1

CASES ON INHERENT LIMITATIONS

EN BANC
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.
EN BANC
G.R. No. L-75697 June 18, 1987
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.

EN BANC

10

G.R. No. L-23645

October 29, 1968

BENJAMIN
P.
GOMEZ, petitioner-appellee,
vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO R.
VALENCIA, in his capacity as Secretary of Public Works and Communications,
and DOMINGO GOPEZ, in his capacity as Acting Postmaster of San Fernando,
Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine C.
Zaballero and Solicitor Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635, 1 as amended by
Republic Act 2631,2 which provides as follows:
To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall
order for the period from August nineteen to September thirty every year the printing
and issue of semi-postal stamps of different denominations with face value showing the
regular postage charge plus the additional amount of five centavos for the said purpose,
and during the said period, no mail matter shall be accepted in the mails unless it bears
such semi-postal stamps: Provided, That no such additional charge of five centavos
shall be imposed on newspapers. The additional proceeds realized from the sale of the
semi-postal stamps shall constitute a special fund and be deposited with the National
Treasury to be expended by the Philippine Tuberculosis Society in carrying out its noble
work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter issued
four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9
(August 28, 1958), and 10 (July 15, 1960). All these administrative orders were issued
with the approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period from August 19
to September 30, 1957, for lack of time. However, two denominations of such stamps,
one at "5 + 5" centavos and another at "10 + 5" centavos, will soon be released for use
by the public on their mails to be posted during the same period starting with the year
1958.
xxx

xxx

xxx

During the period from August 19 to September 30 each year starting in 1958, no mail
matter of whatever class, and whether domestic or foreign, posted at any Philippine
Post Office and addressed for delivery in this country or abroad, shall be accepted for
mailing unless it bears at least one such semi-postal stamp showing the additional value
of five centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one such
semi-postal stamp if posted during the period above stated starting with the year 1958,
in addition to being charged the usual postage prescribed by existing regulations. In the

11

case of business reply envelopes and cards mailed during said period, such stamp
should be collected from the addressees at the time of delivery. Mails entitled to
franking privilege like those from the office of the President, members of Congress, and
other offices to which such privilege has been granted, shall each also bear one such
semi-postal stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in street or postoffice mail boxes without the required semi-postal stamp, shall be returned to the
sender, if known, with a notation calling for the affixing of such stamp. If the sender is
unknown, the mail matter shall be treated as nonmailable and forwarded to the Dead
Letter Office for proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled to franking
privilege which are not exempted from the payment of the five centavos intended for the
Philippine Tuberculosis Society, such extra charge may be collected in cash, for which
official receipt (General Form No. 13, A) shall be issued, instead of affixing the semipostal stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class rate, the extra
charge of five centavos for the Philippine Tuberculosis Society shall be collected on
each separately-addressed piece of second-class mail matter, and the total sum thus
collected shall be entered in the same official receipt to be issued for the postage at the
second-class rate. In making such entry, the total number of pieces of second-class mail
posted shall be stated, thus: "Total charge for TB Fund on 100 pieces . .. P5.00." The
extra charge shall be entered separate from the postage in both of the official receipt
and the Record of Collections.
2. First-class and third-class mail permits. Mails to be posted without postage affixed
under permits issued by this Bureau shall each be charged the usual postage, in
addition to the five-centavo extra charge intended for said society. The total extra
charge thus received shall be entered in the same official receipt to be issued for the
postage collected, as in subparagraph 1.
3. Metered mail. For each piece of mail matter impressed by postage meter under
metered mail permit issued by this Bureau, the extra charge of five centavos for said
society shall be collected in cash and an official receipt issued for the total sum thus
received, in the manner indicated in subparagraph 1.
4. Business reply cards and envelopes. Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for
said society shall be collected in cash on each reply card or envelope delivered, in
addition to the required postage which may also be paid in cash. An official receipt shall
be issued for the total postage and total extra charge received, in the manner shown in
subparagraph 1.
5. Mails entitled to franking privilege. Government agencies, officials, and other
persons entitled to the franking privilege under existing laws may pay in cash such extra
charge intended for said society, instead of affixing the semi-postal stamps to their
mails, provided that such mails are presented at the post-office window, where the fivecentavo extra charge for said society shall be collected on each piece of such mail

12

matter. In such case, an official receipt shall be issued for the total sum thus collected,
in the manner stated in subparagraph 1.
Mail under permits, metered mails and franked mails not presented at the post-office
window shall be affixed with the necessary semi-postal stamps. If found in mail boxes
without such stamps, they shall be treated in the same way as herein provided for other
mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications
received for mailing under any class of mail matter, including newspapers and
magazines admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a letter
at the post office in San Fernando, Pampanga. Because this letter, addressed to a
certain Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the
special anti-TB stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brough suit for declaratory relief in the Court
of First Instance of Pampanga, to test the constitutionality of the statute, as well as the
implementing administrative orders issued, contending that it violates the equal
protection clause of the Constitution as well as the rule of uniformity and equality of
taxation. The lower court declared the statute and the orders unconstitutional; hence
this appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents'
contention that declaratory relief is unavailing because this suit was filed after the
petitioner had committed a breach of the statute. While conceding that the mailing by
the petitioner of a letter without the additional anti-TB stamp was a violation of Republic
Act 1635, as amended, the trial court nevertheless refused to dismiss the action on the
ground that under section 6 of Rule 64 of the Rules of Court, "If before the final
termination of the case a breach or violation of ... a statute ... should take place, the
action may thereupon be converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought
"before breach or violation" of the statute has been committed. Rule 64, section 1 so
provides. Section 6 of the same rule, which allows the court to treat an action for
declaratory relief as an ordinary action, applies only if the breach or violation occurs
after the filing of the action but before the termination thereof. 3
Hence, if, as the trial court itself admitted, there had been a breach of the statute before
the firing of this action, then indeed the remedy of declaratory relief cannot be availed
of, much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question
did not constitute a breach of the statute because the statute appears to be addressed
only to postal authorities. The statute, it is true, in terms provides that "no mail matter
shall be accepted in the mails unless it bears such semi-postal stamps." It does not

13

follow, however, that only postal authorities can be guilty of violating it by accepting
mails without the payment of the anti-TB stamp. It is obvious that they can be guilty of
violating the statute only if there are people who use the mails without paying for the
additional anti-TB stamp. Just as in bribery the mere offer constitutes a breach of the
law, so in the matter of the anti-TB stamp the mere attempt to use the mails without the
stamp constitutes a violation of the statute. It is not required that the mail be accepted
by postal authorities. That requirement is relevant only for the purpose of fixing the
liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct
because this suit was filed not only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other mail that he might send in the
future. Thus, in his complaint, the petitioner prayed that due course be given to "other
mails without the semi-postal stamps which he may deliver for mailing ... if any, during
the period covered by Republic Act 1635, as amended, as well as other mails hereafter
to be sent by or to other mailers which bear the required postage, without collection of
additional charge of five centavos prescribed by the same Republic Act." As one whose
mail was returned, the petitioner is certainly interested in a ruling on the validity of the
statute requiring the use of additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1. It is said that the statute is violative of the equal protection clause of the Constitution.
More specifically the claim is made that it constitutes mail users into a class for the
purpose of the tax while leaving untaxed the rest of the population and that even among
postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar
exemption to offices performing governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails.
As such the objections levelled against it must be viewed in the light of applicable
principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select the
subjects of taxation and to grant exemptions. 4 This power has aptly been described as
"of wide range and flexibility." 5 Indeed, it is said that in the field of taxation, more than in
other areas, the legislature possesses the greatest freedom in classification. 6 The
reason for this is that traditionally, classification has been a device for fitting tax
programs to local needs and usages in order to achieve an equitable distribution of the
tax burden.7
That legislative classifications must be reasonable is of course undenied. But what the
petitioner asserts is that statutory classification of mail users must bear some
reasonable relationship to the end sought to be attained, and that absent such
relationship the selection of mail users is constitutionally impermissible. This is
altogether a different proposition. As explained in Commonwealth v. Life Assurance
Co.:8

14

While the principle that there must be a reasonable relationship between classification
made by the legislation and its purpose is undoubtedly true in some contexts, it has no
application to a measure whose sole purpose is to raise revenue ... So long as the
classification imposed is based upon some standard capable of reasonable
comprehension, be that standard based upon ability to produce revenue or some other
legitimate distinction, equal protection of the law has been afforded. See Allied Stores of
Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v.
Commonwealth of Kentucky, 2d U.S. 56, 573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by the
clearest demonstration that it sanctions invidious discrimination, which is all that the
Constitution forbids. The remedy for unwise legislation must be sought in the legislature.
Now, the classification of mail users is not without any reason. It is based on ability to
pay, let alone the enjoyment of a privilege, and on administrative convinience. In the
allocation of the tax burden, Congress must have concluded that the contribution to the
anti-TB fund can be assured by those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience.
For it is now a settled principle of law that "consideration of practical administrative
convenience and cost in the administration of tax laws afford adequate ground for
imposing a tax on a well recognized and defined class." 9 In the case of the anti-TB
stamps, undoubtedly, the single most important and influential consideration that led the
legislature to select mail users as subjects of the tax is the relative ease and
convenienceof collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through the
regular means of collection. On the other hand, by placing the duty of collection on
postal authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a
class. Mail users were already a class by themselves even before the enactment of the
statue and all that the legislature did was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as amended, no more than reflects a
distinction that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences
that exist in fact is living law; to disregard [them] and concentrate on some abstract
identities is lifeless logic."10
Granted the power to select the subject of taxation, the State's power to grant
exemption must likewise be conceded as a necessary corollary. Tax exemptions are too
common in the law; they have never been thought of as raising issues under the equal
protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are
exempted from the levy the law and administrative officials have sanctioned an invidious
discrimination offensive to the Constitution. The application of the lower courts theory
would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of
equality.
As the United States Supreme Court has said, the legislature may withhold the burden
of the tax in order to foster what it conceives to be a beneficent enterprise. 11 This is the

15

case of newspapers which, under the amendment introduced by Republic Act 2631, are
exempt from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The State cannot be taxed without its consent and
such consent, being in derogation of its sovereignty, is to be strictly
construed.12 Administrative Order 9 of the respondent Postmaster General, which lists
the various offices and instrumentalities of the Government exempt from the payment of
the anti-TB stamp, is but a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis
to the exclusion of other diseases which, it is said, are equally a menace to public
health. But it is never a requirement of equal protection that all evils of the same genus
be eradicated or none at all. 13 As this Court has had occasion to say, "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." 14
2. The petitioner further argues that the tax in question is invalid, first, because it is not
levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is
that derived from his enjoyment of the privileges of living in an organized society,
established and safeguarded by the devotion of taxes to public purposes. Any other
view would preclude the levying of taxes except as they are used to compensate for the
burden on those who pay them and would involve the abandonment of the most
fundamental principle of government that it exists primarily to provide for the common
good.15
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail
or the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same
considerations may induce the legislature to impose a flat tax which in effect is a charge
for the transaction, operating equally on all persons within the class regardless of the
amount involved.16 As Mr. Justice Holmes said in sustaining the validity of a stamp act
which imposed a flat rate of two cents on every $100 face value of stock transferred:
One of the stocks was worth $30.75 a share of the face value of $100, the other $172.
The inequality of the tax, so far as actual values are concerned, is manifest. But, here
again equality in this sense has to yield to practical considerations and usage. There
must be a fixed and indisputable mode of ascertaining a stamp tax. In another sense,
moreover, there is equality. When the taxes on two sales are equal, the same number of
shares is sold in each case; that is to say, the same privilege is used to the same
extent. Valuation is not the only thing to be considered. As was pointed out by the court
of appeals, the familiar stamp tax of 2 cents on checks, irrespective of income or
earning capacity, and many others, illustrate the necessity and practice of sometimes
substituting count for weight ...17

16

According to the trial court, the money raised from the sales of the anti-TB stamps is
spent for the benefit of the Philippine Tuberculosis Society, a private organization,
without appropriation by law. But as the Solicitor General points out, the Society is not
really the beneficiary but only the agency through which the State acts in carrying out
what is essentially a public function. The money is treated as a special fund and as such
need not be appropriated by law.18
3. Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is
one of the grounds on which the lower court invalidated Republic Act 1631, as
amended, namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that
for certain classes of mail matters (such as mail permits, metered mails, business reply
cards, etc.), the five-centavo charge may be paid in cash instead of the purchase of the
anti-TB stamp. It further states that mails deposited during the period August 19 to
September 30 of each year in mail boxes without the stamp should be returned to the
sender, if known, otherwise they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may
be necessary to prevent a failure of the undertaking. The authority given to the
Postmaster General to raise funds through the mails must be liberally construed,
consistent with the principle that where the end is required the appropriate means are
given.19
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of
the additional charge but also that of the regular postage. In the case of business reply
cards, for instance, it is obvious that to require mailers to affix the anti-TB stamp on their
cards would be to make them pay much more because the cards likewise bear the
amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do
not bear the anti-TB stamp, but a declaration therein that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamp" is a declaration that such
mail matter is nonmailable within the meaning of section 1952 of the Administrative
Code. Administrative Order 7 of the Postmaster General is but a restatement of the law
for the guidance of postal officials and employees. As for Administrative Order 9, we
have already said that in listing the offices and entities of the Government exempt from
the payment of the stamp, the respondent Postmaster General merely observed an
established principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed,
without pronouncement as to costs.

EN BANC

17

G.R. No. L-10405

December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of

Rizal, petitioner-appellant,
vs.
THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET
AL., respondents-appellees.
Asst.
Fiscal
Noli
M.
Cortes
and
Jose
P. Santos
for
appellant.
Office of the Asst. Solicitor General Jose G. Bautista and Solicitor A. A. Torres for
appellee.

CONCEPCION, J.:
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance
of Rizal, dismissing the above entitled case and dissolving the writ of preliminary
injunction therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with injunction, upon the ground that Republic
Act No. 920, entitled "An Act Appropriating Funds for Public Works", approved on June
20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00 "for the
construction, reconstruction, repair, extension and improvement" of Pasig feeder road
terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen.
Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at the time of the
passage and approval of said Act, the aforementioned feeder roads were "nothing but
projected and planned subdivision roads, not yet constructed, . . . within the Antonio
Subdivision . . . situated at . . . Pasig, Rizal" (according to the tracings attached to the
petition as Annexes A and B, near Shaw Boulevard, not far away from the intersection
between the latter and Highway 54), which projected feeder roads "do not connect any
government property or any important premises to the main highway"; that the
aforementioned Antonio Subdivision (as well as the lands on which said feeder roads
were to be construed) were private properties of respondent Jose C. Zulueta, who, at
the time of the passage and approval of said Act, was a member of the Senate of the
Philippines; that on May, 1953, respondent Zulueta, addressed a letter to the Municipal
Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the
council, subject to the condition "that the donor would submit a plan of the said roads
and agree to change the names of two of them"; that no deed of donation in favor of the
municipality of Pasig was, however, executed; that on July 10, 1953, respondent
Zulueta wrote another letter to said council, calling attention to the approval of Republic
Act. No. 920, and the sum of P85,000.00 appropriated therein for the construction of the
projected feeder roads in question; that the municipal council of Pasig endorsed said
letter of respondent Zulueta to the District Engineer of Rizal, who, up to the present "has
not made any endorsement thereon" that inasmuch as the projected feeder roads in
question were private property at the time of the passage and approval of Republic Act
No. 920, the appropriation of P85,000.00 therein made, for the construction,
reconstruction, repair, extension and improvement of said projected feeder roads, was
illegal and, therefore, void ab initio"; that said appropriation of P85,000.00 was made by
Congress because its members were made to believe that the projected feeder roads in

18

question were "public roads and not private streets of a private subdivision"'; that, "in
order to give a semblance of legality, when there is absolutely none, to the
aforementioned appropriation", respondents Zulueta executed on December 12, 1953,
while he was a member of the Senate of the Philippines, an alleged deed of donation
copy of which is annexed to the petition of the four (4) parcels of land constituting
said projected feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same date, accepted by the
then Executive Secretary; that being subject to an onerous condition, said donation
partook of the nature of a contract; that, such, said donation violated the provision of our
fundamental law prohibiting members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and voidab initio, for the construction of the projected
feeder roads in question with public funds would greatly enhance or increase the value
of the aforementioned subdivision of respondent Zulueta, "aside from relieving him from
the burden of constructing his subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being undertaken by the Bureau of
Public Highways; and that, unless restrained by the court, the respondents would
continue to execute, comply with, follow and implement the aforementioned illegal
provision of law, "to the irreparable damage, detriment and prejudice not only to the
petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be
declared null and void; that the alleged deed of donation of the feeder roads in question
be "declared unconstitutional and, therefor, illegal"; that a writ of injunction be issued
enjoining the Secretary of Public Works and Communications, the Director of the
Bureau of Public Works and Highways and Jose C. Zulueta from ordering or allowing
the continuance of the above-mentioned feeder roads project, and from making and
securing any new and further releases on the aforementioned item of Republic Act No.
920, and the disbursing officers of the Department of Public Works and Highways from
making any further payments out of said funds provided for in Republic Act No. 920; and
that pending final hearing on the merits, a writ of preliminary injunction be issued
enjoining the aforementioned parties respondent from making and securing any new
and further releases on the aforesaid item of Republic Act No. 920 and from making any
further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no
legal capacity to sue", and that the petition did "not state a cause of action". In support
to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its
provincial governor, should represent the Province of Rizal, pursuant to section 1683 of
the Revised Administrative Code; that said respondent is " not aware of any law which
makes illegal the appropriation of public funds for the improvements of . . . private
property"; and that, the constitutional provision invoked by petitioner is inapplicable to
the donation in question, the same being a pure act of liberality, not a contract. The
other respondents, in turn, maintained that petitioner could not assail the appropriation
in question because "there is no actual bona fide case . . . in which the validity of
Republic Act No. 920 is necessarily involved" and petitioner "has not shown that he has
a personal and substantial interest" in said Act "and that its enforcement has caused or
will cause him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned
decision, dated October 29, 1953, holding that, since public interest is involved in this

19

case, the Provincial Governor of Rizal and the provincial fiscal thereof who represents
him therein, "have the requisite personalities" to question the constitutionality of the
disputed item of Republic Act No. 920; that "the legislature is without power appropriate
public revenues for anything but a public purpose", that the instructions and
improvement of the feeder roads in question, if such roads where private property,
would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street
purposes only and for no other purposes whatsoever; it being expressly understood that
should the Government of the Republic of the Philippines violate the condition hereby
imposed upon it, the title to the land hereby donated shall, upon such violation, ipso
facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is
"absolutely forbidden by the Constitution" and consequently "illegal", for Article 1409 of
the Civil Code of the Philippines, declares in existence and void from the very beginning
contracts "whose cause, objector purpose is contrary to law, morals . . . or public
policy"; that the legality of said donation may not be contested, however, by petitioner
herein, because his "interest are not directly affected" thereby; and that, accordingly, the
appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as much, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein. According
to said petition, respondent Zulueta is the owner of several parcels of residential land
situated in Pasig, Rizal, and known as the Antonio Subdivision, certain portions of which
had been reserved for the projected feeder roads aforementioned, which, admittedly,
were private property of said respondent when Republic Act No. 920, appropriating
P85,000.00 for the "construction, reconstruction, repair, extension and improvement" of
said roads, was passed by Congress, as well as when it was approved by the President
on June 20, 1953. The petition further alleges that the construction of said roads, to be
undertaken with the aforementioned appropriation of P85,000.00, would have the effect
of relieving respondent Zulueta of the burden of constructing his subdivision streets or
roads at his own expenses, 1and would "greatly enhance or increase the value of the
subdivision" of said respondent. The lower court held that under these circumstances,
the appropriation in question was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is selfevident. 2However, respondent Zulueta contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . . Aside from the fact that movant is not aware of
any law which makes illegal the appropriation of public funds for the improvement of
what we, in the meantime, may assume as private property . . . (Record on Appeal, p.
33.)
The first proposition must be rejected most emphatically, it being inconsistent with the
nature of the Government established under the Constitution of the Republic of the
Philippines and the system of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating legislative enactments
deemed violative of the Constitution or organic laws. 3

