CIR v.

DLSU

FACTS
 IN 2004, the BIR issued to DLSU a letter of authority authorizing its revenue officers to examine the
latter's books of accounts and other accounting records for all internal revenue taxes for the period Fiscal
Year Ending 2003
 Subsequently, the BIR through a Formal Letter of Demand assessed DLSU the following deficiency taxes:
(1) income tax on rental earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentary stamp tax (DST) on loans and lease
contracts. The BIR demanded the payment of P17,303,001.12, inclusive of surcharge, interest and penalty
for taxable years 2001, 2002 and 2003
 DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed a petition
for review with the CTA.
 DLSU, a non-stock, non-profit educational institution, principally anchored its petition on Article 15,
Section 4(3):
o All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties.
 The CTA Division partially granted DLSU's petition for review. Both the Commissioner and DLSU moved
for the reconsideration
 DLSU later submitted supplemental pieces of documentary evidence to prove that its rental income was
used actually, directly and exclusively for educational purposes. The CTA division this reduced the amount
of DLSU's tax deficiencies (5m nalang)
o CTA En Banc sustained the findings of the CTA Division.
 Commsioner’s arguments:
o DLSU's rental income is taxable regardless of how such income is derived, used or disposed of
o Article XIV, Section 4 (3) of the Constitution must be harmonized with Section 30 (H) of the Tax
Code, which states among others, that the income of whatever kind and character of a non-stock
and non-profit educational institution from any of its properties, real or personal, or from any of
its activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed by this Code.
o DLSU is exempt only from property tax but not from income tax on the rentals earned from
property
 DLSU’s arguments:
o Article XIV, Section 4 (3) of the Constitution is clear thatall assets and revenues of non-stock,
non-profit educational institutions used actually, directly and exclusively for educational purposes
are exempt from taxes and duties.
o The Tax Code cannot amend the Constitution.

ISSUE: Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes--YES

RATIO
The revenues and assets of non-stock, non-profit educational institutions proved to have been used actually,
directly, and exclusively for educational purposes are exempt from duties and taxes.
 The 1997 Tax Code DID NOT qualify the tax exemption constitutionally-granted to non-stock, non-profit
educational institutions.
 The SC in the YMCA case already analyzed and explained the meaning of Article XIV, Section 4 (3) of the
Constitution.
o Recall in the YMCA case, YMCA was considered as a “charitable institution.” The SC denied
YMCA’s claim that it fell under Article XIV, Section 4 (3). So in that case, YMCA was subject to
income tax under Section 30 of the tax code.
 But in the YMCA case, the SC laid down the requisites for availing the tax exemption under Article XIV,
Section 4 (3), namely:
(1) the taxpayer falls under the classification non-stock, non-profit educational institution; and
 (2) the income it seeks to be exempted from taxation isused actually, directly and exclusively
for educational purposes.
 The SC holds in this case that the
o last paragraph of Section 30 of the Tax Code is without force and effect with respect to non-stock,
non-profit educational institutions, provided, that the non-stock, non-profit educational institutions
PROVE that its assets and revenues are used actually, directly and exclusively for educational
purposes.
o The tax-exemption constitutionally-granted to non-stock, non-profit educational institutions, is not
subject to limitations imposed by law

Unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable institutions, churches,
parsonages or convents, mosques, and non-profit cemeteries), which exempts from tax only the assets, i.e.,
"all lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ,” Article XIV, Section 4 (3) categorically states that ALL REVENUES and assets . . .
used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.
 The addition of the words “revenues” is deliberate.
 The text demonstrates the policy of the 1987 Constitution to provide broader tax privilege to non-stock,
non-profit educational institutions as recognition of their role in assisting the State provide a public
good.
 The tax exemption was seen as beneficial to students who may otherwise be charged unreasonable tuition
fees if not for the tax exemption extended to all revenues and assets

Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that
the revenues and income must have also been sourced from educational activities or activities related to the
purposes of an educational institution.
 The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so long as the
revenues and income are used actually, directly and exclusively for educational purposes, then said
revenues and income shall be exempt from taxes and duties
 Diff between revenue and assets:
o Revenues: amounts earned by a person or entity from the conduct of business operations.
o Assets: tangible and intangible properties owned by a person or entity
 Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly,
and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the
other hand, when it also shows that it uses its assets in the form of real property for educational purposes, it
shall be exempted from RPT.
o To illustrate, if a university leases a portion of its school building to a bookstore or cafeteria, the
leased portion is not actually, directly and exclusively used for educational purposes, even if the
bookstore or canteen caters only to university students, faculty and staff. Leased portion is subhect
to RPT.
o However, if the university actually, directly and exclusively uses for educational purposes the
revenues earned from the lease of its school building, such revenues shall be exempt from
taxes and duties.
o Parenthetically, income and revenues of non-stock, non-profit educational institution not used
actually, directly and exclusively for educational purposes are not exempt from duties and taxes.
 The crucial point of inquiry then is on the use of the assets or on the use of the revenues.

The tax exemption granted by the Constitution to non-stock, non-profit

educational institutions, unlike the exemption that may be availed of by proprietary educational institutions,
is not subject to limitations imposed by law.
 A non-stock, non- profit educational institutions has a more privileged status compared to proprietary
institutions.
 While a non-stock, non-profit educational institution is classified as a tax-exempt entity under Section 30
(Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational institution is covered by
Section 27 (Rates of Income Tax on Domestic Corporations).
 o Also by the Tax Code's clear terms, a proprietary educational institution is entitled only to the
reduced rate of 10% corporate income tax
 Thus, we declare the last paragraph of Section 30 of the Tax Code without force and effect for being
contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purpose.
 IN SUM: For all these reasons, we hold that the income and revenues of DLSUproven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and taxes.

Other Rulings
1. The LOA issued to DLSU is not entirely void. The assessment for taxable year 2003 is valid.
o The requirement to specify the taxable period covered by the LOA is simply to inform the
taxpayer of the extent of the audit and the scope of the revenue officer's authority.
o In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified
Prior Years. The LOA does not strictly comply with RMO 43-90 because it includes unverified
prior years. This does not mean, however, that the entire LOA is void.
o As the CTA correctly held, the assessment for taxable year 2003 is valid because this taxable
period is specified in the LOA. DLSU was fully apprised that it was being audited for taxable year
2003. Corollarily, the assessments for taxable years 2001 and 2002 are void for having been
unspecified on separate LOAs
2. The CTA correctly admitted DLSU's formal offer of supplemental evidence.
a. The SC sustains the CTA's admission of DLSU's supplemental offer of evidence not only because
the Commissioner failed to promptly object, but more so because the strict application of the
technical rules of evidence may defeat the intent of the Constitution.
3. The CTA's appreciation of evidence is generally binding on the Court unless compelling reasons justify
otherwise.