 Commissioner of Internal Revenue v. General Foods (Phils.), Inc., G.R. No. 143672, April 24, 2003, 401 SCRA
545, 551.

12 De Leon, The National Internal Revenue Code, Annotated, vol. I, 2003 edition, p. 443.

13 Chapter II-B.
14 Mertens Law of Federal Income Taxation, Vol. 2 (1996), Cash and Accrual Methods, Chapter 12A, § 12A:51,
p. 12A-77.

15 Id. at 12A:58, p. 12A-87.

16 Id. at 12A:55, p. 12A-82.

17 Id. at 12A:51, p. 12A-77.

18 Commissioner of Internal Revenue v. General Foods (Phils.), Inc., supra note 11 at 550.

19 TSN, July 20, 1995, p. 86.

20 Exhibits "EE" to "II," records, pp. 144-148.

21 Exhibits "E" to "J," id. at 119 to 123.

22 Exhibits "QQ" to "WW," id. at 171-191.

The Lawphil Project - Arellano Law Foundation

G.R. No. 172231 February 12, 2007

YNARES-SANTIAGO, J.

Lessons Applicable: Accrual method, burden of proof in accrual method, deductibility of ordinary and
necessary trade, business, or professional expenses, all events test
Laws Applicable:

FACTS:

BIR disallowed Isabela Cultural Corp. deductible expenses for services which were rendered in 1984 and 1985
but only billed, paid and claimed as a deduction on 1986.

After CA sent its demand letters, Isabela protested.

CTA found it proper to be claimed in 1986 and affirmed by CA

ISSUE: W/N Isabela who uses accrual method can claim on 1986 only

HELD: case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability under
Assessment Notice No. FAS-1-86-90-000680.

NO

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are:

(a) the expense must be ordinary and necessary;

(b) it must have been paid or incurred during the taxable year; - qualified by Section 45 of the National Internal
Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable
year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis
of which the net income is computed

(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.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be
claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the
same for the next year.

The accrual method relies upon the taxpayer’s right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable liability.
Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment.
The accrual of income and expense is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination
of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy. However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if
its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable year.

Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of
proof of establishing the accrual of an item of income or deduction.

In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in
connection with ICC’s tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its
counsel since the 1960’s. - failed to prove the burden

CIR v. ISABELA CULTURAL CORPORATION, GR NO. 172231, 2007-02-12

Facts:

Isabela Cultural Corporation (ICC).

a domestic corporation, received from the BIR Assessment... for deficiency income tax in the amount of
P333,196.86... for deficiency expanded withholding tax in... the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986.
arose from

P333,196.86

Issues:

whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for professional and
security services from ICC's gross income; and (2) held that ICC did not understate its interest income from the
promissory notes of Realty

Investment, Inc; and that ICC withheld the required 1% withholding tax from the deductions for security
services.

Ruling:

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income
and deductions.[12] In the instant case, the accounting method used by ICC is the accrual method.

it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify
the same by the clearest... grant of organic or statute law.

From the nature of the claimed deductions and... the span of time during which the firm was retained, ICC can
be expected to have reasonably known the retainer fees charged by the firm as well as the compensation for
its legal services. The failure to determine the exact amount of the expense during the taxable year when...
they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount o...
the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.

f their obligation to the firm, especially so that it is... using the accrual method of accounting.
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable year.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the
burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden.

the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be
validly claimed as expense deductions in 1986.

ICC failed to present evidence showing that even with only "reasonable accuracy,"... as the standard to
ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said
company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional
services were allowable deductions for the taxable year 1986.

Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should be
cancelled and set aside but only insofar as the claimed deductions of ICC for security services.

valid as to the BIR's disallowance of

ICC's expenses for professional services.

Principles:

For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves
in such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met.

This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability
be determined with reasonable accuracy. However, the test does not demand that the amount of income or
liability be known absolutely, only that a taxpayer has... at his disposal the information necessary to compute
the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if
its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as...
unknowable, within the taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate... amount.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-23226 November 28, 1967

ALHAMBRA CIGAR and CIGARETTE MANUFACTURING COMPANY, petitioner-appellant,

vs.

THE COMMISSIONER OF INTERNAL REVENUE, respondent-appellee.

Gamboa and Gamboa for petitioner-appellant.

Office of the Solicitor General for respondent-appellee.

FERNANDO, J.:

This Court, in this petition for the review of a decision of the Court of Tax Appeals is not faced with a problem
of undue complexity. The law governing the matter has been authoritatively expounded in an opinion by the
then Justice, now Chief Justice, Concepcion in Alhambra Cigar v. Collector of Internal Revenue,1 a case
involving the same parties over a similar question but covering an earlier period of time. The limits of a power
of respondent Commissioner of Internal Revenue to allow deductions from the gross income "the ordinary and
necessary expenses paid or increased during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries and other compensation for personal services actually rendered . . ."2 had
thus been authoritatively expounded. What remains to be decided in this litigation is whether the decision of
the Court of Tax Appeals sought to be reviewed reflected with fidelity the doctrine thus announced or
deviated therefrom.

According to the petition for review, Alhambra Cigar & Cigarette Manufacturing Company, petitioner-
appellant, "is a corporation duly organized and existing under the laws of the Philippines, with principal office
at 31 Tayuman street, Tondo, Manila; and the respondent-appellee is the duly appointed and qualified
Commissioner of Internal Revenue, vested with authority to act as such for the Government of the Republic of
the Philippines, . . . .3

In the petition for review it was contended that the Court of Tax Appeals, in affirming the action taken by
respondent-appellee Commissioner of Internal Revenue, erred "(a) In holding that A. P. Kuenzle and H.A.
Streiff who were the President and Vice-President, respectively, of the petitioner-appellant, were entitled to a
salary of only P6,000.00 each year, for 1954, 1955, 1956 and 1957, and a bonus equal to the reduced bonus of
W. Eggmann for each of said years; and disallowing as deductions the portions of their salary and bonus in
excess of said amounts; (b) In disallowing, as deductions, all the directors' fees and commissions paid by the
petitioner-appellant to A.P. Kuenzle and H.A. Streiff; (c) In holding that the petitioner-appellant is liable for the
alleged deficiency income taxes in question."4

It is indisputable as noted in the brief for petitioner-appellant that the deductions disallowed by respondent-
appellee, Commissioner of Internal Revenue, for the year 1954 to 1957 designated as salaries, officers; bonus,
officers; commissions to managers and directors' fees "relate exclusively to the compensations paid by the
petitioner-appellant in 1954, 1955, 1956 and 1957, to A. P. Kuenzle and H.A. Streiff who were, during the said
years, as they had been in prior years and still are, directors and the president and vice-president, respectively,
of the petitioner-appellant. . . ."5

Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle and H. A. Streiff in
the amount of P15,000.00 each "the respondent-appellee allowed for each of them a salary of only P6,000.00
and disallow the balance of P9,000.00, or a total disallowance of P18,00.0,0 for both of them, for each of the
years in question."6 Under that of the bonus, officers of the amount under such category paid to the above
gentlemen for the year 1954 of P14,750.00 each, "the respondent-appellee allowed each of them a bonus of
only P5,850.00, and disallowed the balance of P8,900.00 or a total disallowance of P17,800.00 for both of
them."7 For the year 1955, the bonus being paid, once again, amounting to P14,750.00 to each of them, "the
respondent-appellee allowed for each of them, a bonus of only P7,000.00, and disallowed the balance of
P7,750.00 each, or a total disallowance of P15,500.00 for both of them."8 For the year 1956, again the
amount, not suffering any change for each, "the respondent-appellee allowed for each of them a bonus of only
P5,500.00 and disallowed the balance of P9,250.00 each, or a total disallowance of P18,500.00 for both of
them."9 Lastly, for the year 1957, of a similar amount payable to each in the concept of bonus, "the
respondent-appellee allowed for each of them a bonus of only P6,500.00, and disallowed the balance of
P8,250.00 each, or a total disallowance of P16,500.00 for both of them."10

As to the deduction in the concept of commissions to managers, the brief for the petitioner appellant states:
"The commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff in the amount of
P13,607.61 each in 1954, or a total of P27,215.22 for both of them; P14,097.62 each in 1955, or a total of
P28,195.24 for both of them; P13,180.87 each in 1956, or a total of P26,361.74 for both of them; and
P13,144.29 each in 1957, or a total of P26,288.48 for both of them, were entirely disallowed by the
respondent-appellee."11

Concerning the directors' fees paid to both officials by petitioner-appellant, it is noted in the brief that "in the
amount of P11,504.71 each in 1954, or a total of P23,009.42 for both of them; P10,693.02 each in 1955, or a
total of P21,386.04 for both of them; P10,360.23 each in 1956, or a total of P20,720.46 for both of them; and
P9,716.63 each in 1957, or a total of P19,433.26 for both of them were also entirely disallowed by the
respondent-appellee."12

In the decision of the respondent Court of Tax Appeals sought to be reviewed, there was an appraisal of the
evidence on which respondent-appellee Commissioner of Internal Revenue based the above deduction on
salaries and bonuses: "The evidence shows that prior to 1954, Messrs. A. P. Kuenzle and H. A. Streiff President
and Vice-President, respectively, of petitioner corporation, were each paid an annual salary P6,000.00 and a
bonus of about four times as much as the annual salary. In Alhambra Cigar and Cigarette Manufacturing
Company v. Coll. of Int. Rev. C.T.A. No. 142 January 31, 1957 (affd. in G.R. Nos. L-12026 & L-12131, May 29,
1959), this Court held that considering the nature of the services performed by Messrs. Kuenzle and Streiff the
salary of P6,000.00 paid to each of them was reasonable and, therefore, deductions is ordinary and necessary
business expense. The bonus paid to each of said officers was however reduced to the amount equivalent to
that paid to Mr. W. Eggmann, the resident Treasurer and Manager of petitioner. Following the decision of the
Supreme Court in G. R. Nos. L-12026 & L- 12131, . . ., respondent allowed as deduction P6,000.00 as salary to
Messrs. Kuenzle and Streiff and a bonus equivalent to that paid annually to Mr. Eggmann from 1954 to 1957,
as indicated above."13

Then the decision of respondent Court of Tax Appeals in affirming what respondent-appellee did explained
why: "Upon the evidence of record, we find no justification to reverse or modify the decision of respondent
with respect to the disallowance of a portion of the salaries and bonuses paid to Messrs. Kuenzle and Streiff.
Petitioner seeks to justify the increase in the salaries of Messrs. Kuenzle and Streiff on the ground of increased
costs of living. The said officers of petitioner are, however, non-residents of the Philippines."14
It may be stated in this connection that the brief for petitioner-appellant did not actually dispute the fact of
non-residence of the aforesaid officials. Thus: "A. P. Kuenzle or H. A. Streiff usually came to the Philippines
every two years, and generally stayed from five to eight weeks (t.s.n., pp. 203-204). During the years in
question, H. A. Streiff was in the Philippines from January 27 to March 20, 1954. He was personally present at
the special meeting of the board of directors of the petitioner-appellant on February 19, 1954 and at the
regular meeting on February 27, 1954, the minutes of all of which he signed as Vice-President (Exhibits Q, Q-1
and Q-2). He was also personally present at the semi-annual meeting of stockholders of the petitioner-
appellant on February 19, 1954, the minutes of which he also signed as vice-president (Exh. R). A. P. Kuenzle
was in the Philippines from February 3 to March 8, 1956 (t.s.n., pp. 204-205). He was personally present at the
special meeting of the board of directors on February 22, and on February 23, 1956, and at the semi-annual
general meeting of stockholders on February 23, 1956, the minutes of all of which he signed as President
(Exhs. Q-8, Q-9. and R-4). H. A. Streiff came again to the Philippines in 1958, and he personally attended the
special meeting of the board of directors on March 7, 1968, the minutes of which he also, signed as Vice-
President (Exh. Q-16)."15