20

As regards the legal feasibility of appropriating public funds for a public purpose, the
principle according to Ruling Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude
of the interest to be affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the promotion of
private interest and the prosperity of private enterprises or business, does not justify
their aid by the use public money. (25 R.L.C. pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
In accordance with the rule that the taxing power must be exercised for public purposes
only, discussedsupra sec. 14, money raised by taxation can be expended only for
public purposes and not for the advantage of private individuals. (85 C.J.S. pp. 645-646;
emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may
be used only for public purpose. The right of the legislature to appropriate funds is
correlative with its right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for one purpose and
the devotion thereof to another purpose, no appropriation of state funds can be made
for other than for a public purpose.
xxx

xxx

xxx

The test of the constitutionality of a statute requiring the use of public funds is whether
the statute is designed to promote the public interest, as opposed to the furtherance of
the advantage of individuals, although each advantage to individuals
might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from
being patently sound, are a necessary corollary to our democratic system of
government, which, as such, exists primarily for the promotion of the general welfare.
Besides, reflecting as they do, the established jurisprudence in the United States, after
whose constitutional system ours has been patterned, said views and jurisprudence are,
likewise, part and parcel of our own constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in
question, upon the ground that petitioner may not contest the legality of the donation
above referred to because the same does not affect him directly. This conclusion is,
presumably, based upon the following premises, namely: (1) that, if valid, said donation
cured the constitutional infirmity of the aforementioned appropriation; (2) that the latter
may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and
admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its
passage or approval, not upon events occurring, or acts performed, subsequently

21

thereto, unless the latter consists of an amendment of the organic law, removing, with
retrospective operation, the constitutional limitation infringed by said statute. Referring
to the P85,000.00 appropriation for the projected feeder roads in question, the legality
thereof depended upon whether said roads were public or private property when the bill,
which, latter on, became Republic Act 920, was passed by Congress, or, when said bill
was approved by the President and the disbursement of said sum became effective, or
on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the
projected feeder roads were to be constructed belonged then to respondent Zulueta, the
result is that said appropriation sought a private purpose, and hence, was null and void.
4 The donation to the Government, over five (5) months after the approval and
effectivity of said Act, made, according to the petition, for the purpose of giving a
"semblance of legality", or legalizing, the appropriation in question, did not cure its
aforementioned basic defect. Consequently, a judicial nullification of said donation need
not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including therefore, his right to
the annulment of said contract, even though such creditors are not affected by the
same, except indirectly, in the manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who
will sustain a direct injury in consequence of its enforcement. Yet, there are many
decisions nullifying, at the instance of taxpayers, laws providing for the disbursement of
public funds, 5upon the theory that "the expenditure of public funds by an officer of the
State for the purpose of administering an unconstitutional act constitutes
a misapplication of such funds," which may be enjoined at the request of a
taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute, the general rule is that not only persons
individually affected, but alsotaxpayers, have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham
vs. Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that
the relationship of a taxpayer of the U.S. to its Federal Government is different from that
of a taxpayer of a municipal corporation to its government. Indeed, under
the composite system of government existing in the U.S., the states of the Union are
integral part of the Federation from an international viewpoint, but, each state enjoys
internally a substantial measure of sovereignty, subject to the limitations imposed by the
Federal Constitution. In fact, the same was made by representatives ofeach state of the
Union, not of the people of the U.S., except insofar as the former represented the
people of the respective States, and the people of each State has, independently of that
of the others, ratified said Constitution. In other words, the Federal Constitution and the
Federal statutes have become binding upon the people of the U.S. in consequence of
an act of, and, in this sense, through the respective states of the Union of which they

22

are citizens. The peculiar nature of the relation between said people and the Federal
Government of the U.S. is reflected in the election of its President, who is chosen
directly, not by the people of the U.S., but by electors chosen by each State, in such
manner as the legislature thereof may direct (Article II, section 2, of the Federal
Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand,
and the Republic of the Philippines, on the other, is not identical to that obtaining
between the people and taxpayers of the U.S. and its Federal Government. It is closer,
from a domestic viewpoint, to that existing between the people and taxpayers of each
state and the government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that of the states
of the Union, insofar as the simple and unitary type of our national government is not
subject to limitations analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal Government in the interest of
the Union. For this reason, the rule recognizing the right of taxpayers to assail the
constitutionality of a legislation appropriating local or state public funds which has
been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601)
has greater application in the Philippines than that adopted with respect to acts of
Congress of the United States appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation
of a land by the Province of Tayabas, two (2) taxpayers thereof were allowed to
intervene for the purpose of contesting the price being paid to the owner thereof, as
unduly exorbitant. It is true that in Custodio vs. President of the Senate (42 Off. Gaz.,
1243), a taxpayer and employee of the Government was not permitted to question the
constitutionality of an appropriation for backpay of members of Congress. However, in
Rodriguez vs. Treasurer of the Philippines and Barredo vs. Commission on Elections
(84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers impugning the
validity of certain appropriations of public funds, and invalidated the same. Moreover,
the reason that impelled this Court to take such position in said two (2) cases the
importance of the issues therein raised is present in the case at bar. Again, like the
petitioners in the Rodriguez and Barredo cases, petitioner herein is not merely a
taxpayer. The Province of Rizal, which he represents officially as its Provincial
Governor, is our most populated political subdivision, 8and, the taxpayers therein bear a
substantial portion of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case
sufficiently justify petitioners action in contesting the appropriation and donation in
question; that this action should not have been dismissed by the lower court; and that
the writ of preliminary injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are
remanded to the lower court for further proceedings not inconsistent with this decision,
with the costs of this instance against respondent Jose C. Zulueta. It is so ordered.

23

EN BANC
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for
appellees.

MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil
Case No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969,
as involving only pure questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June
19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2 of Republic Act No.
2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of
1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are practically the same,
and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan,
Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in
said municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tai of onesixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28,
1962, levies and collects "on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft drinks shall
submit to the Municipal Treasurer a monthly report of the total number of gallons
produced or manufactured during the month. 5

24

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal

production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing
the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264]
declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay
the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary
Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory
and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage
or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging
as a matter of right to every independent government, without being expressly conferred
by the people. 6 It is a power that is purely legislative and which the central legislative
body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does not apply. Legislative
powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to
tax. 9 Under the New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided by law."
Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond
the sphere of the legislative power to enact and vest in local governments the power of
local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the
State has not deemed wise to tax for more general purposes. 10 This is not to say
though that the constitutional injunction against deprivation of property without due
process of law may be passed over under the guise of the taxing power, except when
the taking of the property is in the lawful exercise of the taxing power, as when (1) the
tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either
the person or property taxed is within the jurisdiction of the government levying the tax;

25

and (4) in the assessment and collection of certain kinds of taxes notice and opportunity
for hearing are provided. 11 Due process is usually violated where the tax imposed is for
a private as distinguished from a public purpose; a tax is imposed on property outside
the State, i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in
assessing and collecting taxes. But, a tax does not violate the due process clause, as
applied to a particular taxpayer, although the purpose of the tax will result in an injury
rather than a benefit to such taxpayer. Due process does not require that the property
subject to the tax or the amount of tax to be raised should be determined by judicial
inquiry, and a notice and hearing as to the amount of the tax and the manner in which it
shall be apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the
delegating authority specifies the limitations and enumerates the taxes over which local
taxation may not be exercised. 13 The reason is that the State has exclusively reserved
the same for its own prerogative. Moreover, double taxation, in general, is not forbidden
by our fundamental law, since We have not adopted as part thereof the injunction
against double taxation found in the Constitution of the United States and some states
of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity 15 or by the same jurisdiction for
the same purpose, 16 but not in a case where one tax is imposed by the State and the
other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted,
Ordinance No. 23, which was approved on September 25, 1962, levies or collects from
soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for
.every bottle corked, irrespective of the volume contents of the bottle used. When it was
discovered that the producer or manufacturer could increase the volume contents of the
bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance
No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The difference between the two
ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it
was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the
Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal
of the latter, even without words to that effect. 18 Plaintiff-appellant in its brief admitted
that defendants-appellees are only seeking to enforce Ordinance No. 27, series of
1962. Even the stipulation of facts confirms the fact that the Acting Municipal Treasurer
of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the
provisions of said Ordinance No. 27, series of 1962. The aforementioned admission
shows that only Ordinance No. 27, series of 1962 is being enforced by defendantsappellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his
brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No.
23 as the provisions of the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local

26

governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
almost "everything, accepting those which are mentioned therein." As long as the text
levied under the authority of a city or municipal ordinance is not within the exceptions
and limitations in the law, the same comes within the ambit of the general rule, pursuant
to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against municipalities and
municipal districts to impose "any percentage tax or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax except gasoline, under the
provisions of the National Internal Revenue Code." For purposes of this particular
limitation, a municipal ordinance which prescribes a set ratio between the amount of the
tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for
being outside the power of the municipality to enact. 20 But, the imposition of "a tax of
one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all
soft drinks produced or manufactured under Ordinance No. 27 does not partake of the
nature of a percentage tax on sales, or other taxes in any form based thereon. The tax
is levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set ratio between the volume
of sales and the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco
other than cigars and cigarettes, matches firecrackers, manufactured oils and other
fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,
saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those
specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on
all softdrinks, produced or manufactured, or an equivalent of 1- centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would
not support the claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of imposable taxes.
25 This is in line with the constutional policy of according the widest possible autonomy
to local governments in matters of local taxation, an aspect that is given expression in
the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive
as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if
the purpose of the law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not
more than ten crowners or P2,000.00 with ten but not more than twenty crowners
imposed on manufacturers, producers, importers and dealers of soft drinks and/or
mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No.
41, series of 1968, of defendant Municipality, 29 appears not to affect the resolution of
the validity of Ordinance No. 27. Municipalities are empowered to impose, not only
municipal license taxes upon persons engaged in any business or occupation but also
to levy for public purposes, just and uniform taxes. The ordinance in question
(Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal

27

Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing

Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant.
SO ORDERED.

EN BANC
G.R. No. L-22814

August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY
OF
BUTUAN,
MEMBERS
OF
THE
MUNICIPAL
BOARD,
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF
BUTUAN, defendants-appellees.
Sabido,
Sabido
and
Associates
for
The City Attorney of Butuan City for defendants-appellees.

plaintiff-appellant.

CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan,
dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with
offices and principal place of business in Quezon City. The defendants are the City of
Butuan, its City Mayor, the members of its municipal board and its City Treasurer.
Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter
referred to as the City and collected by the latter, pursuant to its Municipal Ordinance
No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which
plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties
submitted the case for decision in the lower court upon a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products
the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the
municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled
in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and
sale in the City of Butuan and all municipalities of Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was
subsequently amended by Ordinance No. 122 and effective November 28, 1960. A copy
of Ordinance No. 110, Series of 1960 and Ordinance No. 122 are incorporated herein
as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc.,
of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the

28

amount of P4,926.63 from August 16 to December 31, 1960 and the amount of
P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total amount of
P14,177.03 paid under protest and those that if may later on pay until the termination of
this case on the ground that Ordinance No. 110 as amended of the City of Butuan is
illegal, that the tax imposed is excessive and that it is unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan City,
has prepared a form to be accomplished by the plaintiff for the computation of the tax. A
copy of the form is enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January 1, 1961
to July 30, 1961 of its warehouse in Butuan City is incorporated herein as Exhibits "D" to
"D-1" to "D-5". In this Profit and Loss Statement, the defendants claim that the plaintiff is
not entitled to a depreciation of P3,052.63 but only P1,202.55 in which case the profit of
plaintiff will be increased from P1,254.44 to P3,104.52. The plaintiff differs only on the
claim of depreciation which the company claims to be P3,052.62. This is in accordance
with the findings of the representative of the undersigned City Attorney who verified the
records of the plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24 bottles
was increased to P1.92 which price is uniform throughout the Philippines. Said increase
was made due to the increase in the production cost of its manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality and
illegality of Ordinance No. 110, as amended of the City of Butuan in their respective
memoranda.
xxx

xxx

x x x1wph1.t

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors",
within the purview thereof. Section 2 provides for the payment by "any agent and/or
consignee" of any dealer "engaged in selling liquors, imported or local, in the City," of
taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the
soft drinks and carbonated beverages therein named, and "all other soft drinks or
carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent"
for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the
end of every calendar month." Pursuant to Section 5, the taxes "shall be based and
computed from the cargo manifest or bill of lading or any other record showing the
number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks
received within the month." Sections 6, 7 and 8 specify the surcharge to be added for
failure to pay the taxes within the period prescribed and the penalties imposable for
"deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or for failure
"to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or
record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes
the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside"
but "sold within" the City. Section 10 of the ordinance provides that the revenue derived
therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the
General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of
the nature of an import tax; (2) it amounts to double taxation; (3) it is excessive,

29

oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2
of Republic Act No. 2264, upon the authority of which it was enacted, is an
unconstitutional delegation of legislative powers.
The second and last objections are manifestly devoid of merit. Indeed independently
of whether or not the tax in question, when considered in relation to the sales tax
prescribed by Acts of Congress, amounts to double taxation, on which we need not and
do not express any opinion - double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the injunction against double
taxation found in the Constitution of the United States and of some States of the
Union.1 Then, again, the general principle against delegation of legislative powers, in
consequence of the theory of separation of powers 2 is subject to one well-established
exception, namely: legislative powers may be delegated to local governments to
which said theory does not apply3 in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of
soft drinks or carbonated drinks in the production and sale of which plaintiff is
engaged or less than P0.0042 per bottle, is manifestly too small to be excessive,
oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this
connection, it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as
originally approved, was imposed upon dealers "engaged in selling" soft drinks or
carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the
sale of said merchandise. As amended by Ordinance No. 122, the tax is, however,
imposed only upon "any agent and/or consignee of any person, association,
partnership, company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:
... Definition of the Term Consignee or Agent. For purposes of this Ordinance, a
consignee of agent shall mean any person, association, partnership, company or
corporation who acts in the place of another by authority from him or one entrusted with
the business of another or to whom is consigned or shipped no less than 1,000 cases of
hard liquors or soft drinks every month for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks,
are not subject to the tax,unless they are agents and/or consignees of another
dealer, who, in the very nature of things, must be one engaged in business outside the
City. Besides, the tax would not be applicable to such agent and/or consignee, if less
than 1,000 cases of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo manifest or bill
of lading ... showing the number of cases" not sold but "received" by the taxpayer,
the intention to limit the application of the ordinance to soft drinks and carbonated drinks
brought into the City from outside thereof becomes apparent. Viewed from this angle,
the tax partakes of the nature of an import duty, which is beyond defendant's authority to
impose by express provision of law.4
Even however, if the burden in question were regarded as a tax on the sale of said
beverages, it would still be invalid, as discriminatory, and hence, violative of the
uniformity required by the Constitution and the law therefor, since only sales by "agents
or consignees" of outside dealers would be subject to the tax. Sales by local dealers,
not acting for or on behalf of other merchants, regardless of the volume of their sales,

30

and even if the same exceeded those made by said agents or consignees of producers
or merchants established outside the City of Butuan, would be exempt from the
disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does
not require identity or equality under all circumstances, or negate the authority to
classify the objects of taxation.5 The classification made in the exercise of this authority,
to be valid, must, however, be reasonable 6 and this requirement is not deemed satisfied
unless: (1) it is based upon substantial distinctions which make real differences; (2)
these are germane to the purpose of the legislation or ordinance; (3) the classification
applies, not only to present conditions, but, also, to future conditions substantially
identical to those of the present; and (4) the classification applies equally all those who
belong to the same class.7
These conditions are not fully met by the ordinance in question. 8 Indeed, if its purpose
were merely to levy a burden upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by sealers other than agents or consignees of
producers or merchants established outside the City of Butuan should be exempt from
the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall
be entered annulling Ordinance No. 110, as amended by Ordinance No. 122, and
sentencing the City of Butuan to refund to plaintiff herein the amounts collected from
and paid under protest by the latter, with interest thereon at the legal rate from the date
of the promulgation of this decision, in addition to the costs, and defendants herein are,
accordingly, restrained and prohibited permanently from enforcing said Ordinance, as
amended. It is so ordered.

FIRST DIVISION
[G.R. No. 124043. October 14, 1998]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS,
COURT OF TAX APPEALS and YOUNG MENS CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the Young Mens Christian
Association of the Philippines, Inc. (YMCA) established as a welfare, educational and
charitable non-profit corporation -- subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of Appeals [1] on
September 28, 1995[2] and February 29, 1996[3] in CA-GR SP No. 32007. Both

31

Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA
to claim tax exemption on the latters income from the lease of its real property.
The Facts
The Facts are undisputed.[4] Private Respondent YMCA is a non-stock, non-profit
institution, which conducts various programs and activities that are beneficial to the
public, especially the young people, pursuant to its religious, educational and charitable
objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from
leasing out a portion of its premises to small shop owners, like restaurants and canteen
operators, and P44,259.00 from parking fees collected from non-members. On July 2,
1984, the commissioner of internal revenue (CIR) issued an assessment to private
respondent, in the total amount of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes on rentals and
professional fees and deficiency withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its basic protest, filed a letter dated
October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court if
Tax Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor
of the YMCA:
xxx [T]he leasing of private respondents facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the [private
respondents]. It appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of YMCA, that these
facilities were leased to members and that they have to service the needs of its
members and their guests. The Rentals were minimal as for example, the barbershop
was only charged P300 per month. He also testified that there was actually no lot
devoted for parking space but the parking was done at the sides of the building. The
parking was primarily for members with stickers on the windshields of their cars and
they charged P.50 for non-members. The rentals and parking fees were just enough to
cover the costs of operation and maintenance only. The earning[s] from these rentals
and parking charges including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is] channeled to support
its many activities and attainment of its objectives. As pointed out earlier, the
membership dues are very insufficient to support its program. We find it reasonably
necessary therefore for [private respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been different if under the circumstances,
[private respondent] will purchase a lot and convert it to a parking lot to cater to the
needs of the general public for a fee, or construct a building and lease it out to the
highest bidder or at the market rate for commercial purposes, or should it invest its
funds in the buy and sell of properties, real or personal. Under these circumstances, we
could conclude that the activities are already profit oriented, not incidental and
reasonably necessary to the pursuit of the objectives of the association and therefore,
will fall under the last paragraph of section 27 of the Tax Code and any income derived
therefrom shall be taxable.

