EN BANC

[G.R. No. 25386. October 20, 1926.]

ASIATIC PETROLEUM CO. (P. I.), LTD. , plaintiff-appellee, vs. A.

LLANES, provincial treasurer of Cebu, defendant-appellant.

Provincial Fiscal Diaz and Attorney-General Jaranilla for appellant.

Ross, Lawrence & Selph for appellee.

SYLLABUS

1. TAXATION; LAND BELONGING TO GOVERNMENT, EXEMPTION OF

LESSEE. — Land belonging to the Government of the Philippine Islands,
whether of a public or patrimonial character, is exempt from taxation in the
hands of a person occupying the same under a lease executed prior to the
taking effect of section 113 of Act No. 2874, as amended by section 17 of
Act No 3219, of the Philippine Legislature.
2. CONSTITUTIONAL. LAW; RETROACTIVE LEGISLATION; IMPAIRING
OBLIGATION OF CONTRACT. — Act No. 2874 of the Philippine Legislature,
approved November 29, 1919, was given retroactive effect from July 1 of the
same year. While this retroactive provision might be given effect with
respect to the administrative features of the statute, it cannot be given
effect the extent of impairing the obligation of a lease executed in the
interval between July 1, 1919, and the date when the law in fact became
effective, since our Organic Law prohibits the enactment of laws impairing
the obligation of contract.
3. TAXATION, EXEMPTIONS DISFAVORED. — Exemptions from taxation
are highly disfavored in law; 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 implication.

DECISION

STREET, J : p

This action was instituted by the Asiatic Petroleum Co., Ltd., for the
purpose of recovering from the provincial treasurer of Cebu the sum of
P3,523.02, which is alleged to have been illegally exacted under protest
from said company by the defendant for taxes covering the years 1923 to
1925, inclusive, upon the land known as "Shell Island" near the City of Cebu
and upon certain improvements placed thereon by the plaintiff. Upon
hearing the cause the trial court gave judgment in favor of the plaintiff to
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 recover the amount claimed in the complaint, with the lawful interest from
May 28, 1925, the date of the filing of the complaint. From this judgment the
defendant appealed.