There was in the brief of petitioner-appellant stress laid on those work performed by them, both in and
outside the Philippines. "During their stay in the Philippines, A. P. Kuenzle or H. A. Streiff inspected the install
petitions of the petitioner-appellant, and discussed with the local management, personnel and management
matters, long-range planning and policies of the company (t.s.n., pp. 205-206). Aside from these visits of A. P.
Kuenzle and H. A. Streiff to the Philippines, there were other personal consultations between them and the
local management. There were about seven staff members in the local management, and each of them went
on home leave every four years and for consultations in Switzerland with the general managers, AP Kuenzle
and H. A. Streiff. These home leaves each lasted for six months. In this way, at least one staff member went on
home leave every year and for consultations with the general

manager. . . ."16

As to commissions and directors' fees, it is the finding of the Court of Tax Appeals: "In connection with the
commissions paid to Messrs. Kuenzle and Streiff there is no evidence of any particular service rendered by
them to petitioner to warrant payment of commissions. Counsel for petitioner sought to prove the various
types of services performed by said officers, but the services mentioned are those for which they have been
more than adequately compensated in the form of salaries and bonuses. As regards the directors' fees, it is
admitted that Messrs. Kuenzle and Streiff "usually came to the Philippines every two years, and generally
stayed from five to eight weeks." (Page 17, Memorandum for Petitioner.) We cannot see any justification for
the payment of director's fees of about P10,000.00 to each of said officers for coming to the Philippines to visit
their corporation once in two years. Being non-resident President and Vice-President of Petitioner corporation
of which they are the controlling stockholders, we are more inclined to believe that said commissions and
directors' fees, payment of which was based on a certain percentage of the annual profits of petitioner, are in
the nature of dividend distributions,"17
Considering how carefully the Court of Tax Appeals considered the matter of the disallowances in the light of
Section 30 of the National Internal Revenue Code, the task for petitioner-appellant in proving that it erred in
holding that A. P. Kuenzle and H. A. Streiff were entitled only to the salary of P6,000.00 each a year, for 1954,
1955, 1956 and 1957, and a bonus equal to the reduced bonus of one of its officials a certain W. Eggmann, for
each of said years, and in disallowing as deductions the directors' fees and commissions paid by it to them, was
far from easy. Nor could it be said that petitioner-appellant did succeed in such effort As mentioned earlier,
the previous case of Alhambra Cigar & Cigarette Manufacturing Company v. The Collector of Internal
Revenue,18 has laid down the applicable principle of law.

In the language of then Justice, now Chief Justice, Concepcion: "In the light of the tenor of the foregoing
provision, whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for
alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a) Have
"personal services" been "actually rendered" by said officers? (b) In the affirmative case, what is the
"reasonable allowance" therefore? When the Collector of Internal Revenue disallowed the fees, bonuses and
commissions aforementioned, and the company appealed therefrom, it became necessary for the [Court of
Tax Appeals] to determine whether said officer had correctly applied section 30 of the Tax Code, and this, in
turn, required the consideration of the two (2) questions already adverted to. In the circumstances
surrounding the case, we are of the opinion that the [Court of Tax Appeals] has correctly construed and
applied said provision." So it is now. This appeal too cannot prosper.

Even if there were no such previous decision, it would still follow, in the light of the controlling doctrines, that
the Court of Tax Appeals must be sustained. The well written brief for petitioner-appellant citing Botany
Worsted Bills v. United States,19 states: "Whether the amounts disallowed by the respondent-appellee in the
respective years were reasonable compensation for personal services, is a question of fact to be determined
from all the evidence."20 That the question thus involved is inherently factual, appears to be undeniable. This
Court is bound by the finding of facts of the Court of Tax Appeals, especially so, where as here, the evidence in
support thereof is more than substantial, only questions of law thus being left open to it for determination.21
Without ignoring this various factors which petitioner-appellant would have this Court consider in passing
upon the determination made by the Court of Tax Appeals but with full recognition of the fact that the two
officials were non-residents, it cannot be said that it committed the alleged errors, calling for the interposition
of the corrective authority of this Court. Nor as a matter of principle is it advisable for this Court to set aside
the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject unless, as did not happen here, there has been an abuse or improvident exercise of
its authority.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed, with costs against petitioner-appellant.
[G.R. No. L-23226. November 28, 1967.]

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, Petitioner-Appellant, v. THE COMMISSIONER

OF INTERNAL REVENUE, Respondent-Appellee.

Gamboa & Gamboa for Petitioner-Appellant.

Solicitor General for Respondent-Appellee.

SYLLABUS

1. TAXATION; INCOME TAXES; DEDUCTION OF COMPENSATION OF CORPORATE OFFICERS; MATERIAL

QUESTIONS TO BE DETERMINED. — Whenever a controversy arises on the deductibility, for purposes of
income tax, of certain items for alleged compensation officers of a corporation, it is necessary to determine
whether "personal services" have been "actually rendered" by said officers, and, in the affirmative, what is the
"reasonable allowance" therefor.

2. ID.; ID.; ID.; FACTUAL FINDING OF COURT OF TAX APPEALS GENERALLY BINDING ON THE SUPREME COURT.
— The question of whether the amounts disallowed by the Commissioner of Internal Revenue are reasonable
compensation for personal services, is one of fact to be determined from all the evidence; and a finding
thereon by the Court of Tax Appeals is binding on the Supreme Court, especially where the evidence in its
support is more than substantial.

3. COURT OF TAX APPEALS; INADVISABILITY OF SETTING ASIDE ITS CONCLUSIONS. — As a matter of principle, it
is not advisable for the Supreme Court to set aside the conclusion reached by an agency like the Court of Tax
Appeals, which is, by the very nature of its functions, 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.

DECISION
FERNANDO, J.:

This Court, in this petition for the review of a decision of the Court of Tax Appeals is not faced with a problem
of undue complexity. The law governing the matter has been authoritatively expounded in an opinion by the
then Justice, now Chief Justice, Concepcion in Alhambra Cigar v. Collector of Internal Revenue, 1 a case
involving the same parties over a similar question but covering an earlier period of time. The limits of a power
of respondent Commissioner of Internal Revenue to allow deductions from the gross income "the ordinary and
necessary expenses paid or increased during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries and other compensation for personal services actually rendered . . ." 2 had
thus been authoritatively expounded. What remains to be decided in this litigation is whether the decision of
the Court of Tax Appeals sought to be reviewed reflected with fidelity the doctrine thus announced or
deviated therefrom.

According to the petition for review, Alhambra Cigar & Cigarette Manufacturing Company, petitioner-
appellant, "is a corporation duly organized and existing under the laws of the Philippines, with principal office
at 31 Tayuman street, Tondo, Manila; and the respondent-appellee is the duly appointed and qualified
Commissioner of Internal Revenue, vested with authority to act as such for the Government of the Republic of
the Philippines, . . . 3

In the petition for review it was contended that the Court of Tax Appeals, in affirming the action taken by
respondent-appellee Commissioner of Internal Revenue, erred" (a) In holding that A. P. Kuenzle and H. A.
Streiff, who were the President and Vice-President, respectively, of the petitioner-appellant, were entitled to a
salary of only P6,000.00 each a year, for 1954, 1955, 1956 and 1957, and a bonus equal to the reduced bonus
of W. Eggmann for each of said years; and disallowing as deductions the portions of their salary and bonus in
excess of said amounts; (b) In disallowing, as deductions, all the directors’ fees and commissions paid by the
petitioner-appellant to A. P. Kuenzle and H. A. Streiff; (c) In holding that the petitioner- appellant is liable for
the alleged deficiency income taxes in question." 4

It is indisputable as noted in the brief for petitioner-appellant that the deductions disallowed by respondent-
appellee, Commissioner of Internal Revenue, for the years 1954 to 1957 designated as salaries, officers; bonus,
officers; commissions to managers and directors’ fees "relate exclusively to the compensations paid by the
petitioner-appellant in 1954, 1955, 1956 and 1957, to A. P. Kuenzle and H. A. Streiff who were, during the said
years, as they had been in prior years and still are, directors and the president and vice-president, respectively,
of the petitioner-appellant . . ." 5
Under the category of salaries, officers of the fixed annual compensation of A. P. Kuenzle and H. A. Streiff, in
the amount of P15,000.00 each, "the respondent-appellee allowed for each of them a salary of only P6,000.00
and disallowed the balance of P9,000.00, or a total disallowance of P18,000.00 for both of them, for each of
the years in question." 6 Under that of bonus, officers of the amount under such category paid to the above
gentlemen for the year 1954 of P14,750.00 each, "the respondent-appellee allowed each of them a bonus of
only P5,850.00, and disallowed the balance of P8,900.00 or a total disallowance of P17,800.00 for both of
them." 7 For the year 1955, the bonus being paid, once again, amounting to P14,750.00 to each of them, "the
respondent-appellee allowed for each of them a bonus of only P7,000.00, and disallowed the balance of
P7,750.00 each, or a total disallowance of P15,500.00 for both of them." 8 For the year 1956, again the
amount, not suffering any change for each, "the respondent- appellee allowed for each of them a bonus of
only P5,500.00 and disallowed the balance of P9,250.00 each, or a total disallowance of P18,500.00 for both of
them." 9 Lastly, for the year 1957, of a similar amount payable to each in the concept of bonus, "the
respondent- appellee allowed for each of them a bonus of only P6,500.00, and disallowed the balance of
P8,250.00 each, or a total disallowance of P16,500.00 for both of them." 10

As to the deduction in the concept of commissions to managers, the brief for the petitioner appellant states:
"The commissions paid by the petitioner-appellant to A. P. Kuenzle and H. A. Streiff, in the amount of
P13,607.61 each in 1954, or a total of P27,215.22 for both of them; P14,097.62 each in 1955, or a total of
P28,195.24 for both of them; P13,180.87 each in 1956, or a total of P26,361.74 for both of them; and
P13,144.29 each in 1957, or a total of P26,288.48 for both of them, were entirely disallowed by the
respondent-appellee." 11

Concerning the directors’ fees paid to both officials by petitioner-appellant, it is noted in the brief that "in the
amount of P11,504.71 each in 1954, or a total of P23,009.42 for both of them; P10,693.02 each in 1955, or a
total of P21,386.04 for both of them; P10,360.23 each in 1956, or a total of P20,720.46 for both of them; and
P9,716.63 each in 1957, or a total of P19,433.26 for both of them were also entirely disallowed by the
respondent-appellee." 12