32

Considering our findings that [private respondent] was not engaged in the business of
operating or contracting [a] parking lot, we find no legal basis also for the imposition of
[a] deficiency fixed tax and [a] contractors tax in the amount[s] of P353.15
and P3,129.73, respectively.
xxxxxxxxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractors Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but
not to exceed three (3) years pursuant to Section 51 (e)(2) & (3) of the National Internal
Revenue Code effective as of 1984.[5]
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals
(CA). In its Decision of February 16, 1994, the CA [6] initially decided in favor of the CIR
and disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of the respondent Court of Tax Appeals that the
leasing of petitioners (herein respondent) facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the petitioners,'
and the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractors Tax P 3,129.23, &
1980 Deficiency Income Tax P372,578.20,
but the same is AFFIRMED in all other respect. [7]
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being supported by
substantial evidence [are] final and conclusive.
II

33

The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from

the income on rentals of small shops and parking fees [are] in accord with the
applicable law and jurisprudence.[8]
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed
itself and promulgated on September 28, 1995 its first assailed Resolution which, in
part, reads:
The Court cannot depart from the CTAs findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxxxxxxxx
The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the exemption.Not
even the petitioner would hazard the suggestion that YMCA is designed for
profit. Consequently, the little income from small shops and parking fees help[s] to keep
its head above the water, so to speak, and allow it to continue with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and in
accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTAs
decision is AFFIRMED in toto.[9]
The internal revenue commissioners own Motion for Reconsideration was denied by
Respondent Court in its second assailed Resolution of February 29, 1996.Hence, this
petition for review under Rule 45 of the Rules of Court. [10]
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation.[11]
This Courts Ruling
The Petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the
factual findings of the CTA. On the other hand, petitioner argues that the CA merely
reversed the ruling of the CTA that the leasing of private respondents facilities to small
shop owners, to restaurant and canteen operators and the operation of parking lots are

34

reasonably incidental to and reasonably necessary for the accomplishment of the

objectives of the private respondent and that the income derived therefrom are tax
exempt.[12] Petitioner insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA.[13] The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported
by substantial evidence, will not be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts. [14] In the present case, this
Court finds that the February 16, 1994 Decision of the CA did not deviate from this
rule. The latter merely applied the law to the facts as found by the CTA and ruled on the
issue raised by the CIR: Whether or not the collection or earnings of rental income from
the lease of certain premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of 1977, as
amended.[15]
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned
issue, as indeed it was expected to. That it did so in a manner different from that of the
CTA did not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been
held that [t]here is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the
doubt or difference arises as to the truth or falsehood of alleged facts. [16] In the present
case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion is different from that of
the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC:
SEC. 27. Exemptions from tax on corporations. -- The following organizations shall not
be taxed under this Title in respect to income received by them as such -xxxxxxxxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxxxxxxxx
Notwithstanding the provision in the preceding paragraphs, the income of whatever kind
and character of the foregoing organization 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 the tax imposed under this Code. (as
amended by Pres. Decree No. 1457)

35

Petitioners argues that while the income received by the organizations enumerated in
Section 27 (now Section 26) of the NIRC is, as a rule, exempted from the payment of
tax in respect to income received by them as such, the exemption does not apply to
income derived xxx from any if their properties, real or personal, or from any of their
activities conducted for profit, regardless, of the disposition made of such income xxx.
Petitioner adds that rented income derived by a tax-exempt organization from the lease
of its properties, real or personal, [is] not, therefore, exempt from income taxation, even
if such income [is] exclusively used for the accomplishment of its objectives. [17] We
agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine
of strict interpretation in construing tax exemptions. [18] Furthermore, a claim of statutory
exemption from taxation should be manifest and unmistakable from the language of the
law on which it is based. Thus, the claimed exemption must expressly be granted in a
statute stated in a language too clear to be mistaken. [19]
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the
very wording of the last paragraph of then Section 27 of the NIRC which mandates that
the income of exempt organizations (such as the YMCA) from any of their properties,
real or personal, be subject to the imposed by the same Code. Because the last
paragraph of said section unequivocally subjects to tax the rent income f the YMCA
from its rental property,[20] the Court is duty-bound to abide strictly by its literal meaning
and to refrain from resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied.[21] Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on whether to apply a strict
construction or a literal one on statutes that grant tax exemptions to religious, charitable
and educational propert[ies] or institutions.[22]
The last paragraph of Section 27, the YMCA argues, should be subject to the
qualification that the income from the properties must arise from activities conducted for
profit before it may be considered taxable. [23] This argument is erroneous. As previously
stated, a reading of said paragraph ineludibly shows that the income from any property
of exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase any of their activities conducted for profit does not qualify the word
properties. This makes income from the property of the organization taxable, regardless
of how that income is used -- whether for profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed
reversible error when it allowed, on reconsideration, the tax exemption claimed by
YMCA on income it derived from renting out its real property, on the solitary but
unconvincing ground that the said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it used or disposed
of. Where the law does not distinguish, neither should we.
Constitutional Provisions
on Taxation

36

Invoking not only the NIRC but also the fundamental law, private respondent submits
that Article VI, Section 28 of par. 3 of the 1987 Constitution, [24] exempts charitable
institutions from the payment not only of property taxes but also of income tax from any
source.[25] In support of its novel theory, it compares the use of the words charitable
institutions, actually and directly in the 1973 and the 1987 Constitutions, on the hand;
and in Article VI Section 22, par. 3 of the 1935 Constitution, on the other hand. [26]
Private respondent enunciates three points. First, the present provision is divisible into
two categories: (1) [c]haritable institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries, the incomes of which are,
from whatever source, all tax-exempt;[27] and (2) [a]ll lands, buildings and improvements
actually and directly used for religious, charitable or educational purposes, which are
exempt only from property taxes.[28] Second, Lladoc v. Commissioner of Internal
Revenue,[29] which limited the exemption only to the payment of property taxes, referred
to the provision of the 1935 Constitution and not to its counterparts in the 1973 and the
1987 Constitutions.[30] Third, the phrase actually, directly and exclusively used for
religious, charitable or educational purposes refers not only to all lands, buildings and
improvements, but also to the above-quoted first category which includes charitable
institutions like the private respondent. [31]
The Court is not persuaded. The debates, interpellations and expressions of opinion of
the framers of the Constitution reveal their intent which, in turn, may have guided the
people in ratifying the Charter.[32] Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is
now a member of this Court, stressed during the Concom debates that xxx what is
exempted is not the institution itself xxx; those exempted from real estate taxes are
lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes. [33] Father Joaquin G. Bernas, an eminent authority
on the Constitution and also a member of the Concom, adhered to the same view that
the exemption created by said provision pertained only to property taxes. [34]
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that [t]he tax
exemption covers property taxes only."[35] Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, [36] claiming
that the YMCA is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is
exempt from taxes on its properties and income. [37] We reiterate that private respondent
is exempt from the payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi
juris. Hence, for the YMCA to be granted the exemption it claims under the aforecited
provision, it must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it seeks to
be exempted from taxation is used actually, directly, and exclusively for educational
purposes. However, the Court notes that not a scintilla of evidence was submitted by
private respondent to prove that it met the said requisites.

37

Is the YMCA an educational institution within the purview of Article XIV, Section 4, par.3
of the Constitution? We rule that it is not. The term educational institution or institution of
learning has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant. [38]Under the Education Act of 1982,
such term refers to schools.[39] The school system is synonymous with formal education,
[40]
which refers to the hierarchically structured and chronological graded learnings
organized and provided by the formal school system and for which certification is
required in order for the learner to progress through the grades or move to the higher
levels.[41] The Court has examined the Amended Articles of Incorporation [42] and ByLaws[43] of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution.[44]
Furthermore, under the Education Act of 1982, even non-formal education is understood
to be school-based and private auspices such as foundations and civic-spirited
organizations are ruled out.[45] It is settled that the term educational institution, when
used in laws granting tax exemptions, refers to a xxx school seminary, college or
educational establishment xxx.[46] Therefore, the private respondent cannot be deemed
one of the educational institutions covered by the constitutional provision under
consideration.
xxx Words used in the Constitution are to be taken in their ordinary acceptation. While
in its broadest and best sense education embraces all forms and phrases of instruction,
improvement and development of mind and body, and as well of religious and moral
sentiments, yet in the common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is given by
methods common to schools and institutions of learning. That we conceive to be the
true intent and scope of the term [educational institutions,] as used in the Constitution. [47]
Moreover, without conceding that Private Respondent YMCA is an educational
institution, the Court also notes that the former did not submit proof of the proportionate
amount of the subject income that was actually, directly and exclusively used for
educational purposes. Article XIII, Section 5 of the YMCA by-laws, which formed part of
the evidence submitted, is patently insufficient, since the same merely signified that
[t]he net income derived from the rentals of the commercial buildings shall be
apportioned to the Federation and Member Associations as the National Board may
decide.[48] In sum, we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked
Cases Cited by Private
Respondent Inapplicable
The cases[49] relied on by private respondent do not support its cause. YMCA of Manila
v. Collector of Internal Revenue [50] and Abra Valley College, Inc. v. Aquino [51] are not
applicable, because the controversy in both cases involved exemption from the
payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay
City[52] is not in point either, because it involves a claim for exemption from the payment
of regulatory fees, specifically electrical inspection fees, imposed by an ordinance of
Pasay City -- an issue not at all related to that involved in a claimed exemption from the
payment if income taxes imposed on property leases. In Jesus Sacred Heart College v.
Com. Of Internal Revenue,[53] the party therein, which claimed an exemption from the
payment of income tax, was an educational institution which submitted substantial

38

evidence that the income subject of the controversy had been devoted or used solely for
educational purposes. On the other hand, the private respondent in the present case
had not given any proof that it is an educational institution, or that of its rent income is
actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private
respondent. It appreciates the nobility its cause. However, the Courts power and
function are limited merely to applying the law fairly and objectively. It cannot change
the law or bend it to suit its sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the
government. It needs laws that can facilitate, and not frustrate, its humanitarian
tasks. But the Court regrets that, given its limited constitutional authority, it cannot rule
on the wisdom or propriety of legislation. That prerogative belongs to the political
departments of government. Indeed, some of the member of the Court may even
believe in the wisdom and prudence of granting more tax exemptions to private
respondent. But such belief, however well-meaning and sincere, cannot bestow upon
the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals
dated September 28, 1995 and February 29, 1996 are hereby dated February 16, 1995
is REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February
16, 1995 is REINSTATED, insofar as it ruled that the income tax. No pronouncement as
to costs.
SO ORDERED.
EN BANC
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.
Antero Sison for petitioner and for his own behalf.
The Solicitor General for respondents.

FERNANDO, C.J.:
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding 1 on the validity of Section I 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

39

citizens or residents 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 Petitioner3 as taxpayer alleges that by virtue
thereof, "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. 4 He characterizes the
above sction 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." 9The answer then affirmed: "Batas Pambansa Big.
135 is a valid exercise of the State's power to tax. The authorities and cases cited while
correctly quoted or paraghraph do not support petitioner's stand." 10 The prayer is for
the dismissal 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 praphrase 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 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
properly rights, both the due process and equal protection clauses inay properly be
invoked, all 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 1, unfortunate remark
characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the
times following] a free use of absolutes." 16 This is merely to emphasize that it is riot
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

40

by one stroke of Mr. Justice Holmess 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 injury 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 or its face, he has not made out a case. This is merely to adhere to the
authoritative doctrine that were the due process and equal protection clauses are
invoked, considering that they arc not fixed rules but rather broad standards, there is a
need for 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
lice power or the power of eminent domain is to demonstrated 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 circumtances 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 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 Frankfurter: "The equality at which the 'equal protection' clause 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, address to the
attainment of specific ends by the use of specific remedies. The Constitution does not

41

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 shag 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 e 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 businessman certainly not a
suspect classification,

42

WHEREFORE, the petition is dismissed. Costs against petitioner.

EN BANC

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
No. 7496 violates the following provisions of the Constitution:

Republic Act

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.

43

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

9%

Over
P30,000
P2,100
but not over P120,00 of excess over P30,000

15%

Over
P120,000
P15,600
but not over P350,000 of excess over P120,000

20%

Over
P350,000
of excess over P350,000

30%

P61,600

44

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 netincome, 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.

45

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
approach 2 in the income taxation of individual taxpayers and to maintain, by and large,
the present global treatment 3 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

46

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

47

(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. 4Here, 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-

48

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.

EN BANC
G.R. No. L-4817

May 26, 1954

SILVESTER
M.
PUNSALAN,
ET
AL., plaintiffs-appellants,
vs.
THE MUNICIPAL BOARD OF THE CITY OF MANILA, ET AL., defendants-appellants.
Calanog
and
Alafriz
for
plaintiffs-appellants.
City Fiscal Eugenio Angeles and Assistant Fiscal Eulogio S. Serreno for defendantsappellants.
REYES, J.:
This suit was commenced in the Court of First Instance of Manila by two lawyers, a
medical practitioner, a public accountant, a dental surgeon and a pharmacist,
purportedly "in their own behalf and in behalf of other professionals practising in the City
of Manila who may desire to join it." Object of the suit is the annulment of Ordinance No.
3398 of the City of Manila together with the provision of the Manila charter authorizing it
and the refund of taxes collected under the ordinance but paid under protest.
The ordinance in question, which was approved by the municipal board of the City of
Manila on July 25, 1950, imposes a municipal occupation tax on persons exercising
various professions in the city and penalizes non-payment of the tax "by a fine of not
more than two hundred pesos or by imprisonment of not more than six months, or by
both such fine and imprisonment in the discretion of the court." Among the professions
taxed were those to which plaintiffs belong. The ordinance was enacted pursuant to
paragraph (1) of section 18 of the Revised Charter of the City of Manila (as amended by
Republic Act No. 409), which empowers the Municipal Board of said city to impose a
municipal occupation tax, not to exceed P50 per annum, on persons engaged in the
various professions above referred to.

49

Having already paid their occupation tax under section 201 of the National Internal
Revenue Code, plaintiffs, upon being required to pay the additional tax prescribed in the
ordinance, paid the same under protest and then brought the present suit for the
purpose already stated. The lower court upheld the validity of the provision of law
authorizing the enactment of the ordinance but declared the ordinance itself illegal and
void on the ground that the penalty there in provided for non-payment of the tax was not
legally authorized. From this decision both parties appealed to this Court, and the only
question they have presented for our determination is whether this ruling is correct or
not, for though the decision is silent on the refund of taxes paid plaintiffs make no
assignment of error on this point.
To begin with defendants' appeal, we find that the lower court was in error in saying that
the imposition of the penalty provided for in the ordinance was without the authority of
law. The last paragraph (kk) of the very section that authorizes the enactment of this tax
ordinance (section 18 of the Manila Charter) in express terms also empowers the
Municipal Board "to fix penalties for the violation of ordinances which shall not exceed
to(sic) two hundred pesos fine or six months" imprisonment, or both such fine and
imprisonment, for a single offense." Hence, the pronouncement below that the
ordinance in question is illegal and void because it imposes a penalty not authorized by
law is clearly without basis.
As to plaintiffs' appeal, the contention in substance is that this ordinance and the law
authorizing it constitute class legislation, are unjust and oppressive, and authorize what
amounts to double taxation.
In raising the hue and cry of "class legislation", the burden of plaintiffs' complaint is not
that the professions to which they respectively belong have been singled out for the
imposition of this municipal occupation tax; and in any event, the Legislature may, in its
discretion, select what occupations shall be taxed, and in the exercise of that discretion
it may tax all, or it may select for taxation certain classes and leave the others untaxed.
(Cooley on Taxation, Vol. 4, 4th ed., pp. 3393-3395.) Plaintiffs' complaint is that while
the law has authorized the City of Manila to impose the said tax, it has withheld that
authority from other chartered cities, not to mention municipalities. We do not think it is
for the courts to judge what particular cities or municipalities should be empowered to
impose occupation taxes in addition to those imposed by the National Government.
That matter is peculiarly within the domain of the political departments and the courts
would do well not to encroach upon it. Moreover, as the seat of the National
Government and with a population and volume of trade many times that of any other
Philippine city or municipality, Manila, no doubt, offers a more lucrative field for the
practice of the professions, so that it is but fair that the professionals in Manila be made
to pay a higher occupation tax than their brethren in the provinces.
Plaintiffs brand the ordinance unjust and oppressive because they say that it creates
discrimination within a class in that while professionals with offices in Manila have to
pay the tax, outsiders who have no offices in the city but practice their profession
therein are not subject to the tax. Plaintiffs make a distinction that is not found in the
ordinance. The ordinance imposes the tax upon every person "exercising" or "pursuing"
in the City of Manila naturally any one of the occupations named, but does not say
that such person must have his office in Manila. What constitutes exercise or pursuit of
a profession in the city is a matter of judicial determination. The argument against
double taxation may not be invoked where one tax is imposed by the state and the other

50

is imposed by the city (1 Cooley on Taxation, 4th ed., p. 492), it being widely recognized
that there is nothing inherently obnoxious in the requirement that license fees or taxes
be exacted with respect to the same occupation, calling or activity by both the state and
the political subdivisions thereof. (51 Am. Jur., 341.)
In view of the foregoing, the judgment appealed from is reversed in so far as it declares
Ordinance No. 3398 of the City of Manila illegal and void and affirmed in so far as it
holds the validity of the provision of the Manila charter authorizing it.
With costs against plaintiffs-appellants.

EN BANC

G.R. No. 115455 October 30, 1995

ARTURO
M.
TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN
T.
DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO,
as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of
Internal
Revenue;
and
their
AUTHORIZED
AGENTS
OR
REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF
THE BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA;
and
OFELIA
L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue;
HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and
HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115754 October 30, 1995

51

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS,

(CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

INC.,

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA,
EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO
SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G.
FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL,
MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND
NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE
COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF
CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE
vs.
THE SECRETARY OF
REVENUE, respondents.