It appears that on August 22, 1919, the Governor-General, acting on

behalf of the Government of the Philippine Islands, entered into a contract of
lease with the plaintiff, the Asiatic Petroleum Co. (P. I.), whereby the
Government leased to said company for the term of fifty years a piece of
land, having an area of one and one-half hectares, situated adjacent to the
Island of Mactan, municipality of Opon, Province of Cebu, said island being at
a distance of about 600 meters from the landing place of the port of Cebu. At
the time of the making of the lease, the land referred to was accustomed to
be covered by water at high tide but it was needed by the lessee as a site for
tanks to be used in the storage of petroleum. In order to reclaim the site and
protect the improvements thereon from the sea, it was necessary for the
company to build a concrete and cement foundation, protected by retaining
walls of the same material.
The contract of lease recites that the lease is made pursuant to the
provisions of Act No. 1654 of the Philippine Commission, as amended by Act
No. 2570 of the Philippine Legislature; but an examination of the contents of
Act No. 1654 shows that the lease in question was made pursuant to
sections 5 and 6 of Act No. 1654, since these sections alone relate
particularly to the lease of land under water. As pertinent to the discussion,
we note that sections 2 to 4, inclusive, of Act No. 1654 deal with the leasing
of lands that have been made or reclaimed from the sea by the Government
by means of dredging or filling or otherwise; and in section 4 it is declared
that all lands leased under the preceding sections of the Act and all
improvements on such lands shall be subject to local taxation against the
lessees, to the same extent as if such lessees were the owners of both land
and improvements. The portion of the same Act which deals with the subject
of the leasing of lands under water (sections 5 and 6) makes no mention of
the liability of the lessee for taxes; and the leasing contains no stipulation
making the lessee liable for taxes. However, after the lessee obtained
possession, the taxing authorities made an assessment against it with
respect both to the land and improvements thereon for the years 1923 to
1925, inclusive, which tax had been paid by the plaintiff under protest, and
for the recovery of the same, this action was instituted.
It is quite clear that the lessee is not liable for the tax assessed against
it with respect to the land which is the subject of the lease. That land is the
property of the Government; and section 344 of the Administrative Code
especially exempts from local taxation property owned by the United States
of America or by the Government of the Philippine Islands. The circumstance
that the plaintiff now holds said land under a contract of lease with the
Government by no means makes the plaintiff liable for the tax on the land.
This point was expressly ruled by this court in Fairchild vs. Sarmiento (47
Phil., 485), where we held that when the Government as owner of land
leases it for a fixed rental, under a contract not containing a stipulation for
the payment of taxes by the lessee, such land is exempt in the hands of the
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 lessee. This rule must be understood to apply to all property which is exempt
in the hands of the Government, whether it be of a public or patrimonial
nature. In this jurisdiction real property, whether consisting of land or the
improvements thereon, is assessable against the owner; and in the absence
of special provision no liability for the tax attaches to any other person than
the owner.
We note that Act No. 1654 has been superseded by certain provisions
in Act No. 2874; and in section 113 of this Act there is a general provision
that all the lands granted by virtue of said Act, except homesteads, shall be
subject to the ordinary taxes which shall be paid by the grantee even though
the title remains in the Government. This Act was approved November 29,
1919, a little more than three months after the date when the lease now
under consideration was made, but section 129 of Act No. 2874 contains a
provision to the effect that it shall take effect on July l, 1919. Upon this it is
contended by the provincial of Cebu, as attorney for the Government, that
Act No. 2874 should be given a retroactive effect, with the result that the
lessee under this contract is made liable for the taxes upon Shell Island and
improvements thereon, by virtue of said retroactive provision. This view is
untenable. While it may be conceded that the Act referred to could be given
a retroactive effect with respect to the administrative and curative features
of the statute, it could not be given retroactive effect to the extent of
impairing the obligation of an existing lease, since our Organic Law prohibits
the enactment of laws impairing the obligation of contracts (Act of Congress
of August 29, 1916, sec. 3).
It follows from what has been said that no error was committed by the
lower court in giving judgment in favor of the plaintiff to recover the taxes
paid by it under protest upon the land which is the subject of the lease.
Whether the plaintiff was liable for the tax assessed against it upon the
value of the improvements which placed upon Shell Island is a question
which is governed different considerations. In this connection we note these
improvements consist of oil tanks, wharf, warehouse, pump house, and
sheds, together with an office and residence building and coolie quarters.
These are not public improvements, but, are of a private nature, constructed
for the use of the lessee in conducting its business as a purveyor of coal oil.
Said improvements belong to the lessee and will remain its property until the
termination of the lease, when, under subsection ( c) of section 6 of Act No.
1654, the title to the same will vest in the Government of the Philippine
Islands. The fact that the improvements will thus ultimately belong to the
Government in no wise alters the liability of the lessee of taxes thereon, so
long as the property belongs to it. Under section 343 of the Administrative
Code the tax on improvements on real property is assessable against the
owner of such improvements whether he is also the owner of the land on
which they are placed or not. The case not infrequently happens that the
land is assessed to one person and the improvements to another; and so it
should be, when the titles to the two different sorts of property are vested in
different persons.
Upon examining the provisions of Act No. 1654 relative to the leasing
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 of lands reclaimed by the Government, it will be noted that, by section 4, all
lands leased under the preceding sections of the Act, "and all improvements
thereon" shall be subject to local taxation. From the inclusion of
improvements in said section and the omission of all reference to taxation in
the sections dealing with the leasing of lands under water, an argument has
been deduced to the effect that the lessee here should not be held liable for
taxes on the improvements. We consider such implication to be too weak to
support the claim of exemption asserted by the lessee, even supposing that
the inference drawn is in any wise legitimate. Exemptions from taxation are
highly disfavored, so much so that they may almost be said be odious to the
law. He who claims an exemption must be able to point to some positive
provision of law creating the right. It cannot be allowed to exist upon a
vague implication such as is supposed to arise in this case from the omission
from Act No. 1654 of any reference to liability for tax. The books are full of
very strong expressions on this point. As was said by the Supreme Court of
Tennessee in Memphis vs. U. & P. Bank (91 Tenn., 546, 550), "The right of
taxation is inherent in the State. It is a prerogative essential to the
perpetuity of the government; and he who claims an exemption from the
common burden, must justify his claim by the clearest grant of organic or
statute law." Other utterances equally or more emphatic come readily to
hand from the highest authority. In Ohio Life Ins. and Trust Co. vs. Debolt (16
Howard, 416), it was said by Chief Justice Taney, that the right of taxation
will not be held to have been surrendered, "unless the intention to surrender
is manifested by words too plain to be mistaken." In the case of the
Delaware Railroad Tax (18 Wallace, 206, 226), the Supreme Court of the
United States said that the surrender, when claimed, must be shown by
clear, unambiguous language, which will admit of no reasonable
construction consistent with the reservation of the power. If a doubt arise as
to the intent of the legislature, that doubt must be solved in favor of the
State. In Erie Railway Company vs. Commonwealth of Pennsylvania (21
Wallace, 492, 499), Mr. Justice Hunt, speaking of exemptions, observed that
a State cannot strip itself of the most essential power of taxation by doubtful
words. "It cannot, by ambiguous language, be deprived of this highest
attribute of sovereignty." In Tennessee vs. Whitworth (117 U. S., 129, 136), it
was said: "In all cases of this kind the question is as to the intent of the
legislature, the presumption always being against any surrender of the
taxing power." In Farrington vs. Tennesee and County of Shelby (95 U. S.,
679, 686), Mr. Justice Swayne said: ". . . When exemption is claimed, it must
be shown indubitably to exist. At the outset, every presumption is against it.
A well-founded doubt is fatal to the claim. It is only when the terms of the
concession are too explicit to admit fairly of any other construction that the
proposition can be supported."
Reliance is placed in the brief of the appellee upon the case of, the City
of Oakland vs. Albers Bros.' Milling Co. (184 Pac., 868), where it was held
that a dock and warehouse built by a lessee of public land are not subject to
taxation as improvements. But the lease there in question contained a
stipulation declaring that the dock and warehouse, when constructed by the
lessee pursuant to the terms of the lease, should become and remain the
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 property of the lessor. In the case before us the improvements upon which
the assessment; is now sustained certainly belong to the lessee; and, with
the assent of the officials mentioned in the contract, the lessee may assign
the lease, or mortgage or encumber the improvements and its successors
will have full enjoyment of both the lease and the improvements during the
term of the contract. It is true, as already stated, that the improvements
cannot be removed and all upon termination of the lease the improvements
will become the property of the Government. This change of ownership,
which can only occur at the end of the life of the lease, can in no wise affect
the liability of present owners for taxes. In Army and Navy Club vs. Trinidad
(44 Phil., 383) we held that the circumstance that at the end of a long term
of years the property now owned by the Army and Navy Club is subject to an
option for the purchase of the same by the city, at a very small valuation,
does not affect the liability of the present owner for taxes upon the full value
of the property.
But it is also said that the irremovable nature of these improvements
determines their character as realty, with the result that the improvements,
like the land itself, should be held exempt. We see no necessity for thus
ignoring the fact of the present ownership of the improvements by the
lessee. Improvements are taxable separately in this jurisdiction and there is
neither difficulty nor injustice in allowing the tax laws to operate against the
owner of the improvements, while relieving it from liability for the tax on the
land.
The result of the discussion is that while the lessee is not taxable in
respect to the land which is the subject of the lease, it is subject to taxation
with respect to the improvements. The appealed judgment must therefore
be modified be reducing the recovery to the amount paid upon the land,
namely P2,270.88; and this refund must, under section 1579 of the
Administrative Code, be made without interest.
It being understood that the recovery is limited to the amount last
above stated, without interest, the same is affirmed, without costs. So
ordered.
Villamor, Ostrand, Johns, and Villa-Real, JJ., concur.