In the decision of the respondent Court of Tax Appeals sought to be reviewed, there was an appraisal of the
evidence on which respondent-appellee Commissioner of Internal Revenue based the above deductions on
salaries and bonuses: "The evidence shows that prior to 1954, Messrs. A. P. Kuenzle and H. A. Streiff, President
and Vice- President, respectively, of petitioner corporation, were each paid an annual salary P6,000.00 and a
bonus of about four times as much as the annual salary. In Alhambra Cigar and Cigarette Manufacturing
Company v. Coll. of Int. Rev., C.T.A. No. 143, January 31, 1957 (affd. in G. R. Nos. L-12026 & L-12131, May 29,
1959), this Court held that considering the nature of the services performed by Messrs. Kuenzle and Streiff, the
salary of P6,000.00 paid to each of them were reasonable and, therefore, deduction is ordinary and necessary
business expense. The bonus paid to each of said officers was however reduced to the amount equivalent to
that paid to Mr. W. Eggmann, the resident Treasurer and Manager of petitioner. Following the decision of the
Supreme Court in G. R. Nos. L-12026 & L-12131, . . ., respondent allowed as deduction P6,000.00 as salary to
Messrs. Kuenzle and Streiff and a bonus equivalent to that paid annually to Mr. Eggmann from 1954 to 1957,
as indicated above." 13
Then the decision of respondent Court of Tax Appeals in affirming what respondent-appellee did explained
why: "Upon the evidence of record, we find no justification to reverse or modify the decision of respondent
with respect to the disallowance of a portion of the salaries and bonuses paid to Messrs. Kuenzle and Streiff.
Petitioner seeks to justify the increase in the salaries of Messrs. Kuenzle and Streiff on the ground of increased
costs of living. The said officers of petitioner are, however, non-residents of the Philippines." 14

It may be stated in this connection that the brief for petitioner-appellant did not actually dispute the fact of
non- residence of the aforesaid officials. Thus: "A. P. Kuenzle or H. A. Streiff usually came to the Philippines
every two years, and generally stayed from five to eight weeks (t.s.n., pp. 203-204). During the years in
question, H. A. Streiff was in the Philippines from January 27 to March 20, 1954. He was personally present at
the special meeting of the board of directors of the petitioner-appellant on February 19, 1954 and at the
regular meeting on February 27, 1954, the minutes of all of which he signed as Vice-President (Exhibits Q, Q-1
and Q-2). He was also personally present at the semi-annual meeting of stockholders of the petitioner-
appellant on February 19, 1954, the minutes of which he also signed as vice-president (Exh. R). A. P. Kuenzle
was in the Philippines from February 3 to March 8, 1956 (t.s.n., pp. 204-205). He was personally present at the
special meeting of the board of directors on February 22, and on February 23, 1956, and at the semi- annual
general meeting of stockholders on February 23, 1956, the minutes of all of which he signed as President
(Exhs. Q-8, Q-9, and R- 4). H. A. Streiff came again to the Philippines in 1958, and he personally attended the
special meeting of the board of directors on March 7, 1958, the minutes of which he also signed as Vice-
President (Exh. Q-16)." 15

There was in the brief of petitioner-appellant stress laid on those work, performed by them, both in and
outside the Philippines. "During their stay in the Philippines, A. P. Kuenzle or H. A. Streiff inspected the
installations of the petitioner-appellant, and discussed with the local management, personnel and
management matters, long- range planning and policies of the company (t.s.n., pp. 205-206). Aside from these
visits of A. P. Kuenzle and H. A. Streiff to the Philippines, there were other personal consultations between
them and the local management. There were about seven staffmembers in the local management, and each of
them went on home leave every four years and for consultations in Switzerland with the general managers, A.
P. Kuenzle and H. A. Streiff. These home leaves each lasted for six months. In this way, at least one staff
member went on home leave every year and for consultations with the general managers. . ." 16

As to commissions and directors’ fees, it is the finding of the Court of Tax Appeals: "In connection with the
commissions paid to Messrs. Kuenzle and Streiff, there is no evidence of any particular service rendered by
them to petitioner to warrant payment of commissions. Counsel for petitioner sought to prove the various
types of services performed by said officers, but the services mentioned are those for which they have been
more than adequately compensated in the form of salaries and bonuses. As regards the directors’ fees, it is
admitted that Messrs. Kuenzle and Streiff `usually came to the Philippines every two years, and generally
stayed from five to eight weeks.’ (Page 17, Memorandum for Petitioner). We cannot see any justification for
the payment of director’s fees of about P10,000.00 to each of said officers for coming to the Philippines to visit
their corporation once in two years. Being non-resident President and Vice- President of Petitioner corporation
of which they are the controlling stockholders, we are more inclined to believe that said commissions and
directors’ fees, payment of which was based on a certain percentage of the annual profits of petitioner, are in
the nature of dividend distributions." 17

Considering how carefully the Court of Tax Appeals considered the matter of the disallowances in the light of
Section 30 of the National Internal Revenue Code, the task for petitioner-appellant in proving that it erred in
holding that A. P. Kuenzle and H. A. Streiff were entitled only to the salary of P6,000.00 each a year, for 1954,
1955, 1956 and 1957, and a bonus equal to the reduced bonus of one of its officials, a certain W. Eggmann, for
each of said years, and in disallowing as deductions of the directors’ fees and commissions paid by it to them,
was far from easy Nor could it be said that petitioner- appellant did succeed in such effort. As mentioned
earlier, the previous case of Alhambra Cigar & Cigarette Manufacturing Company v. The Collector of Internal
Revenue, 18 has laid down the applicable principle of law.

In the language of then Justice, now Chief Justice, Concepcion: "In the light of the tenor of the foregoing
provision, whenever a controversy arises on the deductibility, for purposes of income tax, of certain items for
alleged compensation of officers of the taxpayer, two (2) questions become material, namely: (a) Have
`personal services’ been `actually rendered’ by said officers? (b) In the affirmative case, what is the ‘reasonable
allowance’ therefore? When the Collector of Internal Revenue disallowed the fees, bonuses and commissions
aforementioned, and the company appealed therefrom, it became necessary for the [Court of Tax Appeals] to
determine whether said officer had correctly applied section 30 of the Tax Code, and this, in turn, required the
consideration of the two (2) questions already adverted to. In the circumstances surrounding the case, we are
of the opinion that the [ Court of Tax Appeals] has correctly construed and applied said provision." So it is now.
This appeal too cannot prosper.

Even if there were no such previous decision, it would still follow, in the light of the controlling doctrines, that
the Court of Tax Appeals must be sustained. The well written brief for petitioner- appellant citing Botany
Worsted Mills v. United States, 19 states: "Whether the amounts disallowed by the respondent-appellee in the
respective years were reasonable compensation for personal services, is a question of fact to be determined
from all the evidence." 20 That the question thus involved is inherently factual, appears to be undeniable. This
Court is bound by the finding of facts of the Court of Tax Appeals, especially so, where as here, the evidence in
support thereof is more than substantial, only questions of law thus being left open to it for determination. 21
Without ignoring the various factors which petitioner-appellant would have this Court consider in passing
upon the determination made by the Court of Tax Appeals but with full recognition of the fact that the two
officials were non- residents, it cannot be said that it committed the alleged errors, calling for the interposition
of the corrective authority of this Court. Nor as a matter of principle is it advisable for this Court to set aside
the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its
function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed
an expertise on the subject, unless, as did not happen here, there has been an abuse or improvident exercise
of its authority.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed, with costs against Petitioner-Appellant.

GR No. L-19537, May 20, 1965 ]

LATE LINO GUTIERREZ SUBSTITUTED BY ANDREA C. VDA. DE GUTIERREZ v. COLLECTOR OF INTERNAL REVENUE

121 Phil. 809

BENGZON, J.P., J.:

Lino Gutierrez was primarily engaged in the business of leasing real property for which he paid real estate
broker's privilege tax. He filed his income tax returns for the years 1951,1952, 1953 and 1954 on the following
dates:

1951

March 1, 1952

1962

February 28, 1958

1953

February 22, 1954

1954
February 23, 1955

and paid the corresponding tax declared therein.

On July 10, 1956 the Commissioner (formerly Collector) of Internal Revenue assessed against Gutierrez the
following deficiency income tax:

1951

P1,400.00

1952

672.00

1953

5,161.00

1954

4,608.00

_________

Total
P11,841.00

The above deficiency tax came about by the disallowance of deductions from gross income representing
depreciation, expenses Gutierrez allegedly incurred in carrying on his business, and the addition to gross
income of receipts which he did not report in his income tax returns. The disallowed business expenses which
were considered by the Commissioner either as personal or capital expenditures consisted of:

1951

Personal expenses:

Transportation expenses to attend funeral of various persons

.P96.50

Repair of car and salary of driver

59.80

Expenses in attending: National Convention of Filipino Businessmen in Baguio

121.35

Alms to indigent family

15.00

Capital expenditures:

Electrical fixtures and supplies

P100.00

Transportation and other expenses to watch laborers in construction work

516.00
Realty tax not paid by former owner of property acquired by Gutierrez

350.00

Litigation expenses to collect rental and eject lessee

702.65

Other disallowed deductions:

Fines and penalties for late payment of taxes

P64.48

1952
Personal expenses:

Car expenses, salary of driver and car depredation

P1,454.37

Contribution to Lydia Yamson and G. Trinidad

52.00

Officers' jewels and apron donated to Biak-na-Bato Lodge No. 7, Free Masons

280.00

Luncheon of Homeowners' Association

5.50

Ticket to opera "Aida"

15.00

1953

Personal expenses:

Car expenses, salary of driver, car depreciation

P1,409.24

Cruise to Corregidor with Homeowners' Association

43.00

Contribution to alms to various individuals

70.00

Tickets to operas

28.00

Capital expenditures:

Cost of one set of Comments on the Rules of Court by Moran

P145.00
1954

Personal expenses:

Car expenses, salary of driver and car depreciation

P1,413.67

Furniture given as commission in connection with business transaction

115.00

Cost of iron door of Gutierrez' residence

55.00
Capital expenditures:

Painting of rental apartments

P908.00

Carpentry and lumber for rental apartments

335.83

Tinsmith and plumbing for rental apartments

605.25

Cement, tiles, gravel, sand and masonry for rental apartments

199.48

Iron bars, Venetian blind, water pumps for rental apartments

P1,340.00

Relocation and registration of property used in tax-payer's business.

1,758.12

He also claimed the depreciation of his residence as follows:

1952

P992.22

1953

942.61

1954

895.48

The following are the items of income which Gutierrez did not declare in his income tax returns:

1951
Income of wife (admitted by Gutierrez)

P2.749.90

1953

Overstatement of purchase price of real estate

P8,476.92

Understatement of profits from sale for real estate

5,803.74
1954

Understatement of profits from sale of real estate

P5,444.24

The overstatement of purchase price of real estate to the sale of two pieces of property in 1953. In Gutierrez
bought a parcel of land situated along Padre Faura St. in Manila for P35,000.00. Sometime in 1953, he sold the
same for P30,400.00. Expenses of sale amounted to P631.80. In his return he claimed a loss of P5,231.80[1]
However, the Commissioner, concluding that said property was bought in Japanese military notes, converted
the buying price to its equivalent in Philippine Commonwealth peso by the use of the Ballantyne Scale of
Values. At P1.30 Japanese military notes per Commonwealth peso, the acquisition cost of P35,000.00 Japanese
military notes was valued at P26,823.08 Philippine Commonwealth peso. Accordingly, the Commissioner
determined a profit of P3,476.92 after restoring to Gutierrez' gross income the P5,231.80 deduction for loss.