AIRLINES,
FINANCE

and

INC., petitioner,
COMMISSIONER

OF

INTERNAL

G.R. No. 115873 October 30, 1995

COOPERATIVE
UNION
OF
THE
PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal
Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive
Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION
OF
PHILIPPINE
BOOK
SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V.
CHATO, as the Commissioner of Internal Revenue; and HON. GUILLERMO
PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.
RESOLUTION

MENDOZA, J.:
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. The motions, of which there are 10 in
all, have been filed by the several petitioners in these cases, with the exception of the

52

Philippine Educational Publishers Association, Inc. and the Association of Philippine

Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to
which the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine
Press Institute, Inc., petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R.
No. 115525, each filed a reply. In turn the Solicitor General filed on June 1, 1995 a
rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real
Estate and Builders Association (CREBA)) reiterate previous claims made by them that
R.A. No. 7716 did not "originate exclusively" in the House of Representatives as
required by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was
filed in the House of Representatives where it passed three readings and that afterward
it was sent to the Senate where after first reading it was referred to the Senate Ways
and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630)
which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate
committee should have done was to amend H. No. 11197 by striking out the text of the
bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a
House bill and the Senate version just becomes the text (only the text) of the House
bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at
least two occasions during the Eighth Congress, the Senate passed its own version of
revenue bills, which, in consolidation with House bills earlier passed, became the
enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987
BY EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX
AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was
approved by the President on April 10, 1992. This Act is actually a consolidation of H.
No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920,
which was approved by the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES)
which was approved by the President on May 22, 1992. This Act is a consolidation of H.
No. 22232, which was approved by the House of Representatives on August 2, 1989,
and S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result
of the consolidation of House and Senate bills. These are the following, with indications
of the dates on which the laws were approved by the President and dates the separate
bills of the two chambers of Congress were respectively passed:
1. R.A. NO. 7642

53

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS
PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE
CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO
REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE, AMENDING
FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO
PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL
SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENTOWNED OR CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND
WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%)
ON GROSS PAYMENT FOR THE PURCHASE OF GOODS AND SIX PERCENT (6%)
ON GROSS RECEIPTS FOR SERVICES RENDERED BY CONTRACTORS (April 6,
1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL
GOVERNMENT, AND FOR OTHER PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660

54

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF

THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED,
ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES
(December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF
STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR
THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW
SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. It is noteworthy that, in the
particular case of S. No. 1630, petitioners Tolentino and Roco, as members of the
Senate, voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner
Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like S.
No. 1630 is instead enacted as a substitute measure, "taking into
Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment shall be considered.
No amendment by substitution shall be entertained unless the text thereof is submitted
in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69. No amendment which seeks the inclusion of a legislative provision foreign to the
subject matter of a bill (rider) shall be entertained.
xxx xxx xxx

55

70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution. (emphasis
added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the
Philippine Senate possesses less power than the U.S. Senate because of textual
differences between constitutional provisions giving them the power to propose or
concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the
Senate may propose or concur with amendments as on other Bills.
Art. VI, 24 of our 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.
The addition of the word "exclusively" in the Philippine Constitution and the decision to
drop the phrase "as on other Bills" in the American version, according to petitioners,
shows the intention of the framers of our Constitution to restrict the Senate's power to
propose amendments to revenue bills. Petitioner Tolentino contends that the word
"exclusively" was inserted to modify "originate" and "the words 'as in any other bills' (sic)
were eliminated so as to show that these bills were not to be like other bills but must be
treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the
power of the Senate. It will be recalled that the 1935 Constitution originally provided for
a unicameral National Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for lawmaking by the
Senate and the House of Representatives. The work of proposing amendments to the
Constitution was done by the National Assembly, acting as a constituent assembly,
some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the
following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose or
concur with amendments. In case of disapproval by the Senate of any such bills, the
Assembly may repass the same by a two-thirds vote of all its members, and thereupon,
the bill so repassed shall be deemed enacted and may be submitted to the President for
corresponding action. In the event that the Senate should fail to finally act on any such
bills, the Assembly may, after thirty days from the opening of the next regular session of
the same legislative term, reapprove the same with a vote of two-thirds of all the
members of the Assembly. And upon such reapproval, the bill shall be deemed enacted
and may be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed
the proposal. It deleted everything after the first sentence. As rewritten, the proposal
was approved by the National Assembly and embodied in Resolution No. 38, as

56

amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66
(1950)). The proposed amendment was submitted to the people and ratified by them in
the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of
the present Constitution was derived. It explains why the word "exclusively" was added
to the American text from which the framers of the Philippine Constitution borrowed and
why the phrase "as on other Bills" was not copied. Considering the defeat of the
proposal, the power of the Senate to propose amendments must be understood to be
full, plenary and complete "as on other Bills." Thus, because revenue bills are required
to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent
over to it by the House, however, the Senate certainly can pass its own version on the
same subject matter. This follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power
to concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is apparently without
restriction. It would seem that by virtue of this power, the Senate can practically re-write
a bill required to come from the House and leave only a trace of the original bill. For
example, a general revenue bill passed by the lower house of the United States
Congress contained provisions for the imposition of an inheritance tax . This was
changed by the Senate into a corporation tax. The amending authority of the Senate
was declared by the United States Supreme Court to be sufficiently broad to enable it to
make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 (1961))
The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and therefore also more
representative of the people. Moreover, its members are presumed to be more familiar
with the needs of the country in regard to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or
concur with amendments to the bills initiated by the House of Representatives. Thus, in
one case, a bill introduced in the U.S. House of Representatives was changed by the
Senate to make a proposed inheritance tax a corporation tax. It is also accepted
practice for the Senate to introduce what is known as an amendment by substitution,
which may entirely replace the bill initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate
may propose or concur with amendments." In the exercise of this power, the Senate
may propose an entirely new bill as a substitute measure. As petitioner Tolentino states
in a high school text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill as

57

a substitute, in which case it will be known as a committee bill; or (4) to make no report
at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in
the House by prescribing that the number of the House bill and its other parts up to the
enacting clause must be preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is
therefore as much an amendment of H. No. 11197 as any which the Senate could have
made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of
S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197,"
implying that there is something substantially different between the reference to S. No.
1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No.
7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both
houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be
mere amendments of the corresponding provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement
A to the basic petition of petitioner Tolentino, while showing differences between the two
bills, at the same time indicates that the provisions of the Senate bill were precisely
intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the
Senate bill was a mere amendment of the House bill, H. No. 11197 in its original form
did not have to pass the Senate on second and three readings. It was enough that after
it was passed on first reading it was referred to the Senate Committee on Ways and
Means. Neither was it required that S. No. 1630 be passed by the House of
Representatives before the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No.
1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act
prohibiting the disclosure of bank deposits), were referred to a conference committee,
the question was raised whether the two bills could be the subject of such conference,
considering that the bill from one house had not been passed by the other and vice
versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is
passed by the House but not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the House, can the two bills be the
subject of a conference, and can a law be enacted from these two bills? I understand
that the Senate bill in this particular instance does not refer to investments in
government securities, whereas the bill in the House, which was introduced by the
Speaker, covers two subject matters: not only investigation of deposits in banks but also

58

investigation of investments in government securities. Now, since the two bills differ in
their subject matter, I believe that no law can be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is precisely in
cases like this where a conference should be had. If the House bill had been approved
by the Senate, there would have been no need of a conference; but precisely because
the Senate passed another bill on the same subject matter, the conference committee
had to be created, and we are now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No.
1630 are distinct and unrelated measures also accounts for the petitioners'
(Kilosbayan's and PAL's) contention that because the President separately certified to
the need for the immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version of the same
revenue bill which at the momentwas being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented
in a house of Congress even though the bills are merely versions of the bill he has
already certified. It is enough that he certifies the bill which, at the time he makes the
certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on
June 1, 1993 the President had earlier certified H. No. 9210 for immediate enactment
because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the
main decision that the phrase "except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that
"printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must
have passed "three readings on separate days." There is not only textual support for
such construction but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and copies
thereof in its final form furnished its Members at least three calendar days prior to its
passage, except when the President shall have certified to the necessity of its
immediate enactment. Upon the last reading of a bill, no amendment thereof shall be
allowed and the question upon its passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill 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 the Members three
days before its passage, except when the Prime Minister 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.

59

This provision of the 1973 document, with slight modification, was adopted in Art. VI,
26 (2) of the present Constitution, thus:
(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 yeasand nays entered in
the Journal.
The exception is based on the prudential consideration that if in all cases three readings
on separate days are required and a bill has to be printed in final form before it can be
passed, the need for a law may be rendered academic by the occurrence of the very
emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency,
especially in a country like the Philippines where budget deficit is a chronic condition.
Even if this were the case, an enormous budget deficit does not make the need for R.A.
No. 7716 any less urgent or the situation calling for its enactment any less an
emergency.
Apparently, the members of the Senate (including some of the petitioners in these
cases) believed that there was an urgent need for consideration of S. No. 1630,
because they responded to the call of the President by voting on the bill on second and
third readings on the same day. While the judicial department is not bound by the
Senate's acceptance of the President's certification, the respect due coequal
departments of the government in matters committed to them by the Constitution and
the absence of a clear showing of grave abuse of discretion caution a stay of the judicial
hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the
Senate where it was discussed for six days. Only its distribution in advance in its final
printed form was actually dispensed with by holding the voting on second and third
readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on March
24, 1994 elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be twofold: (1) to inform the members of Congress of what they must vote on and (2) to give
them notice that a measure is progressing through the enacting process, thus enabling
them and others interested in the measure to prepare their positions with reference to it.
(1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p.
282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and
the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI))
that in violation of the constitutional policy of full public disclosure and the people's right
to know (Art. II, 28 and Art. III, 7) the Conference Committee met for two days in
executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold
such sessions with only the conferees and their staffs in attendance and it was only in

60

1975 when a new rule was adopted requiring open sessions. Unlike its American
counterpart, the Philippine Congress has not adopted a rule prescribing open hearings
for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in
1975, at least staff members were present. These were staff members of the Senators
and Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were
excluded. There is no showing that the conferees themselves did not take notes of their
proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret
diplomatic negotiations involving state interests, conferees keep notes of their meetings.
Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee
reports must contain "a detailed, sufficiently explicit statement of the changes in or other
amendments." These changes are shown in the bill attached to the Conference
Committee Report. The members of both houses could thus ascertain what changes
had been made in the original bills without the need of a statement detailing the
changes.
The same question now presented was raised when the bill which became R.A. No.
1400 (Land Reform Act of 1955) was reported by the Conference Committee.
Congressman Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report of the
conference committee regarding House Bill No. 2557 by reason of the provision of
Section 11, Article XII, of the Rules of this House which provides specifically that the
conference report must be accompanied by a detailed statement of the effects of the
amendment on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to
consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with
the point of order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill
have been amended. In this case before us an entire bill is presented; therefore, it can
be easily seen from the reading of the bill what the provisions are. Besides, this
procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the
provisions of the Rules, and the reason for the requirement in the provision cited by the
gentleman from Pangasinan is when there are only certain words or phrases inserted in
or deleted from the provisions of the bill included in the conference report, and we
cannot understand what those words and phrases mean and their relation to the bill. In
that case, it is necessary to make a detailed statement on how those words and

61

phrases will affect the bill as a whole; but when the entire bill itself is copied verbatim in
the conference report, that is not necessary. So when the reason for the Rule does not
exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the
ruling was appealed, it was upheld by viva voce and when a division of the House was
called,
it
was
sustained
by
a
vote
of
48
to
5.
(Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new
provisions as long as these are germane to the subject of the conference. As this Court
held in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion
written by then Justice Cruz, the jurisdiction of the conference committee is not limited
to resolving differences between the Senate and the House. It may propose an entirely
new provision. What is important is that its report is subsequently approved by the
respective houses of Congress. This Court ruled that it would not entertain allegations
that, because new provisions had been added by the conference committee, there was
thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A. No.
7354 and that copiesthereof in its final form were not distributed among the members of
each House. Both the enrolled bill and the legislative journals certify that the measure
was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution. We
are bound by such official assurances from a coordinate department of the government,
to which we owe, at the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the
Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These committees may
be given instructions by their parent bodies or they may be left without instructions.
Normally the conference committees are without instructions, and this is why they are
often critically referred to as "the little legislatures." Once bills have been sent to them,
the conferees have almost unlimited authority to change the clauses of the bills and in
fact sometimes introduce new measures that were not in the original legislation. No
minutes are kept, and members' activities on conference committees are difficult to
determine. One congressman known for his idealism put it this way: "I killed a bill on
export incentives for my interest group [copra] in the conference committee but I could
not have done so anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted, then the committee is
discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We
cite it only to say that conference committees here are no different from their

62

counterparts in the United States whose vast powers we noted in Philippine Judges
Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has the
power "to determine the rules of its proceedings," including those of its committees. Any
meaningful change in the method and procedures of Congress or its committees must
therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates
Art. VI, 26 (1) of the Constitution which provides that "Every bill passed by Congress
shall embrace only one subject which shall be expressed in the title thereof." PAL
contends that the amendment of its franchise by the withdrawal of its exemption from
the VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue
"in lieu of all other taxes, duties, royalties, registration, license and other fees and
charges of any kind, nature, or description, imposed, levied, established, assessed or
collected by any municipal, city, provincial or national authority or government agency,
now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the
National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
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.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX
(VAT) SYSTEM [BY] 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," Congress thereby clearly expresses its
intention to amend any provision of the NIRC which stands in the way of accomplishing
the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law
by specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply

63

with the constitutional requirement, since it is already stated in the title that the law
seeks to amend the pertinent provisions of the NIRC, among which is 103(q), in order
to widen the base of the VAT. Actually, it is the bill which becomes a law that is required
to express in its title the subject of legislation. The titles of H. No. 11197 and S. No. 1630
in fact specifically referred to 103 of the NIRC as among the provisions sought to be
amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made
by PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE
POSTAL CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND
RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR
OTHER PURPOSES CONNECTED THEREWITH. It contained a provision repealing all
franking privileges. It was contended that the withdrawal of franking privileges was not
expressed in the title of the law. In holding that there was sufficient description of the
subject of the law in its title, including the repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable but
would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed.,
p. 297] As has been correctly explained:
The details of a legislative act need not be specifically stated in its title, but matter
germane to the subject as expressed in the title, and adopted to the accomplishment of
the object in view, may properly be included in the act. Thus, it is proper to create in the
same act the machinery by which the act is to be enforced, to prescribe the penalties for
its infraction, and to remove obstacles in the way of its execution. If such matters are
properly connected with the subject as expressed in the title, it is unnecessary that they
should also have special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what
the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A.
No. 7716 is none of these.
Now it is contended by the 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."
With respect to the first contention, it would suffice to say that since the law granted the
press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. It is thus different from

64

the tax involved in the cases invoked by the PPI. The license tax in Grosjean
v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers
whose weekly circulation was over 20,000, with the result that the tax applied only to 13
out of 124 publishers in Louisiana. These large papers were critical of Senator Huey
Long who controlled the state legislature which enacted the license tax. The censorial
motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue,
460 U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because
although it could have been made liable for the sales tax or, in lieu thereof, for the use
tax on the privilege of using, storing or consuming tangible goods, the press was not.
Instead, the press was exempted from both taxes. It was, however, later made to pay
a special use tax on the cost of paper and ink which made these items "the only items
subject to the use tax that were component of goods to be sold at retail." The U.S.
Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are
withdrawn "absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the
VAT, such as those previously granted to PAL, petroleum concessionaires, enterprises
registered with the Export Processing Zone Authority, and many more are likewise
totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to
broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No.
7716. An enumeration of some of these transactions will suffice to show that by and
large this is not so and that the exemptions are granted for a purpose. As the Solicitor
General says, such exemptions are granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of the end-user rather than for
profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.

65

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against
the press because "even nondiscriminatory taxation on constitutionally guaranteed
freedom is unconstitutional." PPI cites in support of this assertion the following
statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded
by the First Amendment is not so restricted. A license tax certainly does not acquire
constitutional validity because it classifies the privileges protected by the First
Amendment along with the wares and merchandise of hucksters and peddlers and
treats them all alike. Such equality in treatment does not save the ordinance. Freedom
of press, freedom of speech, freedom of religion are in preferred position.
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."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101
Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on
those engaged in the sale of general merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible Society without restraining the free
exercise of its right to propagate.
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.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which
are given free to those who cannot afford to pay so that to tax the sales would be to
increase the price, while reducing the volume of sale. Granting that to be the case, the
resulting burden on the exercise of religious freedom is so incidental as to make it
difficult to differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on
the right of the preacher to make a sermon.

66

On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as
amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to
accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is
not liable to pay the VAT does not excuse it from the payment of this fee because it also
sells some copies. At any rate whether the PBS is liable for the VAT must be decided in
concrete cases, in the event it is assessed this tax by the Commissioner of Internal
Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the
rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of
contracts, (2) classifies transactions as covered or exempt without reasonable basis and
(3) violates the rule that taxes should be uniform and equitable and that Congress shall
"evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to be paid because of the
10% VAT. The additional amount, it is pointed out, is something that the buyer did not
anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities
from numerous sources are cited by the plaintiffs, but none of them show that a lawful
tax on a new subject, or an increased tax on an old one, interferes with a contract or
impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen
the security of another, or may impose additional burdens upon one class and release
the burdens of another, still the tax must be paid unless prohibited by the Constitution,
nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574
(1919)). Indeed not only existing laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into contracts as a postulate of the legal order."
(Philippine-American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968))
Contracts must be understood as having been made in reference to the possible
exercise of the rightful authority of the government and no obligation of contract can
extend to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885
(1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the
sale of agricultural products, food items, petroleum, and medical and veterinary
services, it grants no exemption on the sale of real property which is equally essential.
The sale of real property for socialized and low-cost housing is exempted from the tax,
but CREBA claims that real estate transactions of "the less poor," i.e., the middle class,
who are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are
essential goods and services was already exempt under 103, pars. (b) (d) (1) of the
NIRC before the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A.
No. 7716 granted exemption to these transactions, while subjecting those of petitioner
to the payment of the VAT. Moreover, there is a difference between the "homeless poor"
and the "homeless less poor" in the example given by petitioner, because the second

67

group or middle class can afford to rent houses in the meantime that they cannot yet
buy their own homes. The two social classes are thus differently situated in life. "It is
inherent in the power to tax that the 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.'" (Lutz v.
Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912
(1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates
Art. VI, 28(1) which provides that "The rule of taxation shall be uniform and equitable.
The Congress shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of
the same class be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies equally to all persons,
forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra;
Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original
VAT Law was questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made in these cases,
namely, that the law was "oppressive, discriminatory, unjust and regressive in violation
of Art. VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this
Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is
uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to
the public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services
by persons engaged in business with an aggregate gross annual sales exceeding
P200,000.00. Small corner sari-sari stores are consequently exempt from its
application. Likewise exempt from the tax are sales of farm and marine products, so that
the costs of basic food and other necessities, spared as they are from the incidence of
the VAT, are expected to be relatively lower and within the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the
Cooperative Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues
that the law contravenes the mandate of Congress to provide for a progressive system
of taxation because the law imposes a flat rate of 10% and thus places the tax burden
on all taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted to
mean simply that "direct taxes are . . . to be preferred [and] as much as possible,

68

indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE

PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress is not
to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which
perhaps are the oldest form of indirect taxes, would have been prohibited with the
proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is
difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects
of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3,
amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A.
No. 7716, 4, amending 103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which
involve goods and services which are used or availed of mainly by higher income
groups. These include real properties held primarily for sale to customers or for lease in
the ordinary course of trade or business, the right or privilege to use patent, copyright,
and other similar property or right, the right or privilege to use industrial, commercial or
scientific equipment, motion picture films, tapes and discs, radio, television, satellite
transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common
carriers, services of franchise grantees of telephone and telegraph.

69

The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There is
no fully developed record which can impart to adjudication the impact of actuality. There
is no factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's
members have not even been assessed the VAT. Petitioner's case is not made concrete
by a series of hypothetical questions asked which are no different from those dealt with
in advisory opinions.
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.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It
may be that postponement of adjudication would result in a multiplicity of suits. This
need not be the case, however. Enforcement of the law may give rise to such a case. A
test case, provided it is an actual case and not an abstract or hypothetical one, may
thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion
that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made
that "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." This duty
can only arise if an actual case or controversy is before us. Under Art . VIII, 5 our
jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean
is that in the exercise of that jurisdiction we have the judicial power to determine
questions of grave abuse of discretion by any branch or instrumentality of the
government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right
to sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559
(1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the
Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary
Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129).
The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of
all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming
within its jurisdiction, this Court cannot inquire into any allegation of grave abuse of
discretion by the other departments of the government.