Separate Opinions
AVANCEÑA, C.J., with whom concurs ROMUALDEZ, J., dissenting:

I dissent. If the land involved in this case is exempt from taxation by

reason of being Government property, the improvements thereon must
likewise be exempt, being also Government property. According to article
358 of the Civil Code, whatever is built on another's land and any
improvements made thereon belong to the owner of the same. It is true that
this rule is modified in regard to the usufructuary and to the lessee (articles
487 and 1573, Civil Code), who have the right to remove whatever was built
and the improvements made on the land if it is possible to do so without
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 injury to the latter. But, according to Act No. 1654, governing the lease in
question, and the terms of the contract executed by the plaintiff, as lessee,
the improvements on the land shall become the property of the Government
at the expiration of the lease. This means that once the improvements have
been made by the plaintiff it cannot dispose of them because it must
conserve them for the purposes of the law and the terms of the contract and
cannot remove them. According to this, the modification of the rule
established in article 358 of the Civil Code does not apply in the present case
by express provision of a special law and by express agreement of the
parties and, consequently, said rule strictly applies here, and these
improvements must be considered Government property as it is the owner
of the land.
It is said, however, that as, according to the law and the contract,
these improvements shall become the property of the Government at the
expiration of the lease, it follows that during the lease they are the property
of the lessee. This inference is not justified if it is taken into consideration
that this provision of the law and this clause of the contract have for their
purpose only the elimination of the sole modification of the rule established
in article 358, in favor of the lessee, so as to make it strictly applicable. In
fact, taking into consideration this condition of the lease, the lessee, even
before the expiration of the contract cannot be considered the owner of the
improvements which he may make on the land, because he lacks one of the
principal attributes of ownership, which is the power to dispose.
This must have been the intention of Act No. 1654 which, in making
inapplicable, in leases of reclaimed seashore land, the exemption in favor of
the Government from taxation, has made reference not only to the land but
also to the improvements thereon If these improvements made by the lessee
were to be considered the property of the lessee during the lease, the law
would not have referred to them inasmuch as even without this reference
said improvements be subject to taxation. For this reason, undoubtedly, it is
provided in the law that the lessee of reclaimed seashore and shall pay the-
taxes, not on account of being the owner, but in the same manner as if he
were the owner of the land and the improvements.
In other words, it is my opinion that the Government, being the owner
of the land on which the improvements were, upon which taxes are sought
to be levied, and as there improvements have been made by the plaintiff, as
lessee, without the right to remove them, they must be held to be
Government property and are also exempt from taxation.

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