In another transaction, Gutierrez sold a piece of land for P1,200.00. Alleging that said property was purchased
for P1,200.00, he reported no profit thereunder. However, after verifying the deed of acquisition, the
Commissioner discovered the purchase price to be only P800.00. Consequently, he determined a profit of
P400.00 which was added to the gross income for 1953.

The understatement of profit from the sale of real estate may be explained thus: In 1953 and 1954 Gutierrez
sold four other properties upon which he made substantial profits.[2] Convinced that said properties were
capital assets, he declared only 50% of the profits from their sale. However, treating said properties as
ordinary assets (as property held and used by Gutierrez in his business), the Commissioner taxed 100% of the
profits from their disposition pursuant to Section 35 of the Tax Code.
Having unsuccessfully questioned the legality and correctness of the aforesaid assessment, Gutierrez instituted
on February 17, 1958 an appeal to the Court of Tax Appeals. Later, on February 21, 1958, the Commissioner
issued a warrant of distraint and levy on one of Gutierrez' real properties but desisted from enforcing the same
when Gutierrez filed a bond to assure payment of his tax liability.

In a decision dated January 28, 1962, the Court of Tax Appeals upheld in toto the assessment of the
Commissioner of Internal Revenue. Hence, this appeal.

On October 18, 1962 Lino Gutierrez died and he was substituted by Andrea C. Vda. de Gutierrez, Antonio D.
Gutierrez, Santiago D. Gutierrez, Guillermo D. Gutierrez and Thomas D. Gutierrez, his heirs, as party
petitioners.

The issues are: (1) Are the taxpayer's aforementioned claims for deduction proper and allowable? (2) May the
Ballantyne Scale of Values be applied in determining the acquisition cost in 1943 of a real property sold in 1953
for income tax purposes? (3) Are real properties used in the trade or business of the taxpayer capital or
ordinary assets? (4) Has the right of the Commissioner of Internal Revenue to collect the deficiency income tax
for the years 1951 and 1952 prescribed? (5) Has the right of the Commissioner of Internal Revenue to collect
by distraint and levy the deficiency income tax for 1964 prescribed? If not, may the taxpayer's real property be
distrained and levied upon, without first exhausting his personal property?

We come first to the question whether or not the deductions claimed by Gutierrez are allowable. Section 30
(a) of the Tax Code allows business expenses to be deducted from gross income. We quote:

Sec. 30. Deductions from, gross income. In computing net income there shall be allowed as deductions

"(a) Expenses:

"(1) In general. AM 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 he made as a condition to the continued use or possession, for the
purposes of the trade or business, or property to which the taxpayer has not taken or is not taking title of in
which he has no equity."
To be deductible, therefore, an expense must be (1) ordinary and necessary; (2) paid or incurred within the
taxable year; and, (3) paid or incurred in carrying on a trade or business.[3]

The transportation expenses which petitioner incurred to attend the funeral of his friends and the cost of
admission tickets to operas were expenses relative to his personal and social activities rather than to his
business of leasing real estate. Likewise, the procurement and installation of an Iron door to hi3 residence is
purely a personal expense. Personal, living, or family expenses are not deductible.[4]

On the other hand, the cost of furniture given by the taxpayer as commission in furtherance of a business
transaction, the expenses incurred in attending the National Convention of Filipino Businessmen, luncheon
meeting and cruise to Corregidor of the Homeowners' Association, were shown to have been made in the
pursuit of his business. Commissions given in consideration for bringing about a profitable transaction are part
of the cost of the business transaction and are deductible.

The record shows that Gutierrez was an officer of the Junior Chamber of Commerce which sponsored the
National Convention of Filipino Businessmen. He was also the president of the Homeowners' Association, an
organization established by those engaged in the real estate trade. Having proved that his membership thereof
and activities in connection therewith were solely to enhance his business, the expenses incurred thereunder
are deductible as ordinary and necessary business expenses.

With respect to the taxpayer's claim for deduction for car expenses, salary of his driver and car depreciation,
one-third of the same was disallowed by the Commissioner on the ground that the taxpayer used his car and
driver both for personal and business purposes. There is no clear showing, however, that the car was devoted
more for the taxpayer's business than for his personal needs.[5] According to the evidence, the taxpayer's car
was utilized both for personal and business needs. We therefore find it reasonable to allow as deduction one-
half of the driver's salary, car expenses and depreciation.

The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the
taxpayer's rental apartments, did not increase the value of such apartments, or prolong their life. They merely
kept the apartments in an ordinary operating condition. Hence, the expenses incurred therefor are deductible
as necessary expenditures for the maintenance of the taxpayer's business.

Similarly, the litigation expenses defrayed by Gutierrez to collect apartment rentals and to eject delinquent
tenants are ordinary and necessary expenses in pursuing his business. It is routinary and necessary for one in
the leasing business to collect rentals and to eject tenants who refuse to pay their accounts.
The following are not deductible business expenses but should be integrated into the cost of the capital assets
for which they were incurred and depreciated yearly: (1) Expenses in watching over laborers in construction
work. Watching over laborers is an activity more akin to the construction work than to running the taxpayer's
business. Hence, the expenses incurred therefor should form part of the construction cost. (2) Real estate tax
which remained unpaid by the former owner of Gutierrez' rental property but which the latter paid, is an
additional cost to acquire such property and ought therefore to be treated as part of the property's purchase
price. (3) The iron bars, Venetian blind and water pump augmented the value of the apartments where they
were installed. Their cost is not a maintenance charge, [6] hence, not deductible.[7] (4) Expenses for the
relocation, survey and registration of property tend to strengthen title over the property, hence, they should
be considered as addition to the cost of such property. (5) The set of "Comments on the Rules of Court" having
a life span of more than one year should be depreciated ratably during its whole life span instead of its total
cost being deducted in one year.

Coming to the claim for depreciation of Gutierrez' residence, we find the same not deductible. A taxpayer may
deduct from gross income a reasonable allowance for deterioration of property arising out of its use or
employment in business or trade.[8] Gutierrez' residence was not used in his trade or business.

Gutierrez also claimed for deduction the fines and penalties which he paid for late payment of taxes. While
Section 30 allows taxes to be deducted from gross income, it does not specifically allow fines and penalties to
be so deducted. Deductions from gross income are matters of legislative grace; what is not expressly granted
by Congress is withheld. Moreover, when acts arc condemned by law and their commission is made punishable
by fines or forfeitures, to allow them to be deducted from the wrongdoer's gross income, reduces, and so in
part defeats, the prescribed punishment. [9]

As regards the alms to an indigent family and various individuals, contributions to Lydia Yamson and G.
Trinidad and a donation consisting of officers' jewels and aprons to Biak-na-Bato Lodge No. 7, the same are not
deductible from gross income inasmuch as their recipients have not been shown to be among those specified
by law. Contributions are deductible when given to the Government of the Philippines, or any of its political
subdivisions for exclusively public purposes, to domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, athletic, cultural or educational purposes, or for the
rehabilitation of veterans, or to societies for the prevention of cruelty to children or animals, no part of the net
income of which inures to the benefit of any private stockholder or individual.[10]

We come to the question whether or not the Ballantyne Scale of Values can be applied to tax cases.

Sometime in 1943 Gutierrez bought a piece of real estate in Manila for a price of P35.000.00. In 1953 he sold
said property for P30.400.00, thereby incurring a loss which he claimed as deduction in his income tax return
for 1953. The Commissioner of Internal Revenue, convinced that the purchase price of the property in 1943
was in Japanese military notes, converted said purchase price into Philippine Commonwealth pesos by the use
of the Ballantyne Scale of Values. As a result, the Commissioner found Gutierrez to have profited, instead of
lost in the sale.

Firstly, Gutierrez maintains that the purchase price was paid for in Commonwealth pesos. On the other hand
the Commissioner insists that inasmuch as the prevailing currency in the City of Manila in 1943 was the
Japanese military issue, the transaction could have been in said military notes. The evidence offered by
Gutierrez, consisting of the testimony of his son to the effect that it was he who carried the bundle of
Commonwealth pesos and Japanese military notes when his father purchased the property, did not convince
the Tax Court. No cogent reason to alter the court a quo's finding of fact in this regard has been given. There is
no definite showing that Gutierrez paid for the property in Commonwealth pesos. Considering that in 1943 the
medium of exchange in Manila was the Japanese military notes, the use of which the Japanese Military
Government enforced with stringent measures, we are inclined to concur with the finding that the purchase
price was in Japanese military notes. We are specifically mindful of the fact that Gutierrez sold the property in
1953 for only P30,400.00 at a time when the price of real estate in the City of Manila was much greater than in
1943.

It is further contended by Gutierrez that the money he used to pay for the purchase of the property in
question came from the proceeds of merchandise acquired prior to World War II but which he sold after
Manila was occupied by the Japanese military forces, hence the purchase price should be deemed to have
been made in Commonwealth pesos inasmuch as the aforesaid merchandise was purchased in Commonwealth
pesos. This contention, if true, strengthens our conclusion that the real estate in question was bought in
Japanese military notes. For, at the time Gutierrez sold his merchandise, the prevailing currency in the City of
Manila was the Japanese military money. Consequently, the proceeds therefrom, which was used to buy the
real estate in question, were Japanese military notes.

Gutierrez assails the use of the Ballantyne Scale of Values in converting the purchase price of the real estate in
question from Japanese military notes to Philippine Commonwealth pesos on the ground that (1) the
Ballantyne Scale of Values was intended only for transactions entered into by parties voluntarily during the
Japanese occupation, wherein a portion of the contract was left unperformed until liberation of the Philippines
by the American^; (2) that such Scale of Values cannot be the basis of a tax, for it is not a law.

In determining the gain or loss from the sale of property the purchase price and the selling price ought to be in
the same currency. Since in this case the purchase price was in Japanese military notes and the selling price
was in our present legal tender, the Japanese military notes should be converted to the present currency.
Since the only standard scale recognized by courts for the purpose is the Ballantyne Scale of Values, we find it
compelling to use such table of values rather than adopt an arbitrary scale. It may not be amiss to state in this
connection that the Ballantyne Scale of Values is not being used herein as the authority to impose the tax, but
only as a medium of computing the tax base upon which the tax is to be imposed.
It is furthermore proffered by the taxpayer that in determining gain or loss, the real value of the
Commonwealth peso at the time the property was purchased and the value of the Republic peso at the time
the same property was sold should be considered. The Commonwealth peso and the Republic peso are the
same currency, with the same intrinsic value, sanctioned by the same authorities. Both are legal tender and
accepted at face value regardless of fluctuation in their buying power. The 1941 Commonwealth peso when
used to buy in 1953 or in 1965 is accorded the same value: one peso.

In his income tax returns for 1953 and 1954, Gutierrez reported only 50% of profits he realized from the sale of
real properties during the years 1953 and 1954 on the ground that said properties were capital assets. Profits
from the sale of capital assets are taxable to the extent of 50% thereof pursuant to Section 34 of the Tax Code.