70

VIII. Alleged violation of policy towards cooperatives. On the other hand, the
Cooperative Union of the Philippines (CUP), after briefly surveying the course of
legislation, argues that it was to adopt a definite policy of granting tax exemption to
cooperatives that the present Constitution embodies provisions on cooperatives. To
subject cooperatives to the VAT would therefore be to infringe a constitutional policy.
Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting cooperatives
from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955;
that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and
sales taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the
exemption; and that finally in 1987 the framers of the Constitution "repudiated the
previous actions of the government adverse to the interests of the cooperatives, that
is, the repeated revocation of the tax exemption to cooperatives and instead upheld the
policy of strengthening the cooperatives by way of the grant of tax exemptions," by
providing the following in Art. XII:
1. The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services
produced by the nation for the benefit of the people; and an expanding productivity as
the key to raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged to
broaden the base of their ownership.
15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955
singled out cooperatives by withdrawing their exemption from income and sales taxes
under P.D. No. 175, 5. What P.D. No. 1955, 1 did was to withdraw the exemptions
and preferential treatments theretofore granted to private business enterprises in
general, in view of the economic crisis which then beset the nation. It is true that after
P.D. No. 2008, 2 had restored the tax exemptions of cooperatives in 1986, the
exemption was again repealed by E.O. No. 93, 1, but then again cooperatives were
not the only ones whose exemptions were withdrawn. The withdrawal of tax incentives
applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in
order to promote their growth and viability. Hence, there is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation,
as far as the grant of tax privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of

71

Congress. If Congress does not grant exemption and there is no discrimination to

cooperatives, no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives
are exempt from taxation. Such theory is contrary to the Constitution under which only
the following are exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit educational
institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies
cooperatives the equal protection of the law because electric cooperatives are
exempted from the VAT. The classification between electric and other cooperatives
(farmers cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently
rests on a congressional determination that there is greater need to provide cheaper
electric power to as many people as possible, especially those living in the rural areas,
than there is to provide them with other necessities in life. We cannot say that such
classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity
of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have now come to the conclusion
that the law suffers from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a grave abuse
of discretion. Any question as to its necessity, desirability or expediency must be
addressed to Congress as the body which is electorally responsible, remembering that,
as Justice Holmes has said, "legislators are the ultimate guardians of the liberties and
welfare of the people in quite as great a degree as are the courts." (Missouri, Kansas &
Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public
accountability of legislators, that those who took part in passing the law in question by
voting for it in Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the
temporary restraining order previously issued is hereby lifted.
SO ORDERED.

EN BANC
G.R. Nos. L-49839-46

April 26, 1991

JOSE
B.
L.
REYES
and
EDMUNDO
A.
REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as
appointed and Acting Members of the CENTRAL BOARD OF ASSESSMENT
APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL ROSARIO, RAUL C.

72

FLORES, in their capacities as appointed and Acting Members of the BOARD OF

ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City
Assessor of Manila,respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the
Central Board of Assessment Appeals1 in CBAA Cases Nos. 72-79 entitled "J.B.L.
Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals of Manila and City
Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax
Assessment Appeals2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose
Reyes, et al. v. City Assessor of Manila" and "Edmundo Reyes and Milagros Reyes v.
City Assessor of Manila" upholding the classification and assessments made by the City
Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land
situated in Tondo and Sta. Cruz Districts, City of Manila, which are leased and entirely
occupied as dwelling sites by tenants. Said tenants were paying monthly rentals not
exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an
increase in monthly rentals of dwelling units or of lands on which another's dwelling is
located, where such rentals do not exceed three hundred pesos (P300.00) a month but
allowing an increase in rent by not more than 10% thereafter. The said Act also
suspended paragraph (1) of Article 1673 of the Civil Code for two years from its
effectivity thereby disallowing the ejectment of lessees upon the expiration of the usual
legal period of lease. On October 12, 1972, Presidential Decree No. 20 amended R.A.
No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00
and by indefinitely suspending the aforementioned provision of the Civil Code,
excepting leases with a definite period. Consequently, the Reyeses, petitioners herein,
were precluded from raising the rentals and from ejecting the tenants. In 1973,
respondent City Assessor of Manila re-classified and reassessed the value of the
subject properties based on the schedule of market values duly reviewed by the
Secretary of Finance. The revision, as expected, entailed an increase in the
corresponding tax rates prompting petitioners to file a Memorandum of Disagreement
with the Board of Tax Assessment Appeals. They averred that the reassessments made
were "excessive, unwarranted, inequitable, confiscatory and unconstitutional"
considering that the taxes imposed upon them greatly exceeded the annual income
derived from their properties. They argued that the income approach should have been
used in determining the land values instead of the comparable sales approach which
the City Assessor adopted (Rollo, pp. 9-10-A). The Board of Tax Assessment Appeals,
however, considered the assessments valid, holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete
evidence which could overcome the presumptive regularity of the classification and
assessments appear to be in accordance with the base schedule of market values and

73

of the base schedule of building unit values, as approved by the Secretary of Finance,
the cases should be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals.1wphi1 They
submitted, among others, the summary of the yearly rentals to show the income derived
from the properties. Respondent City Assessor, on the other hand, submitted three (3)
deeds of sale showing the different market values of the real property situated in the
same vicinity where the subject properties of petitioners are located. To better
appreciate the locational and physical features of the land, the Board of Hearing
Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners
nor their authorized representatives were present during the said ocular inspection
despite proper notices served them. It was found that certain parcels of land were below
street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the
dispositive portion of which reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the
lots covered by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1)
PD-266, the appealed Decision is modified by allowing a 20% reduction in their
respective market values and applying therein the assessment level of 30% to arrive at
the corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES
APPROACH" METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS'
PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in
question. Petitioners maintain that the "Income Approach" method would have been
more realistic for in disregarding the effect of the restrictions imposed by P.D. 20 on the
market value of the properties affected, respondent Assessor of the City of Manila
unlawfully and unjustifiably set increased new assessed values at levels so high and
successive that the resulting annual real estate taxes would admittedly exceed the sum
total of the yearly rentals paid or payable by the dweller tenants under P.D. 20. Hence,
petitioners protested against the levels of the values assigned to their properties as
revised and increased on the ground that they were arbitrarily excessive, unwarranted,
inequitable, confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its
decision that the income approach is used in determining land values in some vicinities,

74

it maintains that when income is affected by some sort of price control, the same is
rejected in the consideration and study of land values as in the case of properties
affected by the Rent Control Law for they do not project the true market value in the
open market (Rollo, p. 21). Thus, respondents opted instead for the "Comparable Sales
Approach" on the ground that the value estimate of the properties predicated upon
prices paid in actual, market transactions would be a uniform and a more credible
standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise
stated, public respondents would have this Court completely ignore the effects of the
restrictions of P.D. No. 20 on the market value of properties within its coverage. In any
event, it is unquestionable that both the "Comparable Sales Approach" and the "Income
Approach" are generally acceptable methods of appraisal for taxation purposes (The
Law on Transfer and Business Taxation by Hector S. De Leon, 1988 Edition). However,
it is conceded that the propriety of one as against the other would of course depend on
several factors. Hence, as early as 1923 in the case of Army & Navy Club, Manila v.
Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the
assessors, in finding the value of the property, have to consider all the circumstances
and elements of value and must exercise a prudent discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation
must not only be uniform, but must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of
property of the same class shall be taxed at the same rate (Churchill v. Concepcion, 34
Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive
aspects of taxation required in the 1973 Charter (Fernando "The Constitution of the
Philippines", p. 221, Second Edition). Thus, the need to examine closely and determine
the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the person
affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the
powers of government. But for all its plenitude the power to tax is not unconfined as
there are restrictions. Adversely effecting as it does property rights, both the due
process and equal protection clauses of the Constitution may properly be invoked to
invalidate in appropriate cases a revenue measure. If it were otherwise, there would be
truth to the 1903 dictum of Chief Justice Marshall that "the power to tax involves the
power to destroy." The web or unreality spun from Marshall's famous dictum was
brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not
the power to destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v.
Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v. Commissioner of Internal Revenue, 139
SCRA 439 [1985]).
In the same vein, 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 confiscation of property. That would be a clear abuse of power
(Sison v. Ancheta, supra).

75

The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a 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 (Ibid., p.
662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the
first Fundamental Principle to guide the appraisal and assessment of real property for
taxation purposes is that the property must be "appraised at its current and fair market
value."
By no strength of the imagination can the market value of properties covered by P.D.
No. 20 be equated with the market value of properties not so covered. The former has
naturally a much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of
subject properties under the "comparable sales approach" were presented by the public
respondents, namely: (1) that the sale must represent a bonafide arm's length
transaction between a willing seller and a willing buyer and (2) the property must be
comparable property (Rollo, p. 27). Nothing can justify or support their view as it is of
judicial notice that for properties covered by P.D. 20 especially during the time in
question, there were hardly any willing buyers. As a general rule, there were no takers
so that there can be no reasonable basis for the conclusion that these properties were
comparable with other residential properties not burdened by P.D. 20. Neither can the
given circumstances be nonchalantly dismissed by public respondents as imposed
under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no
end to it in sight.
Verily, taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. However, 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 taxations, which is the promotion of the common
good, may be achieved (Commissioner of Internal Revenue v. Algue Inc., et al., 158
SCRA 9 [1988]). Consequently, it stands to reason that petitioners who are burdened by
the government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the
principle of social justice should not now be penalized by the same government by the
imposition of excessive taxes petitioners can ill afford and eventually result in the
forfeiture of their properties.
By the public respondents' own computation the assessment by income approach would
amount to only P10.00 per sq. meter at the time in question.
PREMISES CONSIDERED, (a) the petition is GRANTED; (b) the assailed decisions of
public respondents are REVERSED and SET ASIDE; and (e) the respondent Board of
Assessment Appeals of Manila and the City Assessor of Manila are ordered to make a
new assessment by the income approach method to guarantee a fairer and more
realistic basis of computation (Rollo, p. 71).

76

SO ORDERED.

SECOND DIVISION
G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,
vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,
Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued,
Abra; HEIRS OF PATERNO MILLARE,respondents.

PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First
Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656,
entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs.
Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal
Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of
which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against the lot and building of the Abra Valley
Junior College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra,
is valid;
That since the school is not exempt from paying taxes, it should therefore pay all back
taxes in the amount of P5,140.31 and back taxes and penalties from the promulgation
of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial,
be confiscated to apply for the payment of the back taxes and for the redemption of the
property in question, if the amount is less than P6,000.00, the remainder must be
returned to the Director of Pedro Borgonia, who represents the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the
trial must be returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated
with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of
Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972
in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of

77

Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate
taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot
and building covered by Original Certificate of Title No. Q-83 duly registered in the name
of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and
Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes
thereon. The "Notice of Sale" was caused to be served upon the petitioner by the
respondent treasurers on July 8, 1972 for the sale at public auction of said college lot
and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal
Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted.
The certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through
counstel a motion to dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer,
through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer
by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This
was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31,
1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid;
Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction,
the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra,
Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and
municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale.
Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the
trial court the sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied
by the trial court in its questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully
enter into the following agreed stipulation of facts:
1. That the personal circumstances of the parties as stated in paragraph 1 of the
complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial
Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings
thereon located in Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra
caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on
the property of said school under Original Certificate of Title No. 0-83 for the satisfaction
of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the
one attached to the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was
sold at public auction for the satisfaction of the unpaid real property taxes thereon and

78

the same was sold to defendant Paterno Millare who offered the highest bid of
P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal
Treasurer.
5. That all other matters not particularly and specially covered by this stipulation of facts
will be the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit
this stipulation of facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd.
Typ
Attorney for Plaintiff
Sgd.
Typ
Provincial
Counsel for Defedants

Agripino
AGRIPINO

Brillantes
BRILLANTES

Loreto
LORETO

Roldan
ROLDAN
Fiscal

Provincial
Abra
and
Treasurer of Bangued, Abra
Sgd.
Demetrio
Typ.
DEMETRIO
Attorney
Paterno Millare (Rollo, pp. 17-18)

Treasurer

of
Municipal

the
V.
V.
for

Pre
PRE
Defendant

Aside from the Stipulation of Facts, the trial court among others, found the following: (a)
that the school is recognized by the government and is offering Primary, High School
and College Courses, and has a school population of more than one thousand students
all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from
the plaza and about 120 meters from the Court of First Instance building; (c) that the
elementary pupils are housed in a two-storey building across the street; (d) that the high
school and college students are housed in the main building; (e) that the Director with
his family is in the second floor of the main building; and (f) that the annual gross
income of the school reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by
the parties, is whether or not the lot and building in question are used exclusively for
educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon.
Eustaquio Z. Montero, filed a Memorandum for the Government on March 25, 1974, and
a Supplemental Memorandum on May 7, 1974, wherein they opined "that based on the
evidence, the laws applicable, court decisions and jurisprudence, the school building
and school lot used for educational purposes of the Abra Valley College, Inc., are
exempted from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49;
44 and 49).

79

Nonetheless, the trial court disagreed because of the use of the second floor by the
Director of petitioner school for residential purposes. He thus ruled for the government
and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within
which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition;
Rollo, p. 57) petitioner instead availed of the instant petition for review on certiorari with
prayer for preliminary injunction before this Court, which petition was filed on August 17,
1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to
the petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p.
74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF
THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF
THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND
BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR
EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT
RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND
BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND
IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00
DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31
REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively
for educational purposes."
Petitioner contends that the primary use of the lot and building for educational purposes,
and not the incidental use thereof, determines and exemption from property taxes under
Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of
subject college lot and building, which are contrary thereto as well as to the provision of
Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal
basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in
question which were subjected to seizure and sale to answer for the unpaid tax are
used: (1) for the educational purposes of the college; (2) as the permanent residence of
the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the

80

in-laws and grandchildren; and (3) for commercial purposes because the ground floor of
the college building is being used and rented by a commercial establishment, the
Northern Marketing Corporation (See photograph attached as Annex "8" (Comment;
Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at
bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for "Cemeteries, churches and
parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by
Republic Act No. 409, otherwise known as the Assessment Law, provides:
The following are exempted from real property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious, charitable, scientific or educational
purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the
basic and controlling guide, norm and standard to determine tax exemption, and not the
mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217
[1916], this Court ruled that while it may be true that the YMCA keeps a lodging and a
boarding house and maintains a restaurant for its members, still these do not constitute
business in the ordinary acceptance of the word, but an institution used exclusively for
religious, charitable and educational purposes, and as such, it is entitled to be
exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352
[1972], this Court included in the exemption a vegetable garden in an adjacent lot and
another lot formerly used as a cemetery. It was clarified that the term "used exclusively"
considers incidental use also. Thus, the exemption from payment of land tax in favor of
the convent includes, not only the land actually occupied by the building but also the
adjacent garden devoted to the incidental use of the parish priest. The lot which is not
used for commercial purposes but serves solely as a sort of lodging place, also qualifies
for exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this
Court in the cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA
186 [1961] and Commissioner of Internal Revenue vs. Bishop of the Missionary District,
14 SCRA 991 [1965], thus
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is 'not limited to property actually indispensable' therefor (Cooley
on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes, such as in the case of
hospitals, "a school for training nurses, a nurses' home, property use to provide housing

81

facilities for interns, resident doctors, superintendents, and other members of the
hospital staff, and recreational facilities for student nurses, interns, and residents' (84
CJS 6621), such as "Athletic fields" including "a firm used for the inmates of the
institution. (Cooley on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for purposes mentioned in
the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and nonrestrictive interpretation of the phrase "exclusively used for educational purposes" as
provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution,
reasonable emphasis has always been made that exemption extends to facilities which
are incidental to and reasonably necessary for the accomplishment of the main
purposes. Otherwise stated, the use of the school building or lot for commercial
purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of
the second floor of the main building in the case at bar for residential purposes of the
Director and his family, may find justification under the concept of incidental use, which
is complimentary to the main or primary purposeeducational, the lease of the first
floor thereof to the Northern Marketing Corporation cannot by any stretch of the
imagination be considered incidental to the purpose of education.
It will be noted however that the aforementioned lease appears to have been raised for
the first time in this Court. That the matter was not taken up in the to court is really
apparent in the decision of respondent Judge. No mention thereof was made in the
stipulation of facts, not even in the description of the school building by the trial judge,
both embodied in the decision nor as one of the issues to resolve in order to determine
whether or not said properly may be exempted from payment of real estate taxes (Rollo,
pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even
after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the
first time on appeal. Nonetheless, as an exception to the rule, this Court has held that
although a factual issue is not squarely raised below, still in the interest of substantial
justice, this Court is not prevented from considering a pivotal factual matter. "The
Supreme Court is clothed with ample authority to review palpable errors not assigned as
such if it finds that their consideration is necessary in arriving at a just decision." (Perez
vs. Court of Appeals, 127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the
school building as well as the lot where it is built, should be taxed, not because the
second floor of the same is being used by the Director and his family for residential
purposes, but because the first floor thereof is being used for commercial purposes.
However, since only a portion is used for purposes of commerce, it is only fair that half
of the assessed tax be returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I,
is hereby AFFIRMED subject to the modification that half of the assessed tax be
returned to the petitioner.
SO ORDERED.

82

FIRST DIVISION

G.R. No. L-47421 May 14, 1990

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
HON. COURT OF TAX APPEALS and MANILA GOLF & COUNTRY CLUB,
INC., respondents.
Bito, Misa & Lozada for private respondent.
MEDIALDEA, J.:
In Commissioner of Internal Revenue v. Manila Hotel Corporation, et al., G.R. No.
83250, September 26, 1989, We overruled a decision of the Court of Tax Appeals which
declared the collection of caterer's tax under Section 191-A of Republic Act No. 6110
illegal because Sec. 42 of House Bill No. 17839, which carries that proviso, was vetoed
by then President Ferdinand E. Marcos when the bill was presented to him and
Congress had not taken any step to override the presidential veto. We held thus:
The power of the State to impose the 3% caterer's tax is not debatable. The Court of
Tax Appeals erred, however, in holding that the tax was abolished as a result of the
presidential veto of August 4, 1969. It failed to examine the law then, and up to now,
existing on the subject which has always imposed a 3% caterer's tax on operators of
restaurants. Since the Manila Hotel operates restaurants in its premises, it is liable to
pay the tax provided in paragraph (1), Section 206 of the Tax Code. (Commissioner of
Internal Revenue v. Manila Hotel Corporation and the Court of Tax Appeals, G.R. No.
83250, September 26, 1989)
The petition now before Us presents an identical question: whether the presidential veto
referred to the entire section or merely to the imposition of 20% tax on gross receipts of
operators or proprietors of restaurants, refreshment parlors, bars and other eating
places which are maintained within the premises or compound of a hotel, motel or
resthouses. Reference to the Manila Hotel case, therefore, might have been sufficient to
dispose of this petition were it not for the position of the CTA that a chief executive has
no power to veto part of an item in a bill; either he vetoes an entire section or approves
it but not a fraction thereof.
Herein private respondent, Manila Golf & Country Club, Inc. is a non-stock corporation.
True, it maintains a golf course and operates a clubhouse with a lounge, bar and dining
room, but these facilities are for the exclusive use of its members and accompanied
guests, and it charges on cost-plus-expense basis. As such, it claims it should have
been exempt from payment of privilege taxes were it not for the last paragraph of
Section 191-A of R.A. No. 6110, otherwise known as the "Omnibus Tax Law." Section
191-A reads:
Sec. 191-A. Caterer. A caterer's tax is hereby imposed as follows:

83

(1) On proprietors or operators of restaurants, refreshment parlors and other eating

places, including clubs, and caterers, three per cent of their gross receipts.
(2) On proprietors or operators of restaurants, bars, cafes and other eating places,
including clubs, where distilled spirits, fermented liquors, or wines are served, three per
cent of their gross receipts from sale of food or refreshments and seven per cent of their
gross receipts from sale of distilled spirits, fermented liquors or wines. Two sets of
commercial invoices or receipts serially numbered in duplicate shall be separately
prepared and issued, one for sale of refreshments served, and another for each sale of
distilled spirits, fermented liquors or wines served, the originals of the invoices or
receipts to be issued to the purchaser or customer.
(3) On proprietors or operators of restaurants, refreshment parlors, bars, cafes and
other eating places which are maintained within the preferences or compound of
a hotel, motel, resthouse, cockpit, race track, jai-alai, cabaret, night or day club by
means of a connecting door or passage twenty per cent of their gross receipts.
Where the establishments are operated or maintained by clubs of any kind or nature
(irrespective of the disposition of their net income and whether or not they cater
exclusively to members or their guests) the keepers of the establishments shall pay the
corresponding tax at the rate fixed above. (Emphasis supplied)
Republic Act No. 6110 took effect on September 1, 1969. By this virtue, petitioners
assessed the club fixed taxes as operators of golf links and restaurants, and also
percentage tax (caterer's tax) for its sale of foods and fermented liquors/wines for the
period covering September 1969 to December 1970 in the amount of P32,504.96. The
club protested claiming the assessment to be without basis because Section 42 was
vetoed by then President Marcos. The veto message reads:
MALACAANG
Manila
August 4, 1969
Gentlemen of the House of Representatives:
I have the honor to inform you that I have this day signed H.B. No. 17839, entitled:
AN ACT AMENDING CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED
Pursuant to the provisions of Section 20-(3), Article VI, of the Constitution, however, I
have vetoed the following items in this bill:
xxx xxx xxx
pp. 44, SEC. 42. Inserting a new Section 191-A which imposes a caterer's tax of three
percent of the gross receipts of proprietors or operators of restaurants, refreshment
parlors and other eating places; three percent of gross receipts from sale of food or
refreshment and seven percent on gross receipts from the sale of distilled spirits,
fermented liquors or wines, on proprietors or operators of restaurants, bars, cafes and
other eating places, including clubs, where distilled spirits, fermented liquors, or wines

84

are served; and twenty percent of gross receipts on proprietor or operators of

restaurants, refreshment parlors, bars, cafes and other eating places maintained within
the premises or compound of a hotel, motel, resthouse, cockpit, race track, jai-alai,
cabaret, night or day club, or which are accessible to patrons of said establishments by
means of a connecting door or passage.
The burden of petition will be shifted to the consuming public.
The development of hotels, essential to our tourist industry, may be restrained
considering that a big portion of hotel earnings comes from food sale. . . .
This bill, H.B. No. 17839, has become Republic Act No. 6110.
Respectfully,
(SGD.) FERDINAND E. MARCOS
[Emphasis ours]
The protestation of the club was denied by the petitioner who maintains that Section 42
was not entirely vetoed but merely the words "hotels, motels, resthouses" on the ground
that it might restrain the development of hotels which is essential to the tourism industry.
This in fact was the position of the House Ways and Means Committee which reported,
to wit:
When Congress decided to split Section 191 into two parts, one dealing with
contractors, and the other dealing with those who serve food and drinks, the intention
was to classify and to improve. While the Congress expanded the coverage of both 191
and 191-A, it also provided for certain exemptions. The veto message seems to object
to certain additions to 191-A. What additions are objectionables can be gleaned from
the reasons given: a general reason that this sort of tax is passed on to the consuming
public, and a particular reason that hotel developments, so essential to the tourist
industry, may be restrained. These reasons have been taken together in the
interpretations of the veto message and the deletions of such enterprises as are
connected with the tourist industry has therefore been recommended.
To interpret the veto. message otherwise would result in the exemption of entities
already subject of tax. This would be absurd. Where the Congress wanted to exempt, it
was so provided in the bill. While the President may veto any item or items in a revenue
bill the constitution does not give him the power to repeal an existing tax. (2nd
Indorsement dated December 9, 1969, Chairman on Ways and Means, Sixth Congress
of the Republic of the Phil.) (Exhs. 14, p. 85, B.I.R. rec.). (pp. 20-21, Rollo)
It was by reason of this interpretation of the Committee that R.A. No. 6110 was
published in Volume 66, No. 18, p. 4531 of the Official Gazette (May 4, 1970) in such a
way that Section 191-A was included in the text save for the words "hotels, motels,
resthouses."
As already mentioned, the Court of Tax Appeals, upon petition by the club, sustained
the latter's position reasoning that the veto message was clear and unqualified, as in
fact it was confirmed three years later, after much controversy, by the Office of the
President, thus:
Mr. Antero M. Sison, Jr.

85

San Martin Building, 1564,

A. Mabini, P.O. Box 2288
Manila, Philippines
Dear Sir:
With reference to your letter dated July 14, 1972, we wish to inform you that Section 42
(which contains Sec. 191-A) of House Bill No. 17839, now R.A. 6110 was one of the
Sections vetoed by the President in his veto message dated August 4, 1969, vetoing
certain sections of the said revenue bill.
Very Truly Yours,
(SGD.) IRINEO T. AGUIRRE, JR.
Presidential Staff Assistant
(p. 49, Rollo)
As mentioned earlier, We have already ruled that the presidential veto referred merely
to the inclusion of hotels, motels and resthouses in the 20% caterer's tax bracket but not
to the whole section. But, as mentioned earlier also, the CTA opined that the President
could not veto words or phrases in a bill but only an entire item. Obviously, what the
CTA meant by "item" was an entire section. We do not agree. But even assuming it to
be so, it would also be to petitioner's favor. The ineffectual veto by the President
rendered the whole section 191-A as not having been vetoed at all and it, therefore,
became law as an unconstitutional veto has no effect, whatsoever. (See Bolinao
Electronics Corp. v. Valeria No. L-20740, June 30, 1964, 11 SCRA 486).
However, We agree with then Solicitor General Estelito Mendoza and his associates
that inclusion of hotels, motels and resthouses in the 20% caterer's tax bracket are
"items" in themselves within the meaning of Sec. 20(3), Art. VI of the 1935 Constitution
which, therefore, the President has the power to veto. An "item" in a revenue bill does
not refer to an entire section imposing a particular kind of tax, but rather to the subject of
the tax and the tax rate. In the portion of a revenue bill which actually imposes a tax, a
section identifies the tax and enumerates the persons liable therefor with the
corresponding tax rate. To construe the word "item" as referring to the whole section
would tie the President's hand in choosing either to approve the whole section at the
expense of also approving a provision therein which he deems unacceptable or veto the
entire section at the expense of foregoing the collection of the kind of tax altogether.
The evil which was sought to be prevented in giving the President the power to
disapprove items in a revenue bill would be perpetrated rendering that power inutile
(See Commonwealth ex rel. Elkin v. Barnett, 199 Pa. 161, 55 LRA 882 [1901]).
ACCORDINGLY, the petition is GRANTED and the decision of the Court of Tax Appeals
in CTA Case No. 2630 is set aside. Section 191-A of RA No. 6110 is valid and
enforceable and, hence, the Manila Golf & Country Club Inc. is liable for the amount
assessed against it.
SO ORDERED.

86

CASES ON TAX CONSTRUCTION

EN BANC
[G.R. No. 117359. July 23, 1998]

DAVAO GULF LUMBER

CORPORATION, petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.
DECISION
PANGANIBAN, J.:

Because taxes are the lifeblood of the nation, statutes that allow exemptions are
construed strictly against the grantee and liberally in favor of the government. Otherwise
stated, any exemption from the payment of a tax must be clearly stated in the language
of the law; it cannot be merely implied therefrom.
Statement of the Case
This principium is applied by the Court in resolving this petition for review under
Rule 45 of the Rules of Court, assailing the Decision of Respondent Court of
Appeals in CA-GR SP No. 34581 dated September 26, 1994, which affirmed the June
21, 1994 Decision of the Court of Tax Appeals in CTA Case No. 3574. The dispositive
portion of the CTA Decision affirmed by Respondent Court reads:
[1]

[2]

[3]

[4]

WHEREFORE, judgment is hereby rendered ordering the respondent to

refund to the petitioner the amount of P2,923.15 representing the partial
refund of specific taxes paid on manufactured oils and fuels.
[5]

The Antecedent Facts

The facts are undisputed. Petitioner is a licensed forest concessionaire possessing
a Timber License Agreement granted by the Ministry of Natural Resources (now
Department of Environment and Natural Resources). From July 1, 1980 to January 31,
1982 petitioner purchased, from various oil companies, refined and manufactured
mineral oils as well as motor and diesel fuels, which it used exclusively for the
exploitation and operation of its forest concession. Said oil companies paid the specific
taxes imposed, under Sections 153 and 156 of the 1977 National Internal Revenue
Code (NIRC), on the sale of said products. Being included in the purchase price of the
oil products, the specific taxes paid by the oil companies were eventually passed on to
the user, the petitioner in this case.
[6]

[7]

87

On December 13, 1982, petitioner filed before Respondent Commissioner of

Internal
Revenue
(CIR)
a
claim
for
refund
in
the
amount
ofP120,825.11, representing 25% of the specific taxes actually paid on the abovementioned fuels and oils that were used by petitioner in its operations as forest
concessionaire. The claim was based on Insular Lumber Co. vs. Court of Tax
Appeals and Section 5 of RA 1435 which reads:
[8]

Section 5. The proceeds of the additional tax on manufactured oils shall

accrue to the road and bridge funds of the political subdivision for whose
benefit the tax is collected: Provided, however, That whenever any oils
mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be
refunded by the Collector of Internal Revenue upon submission of proof of
actual use of oils and under similar conditions enumerated in subparagraphs
one and two of section one hereof, amending section one hundred forty-two of
the Internal Revenue Code: Provided, further, That no new road shall be
constructed unless the routes or location thereof shall have been approved by
the Commissioner of Public Highways after a determination that such road
can be made part of an integral and articulated route in the Philippine
Highway System, as required in section twenty-six of the Philippine Highway
Act of 1953.
It is an unquestioned fact that petitioner complied with the procedure for refund,
including the submission of proof of the actual use of the aforementioned oils in its
forest concession as required by the above-quoted law. Petitioner, in support of its claim
for refund, submitted to the CIR the affidavits of its general manager, the president of
the Philippine Wood Products Association, and three disinterested persons, all attesting
that the said manufactured diesel and fuel oils were actually used in the exploitation and
operation of its forest concession.
On January 20, 1983, petitioner filed at the CTA a petition for review docketed as
CTA Case No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner
entitled to a partial refund of specific taxes the latter had paid in the reduced amount
of P2,923.15. The CTA ruled that the claim on purchases of lubricating oil (from July 1,
1980 to January 19, 1981), and on manufactured oils other than lubricating oils (from
July 1, 1980 to January 4, 1981) had prescribed. Disallowed on the ground that they
were not included in the original claim filed before the CIR were the claims for refund on
purchases of manufactured oils from January 1, 1980 to June 30, 1980 and from
February 1, 1982 to June 30, 1982. In regard to the other purchases, the CTA granted
the claim, but it computed the refund based on rates deemed paid under RA 1435, and
not on the higher rates actually paid by petitioner under the NIRC.
Insisting that the basis for computing the refund should be the increased rates
prescribed by Sections 153 and 156 of the NIRC, petitioner elevated the matter to the
Court of Appeals. As noted earlier, the Court of Appeals affirmed the CTA
Decision. Hence, this petition for review.
[9]

Public Respondents Ruling

88

In its petition before the Court of Appeals, petitioner raised the following arguments:

I. The respondent Court of Tax Appeals failed to apply the Supreme Courts
Decision in Insular Lumber Co. v. Court of Tax Appeals which granted the
claim for partial refund of specific taxes paid by the claimant, without
qualification or limitation.
II. The respondent Court of Tax Appeals ignored the increase in rates imposed
by succeeding amendatory laws, under which the petitioner paid the specific
taxes on manufactured and diesel fuels.
III. In its decision, the respondent Court of Tax Appeals ruled contrary to
established tenets of law when it lent itself to interpreting Section 5 of R.A.
1435, when the construction of said law is not necessary.
IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be
applied but rather, Sections 153 and 156 of the National Internal Revenue
Code, as amended.
V. To rule that the basis for computation of the refunded taxes should be
Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the National
Internal Revenue Code is unfair, erroneous, arbitrary, inequitable and
oppressive.
[10]

The Court of Appeals held that the claim for refund should indeed be computed on
the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In so ruling,
it cited our pronouncement in Commissioner of Internal Revenue v. Rio Tuba Nickel
Mining Corporation and our subsequent Resolution dated June 15, 1992 clarifying the
said Decision. Respondent Court further ruled that the claims for refund which
prescribed and those which were not filed at the administrative level must be excluded.
[11]

The Issue
In its Memorandum, petitioner raises one critical issue:

Whether or not petitioner is entitled under Republic Act No. 1435 to the refund
of 25% of the amount of specific taxes it actually paid on various refined and
manufactured mineral oils and other oil products taxed under Sec. 153 and
Sec. 156 of the 1977 (Sec. 142 and Sec. 145 of the 1939) National Internal
Revenue Code.
[12]

In the main, the question before us pertains only to the computation of the tax
refund. Petitioner argues that the refund should be based on the increased rates of
specific taxes which it actually paid, as prescribed in Sections 153 and 156 of the
NIRC. Public respondent, on the other hand, contends that it should be based on
specific taxes deemed paid under Sections 1 and 2 of RA 1435.
The Courts Ruling

89

The petition is not meritorious.

Petitioner Entitled to Refund
Under Sec. 5 of RA 1435
At the outset, it must be stressed that petitioner is entitled to a partial refund under
Section 5 of RA 1435, which was enacted to provide means for increasing the Highway
Special Fund.
The rationale for this grant of partial refund of specific taxes paid on purchases of
manufactured diesel and fuel oils rests on the character of the Highway Special
Fund. The specific taxes collected on gasoline and fuel accrue to the Fund, which is to
be used for the construction and maintenance of the highway system. But because the
gasoline and fuel purchased by mining and lumber concessionaires are used within
their own compounds and roads, and their vehicles seldom use the national highways,
they do not directly benefit from the Fund and its use. Hence, the tax refund gives the
mining and the logging companies a measure of relief in light of their peculiar situation.
When the Highway Special Fund was abolished in 1985, the reason for the refund
likewise ceased to exist. Since petitioner purchased the subject manufactured diesel
and fuel oils from July 1, 1980 to January 31, 1982 and submitted the required proof
that these were actually used in operating its forest concession, it is entitled to claim the
refund under Section 5 of RA 1435.
[13]

[14]

Tax Refund Strictly Construed

Against the Grantee
Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it
had actually paid for the petroleum products used in its operations. In other words, it
claims a refund based on the increased rates under Sections 153 and 156 of the NIRC.
Petitioner argues that the statutory grant of the refund privilege, specifically the
phrase twenty-five per centum of the specific tax paid thereon shall be refunded by the
Collector of Internal Revenue, is clear and unambiguous enough to require construction
or qualification thereof. In addition, it cites our pronouncement in Insular Lumber vs.
Court of Tax Appeals:
[15]

[16]

[17]

x x x Section 5 [of RA 1435] makes reference to subparagraphs 1 and 2 of

Section 1 only for the purpose of prescribing the procedure for refund.This
express reference cannot be expanded in scope to include the limitation of the
period of refund. If the limitation of the period of refund of specific taxes paid
on oils used in aviation and agriculture is intended to cover similar taxes paid
on oil used by miners and forest concessionaires, there would have been no
need of dealing with oil used by miners and forest concessions separately and
Section 5 would very well have been included in Section 1 of Republic Act No.
1435, notwithstanding the different rate of exemption.
Petitioner then reasons that the express mention of Section 1 of RA 1435 in Section
5 cannot be expanded to include a limitation on the tax rates to be applied x x x
[otherwise,] Section 5 should very well have been included in Section 1 x x x.
[18]

90

The Court is not persuaded. The relevant statutory provisions do not clearly support
petitioners claim for refund. RA 1435 provides:

SECTION 1. Section one hundred and forty-two of the National Internal

Revenue Code, as amended, is further amended to read as follows:
SEC. 142. Specific tax on manufactured oils and other fuels. -- On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes:
(a) Kerosene or petroleum, per liter of volume capacity, two and one-half
centavos;
(b) Lubricating oils, per liter of volume capacity, seven centavos;
(c) Naptha, gasoline, and all other similar products of distillation, per liter of
volume capacity, eight centavos; and
(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been paid, only the alcohol
content shall be subject to the tax herein prescribed. For the purpose of this
subsection, the removal of denatured alcohol of not less than one hundred
eighty degrees proof (ninety per centum absolute alcohol) shall be deemed to
have been removed for motive power, unless shown to the contrary.
Whenever any of the oils mentioned above are, during the five years from
June eighteen, nineteen hundred and fifty two, used in agriculture and
aviation, fifty per centum of the specific tax paid thereon shall be refunded by
the Collector of Internal Revenue upon the submission of the following:
(1) A sworn affidavit of the producer and two disinterested persons proving
that the said oils were actually used in agriculture, or in lieu thereof
(2) Should the producer belong to any producers association or federation,
duly registered with the Securities and Exchange Commission, the affidavit of
the president of the association or federation, attesting to the fact that the oils
were actually used in agriculture.
(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector
proving that the said oils were actually used in aviation: Provided,That no
such refunds shall be granted in respect to the oils used in aviation by citizens
and corporations of foreign countries which do not grant equivalent refunds or
exemptions in respect to similar oils used in aviation by citizens and
corporations of the Philippines.