Section 34 provides:

"Sec. 34. Capital gains and losses. (a) Definitions. As used in this title

"(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.

******

(b) Percentage taken into account. In the case of a taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized' upon the sale or exchange of 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 not more than twelve months;

"(2) Fifty per centum if the capital asset has been held for more than twelve months."

Section 34, before it was amended by Republic Act 82 in 1947, considered as capital assets real property used
in the trade or business of a taxpayer. However, with the passage of Republic Act 82, Congress classified 'real
property used in the trade or business of the taxpayer" as ordinary asset. The explanatory note to Republic Act
82 says: ". . . the words 'or real property used in the trade or business of the taxpayer' have been included
among the non-capital assets. This has the effect of withdrawing the gain or loss from the sale or exchange of
real property used in the trade or business of the taxpayer from the operation of the capital gains and losses
provisions. As such real property is used in the trade or business of the taxpayer, it is logical that the gain or
loss from the sale or exchange thereof should be treated as ordinary income or loss." [11] Accordingly, the real
estate, admittedly used by Gutierrez in his business, which he sold in 1953 and 1964 should be treated as
ordinary assets and the gain from the sale thereof, as ordinary gain, hence, fully taxable.[12]

With regard to the issue of the prescription of the Commissioner's right to collect deficiency tax for 1951 and
1952, Gutierrez claims that the counting of the 5- year period to collect income tax should start from the time
the income tax returns were filed. He, therefore, urges, us to declare the Commissioner's right to collect the
deficiency tax for 1951 and 1952 to have prescribed, the income tax returns for 1951 and 1952 having been
filed in March 1952 and on February 28, 1953, respectively, and the action to collect the tax having been
instituted on March 5, 1958 when the Commissioner filed his answer to the petitioner for review in C.T.A. Case
No. 504. On the other hand, the Commissioner argues that the running of the prescriptive period to collect
commences from the time of assessment. Inasmuch as the tax for 1951 and 1952 were assessed only on July
10, 1956, Jess than five years lapsed when he filed his answer on March 5, 1958.

The period of limitation to collect income tax is counted from the assessment of the tax as provided for in
paragraph (c) of Section 332 quoted below:

"Sec. 332(e) Where the assessment of any internal-revenue tax has been made with the period of limitation
above prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begin (1)
within five years after the assessment of the tax, or (21 prior to the expiration of any period for collection
agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the expiration of such
five-year period. The period so agreed upon may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon."

Inasmuch as the assessment for deficiency income tax was made on July 10, 1956 which is 7 months and 25
days prior to the action for collection, the right of the Commissioner to collect such tax has not prescribed.

The next issue relates to the prescription of the right of the Commissioner of Internal Revenue to collect the
deficiency tax for 1954 by distraint and levy.

The pertinent provision of the Tax Code states:

Sec. 51 (c) Refusal or neglect to make returns; fraudulent returns, etc. In cases of refusal oil neglected to make
a return and in cases of erroneous, false, or fraudulent returns, the Collector of Internal Revenue shall, upon
the discovery thereof at any time within three years after said return is due, or has been made, make a return
upon information obtained as provided for in this code or by existing law, or require the necessary corrections
to be made, and the assessment made by the Collector of Internal Revenue thereon shall be paid by such
person or corporation immediately upon notification of the amount of such assessment.

On February 23, 1955 Gutierrez filed his income tax return for 1954 and on February 24, 1958 the
Commissioner of Internal Revenue issued a warrant of distraint and levy to collect the tax due thereunder.
Gutierrez contends that the Commissioner's right to issue said warrant is barred, for the same was issued
more than 3 years from the time he filed his income tax return. On the other hand, the Commissioner of
Internal Revenue maintains that his right did not lapse inasmuch as from the last day prescribed by law for the
filing of the 1954 return to the date when he issued the warrant of distraint and levy less than 3 years passed.
The question now is: should the counting of the prescriptive period commence from the actual filing of the
return or from the last day prescribed by law for the filing thereof?

We observe that Section 51 (d) speaks of erroneous, false or fraudulent returns and refusal or neglect of the
taxpayer to file a return. It also provides for two dates from which to count the three-year prescriptive period,
namely, the date when the return is due and the date the return has been made. We are inclined to conclude
that the date when the return is due refers to cases where the taxpayer refused or neglected to file a return,
and the date when the return has been made refers to instances where the taxpayer filed erroneous, false or
fraudulent returns. Since Gutierrez filed an income tax return, the three-year prescriptive period should be
counted from the time he filed such return. From February 23, 1955 when the income tax return for 1954 was
filed, to February 24, 1958, when the warrant of distraint and levy was issued, 3 years and 2 days elapsed. The
right of the Commissioner to issue said warrant of distraint and levy having lapsed by two days, the warrant
issued is null and void.

The above finding has made academic the question of whether or not the warrant of distraint and levy can be
enforced against the taxpayer's real property without first exhausting his personal properties.

In resume, the tax liability of Lino Gutierrez 1951, 1952, 1953 and 1954 may be computed as follows:

1951
Net income per investigation

P29,471.8l

Add: Disallowed deductions for salary of driver and car expenses

29.90

_________
P29,501.71

Less: Allowable deductions:

Expenses in attending National Convention of Filipino businessmen

P121.35

Repair of rental apartments

802.65

924.00
Net income

P30,425.71

Less: Personal exemption

3,600.00

_________

Amount subject to tax

P26,825.71

Tax due thereon

P 5,668.00

Less tax already paid

3,981.00

Deficiency income tax due

P 1,687.00

1952

Net income per investigation

P21.632.22
Add: Disallowed deductions:

Salary of driver

P260.67

Car expenses

401.51

Car depreciation

65.00

727.18

P22,359.40
Less: Allowable deduction:

Luncheon, Homeowners' Association

5.50

Net income
P22.364.90

Less: Personal exemption

3,600.00

Amount subject to tax.

P18.764.90

Tax due thereon

P 3,324.00

Less tax already paid

2,476.00

Deficiency income tax due

P 848.00

1953
Net income per investigation

P69,180.91

Add: Disallowed deductions:

Salary of driver

P140.00

Car expenses
406.00

Car depreciation

58.50

604.50

P69.785.10

Less: Allowable deduction:

Cruise to Corregidor with Homeowners Association

42.00

Net income

P69,828.40

Less: Personal exemption

3,600.00
Amount subject to tax

P66,228.40

Tax due thereon

P15,179.00

Less tax already paid

9,805.00
Deficiency income tax due

P 5,374.00

1954

Net income per investigation

P43,881.92

Add: Disallowed deductions:

Salary of driver

P140.00

Car expenses

414.18

Car depreciation

72.65

626.83
P44,508.75

Less: Allowable deductions:

Furniture given in connection with business transaction

P115.00

Repairs of rental apartments

2,048.56

P 2,163.56

Net income

P42.345.19

Less: Personal exemption

3,000.00
Amount subject to tax

P39,345.19

Tax due thereon

P 9,984.00

Less tax already paid

5,964.00
Deficiency income tax due

P 4,020.00

SUMMARY

1951
P 1,687.00

1952

848.00

1953

5,374.00

1954

4,020.00

Total.
P11,929.00

Wherefore, the decision appealed from is modified and Lino Gutierrez and/or his heirs, namely, Andrea C, Vda.
de Gutierrez, Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo D. Gutierrez and Tomas D. Gutierrez, are
ordered to pay the sums of P1,687.00, P848.00, P5,374.00, and P4,020.00, as deficiency income tax for the
years 1951,1952,1953 1954, respectively, or a total of P11,929.00, plus the statutory penalties in case of
delinquency. No costs. So ordered.

SYLLABUS

1. TAXATION; INCOME TAX; DEDUCTIONS; TRANSPORTATION TO ATTEND FUNERAL AND IRON DOOR OF
RESIDENCE NOT DEDUCTIBLE. — The transportation expenses which a businessman incurred to attend the
funeral of his friends and the cost of admission tickets to operas were expenses relative to his personal and
social activities rather than to his business of leasing real estate. Likewise, the procurement and installation of
an iron door to his residence is purely a personal expense. Personal, living, or family expenses are not
deductible.

2. ID.; ID.; ID.; COMMISSIONS AND EXPENSES IN ASSOCIATION TO ENHANCE BUSINESS DEDUCTIBLE. — The
cost of furniture given by the taxpayer as commission in furtherance of a business transaction, the expenses
incurred in attending a businessmen, luncheon meeting and cruise of a business association, when shown to
have been made in the pursuit of his business, are deductible.

3. ID.; ID.; ID.; MAINTENANCE OF CAR USED BOTH FOR PERSONAL AND BUSINESS NEEDS PARTLY DEDUCTIBLE.
— Where there is no clear showing that the taxpayer’s car was devoted more for the taxpayer’s business than
for his personal needs, but according to the evidence, the taxpayer’s car was utilized both for personal and
business needs, it is held that it is reasonable to allow as deduction one-half of the driver’s salary, car expenses
and depreciation.

4. ID.; ID.; ID.; ORDINARY REPAIRS FOR MAINTENANCE OF RENTAL APARTMENTS DEDUCTIBLE. — Where
electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the
taxpayer’s rental apartments, did not increase the value of such apartments, or prolong their life but merely
kept the apartments in an ordinary operating condition, its is held that the expenses incurred therefor are
deductible as necessary expenditure for the maintenance of the taxpayer’s business.

5. ID.; ID.; ID.; LITIGATION EXPENSES TO COLLECT APARTMENT RENTALS DEDUCTIBLE. — The litigation
expenses defrayed by a taxpayer to collect apartment rentals and to eject delinquent tenants are ordinary and
necessary expenses in pursuing his business.

6. ID.; ID.; ID.; CAPITAL EXPENDITURES NOT DEDUCTIBLE. — The following are not deductible business
expenses but should be integrated into the cost of the capital assets for which they were incurred and
depreciated yearly: (1) Expenses in watching over laborers in construction work. Watching over laborers is an
activity more akin to the construction work than to running the taxpayer’s business. Hence, the expenses
incurred therefor should form part of the construction cost. (2) Real estate tax which remained unpaid by the
former owner of the taxpayer’s rental property but which the latter paid, is an additional cost to acquire such
property and ought therefore to be treated as part of the property’s purchase price. (3) The iron bars, venetian
blind and water pump augmented the value of the apartments where they were installed. Their cost is not a
maintenance charge, hence, not deductible. (4) Expenses for the relocation, survey and registration of
property tend to strengthen title over the property, hence, they should be considered as addition to the cost
of such property. (5) The set of "Comments on the Rules of Court" having a life span of more than one year
should be depreciated ratably during its whole life span instead of its total cost being deducted in one year.

7. ID.; ID.; ID.; DEPRECIATION OF RESIDENCE NOT DEDUCTIBLE. — The claim for depreciation of taxpayer’s
residence is not deductible where such residence was not used in his trade or business. A taxpayer may deduct
from gross income reasonable allowance for deterioration of property arising out of its use or employment in
business or trade.

8. ID.; ID.; ID.; FINES AND PENALTIES NOT DEDUCTIBLE. — Fines and penalties paid for late payment of taxes
are not deductible.