91

SEC. 2. Section one hundred and forty-five of the National Internal Revenue
Code, as amended, is further amended to read as follows:
SEC. 145. Specific Tax on Diesel fuel oil. -- On fuel oil, commercially known
as diesel fuel oil, and on all similar fuel oils, having more or less the same
generating power, there shall be collected, per metric ton, one peso.
xxxxxxxxx

Section 5. The proceeds of the additional tax on manufactured oils shall

accrue to the road and bridge funds of the political subdivision for whose
benefit the tax is collected: Provided, however, That whenever any oils
mentioned above are used by miners or forest concessionaires in their
operations, twenty-five per centum of the specific tax paid thereon shall be
refunded by the Collector of Internal Revenue upon submission of proof of
actual use of oils and under similar conditions enumerated in subparagraphs
one and two of section one hereof, amending section one hundred forty-two of
the Internal Revenue Code: Provided, further, That no new road shall be
constructed unless the route or location thereof shall have been approved by
the Commissioner of Public Highways after a determination that such road
can be made part of an integral and articulated route in the Philippine
Highway System, as required in section twenty-six of the Philippine Highway
Act of 1953.
Subsequently, the 1977 NIRC, PD 1672 and EO 672 amended the first two
provisions, renumbering them and prescribing higher rates.Accordingly, petitioner paid
specific taxes on petroleum products purchased from July 1, 1980 to January 31, 1982
under the following statutory provisions.
From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as
follows:

SEC. 153. Specific tax on manufactured oils and other fuels. -- On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes which shall attach to the articles hereunder enumerated as
soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, seven centavos;
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
(c) Naphtha, gasoline and all other similar products of distillation, per liter of
volume capacity, ninety-one centavos: Provided, That, on premium and
aviation gasoline, the tax shall be one peso per liter of volume capacity;
(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That, unless otherwise provided for by

92

special laws, if the denatured alcohol is mixed with gasoline, the specific tax
on which has already been paid, only the alcohol content shall be subject to
the tax herein prescribed. For the purposes of this subsection, the removal of
denatured alcohol of not less than one hundred eighty degrees proof (ninety
per centum absolute alcohol) shall be deemed to have been removed for
motive power, unless shown to the contrary;
(e) Processed gas, per liter of volume capacity, three centavos;
(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;
(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided,
That, liquefied petroleum gas used for motive power shall be taxed at the
equivalent rate as the specific tax on diesel fuel oil;
(h) Asphalts, per kilogram, eight centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos. (As
amended by Sec. 1, P.D. No. 1672.)
xxxxxxxxx

SEC. 156. Specific tax on diesel fuel oil. -- On fuel oil, commercially known as
diesel fuel oil, and on all similar fuel oils, having more or less the same
generating power, per liter of volume capacity, seventeen and one-half
centavos, which tax shall attach to this fuel oil as soon as it is in existence as
such."
Then on March 21, 1981, these provisions were amended by EO 672 to read:

SEC. 153. Specific tax on manufactured oils and other fuels. -- On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes which shall attach to the articles hereunder enumerated as
soon as they are in existence as such:
(a) Kerosene, per liter of volume capacity, nine centavos;
(b) Lubricating oils, per liter of volume capacity, eighty centavos;
(c) Naphtha, gasoline and all other similar products of distillation, per liter of
volume capacity, one peso and six centavos: Provided, That on premium and
aviation gasoline, the tax shall be one peso and ten centavos and one peso,
respectively, per liter of volume capacity;

93

(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo; Provided, That unless otherwise provided for by
special laws, if the denatured alcohol is mixed with gasoline, the specific tax
on which has already been paid, only the alcohol content shall be subject to
the tax herein prescribed. For the purpose of this subsection, the removal of
denatured alcohol of not less than one hundred eighty degrees proof
(ninety per centum absolute alcohol) shall be deemed to have been removed
for motive power, unless shown to the contrary;
(e) Processed gas, per liter of volume capacity, three centavos;
(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;
(g) Liquefied petroleum gas, per kilogram, twenty-one
centavos: Provided, That, liquified petroleum gas used for motive power shall
be taxed at the equivalent rate as the specific tax on diesel fuel oil;
(h) Asphalts, per kilogram, twelve centavos;
(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;
(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos.
xxxxxxxxx

SEC. 156. Specific tax on diesel fuel oil. -- On fuel oil, commercially known as
diesel fuel oil, and all similar fuel oils, having more or less the same
generating power, per liter of volume capacity, twenty-five and one-half
centavos, which tax shall attach to this fuel oil as soon as it is in existence as
such.
A tax cannot be imposed unless it is supported by the clear and express language
of a statute; on the other hand, once the tax is unquestionably imposed, [a] claim of
exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken. Since the partial refund authorized under Section 5, RA 1435,
is in the nature of a tax exemption, it must be construed strictissimijuris against the
grantee. Hence, petitioners claim of refund on the basis of the specific taxes it actually
paid must expressly be granted in a statute stated in a language too clear to be
mistaken.
[19]

[20]

[21]

We have carefully scrutinized RA 1435 and the subsequent pertinent statutes and
found no expression of a legislative will authorizing a refund based on the higher rates
claimed by petitioner. The mere fact that the privilege of refund was included in Section
5, and not in Section 1, is insufficient to support petitioners claim. When the law itself
does not explicitly provide that a refund under RA 1435 may be based on higher rates
which were nonexistent at the time of its enactment, this Court cannot presume
otherwise. A legislative lacuna cannot be filled by judicial fiat.
[22]

94

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of
Appeals and Atlas Consolidated Mining and Development Corporation (the second
Atlas case), the CIR contended that the refund should be based on Sections 1 and 2 of
RA 1435, not Sections 153 and 156 of the NIRC of 1977. In categorically ruling that
Private Respondent Atlas Consolidated Mining and Development Corporation was
entitled to a refund based on Sections 1 and 2 of RA 1435, the Court, through Mr.
Justice Hilario G. Davide, Jr., reiterated our pronouncement inCommissioner of Internal
Revenue vs. Rio Tuba Nickel and Mining Corporation:
[23]

Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision

in the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we
stated:
Since the private respondents claim for refund covers specific taxes paid from
1980 to July 1983 then we find that the private respondent is entitled to a
refund. It should be made clear, however, that Rio Tuba is not entitled to the
whole amount it claims as refund.
The specific taxes on oils which Rio Tuba paid for the aforesaid period were
no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435
but on the increased rates mandated under Sections 153 and 156 of the
National Internal Revenue Code of 1977. We note however, that the latter law
does not specifically provide for a refund to these mining and lumber
companies of specific taxes paid on manufactured and diesel fuel oils.
In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the
Court held that the authorized partial refund under Section 5 of R.A. No. 1435
partakes of the nature of a tax exemption and therefore cannot be allowed
unless granted in the most explicit and categorical language. Since the grant
of refund privileges must be strictly construed against the taxpayer, the basis
for the refund shall be the amounts deemed paid under Sections 1 and 2 of
R.A. No. 1435.
ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby
MODIFIED. The private respondents CLAIM for REFUND is GRANTED,
computed on the basis of the amounts deemed paid under Sections 1 and 2
of R.A. NO. 1435, without interest.
[24]

We rule, therefore, that since Atlass claims for refund cover specific taxes paid
before 1985, it should be granted the refund based on the rates specified by
Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under
Sections 153 and 156 of the Tax Code of 1977, provided the claims are not
yet barred by prescription. (Underscoring supplied.)
Insular Lumber Co. and First Atlas Case Not
Inconsistent With Rio Tuba

95

and Second Atlas Case

Petitioner argues that the applicable jurisprudence in this case should
be Commissioner of Internal Revenue vs. Atlas Consolidated and Mining Corp. (the first
Atlas case), an unsigned resolution, and Insular Lumber Co. vs. Court of Tax
Appeals, an en banc decision. Petitioner also asks the Court to take a second look
at Rio Tuba and the second Atlas case, both decided by Divisions, in view
of Insular which was decided en banc. Petitioner posits that [I]n view of the similarity of
the situation of herein petitioner with Insular Lumber Company (claimant inInsular
Lumber) and Rio Tuba Nickel Mining Corporation (claimant in Rio Tuba), a dilemma has
been created as to whether or not Insular Lumber, which has been decided by the
Honorable Court en banc, or Rio Tuba, which was decided only [by] the Third Division of
the Honorable Court, should apply.
[25]

[26]

We find no conflict between these two pairs of cases. Neither Insular Lumber
Co. nor the first Atlas case ruled on the issue of whether the
refund privilege under Section 5 should be computed based on the specific tax deemed
paid under Sections 1 and 2 of RA 1435, regardless of what was actually paid under the
increased rates. Rio Tuba and the second Atlas case did.
Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum
products purchased in the year 1963, when the increased rates under the NIRC of 1977
were not yet in effect. Thus, the issue now before us did not exist at the time, since the
applicable rates were still those prescribed under Sections 1 and 2 of RA 1435.
On the other hand, the issue raised in the first Atlas case was whether the claimant
was entitled to the refund under Section 5, notwithstanding its failure to pay any
additional tax under a municipal or city ordinance. Although Atlas purchased petroleum
products in the years 1976 to 1978 when the rates had already been changed, the
Court did not decide or make any pronouncement on the issue in that case.
Clearly, it is impossible for these two decisions to clash with our pronouncement
in Rio Tuba and second Atlas case, in which we ruled that the refund granted be
computed on the basis of the amounts deemed paid under Sections 1 and 2 of RA
1435. In this light, we find no basis for petitioners invocation of the constitutional
proscription that no doctrine or principle of law laid down by the Court in a decision
rendered en bancor in division may be modified or reversed except by the Court
sitting en banc.
[27]

Finally, petitioner asserts that equity and justice demand that the computation of the
tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC.
We disagree. According to an eminent authority on taxation, there is no tax exemption
solely on the ground of equity.
[28]

[29]

WHEREFORE, the petition is hereby DENIED and the assailed Decision of the
Court of Appeals is AFFIRMED.
SO ORDERED.

96

SECOND DIVISION
[G.R. No. 118043. July 23, 1998]

LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now

JARDINE-CMG LIFE INSURANCE CO. INC.),petitioner, vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.
DECISION
MENDOZA, J.:

This is a petition for review on certiorari of the decision rendered on November 18,
1994 by the Court of Appeals reversing, in part, the decision of the Court of Tax
Appeals in C.T.A. Case No. 4583.
[1]

The facts are not in dispute. Petitioner, now the Jardine-CMG Life Insurance
Company, Inc., is a domestic corporation engaged in the life insurance business. In
1984, it issued 50,000 shares of stock as stock dividends, with a par value of P100 or a
total of P5 million. Petitioner paid documentary stamp taxes on each certificate on the
basis of its par value. The question in this case is whether in determining the amount to
be paid as documentary stamp tax, it is the par value of the certificates of stock or the
book value of the shares which should be considered. The pertinent provision of law, as
it stood at the time of the questioned transaction, reads as follows:
[2]

SEC. 224. Stamp tax on original issues of certificates of stock. -- On every

original issue, whether on organization, reorganization or for any lawful
purpose, of certificates of stock by any association, company or corporation,
there shall be collected a documentary stamp tax of one peso and ten
centavos on each two hundred pesos, or fractional part thereof, of the par
value of such certificates: Provided, That in the case of the original issue of
stock without par value the amount of the documentary stamp tax herein
prescribed shall be based upon the actual consideration received by the
association, company, or corporation for the issuance of such stock, and in the
case of stock dividends on the actual value represented by each share.
[3]

The Commissioner of Internal Revenue took the view that the book value of the
shares, amounting to P19,307,500.00, should be used as basis for determining the
amount of the documentary stamp tax. Accordingly, respondent Internal Revenue
Commissioner issued a deficiency documentary stamp tax assessment in the amount
of P78,991.25 in excess of the par value of the stock dividends.
Together with another documentary stamp tax assessment which it also questioned,
petitioner appealed the Commissioners ruling to the Court of Tax Appeals. On March 30,

97

1993, the CTA rendered its decision holding that the amount of the documentary stamp
tax should be based on the par value stated on each certificate of stock. The dispositive
portion of its decision reads:

WHEREFORE, the deficiency documentary stamp tax assessments in the

amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby
cancelled for lack of merit. Respondent Commissioner of Internal Revenue is
ordered to desist from collecting said deficiency documentary stamp taxes for
the same are considered withdrawn.
SO ORDERED.
In turn, respondent Commissioner of Internal Revenue appealed to the Court of
Appeals which, on November 18, 1994, reversed the CTAs decision and held that, in
assessing the tax in question, the basis should be the actual value represented by the
subject shares on the assumption that stock dividends, being a distinct class of shares,
are not subject to the qualification in the law as to the type of certificate of stock used
(with or without par value). The appellate court, therefore, ordered:

IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby

REVERSED with respect to the deficiency tax assessment on the stock
dividends, but AFFIRMED with regards to the assessment on the Insurance
Policies. Consequently, private respondent is ordered to pay the petitioner
herein the sum of P78,991.25, representing documentary stamp tax on the
stock dividends it issued. No costs pronouncement.
SO ORDERED.
Hence, this petition with the following assignment of error:

RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

STOCK DIVIDENDS INVOLVING SHARES WITH PAR VALUE ARE
SUBJECT TO DOCUMENTARY STAMP TAX BASED ON THE BOOK
VALUE OF SAID SHARES WHICH RULING IS CONTRARY TO WHAT IS
CLEARLY PROVIDED FOR BY SECTION 224 (NOW SECTION 175) OF
THE TAX CODE.
The petition has merit.
First. In ruling that the book value of the shares should be considered in assessing
the documentary stamp tax, the Court of Appeals stated:

There are three (3) classes of stocks referred to in Section 224 (now 175) of
the Internal Revenue Code: (a) Certificate of Stocks with par value,
(b) Certificate of Stock with no par value and (c) stock dividends. The first two
(2) mentioned are original issuances of the corporation, association or
company while the third ones are taken by the corporation, association or
company out of or from their unissued shares of stock, hence are also

98

originals. Undoubtedly, all the three classifications are subject to the

documentary stamp tax.
Conformably, in the case of stock certificates with par value, the documentary
stamp tax is based on the par value of the stock; for stock certificates without
par value, the same tax is computed from the actual consideration received by
the corporation, association or company; but for stock dividends, documentary
stamp tax is to be paid on the actual value represented by each share.
Since in dividends, no consideration is technically received by the corporation,
petitioner is correct in basing the assessment on the book value thereof
rejecting the principles enunciated in Commissioner of Internal Revenue vs.
Heald Lumber Co. (10 SCRA 372) as the said case refers to purchases of nopar certificates of stocks and not to stock dividends.
[4]

Apparently, the Court of Appeals treats stock dividends as distinct from ordinary
shares of stock for purposes of the then 224 of the National Internal Revenue Code.
There is, however, no basis for considering stock dividends as a distinct class from
ordinary shares of stock since under this provision only certificates of stock are required
to be distinguished (into either one with par value or one without) rather than the
classes of shares themselves.
Indeed, a reading of the then 224 of the NIRC as quoted earlier, starting from its
heading, will show that the documentary stamp tax is not levied upon the shares of
stock per se but rather on the privilege of issuing certificates of stock.
A stock certificate is merely evidence of a share of stock and not the share
itself. This distinction is clear in the Corporation Code, to wit:

SEC. 63. Certificate of stock and transfer of shares. - The capital stock of
stock corporations shall be divided into shares for which certificates signed by
the president or vice-president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized to make
the transfer. No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the corporation so as to
show the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation.
[5]

Stock dividends are in the nature of shares of stock, the consideration for which is
the amount of unrestricted retained earnings converted into equity in the corporations
books. Thus,
[6]

99

A stock dividend is any dividend payable in shares of stock of the corporation

declaring or authorizing such dividend. It is, what the term itself implies, a
distribution of the shares of stock of the corporation among the stockholders
as dividends. A stock dividend of a corporation is a dividend paid in shares of
stock instead of cash, and is properly payable only out of surplus profits. So, a
stock dividend is actually two things: (1) a dividend and (2) the enforced use
of the dividend money to purchase additional shares of stock at par...
[7]

From the foregoing, it is clear that stock dividends are shares of stock and not
certificates of stock which merely represent them. There is, therefore, no reason for
determining the actual value of such dividends for purposes of the documentary stamp
tax if the certificates representing them indicate a par value.
The Solicitor General himself says that, based on the then 224, there are only two
bases for determining the amount of the documentary stamp tax:

An examination of the structure of the main provision of Sec. [224] of the

NIRC will show that it intends to classify the tax bases into two, either the par
value, or the actual consideration or actual value. It specifies in the first part
that the basis for the imposition of the documentary stamp tax on shares of
stocks belonging to the first category, discussed in the early part of this
comment, shall be the face value. In contradistinction, the provision specifies
in the proviso that for the second and third categories, the basis for the tax
shall not be the face value. Rather, the basis is either the actual consideration
received by the corporation for the share or the actual value of the share.
[8]

Apparently, the former tax code sought to distinguish between stock dividends
without par value and other transactions involving ordinary shares of stock without par
value in the second clause of the then 224 in order to prevent claims that the former are
exempt from documentary stamp taxes as, unlike in the case of ordinary shares,
corporations actually receive nothing from their stockholders in exchange for such stock
dividends. Hence the provision that, in the case of stock dividends, the amount of the
documentary stamp tax must be based on the actual value of each share. This is the
only purpose for the distinction in the second clause of the subject provision.
Second. It is error for the Solicitor General to contend that, under the then 224 of
the NIRC, the basis for assessment is the actual value of the business transaction that
is the source of the original issuance of stock certificates. To the contrary, the
documentary stamp tax here is notlevied upon the specific transaction which gives rise
to such original issuance but on the privilege of issuing certificates of stock. As we have
held in several cases:
[9]

A documentary stamp tax is in the nature of an excise tax. It is not imposed

upon the business transacted but is an excise upon the privilege, opportunity
or facility offered at exchanges for the transaction of the business. It is an
excise upon the facilities used in the transaction of the business separate and
apart from the business itself. (Du Pont v. U.S., 300 U.S. 150; Thomas v. U.S.,
192 U.S., 363; Nicol v. Ames, 173 U.S. 509). With respect to stock certificates,

100

it is levied upon the privilege of issuing them; not on the money or property
received by the issuing company for such certificates. Neither is it imposed
upon the share of stock. As Justice Learned Hand pointed out in one case,
documentary stamp tax is levied on the document and not on the property
which it described. (Empire Trust co. v. Hoey, 103 F 2d. 430). . . .
[10]

Third. Settled is the rule that, in case of doubt, tax laws must be construed strictly
against the State and liberally in favor of the taxpayer. This is because taxes, as
burdens which must be endured by the taxpayer, should not be presumed to go beyond
what the law expressly and clearly declares. That such strict construction is
necessary in this case is evidenced by the change in the subject provision as presently
worded, which now expressly levies the said tax on shares of stock as against the
privilege of issuing certificates of stock as formerly provided:
[11]

SEC. 175. Stamp Tax on Original Issue of Shares of Stock. - On every original
issue, whether on organization, reorganization or for any lawful purpose,
of shares of stock by any association, company or corporation, there shall be
collected a documentary stamp tax of Two pesos (P2.00) on each Two
hundred pesos (P200), or fractional part thereof, of the par value, of such
shares of stock: Provided, That in the case of the original issue of shares of
stock without par value the amount of the documentary stamp tax herein
prescribed shall be based upon the actual consideration for the issuance of
such shares of stock: Provided, further, That in the case of stock dividends, on
the actual value represented by each share.
[12]

WHEREFORE, the decision of the Court of Appeals is REVERSED insofar as the

deficiency tax assessment on stock dividends is concerned and the decision of the
Court of Tax Appeals is reinstated.
SO ORDERED.

DOUBLE TAXATION

EN BANC
G.R. No. L-22814

August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
CITY
OF
BUTUAN,
MEMBERS
OF
THE
MUNICIPAL
BOARD,

101

THE CITY MAYOR and THE

BUTUAN, defendants-appellees.

CITY

TREASURER,

Sabido,
Sabido
and
Associates
for
The City Attorney of Butuan City for defendants-appellees.

all

of

the

CITY

OF

plaintiff-appellant.