9. ID.; ID.; ID.; CONTRIBUTIONS TO PERSONS NOT SPECIFIED BY LAW NOT DEDUCTIBLE. — The aims to an
indigent family and various individuals, and a donation consisting of officer’s jewels and aprons to Biak-na-Bato
Lodge No. 7, are not deductible from gross income inasmuch as their recipients have not been shown to be
among those specified by law.

10. ID.; ID.; BALLANTYNE SCALE OF VALUES AS BASIS OF COST OF PROPERTY SOLD. — When property bought
during the Japanese occupation is sold after the war, the Ballantyne Scale of Values is used to compute the tax
based upon which the tax is to be imposed.
11. ID.; ID.; ID.; REAL PROPERTIES USED IN TAXPAYER’S BUSINESS ARE ORDINARY ASSETS. — Real property
used in the trade or business of the taxpayer is ordinary asset, and any gain or loss from the sale or exchange
thereof should be treated as ordinary, not capital gain or loss.

12. ID.; ID.; PRESCRIPTION PERIOD OF COLLECTION OF TAX STARTS FROM ASSESSMENT. — The period of
limitation to collect income tax is counted from the assessment of the tax.

13. ID.; ID.; ID.; PRESCRIPTION PERIOD TO COLLECT TAX BY DISTRAINT AND LEVY STARTS FROM FILING OF
RETURNS. — Where the taxpayer has filed an income tax return, the three-year prescriptive period to collect
the tax by distraint and levy should be counted from the time he filed such return.

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, not matters of right. They are not created by implication but upon clear expression in
the law [Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965].

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Republic of the Philippines

SUPREME COURT

Manila

FIRST DIVISION

G.R. No. 173373 July 29, 2013

H. TAMBUNTING PAWNSHOP, INC., Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

BERSAMIN, J.:

To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and documentary
bases of its claim.

Antecedents

H. Tambunting Pawnshop, Inc. (petitioner), a domestic corporation duly licensed and authorized to engage in
the pawnshop business, appeals the adverse decision promulgated on April 24, 2006,1 whereby the Court of
Tax Appeals En Bane (CTA En Bane) affirmed the decision of the CTA First Division ordering it to pay deficiency
income taxes in the amount of ₱4,536,687.15 for taxable yaar 1997, plus 20% delinquency interest computed
from August 29, 2000 until full payment, but cancelling the compromise penalties for lack of basis.

On June 26, 2000, the Bureau of Internal Revenue (BIR), through then Acting Regional Director Lucien E.
Sayuno of Revenue Region No. 6 in Manila, issued assessment notices and demand letters, all numbered 32-1-
97, assessing Tambunting for deficiency percentage tax, income tax and compromise penalties for taxable year
1997,2 as follows:

Deficiency Percentage Tax

Taxable Sales/Receipts ₱12,749,135.25

============

Percentage Tax due (5%) P 637,456.76

Add: 20% Interest up to 7-26-00 320,513.24

--------------------

Total Percentage Tax Due P 957,970.00

============

Deficiency Income Tax

Taxable Net Income per Return P 54,107.36

Adjustments per investigation Section 28

Overstatement of gain/loss on auction sales

Gain/Loss per F/S P 4,914,967.50

Gain/Loss per Audit 133,057.40 4,781,910.00

--------------------

Unsupported Security/Janitorial Expenses

Per F/S 2,183,573.02

Per Audit 358,800.00 1,824,773.02

--------------------

Unsupported Rent Expenses

Per F/S 2,293,631.13

Per Audit 434,406.77 1,859,224.35

--------------------

Unsupported Interest Expenses 1,155,154.28

Unsupported Management & Professional Fees 96,761.00

Unsupported Repairs & Maintenance 348,074.68

Unsupported 13th Month Pay & Bonus 317,730.73

Disallowed Loss on Fire & Theft 906,560.00

--------------------

Taxable Net Income per Investigation P 11,344,295.43

============

Income Tax Due (35%) P 3,970,503.40

Less Income Tax Paid 18,937.57

---------------------

Deficiency Income Tax 3,951,565.83

Add: 20% Interest to 7-26-00 1,799,938.23

---------------------

Total Income Tax Due 5,751,504.06

Compromise Penalties

Late Payment of Income Tax 25,000.00

Late Payment of Percentage Tax 20,000.00

Failure to Pay Withholding Tax Return for

the Months of April and May 24,000.00

-----------------

69,000.00

==========

On July 26, 2000, Tambunting instituted an administrative protest against the assessment notices and demand
letters with the Commissioner of Internal Revenue.3

On February 21, 2001, Tambunting brought a petition for review in the CTA, pursuant to Section 228 of the
National Internal Revenue Code of 1997,4 citing the inaction of the Commissioner of Internal Revenue on its
protest within the 180-day period prescribed by law.

On October 8, 2004, the CTA First Division rendered a decision, the pertinent portion of which is hereunder
quoted, to wit:

In view of all the foregoing verification, petitioner’s allowable deductions are summarized below:

Particulars Per Petitioner's

Financial

Statement Per BIR's

Examination Per Court's

Verification

Loss on Auction

Sale P 4,914,967.50 P 133,057.40 P 133,057.40

Security & Janitorial

Services 2,183,573.02 358,800.00 736,044.26

Rent Expense 2,293,631.13 434,406.77 642,619.10

Interest Expense 1,155,154.28 - 1,155,154.28

Professional &

Management Fees 96,761.00 - -

Repairs &

Maintenance 348,074.68 - 329,399.18

13th

Month pay &

Bonuses 317,730.73 - 317,730.73

Loss on Fire 906,560.00 - -

Total --------------------

P 12,216,452.34

============= --------------------

P 926,264.17

============= --------------------

P 3,314,004.95

=============

Apparently, petitioner is still liable for deficiency income tax in the reduced amount of ₱4,536,687.15,
computed as follows:

Net Income Per Return ₱54,107.36

Add: Overstatement of Gain/Loss on Auction Sales

Gain/Loss on Auction Sales per F/S ₱4,914,967.50

Gain/Loss on Auction Sales per Court’s

Verification 133,057.40 4,781,910.00

------------------

Unsupported Security/Janitorial Services

Security, Janitorial Services per F/S ₱2,183,573.02

Security, Janitorial Services

per Court’s Verification 736,044.26 1,447,528.76

------------------

Unsupported Rent Expenses

Rent Expenses per F/S ₱2,293,631.13

Rent Expenses per Court’s

Verification 642,619.10 1,651,012.03

------------------

Unsupported Management & Professional Fees 96,761.00

Unsupported Repairs & Maintenance

(₱348,074.68 - ₱329,399.18) 18,675.50

Disallowed Loss on Fire & Theft 906,560.00

---------------

Net Income

P 8,956,554.65

=============

Income Tax Due Thereon P 3,134,794.13

Less: Amount Paid 18,937.57

------------------

Balance P 3,115,856.56

Add: 20% Interest until 7-26-00 1,420,830.59

------------------

TOTAL INCOME TAX DUE

₱4,536,687.15
=============

WHEREFORE, petitioner is ORDERED to PAY the respondent the amount of ₱4,536,687.15 representing
deficiency income tax for the year 1997, plus 20% delinquency interest computed from August 29, 2000 until
full payment thereof pursuant to Section 249 (C) of the National Internal Revenue Code. However, the
compromise penalties in the sum of ₱49,000.00 is hereby CANCELLED for lack of legal basis.

SO ORDERED.5

After its motion for reconsideration was denied for lack of merit on February 18, 2005,6 Tambunting filed a
petition for review in the CTA En Banc, arguing that the First Division erred in disallowing its deductions on the
ground that it had not substantiated them by sufficient evidence.

On April 24, 2006, the CTA En Banc denied Tambunting’s petition for review,7 disposing:

WHEREFORE, the Court en banc finds no reversible error to warrant the reversal of the assailed Decision and
Resolution promulgated on October 8, 2004 and February 11, 2005, respectively, the instant Petition for
Review is hereby DISMISSED. Accordingly, the aforesaid Decision and Resolution are hereby AFFIRMED in toto.

SO ORDERED.

On June 29, 2006, the CTA En Banc also denied Tambunting’s motion for reconsideration for its lack of merit.8

Issues

Hence, this appeal by petition for review on certiorari.

Tambunting argues that the CTA should have allowed its deductions because it had been able to point out the
provisions of law authorizing the deductions; that it proved its entitlement to the deductions through all the
documentary and testimonial evidence presented in court;9 that the provisions of Section 34 (A)(1)(b) of the
1997 National Internal Revenue Code, governing the types of evidence to prove a claim for deduction of
expenses, were applicable because the law took effect during the pendency of the case in the CTA;10 that the
CTA had allowed deductions for ordinary and necessary expenses on the basis of cash vouchers issued by the
taxpayer or certifications issued by the payees evidencing receipt of interest on loans as well as agreements
relating to the imposition of interest;11 that it had thus shown beyond doubt that it had incurred the losses in
its auction sales;12 and that it substantially complied with the requirements of Revenue Regulations No. 12-77
on the deductibility of its losses.13

On December 5, 2006, the Commissioner of Internal Revenue filed a comment,14 stating that the conclusions
of the CTA were entitled to respect,15 due to its being a highly specialized body specifically created for the
purpose of reviewing tax cases;16 and that the petition involved factual and evidentiary matters not
reviewable by the Court in an appeal by certiorari.17

On March 22, 2007, Tambunting reiterated its arguments in its reply.18

Ruling

The petition has no merit.

At the outset, the Court agrees with the CTA En Banc that because this case involved assessments relating to
transactions incurred by Tambunting prior to the effectivity of Republic Act No. 8424 (National Internal
Revenue Code of 1997, or NIRC of 1997), the provisions governing the propriety of the deductions was
Presidential Decree 1158 (NIRC of 1977). In that regard, the pertinent provisions of Section 29 (d) (2) & (3)of
the NIRC of 1977 state:

xxxx

(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off within the
taxable year and not compensated for by insurance or otherwise.

(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the losses deductible
are those actually sustained during the year incurred in business or trade conducted within the Philippines,
and losses actually sustained during the year in transactions

entered into for profit in the Philippines although not connected with their business or trade, when such losses
are not compensated for by insurance or otherwise. The Secretary of Finance, upon recommendation of the
Commissioner of Internal Revenue, is hereby authorized to promulgate rules and regulations prescribing,
among other things, the time and manner by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft, or embezzlement during the taxable year: Provided, That the time to be
so prescribed in the regulations shall not be less than 30 days nor more than 90 days from the date of the
occurrence of the casualty or robbery, theft, or embezzlement giving rise to the loss.

The CTA En Banc ruled thusly:

To prove the loss on auction sale, petitioner submitted in evidence its "Rematado" and "Subasta" books and
the "Schedule of Losses on Auction Sale". The "Rematado" book contained a record of items foreclosed by the
pawnshop while the "Subasta" book contained a record of the auction sale of pawned items foreclosed.

However, as elucidated by the petitioner, the gain or loss on auction sale represents the difference between
the capital (the amount loaned to the pawnee, the unpaid interest and other expenses incurred in connection
with such loan) and the price for which the pawned articles were sold, as reflected in the "Subasta" Book.
Furthermore, it explained that the amounts appearing in the "Rematado" book do not reflect the total capital
of petitioner as it merely reflected the amounts loaned to the pawnee. Likewise, the amounts appearing in the
"Subasta" book, are not representative of the amount of sale made during the "subastas" since not all articles
are eventually sold and disposed of by petitioner.