CONCEPCION, C.J.:
Direct appeal to this Court, from a decision of the Court of First Instance of Agusan,
dismissing plaintiff's complaint, with costs.
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with
offices and principal place of business in Quezon City. The defendants are the City of
Butuan, its City Mayor, the members of its municipal board and its City Treasurer.
Plaintiff seeks to recover the sums paid by it to the City of Butuan hereinafter
referred to as the City and collected by the latter, pursuant to its Municipal Ordinance
No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which
plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties
submitted the case for decision in the lower court upon a stipulation to the effect:
1. That plaintiff's warehouse in the City of Butuan serves as a storage for its
products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan
and all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft
drinks are bottled in Cebu City and shipped to the Butuan City warehouse of
plaintiff for distribution and sale in the City of Butuan and all municipalities of
Agusan. .
2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which
was subsequently amended by Ordinance No. 122 and effective November 28,
1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No. 122 are
incorporated herein as Exhibits "A" and "B", respectively.
3. That Ordinance No. 110 as amended, imposes a tax on any person,
association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff
paid under protest the amount of P4,926.63 from August 16 to December 31,
1960 and the amount of P9,250.40 from January 1 to July 30, 1961.
4. That the plaintiff filed the foregoing complaint for the recovery of the total
amount of P14,177.03 paid under protest and those that if may later on pay until
the termination of this case on the ground that Ordinance No. 110 as amended of
the City of Butuan is illegal, that the tax imposed is excessive and that it is
unconstitutional.
5. That pursuant to Ordinance No. 110 as amended, the City Treasurer of Butuan
City, has prepared a form to be accomplished by the plaintiff for the computation
of the tax. A copy of the form is enclosed herewith as Exhibit "C".
6. That the Profit and Loss Statement of the plaintiff for the period from January
1, 1961 to July 30, 1961 of its warehouse in Butuan City is incorporated herein as
Exhibits "D" to "D-1" to "D-5". In this Profit and Loss Statement, the defendants
claim that the plaintiff is not entitled to a depreciation of P3,052.63 but only

102

P1,202.55 in which case the profit of plaintiff will be increased from P1,254.44 to
P3,104.52. The plaintiff differs only on the claim of depreciation which the
company claims to be P3,052.62. This is in accordance with the findings of the
representative of the undersigned City Attorney who verified the records of the
plaintiff.
7. That beginning November 21, 1960, the price of Pepsi-Cola per case of 24
bottles was increased to P1.92 which price is uniform throughout the Philippines.
Said increase was made due to the increase in the production cost of its
manufacture.
8. That the parties reserve the right to submit arguments on the constitutionality
and illegality of Ordinance No. 110, as amended of the City of Butuan in their
respective memoranda.
xxx

xxx

x x x1wph1.t

Section 1 of said Ordinance No. 110, as amended, states what products are "liquors",
within the purview thereof. Section 2 provides for the payment by "any agent and/or
consignee" of any dealer "engaged in selling liquors, imported or local, in the City," of
taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the
soft drinks and carbonated beverages therein named, and "all other soft drinks or
carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent"
for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the
end of every calendar month." Pursuant to Section 5, the taxes "shall be based and
computed from the cargo manifest or bill of lading or any other record showing the
number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks
received within the month." Sections 6, 7 and 8 specify the surcharge to be added for
failure to pay the taxes within the period prescribed and the penalties imposable for
"deliberate and willful refusal to pay the tax mentioned in Sections 2 and 3" or for failure
"to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or
record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes
the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside"
but "sold within" the City. Section 10 of the ordinance provides that the revenue derived
therefrom "shall be alloted as follows: 40% for Roads and Bridges Fund; 40% for the
General Fund and 20% for the School Fund."
Plaintiff maintains that the disputed ordinance is null and void because: (1) it partakes of
the nature of an import tax; (2) it amounts to double taxation; (3) it is excessive,
oppressive and confiscatory; (4) it is highly unjust and discriminatory; and (5) section 2
of Republic Act No. 2264, upon the authority of which it was enacted, is an
unconstitutional delegation of legislative powers.
The second and last objections are manifestly devoid of merit. Indeed independently
of whether or not the tax in question, when considered in relation to the sales tax
prescribed by Acts of Congress, amounts to double taxation, on which we need not and
do not express any opinion - double taxation, in general, is not forbidden by our
fundamental law. We have not adopted, as part thereof, the injunction against double
taxation found in the Constitution of the United States and of some States of the
Union.1 Then, again, the general principle against delegation of legislative powers, in

103

consequence of the theory of separation of powers 2 is subject to one well-established

exception, namely: legislative powers may be delegated to local governments to
which said theory does not apply3 in respect of matters of local concern.
The third objection is, likewise, untenable. The tax of "P0.10 per case of 24 bottles," of
soft drinks or carbonated drinks in the production and sale of which plaintiff is
engaged or less than P0.0042 per bottle, is manifestly too small to be excessive,
oppressive, or confiscatory.
The first and the fourth objections merit, however, serious consideration. In this
connection, it is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as
originally approved, was imposed upon dealers "engaged in selling" soft drinks or
carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the
sale of said merchandise. As amended by Ordinance No. 122, the tax is, however,
imposed only upon "any agent and/or consignee of any person, association,
partnership, company or corporation engaged in selling ... soft drinks or carbonated
drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:
... Definition of the Term Consignee or Agent. For purposes of this
Ordinance, a consignee of agent shall mean any person, association,
partnership, company or corporation who acts in the place of another by authority
from him or one entrusted with the business of another or to whom is consigned
or shipped no less than 1,000 cases of hard liquors or soft drinks every month
for resale, either retail or wholesale.
As a consequence, merchants engaged in the sale of soft drink or carbonated drinks,
are not subject to the tax,unless they are agents and/or consignees of another
dealer, who, in the very nature of things, must be one engaged in business outside the
City. Besides, the tax would not be applicable to such agent and/or consignee, if less
than 1,000 cases of soft drinks are consigned or shipped to him every month. When we
consider, also, that the tax "shall be based and computed from the cargo manifest or bill
of lading ... showing the number of cases" not sold but "received" by the taxpayer,
the intention to limit the application of the ordinance to soft drinks and carbonated drinks
brought into the City from outside thereof becomes apparent. Viewed from this angle,
the tax partakes of the nature of an import duty, which is beyond defendant's authority to
impose by express provision of law.4
Even however, if the burden in question were regarded as a tax on the sale of said
beverages, it would still be invalid, as discriminatory, and hence, violative of the
uniformity required by the Constitution and the law therefor, since only sales by "agents
or consignees" of outside dealers would be subject to the tax. Sales by local dealers,
not acting for or on behalf of other merchants, regardless of the volume of their sales,
and even if the same exceeded those made by said agents or consignees of producers
or merchants established outside the City of Butuan, would be exempt from the
disputed tax.
It is true that the uniformity essential to the valid exercise of the power of taxation does
not require identity or equality under all circumstances, or negate the authority to
classify the objects of taxation.5 The classification made in the exercise of this authority,
to be valid, must, however, be reasonable 6 and this requirement is not deemed satisfied

104

unless: (1) it is based upon substantial distinctions which make real differences; (2)
these are germane to the purpose of the legislation or ordinance; (3) the classification
applies, not only to present conditions, but, also, to future conditions substantially
identical to those of the present; and (4) the classification applies equally all those who
belong to the same class.7
These conditions are not fully met by the ordinance in question. 8 Indeed, if its purpose
were merely to levy a burden upon the sale of soft drinks or carbonated beverages,
there is no reason why sales thereof by sealers other than agents or consignees of
producers or merchants established outside the City of Butuan should be exempt from
the tax.
WHEREFORE, the decision appealed from is hereby reversed, and another one shall
be entered annulling Ordinance No. 110, as amended by Ordinance No. 122, and
sentencing the City of Butuan to refund to plaintiff herein the amounts collected from
and paid under protest by the latter, with interest thereon at the legal rate from the date
of the promulgation of this decision, in addition to the costs, and defendants herein are,
accordingly, restrained and prohibited permanently from enforcing said Ordinance, as
amended. It is so ordered.

THIRD DIVISION

[G.R. No. 127105. June 25, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND

SON, INC., and COURT OF APPEALS, respondents.
DECISION
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking
to set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP
No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.

105

The said License Agreement was duly registered with the Technology Transfer Board of
the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 (Exh. A).
For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected the
same to 25% withholding tax on royalty payments which [respondent] paid for the period
covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B to L and
submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD)
of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, the
antecedent facts attending [respondents] case fall squarely within the same
circumstances under which said MacGeorge and Gillete rulings were issued. Since the
agreement was approved by the Technology Transfer Board, the preferential tax rate of
10% should apply to the [respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax
pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]
(Petition for Review [filed with the Court of Appeals], par. 12). [Respondents] claim for
the refund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
______ _______ __________ __________ ______
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
P6,421,770 P1,605,443 P642,177 P963,266[1]
======== ======== ======= =======

106

The Commissioner did not act on said claim for refund. Private respondent S.C.
Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of
Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a
refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C.
Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid withholding tax on
royalty payments beginning July, 1992 to May, 1993.[2]
The Commissioner of Internal Revenue thus filed a petition for review with the Court
of Appeals which rendered the decision subject of this appeal on November 7, 1996
finding no merit in the petition and affirming in toto the CTA ruling.[3]
This petition for review was filed by the Commissioner of Internal Revenue raising
the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA
IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES
AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is
known as the most favored nation clause, the lowest rate of the Philippine tax at 10%
may be imposed on royalties derived by a resident of the United States from sources
within the Philippines only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains
no matching credit provision as that provided under Article 24 of the RP-West Germany
Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assuming
that the phrase paid under similar circumstances refers to the payment of royalties, and
not taxes, as held by the Court of Appeals, still, the most favored nation clause cannot
be invoked for the reason that when a tax treaty contemplates circumstances attendant
to the payment of a tax, or royalty remittances for that matter, these must necessarily
refer to circumstances that are tax-related. Finally, petitioner argues that since S.C.
Johnsons invocation of the most favored nation clause is in the nature of a claim for
exemption from the application of the regular tax rate of 25% for royalties, the provisions
of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition
should be denied (1) because it contains a defective certification against forum
shopping as required under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2) that the most favored
nation clause under the RP-US Tax Treaty refers to royalties paid under similar
circumstances as those royalties subject to tax in other treaties; that the phrase paid
under similar circumstances does not refer to payment of the tax but to the subject
matter of the tax, that is, royalties, because the most favored nation clause is intended
to allow the taxpayer in one state to avail of more liberal provisions contained in another
tax treaty wherein the country of residence of such taxpayer is also a party thereto,
subject to the basic condition that the subject matter of taxation in that other tax treaty is
the same as that in the original tax treaty under which the taxpayer is liable; thus, the
RP-US Tax Treaty speaks of royalties of the same kind paid under similar
circumstances. S.C. Johnson also contends that the Commissioner is estopped from
insisting on her interpretation that the phrase paid under similar circumstances refers to
the manner in which the tax is paid, for the reason that said interpretation is embodied
in Revenue Memorandum Circular (RMC) 39-92 which was already abandoned by the
Commissioners predecessor in 1993; and was expressly revoked in BIR Ruling No.
052-95 which stated that royalties paid to an American licensor are subject only to 10%
withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the

107

RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if
such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal
Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum
shopping was signed by petitioners counsel is not a fatal defect as to warrant the
dismissal of this petition since Circular No. 28-91 applies only to original actions and not
to appeals, as in the instant case. Moreover, the requirement that the certification
should be signed by petitioner and not by counsel does not apply to petitioner who has
only the Office of the Solicitor General as statutory counsel.Petitioner reiterates that
even if the phrase paid under similar circumstances embodied in the most favored
nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes,
still the presence or absence of a matching credit provision in the said RP-US Tax
Treaty would constitute a material circumstance to such payment and would be
determinative of the said clauses application.
We address first the objection raised by private respondent that the certification
against forum shopping was not executed by the petitioner herself but by her counsel,
the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M.
Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO : xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies have to
resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying with pertinent provisions of the Rules of
Court and existing circulars, must certify under oath to all of the following facts or
undertakings: (a) he has not theretofore commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or
agency; xxx
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be
a cause for the summary dismissal of the multiple petitions or complaints; xxx
The circular expressly requires that a certificate of non-forum shopping should be
attached to petitions filed before this Court and the Court of Appeals.Petitioners
allegation that Circular No. 28-91 applies only to original actions and not to appeals as
in the instant case is not supported by the text nor by the obvious intent of the Circular
which is to prevent multiple petitions that will result in the same issue being resolved by
different courts.
Anent the requirement that the party, not counsel, must certify under oath that he
has not commenced any other action involving the same issues in this Court or the
Court of Appeals or any other tribunal or agency, we are inclined to accept petitioners
submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the
1987 Administrative Code[4] to be represented only by the Solicitor General, the
certification executed by the OSG in this case constitutes substantial compliance with
Circular No. 28-91.

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With respect to the merits of this petition, the main point of contention in this appeal
is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of
tax to be imposed by the Philippines upon royalties received by a non-resident foreign
corporation. The provision states insofar as pertinent that1) Royalties derived by a resident of one of the Contracting States from sources
within the other Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind
paid under similar circumstances to a resident of a third State.
xxx xxx xxx
(italics supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted
provision, it is entitled to the concessional tax rate of 10 percent on royalties based on
Article 12 (2) (b) of the RP-Germany Tax Treaty which provides:
(2) However, such royalties may also be taxed in the Contracting State in which
they arise, and according to the law of that State, but the tax so charged shall
not exceed:
xxx
b) 10 percent of the gross amount of royalties arising from the use of, or the
right to use, any patent, trademark, design or model, plan, secret formula or
process, or from the use of or the right to use, industrial, commercial, or
scientific equipment, or for information concerning industrial, commercial or
scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in
the Republic of the Philippines, only apply if the contract giving rise to such royalties has
been approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20
percent of the gross amount of such royalties against German income and corporation
tax for the taxes payable in the Philippines on such royalties where the tax rate is
reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty
states1) Tax shall be determined in the case of a resident of the Federal Republic of
Germany as follows:
xxxxxxxxx

109

b) Subject to the provisions of German tax law regarding credit for foreign tax, there
shall be allowed as a credit against German income and corporation tax payable in
respect of the following items of income arising in the Republic of the Philippines, the
tax paid under the laws of the Philippines in accordance with this Agreement on:
xxxxxxxxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxxxxxxxx
c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be
deemed to be
xxxxxxxxx
cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.
xxxxxxxxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not
paid under circumstances similar to those in the RP-West Germany Tax Treaty since
there is no provision for a 20 percent matching credit in the former convention and
private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioners position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax
paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a German resident from sources within the
Philippines arising from the use of, or the right to use, any patent, trade mark, design or
model, plan, secret formula or process, is taxed at 10% of the gross amount of said
royalty under certain conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed in favor of the German
resident. That means the rate of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of West Germany. The clear
intent of the matching credit is to soften the impact of double taxation by different
jurisdictions.
The RP-US Tax Treaty contains no similar matching credit as that provided under the
RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty
is not paid under similar circumstances as those obtaining in the RP-West Germany Tax
Treaty. Therefore, the most favored nation clause in the RP-West Germany Tax Treaty
cannot be availed of in interpreting the provisions of the RP-US Tax Treaty.[5]
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld
by the Court of Appeals, that the phrase paid under similar circumstances in Article 13
(2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty,
and not to the payment of the tax, for the reason that the phrase paid under similar
circumstances is followed by the phrase to a resident of a third state. The respondent
court held that Words are to be understood in the context in which they are used, and
since what is paid to a resident of a third state is not a tax but a royalty logic instructs

110

that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.
The above construction is based principally on syntax or sentence structure but fails
to take into account the purpose animating the treaty provisions in point. To begin with,
we are not aware of any law or rule pertinent to the payment of royalties, and none has
been brought to our attention, which provides for the payment of royalties under
dissimilar circumstances. The tax rates on royalties and the circumstances of payment
thereof are the same for all the recipients of such royalties and there is no disparity
based on nationality in the circumstances of such payment. [6] On the other hand, a
cursory reading of the various tax treaties will show that there is no similarity in the
provisions on relief from or avoidance of double taxation [7] as this is a matter of
negotiation between the contracting parties. [8] As will be shown later, this dissimilarity is
true particularly in the treaties between the Philippines and the United States and
between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the
Philippines has entered into for the avoidance of double taxation. [9] 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.[10] 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. [11], citing the Committee on
Fiscal Affairs of the Organization for Economic Co-operation and Development
(OECD).11 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.[12] 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.[13]
Double taxation usually takes place when a person is resident of a contracting state
and derives income from, or owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate double taxation, a tax treaty
resorts to several methods. First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both states are given the right to
tax, although the amount of tax that may be imposed by the state of source is limited. [14]
The second method for the elimination of double taxation applies whenever the
state of source is given a full or limited right to tax together with the state of
residence. In this case, the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two methods of relief- the
exemption method and the credit method. In the exemption method, the income or
capital which is taxable in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into account in determining the
rate of tax applicable to the taxpayers remaining income or capital. On the other hand,
in the credit method, although the income or capital which is taxed in the state of source
is still taxable in the state of residence, the tax paid in the former is credited against the
tax levied in the latter. The basic difference between the two methods is that in the
exemption method, the focus is on the income or capital itself, whereas the credit
method focuses upon the tax.[15]
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that
the Philippines will give up a part of the tax in the expectation that the tax given up for
this particular investment is not taxed by the other country. [16] Thus the petitioner
correctly opined that the phrase royalties paid under similar circumstances in the most

111

favored nation clause of the US-RP Tax Treaty necessarily contemplated circumstances
that are tax-related.
In the case at bar, the state of source is the Philippines because the royalties are
paid for the right to use property or rights, i.e. trademarks, patents and technology,
located within the Philippines.[17] The United States is the state of residence since the
taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty,
the state of residence and the state of source are both permitted to tax the royalties,
with a restraint on the tax that may be collected by the state of source. [18] Furthermore,
the method employed to give relief from double taxation is the allowance of a tax credit
to citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount
shall not exceed the limitations provided by United States law for the taxable year.
[19]
Under Article 13 thereof, the Philippines may impose one of three rates- 25 percent
of the gross amount of the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored
nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany
Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax
Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This
would mean that private respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of the taxes imposable
upon royalties earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar
provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly
allows crediting against German income and corporation tax of 20% of the gross
amount of royalties paid under the law of the Philippines. On the other hand, Article 23
of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of
royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of
the United States (as it may be amended from time to time without changing
the general principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United States tax the
appropriate amount of taxes paid or accrued to the Philippines and, in the
case of a United States corporation owning at least 10 percent of the voting
stock of a Philippine corporation from which it receives dividends in any
taxable year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such
dividends with respect to the profits out of which such dividends are
paid. Such appropriate amount shall be based upon the amount of tax paid
or accrued to the Philippines, but the credit shall not exceed the limitations
(for the purpose of limiting the credit to the United States tax on income from
sources within the Philippines or on income from sources outside the United
States) provided by United States law for the taxable year. xxx.

112

The reason for construing the phrase paid under similar circumstances as used in
Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a
logical reading of the text in the light of the fundamental purpose of such treaty which is
to grant an incentive to the foreign investor by lowering the tax and at the same time
crediting against the domestic tax abroad a figure higher than what was collected in the
Philippines.
In one case, the Supreme Court pointed out that laws are not just mere
compositions, but have ends to be achieved and that the general purpose is a more
important aid to the meaning of a law than any rule which grammar may lay down. [20] It
is the duty of the courts to look to the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and should give the law a reasonable or
liberal construction which will best effectuate its purpose. [21] The Vienna Convention on
the Law of Treaties states that a treaty shall be interpreted in good faith in accordance
with the ordinary meaning to be given to the terms of the treaty in their context and in
the light of its object and purpose.[22]
As stated earlier, the ultimate reason for avoiding double taxation is to encourage
foreign investors to invest in the Philippines - a crucial economic goal for developing
countries.[23] The goal of double taxation conventions would be thwarted if such treaties
did not provide for effective measures to minimize, if not completely eliminate, the tax
burden laid upon the income or capital of the investor. Thus, if the rates of tax are
lowered by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption. [24] Otherwise, the tax
which could have been collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the tax burden imposed
upon the investor would remain unrelieved. If the state of residence does not grant
some form of tax relief to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime, should it impose a lower tax
rate on the royalty earnings of the investor, and it would be better to impose the regular
rate rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on relief from
double taxation in the two tax treaties in question should be considered in light of the
purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the most
favored among other countries.[25] The most favored nation clause is intended to
establish the principle of equality of international treatment by providing that the citizens
or subjects of the contracting nations may enjoy the privileges accorded by either party
to those of the most favored nation. [26] The essence of the principle is to allow the
taxpayer in one state to avail of more liberal provisions granted in another tax treaty to
which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under
which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2)
(b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for
the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S.
firms despite the absence of a matching credit (20% for royalties) would derogate from
the design behind the most favored nation clause to grant equality of international
treatment since the tax burden laid upon the income of the investor is not the same in
the two countries. The similarity in the circumstances of payment of taxes is a condition
for the enjoyment of most favored nation treatment precisely to underscore the need for
equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give
a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as
allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed

113

entitled to the 10 percent rate granted under the latter treaty for the reason that there is
no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construedstrictissimi
juris against the person or entity claiming the exemption. [27] The burden of proof is upon
him who claims the exemption in his favor and he must be able to justify his claim by the
clearest grant of organic or statute law.[28] Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties; however, there is nothing on record to
support a claim that the tax on royalties under the RP-US Tax Treaty is paid under
similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision
dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7,
1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.

PEOPLE VS MENDAROS
(Cannot be searched online)