Petitioner submits that based on the evidence presented, it was able to show beyond doubt that it incurred
the amount of losses on auction sale claimed as deduction from its gross income for the taxable year 1997.
And that the documents/records submitted in evidence as well as the facts contained therein were neither
contested nor controverted by the respondent, hence, admitted.

xxxx

In this case, petitioner's reliance on the entries made in the "Subasta" book were not sufficient to substantiate
the claimed deduction of loss on auction sale. As admitted by the petitioner, the contents in the "Rematado"
and "Subasta" books do not reflect the true amounts of the total capital and the auction sale, respectively. Be
that as it may, petitioner still failed to adduce evidence to substantiate the other expenses alleged to have
been incurred in connection with the sale of pawned items.

As correctly held by the Court's Division in the assailed decision, and We quote:

x x x The remaining evidence is neither conclusive to sustain its claim of loss on auction sale in the aggregate
amount of ₱4,915,967.50. While it appears that the basis of respondent is not strong, petitioner, nevertheless,
should not rely on the weakness of such evidence but on the strength of its own documents. The facts
essential for the proper disposition of the said controversy were available to the petitioner. Petitioner should
have endeavored to make the facts clear to this court. Sad to say, it failed to dispute the same with clear and
convincing proof. x x x19

We affirm the aforequoted ruling of the CTA En Banc.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in strictissimi juris
against the taxpayer is well settled.20 Corollary to this rule is the principle 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.21 An item of expenditure,
therefore, must fall squarely within the language of the law in order to be deductible.22 A mere averment that
the taxpayer has incurred a loss does not automatically warrant a deduction from its gross income.

As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The subasta books it
presented were not the proper evidence of such losses from the auctions because they did not reflect the true
amounts of the proceeds of the auctions due to certain items having been left unsold after the auctions. The
rematado books did not also prove the amounts of capital because the figures reflected therein were only the
amounts given to the pawnees. It is interesting to note, too, that the amounts received by the pawnees were
not the actual values of the pawned articles but were only fractions of the real values.

As to business expenses, Section 29 (a) (1) (A) of the NIRC of 1977 provides:

(a) Expenses. — (1) Business expenses.— (A) In general. — All 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, profession or business, rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the trade, profession or business, of property
to which the taxpayer has not taken or is not taking title or in which he has no equity.

The requisites for the deductibility of ordinary and necessary trade or business expenses, like those paid for
security and janitorial services, management and professional fees, and rental expenses, are that: (a) the
expenses must be ordinary and necessary; (b) they must have been paid or incurred during the taxable year;
(c) they must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) they
must be supported by receipts, records or other pertinent papers.23

In denying Tambunting’s claim for deduction of its security and janitorial expenses, management and
professional fees, and its rental expenses, the CTA En Banc explained:
Contrary to petitioner’s contention, the security/janitorial expenses paid to Pathfinder Investigation were not
duly substantiated. The certification issued by Mr. Balisado was not the proper document required by law to
substantiate its expenses. Petitioner should have presented the official receipts or invoices to prove its claim
as provided for under Section 238 of the National Internal Revenue Code of 1977, as amended, to wit:

"SEC. 238. Issuance of receipts or sales or commercial invoices. — All persons subject to an internal revenue
tax shall for each sale or transfer of merchandise or for services rendered valued at ₱25.00 or more, issue
receipts or sales or commercial invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature of service; Provided, That in the case of sales,
receipts or transfers in the amount of ₱100.00 or more, or, regardless of amount, where the sale or transfer is
made by persons subject to value-added tax to other persons also subject to value-added tax; or, where the
receipts is issued to cover payment made as rentals, commissions, compensation or fees, receipts or invoices
shall be issued which shall show the name, business style, if any, and address of the purchaser, customer, or
client. The original of each receipt or invoice shall be issued to the purchases, customer or client at the time
the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and preserve
the same in his place of business for a period of 3 years from the close of the taxable year in which such
invoice or receipt was issued, while the duplicate shall be kept and preserved by the issuer, also in his place of
business, for a like period.

With regard to the misclassified items of expenses, petitioner's statements were self-serving, likewise it failed
to substantiate its allegations by clear and convincing evidence as provided under the foregoing provision of
law.

Bearing in mind the principle in taxation that deductions from gross income partake the nature of tax
exemptions which are construed in strictissimi juris against the taxpayer, the Court en banc is not inclined to
believe the self-serving statements of petitioner regarding the misclassified items of office supplies,
advertising and rent expenses.

Among the expenses allegedly incurred, courts may consider only those supported by credible evidence and
which appear to have been genuinely incurred in connection with the trade or business of the taxpayer.24

xxxx

As previously discussed, the proper substantiation requirement for an expense to be allowed is the official
receipt or invoice. While the rental payments were subjected to the applicable expanded withholding taxes,
such returns are not the documents required by law to substantiate the rental expense. Petitioner should have
submitted official receipts to support its claim.

Moreover, the issue on the submission of cash vouchers as evidence to prove expenses incurred has been
addressed by this Court in the assailed Resolution, to wit:

"The trend then was to allow deductions based on cash vouchers which are signed by the payees. It bears to
note that the cases cited by petitioner are pronouncements by this Court in 1980, 1982 and 1989.

However, latest jurisprudence has deviated from such interpretation of the law. Thus, this Court held in the
case of Pilmico-Mauri Foods Corporation vs. Commissioner of Internal Revenue C.T.A. Case No. 6151,
December 15, 2004;

[P]etitioner’s contention that the NIRC of 1977 did not impose substantiation requirements on deductions
from gross income is bereft of merit. Section 238 of the 1977 Tax Code [now Section 237] provides:

xxxx

From the foregoing provision of law, a person who is subject to an internal revenue tax shall issue receipts,
sales or commercial invoices, prepared at least in duplicate. The provision likewise imposed a responsibility
upon the purchaser to keep and preserve the original copy of the invoice or receipt for a period of three years
from the close of the taxable year in which the invoice or receipt was issued. The rationale behind the latter
requirement is the duty of the taxpayer to keep adequate records of each and every transaction entered into
in the conduct of its business. So that when their books of accounts are subjected to a tax audit examination,
all entries therein could be shown as adequately supported and proven as legitimate business transactions.
Hence, petitioner’s claim that the NIRC of 1977 did not require substantiation requirements is erroneous."

In order that the cash vouchers may be given probative value, these must be validated with official receipts.25

xxxx

Petitioner’s management and professional fees were disallowed as these were supported merely by cash
vouchers, which the Court’s Division correctly found to have little probative value.26
Again, we affirm the foregoing holding of the CTA En Banc for the reasons therein stated. To reiterate,
deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against
the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed.27
Tambunting did not discharge its burden of substantiating its claim for deductions due to the inadequacy of its
documentary support of its claim. Its reliance on withholding tax returns, cash vouchers, lessor’s certifications,
and the contracts of lease was futile because such documents had scant probative value. As the CTA En Banc
succinctly put it, the law required Tambunting to support its claim for deductions with the corresponding
official receipts issued by the service providers concerned.

Regarding proof of loss due to fire, the text of Section 29(d) (2) & (3) of P.D. 1158 (NIRC of 1977) then in effect,
is clear enough, to wit:

(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off within the
taxable year and not compensated for by insurance or otherwise.

(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the losses deductible
are those actually sustained during the year incurred in business or trade conducted within the Philippines,
and losses actually sustained during the year in transactions entered into for profit in the Philippines although
not connected with their business or trade, when such losses are not compensated for by insurance or
otherwise. The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, is
hereby authorized to promulgate rules and regulations prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft, or
embezzlement during the taxable year: Provided, That the time to be so prescribed in the regulations shall not
be less than 30 days nor more than 90 days from the date of the occurrence of the casualty or robbery, theft,
or embezzlement giving rise to the loss.

The implementing rules for deductible losses are found in Revenue Regulations No. 12-77, as follows:

SECTION 1. Nature of deductible losses.— Any loss arising from fires, storms or other casualty, and from
robbery, theft or embezzlement, is allowable as a deduction under Section 30 (d) for the taxable year in which
the loss is sustained. The term "casualty" is the complete or partial destruction of property resulting from an
identifiable event of a sudden, unexpected, or unusual nature. It denotes accident, some sudden invasion by
hostile agency, and excludes progressive deterioration through steadily operating cause. Generally, theft is the
criminal appropriation of another’s property for the use of the taker. Embezzlement is the fraudulent
appropriation of another's property by a person to whom it has been entrusted or into whose hands it has
lawfully come.
SECTION 2. Requirements of substantiation. — The taxpayer bears the burden of proving and substantiating
his claim for deduction for losses allowed under Section 30 (d) and should comply with the following
substantiation requirements:

(a) A declaration of loss which must be filed with the Commissioner of Internal Revenue or his deputies within
a certain period prescribed in these regulations after the occurrence of the casualty, robbery, theft or
embezzlement.

(b) Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and
amount of the loss.

SECTION 3. Declaration of loss. — Within forty-five days after the date of the occurrence of casualty or
robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who intends to claim the loss as
a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of loss with the
nearest Revenue District Officer. The sworn declaration of loss shall contain, among other things, the following
information:

(a) The nature of the event giving rise to the loss and the time of its occurrence;

(b) A description of the damaged property and its location;

(c) The items needed to compute the loss such as cost or other basis of the property; depreciation allowed or
allowable if any; value of property before and after the event; cost of repair;

(d) Amount of insurance or other compensation received or receivable.

Evidence to support these items should be furnished, if available. Examples are purchase contracts and deeds,
receipted bills for improvements, and pictures and competent appraisals of the property before and after the
casualty.

SECTION 4. Proof of loss.— (a) In general. — The declaration of loss, being one of the essential requirements of
substantiation of a claim for a loss deduction, is subject to verification and does not constitute sufficient proof
of the loss that will justify its deductibility for income tax purposes. Therefore, the mere filing of a declaration
of loss does not automatically entitle the taxpayer to deduct the alleged loss from gross income. The failure,
however, to submit the said declaration of loss within the period prescribed in these regulations will result in
the disallowance of the casualty loss claimed in the taxpayer's income tax return. The taxpayer should
therefore file a declaration of loss and should be prepared to support and substantiate the information
reported in the said declaration with evidence which he should gather immediately or as soon as possible after
the occurrence of the casualty or event causing the loss.

xxxx

(b) Casualty loss. — Photographs of the property as it existed before it was damaged will be helpful in showing
the condition and value of the property prior to the casualty. Photographs taken after the casualty which show
the extent of damage will be helpful in establishing the condition and value of the property after it was
damaged. Photographs showing the condition and value of the property after it was repaired, restored or
replaced may also be helpful.

Furthermore, since the valuation of the property is of extreme importance in determining the amount of loss
sustained, the taxpayer should be prepared to come forward with documentary proofs, such as cancelled
checks, vouchers, receipts and other evidence of cost.

The foregoing evidence should be kept by the taxpayer as part of his tax records and be made available to a
revenue examiner, upon audit of his income tax return and the declaration of loss.

(c) Robbery, theft or embezzlement losses. - To support the deduction for losses arising from robbery, theft or
embezzlement, the taxpayer must prove by credible. evidence all the elements of the loss, the amount of the
loss, and the proper year of the deduction. The taxpayer bears the burden of proof, and no deduction will be
allowed unless he shows the property was stolen, rather than misplaced or lost. A mere disappearance of
property is not enough, nor is a mere error or shortage in accounts.

Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a
mere report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising
therefrom. (Bold underscoring supplied for emphasis)

In the context of the foregoing rules, the CT A En Bane aptly rejected Tam bunting's claim for deductions due
to losses from fire and theft. The documents it had submitted to support the claim, namely: (a) the
certification from the Bureau of Fire Protection in Malolos; (b) the certification from the Police Station in
Malolos; (c) the accounting entry for the losses; and (d) the list of properties lost, were not enough. What were
required were for Tambunting to submit the sworn declaration of loss mandated by Revenue Regulations 12-
77. Its failure to do so was prejudicial to the claim because the sworn declaration of loss was necessary to
forewarn the BIR that it had suffered a loss whose extent it would be claiming as a deduction of its tax liability,
and thus enable the BIR to conduct its own investigation of the incident leading to the loss. Indeed, the
documents Tambunting submitted to the BIR could not serve the purpose of their submission without the
sworn declaration of loss.

WHEREFORE, the Court AFFIRMS the decision promulgated on April 24, 2006; and ORDERS petitioner to pay
the costs of suit.

SO ORDERED.

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.

REGALADO, J.:p

This is an appeal by certiorari from the decision of respondent Court of Appeals1 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.

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, computed as
follows:
Deficiency Income Tax

Net Income per investigation P197,502,568.00

Add: Disallowances

Bad Debts P 713,070.93

Interest Expense P 2,666,545.49

—————— ——————

P3,379,616.00

Net Taxable Income 200,882,184.00

Tax Due Thereon 70,298,764.00

Less: Tax Paid 69,115,899.00

Deficiency Income Tax 1,182,865.00

Add: 20% Interest (60% max.) 709,719.00

——————

Total Amount Due and Collectible P1,892,584.002

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
decision3 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 supposed 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. SP 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 P 29,098.30

(Pet Mini Grocery)

2. Esther Guinto 254,375.54

(Esther Sari-sari Store)

3. Manuel Orea 34,272.82

(Elman Gen. Mdsg.)

—————

TOTAL P 317,746.66

xxx xxx xxx

With regard to the other accounts, namely:

1. Remoblas Store P 11,961.00

2. Tomas Store 16,842.79

3. AFPCES 13,833.62

4. CM Variety Store 10,895.82

5. U' Ren Mart Enterprise 10,487.08

6. Aboitiz Shipping Corp. 89,483.40

7. J. Ruiz Trucking 69,640.34

8. Renato Alejandro 13,550.00

9. Craig, Mostyn Pty. Ltd. 23,738.00

10. C. Itoh 19,272.22

11. Crocklaan B.V. 77,690.00

12. Enriched Food Corp. 24,158.00

13. Lucito Sta. Maria 13,772.00

—————

TOTAL P 395,324.27

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.7
However, 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. 10 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.

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.

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:

Sec. 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:
Sec. 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 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.

391 Phil. 59

VITUG, J.:

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-taping" 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.

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 of 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 is ordinary 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 tax"
year and are capital assets, the loss resulting therefrom shall, for the purposes of his 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. -

"x x x xxx x x x.

"(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 an shall not be included in determining the
applicability of such limitation to other losses."

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 in vestment 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 be recognized. 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 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 moneys 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.

Today is Monday, September 23, 2019 home

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Republic of the Philippines

SUPREME COURT
Manila

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.

CRUZ, J.:

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.

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 Pl,226,647.72 paid by
ESSO to the Central Bank on its profit remittances to its New York head office.
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, coincident 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 Unites 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 remittance 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

Since the margin fees in question were incurred for the remittance of funds 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.

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.

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-13912 September 30, 1960

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

CONSUELO L. VDA. DE PRIETO, respondent.

Office of the Solicitor General Edilberto Barot, Solicitor F.R. Rosete and Special Atty. B. Gatdula, Jr. for
petitioner.

Formilleza and Latorre for respondent.

GUTIERREZ DAVID, J.:

This is an appeal from a decision of the Court of tax Appeals reversing the decision of the Commissioner of
Internal Revenue which held herein respondent Consuelo L. Vda. de Prieto liable for the payment of the sum
of P21,410.38 as deficiency income tax, plus penalties and monthly interest.

The case was submitted for decision in the court below upon a stipulation of facts, which for brevity is
summarized as follows: On December 4, 1945, the respondent conveyed by way of gifts to her four children,
namely, Antonio, Benito, Carmen and Mauro, all surnamed Prieto, real property with a total assessed value of
P892,497.50. After the filing of the gift tax returns on or about February 1, 1954, the petitioner Commissioner
of Internal Revenue appraised the real property donated for gift tax purposes at P1,231,268.00, and assessed
the total sum of P117,706.50 as donor's gift tax, interest and compromises due thereon. Of the total sum of
P117,706.50 paid by respondent on April 29, 1954, the sum of P55,978.65 represents the total interest on
account of deliquency. This sum of P55,978.65 was claimed as deduction, among others, by respondent in her
1954 income tax return. Petitioner, however, disallowed the claim and as a consequence of such disallowance
assessed respondent for 1954 the total sum of P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31, 1957, surcharge and compromise for the late payment.

Under the law, for interest to be deductible, it must be shown that there be an indebtedness, that there
should be interest upon it, and that what is claimed as an interest deduction should have been paid or accrued
within the year. It is here conceded that the interest paid by respondent was in consequence of the late
payment of her donor's tax, and the same was paid within the year it is sought to be declared. The only
question to be determined, as stated by the parties, is whether or not such interest was paid upon an
indebtedness within the contemplation of section 30 (b) (1) of the Tax Code, the pertinent part of which reads:

SEC. 30 Deductions from gross income. — In computing net income there shall be
allowed as deductions —

xxx xxx xxx

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations the interest upon which is exempt from taxation as
income under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing similar provisions as in the
above-quoted section has been defined as an unconditional and legally enforceable obligation for the payment
of money.1awphîl.nèt (Federal Taxes Vol. 2, p. 13,019, Prentice-Hall, Inc.; Merten's Law of Federal Income
Taxation, Vol. 4, p. 542.) Within the meaning of that definition, it is apparent that a tax may be considered an
indebtedness. As stated by this Court in the case of Santiago Sambrano vs. Court of Tax Appeals and Collector
of Internal Revenue (101 Phil., 1; 53 Off. Gaz., 4839) —

Although taxes already due have not, strictly speaking, the same concept as debts, they are, however,
obligations that may be considered as such.
The term "debt" is properly used in a comprehensive sense as embracing not merely money due by contract
but whatever one is bound to render to another, either for contract, or the requirement of the law. (Camben
vs. Fink Coule and Coke Co. 61 LRA 584)

Where statute imposes a personal liability for a tax, the tax becomes, at least in a board sense, a debt. (Idem).

A tax is a debt for which a creditor's bill may be brought in a proper case. (State vs. Georgia Co., 19 LRA 485).

It follows that the interest paid by herein respondent for the late payment of her donor's tax is deductible
from her gross income under section 30(b) of the Tax Code above quoted.

The above conclusion finds support in the established jurisprudence in the United States after whose laws our
Income Tax Law has been patterned. Thus, under sec. 23(b) of the Internal Revenue Code of 1939, as amended
1 , which contains similarly worded provisions as sec. 30(b) of our Tax Code, the uniform ruling is that interest
on taxes is interest on indebtedness and is deductible. (U.S. vs. Jaffray, 306 U.S. 276. See also Lustig vs. U.S.,
138 F. Supp. 870; Commissioner of Internal Revenue vs. Bryer, 151 F. 2d 267, 34 AFTR 151; Penrose vs. U.S. 18
F. Supp. 413, 18 AFTR 1289; Max Thomas Davis, et al. vs. Commissioner of Internal Revenue, 46 U.S. Boared of
Tax Appeals Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax Court of United States Reports, p. 255; Armour vs.
Commissioner of Internal Revenue, 6 Tax Court of the United States Reports, p. 359; The Koppers Coal Co. vs.
Commissioner of Internal Revenue, 7 Tax Court of United States Reports, p. 1209; Toy vs. Commissioner of
Internal Revenue; Lucas vs. Comm., 34 U.S. Board of Tax Appeals Reports, 877; Evens and Howard Fire Brick
Co. vs. Commissioner of Internal Revenue, 3 Tax Court of United States Reports, p. 62). The rule applies even
though the tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall, sec. 163, 13,022; see also Merten's Law
of Federal Income Taxation, Vol. 5, pp. 23-24.)

To sustain the proposition that the interest payment in question is not deductible for the purpose of
computing respondent's net income, petitioner relies heavily on section 80 of Revenue Regulation No. 2
(known as Income Tax Regulation) promulgated by the Department of Finance, which provides that "the word
`taxes' means taxes proper and no deductions should be allowed for amounts representing interest, surcharge,
or penalties incident to delinquency." The court below, however, held section 80 as inapplicable to the instant
case because while it implements sections 30(c) of the Tax Code governing deduction of taxes, the respondent
taxpayer seeks to come under section 30(b) of the same Code providing for deduction of interest on
indebtedness. We find the lower court's ruling to be correct. Contrary to petitioner's belief, the portion of
section 80 of Revenue Regulation No. 2 under consideration has been part and parcel of the development to
the law on deduction of taxes in the United States. (See Capital Bldg. and Loan Assn. vs. Comm., 23 BTA 848.
Thus, Mertens in his treatise says: "Penalties are to be distinguished from taxes and they are not deductible
under the heading of taxs." . . . Interest on state taxes is not deductible as taxes." (Vol. 5, Law on Federal
Income Taxation, pp. 22-23, sec. 27.06, citing cases.) This notwithstanding, courts in that jurisdiction, however,
have invariably held that interest on deficiency taxes are deductible, not as taxes, but as interest. (U.S. vs.
Jaffray, et al., supra; see also Mertens, sec. 26.09, Vol. 4, p. 552, and cases cited therein.) Section 80 of
Revenue Regulation No. 2, therefore, merely incorporated the established application of the tax deduction
statute in the United States, where deduction of "taxes" has always been limited to taxes proper and has never
included interest on delinquent taxes, penalties and surcharges.

To give to the quoted portion of section 80 of our Income Tax Regulations the meaning that the petitioner
gives it would run counter to the provision of section 30(b) of the Tax Code and the construction given to it by
courts in the United States. Such effect would thus make the regulation invalid for a "regulation which
operates to create a rule out of harmony with the statute, is a mere nullity." (Lynch vs. Tilden Produce Co., 265
U.S. 315; Miller vs. U.S., 294 U.S. 435.) As already stated, section 80 implements only section 30(c) of the Tax
Code, or the provision allowing deduction of taxes, while herein respondent seeks to be allowed deduction
under section 30(b), which provides for deduction of interest on indebtedness.

In conclusion, we are of the opinion and so hold that although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax Regulations, the
taxpayer is not precluded thereby from claiming said interest payment as deduction under section 30(b) of the
same Code.

In view of the foregoing, the decision sought to be reviewed is affirmed, without pronouncement as to costs.