[ G.R. No.

83250, September 26, 1989 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
VS. MANILA HOTEL CORPORATION AND THE COURT OF
TAX APPEALS, RESPONDENTS.
DECISION
GRIÑO-AQUINO, J.:
On January 22, 1979, the Hotel received a letter dated January 11,
1979 from the Commissioner of Internal Revenue denying its claim for
refund.
On February 2, 1988, the Court of Tax Appeals rendered the assailed
decision in favor of the Hotel. It found that Congress has not taken
any step to override the presidential veto of the proposed Section 191-
A of the National Internal Revenue Code, hence, Section 191-A did
not become a law; there was no legal basis for collecting the caterer's
tax.

The Commissioner of Internal Revenue seeks a review of the decision
dated February 2, 1988 of the Court of Tax Appeals (CTA) in CTA
Case No. 2991 entitled, "Manila Hotel Corporation vs. Commissioner
of Internal Revenue" ordering the Commissioner "to refund to the
Manila Hotel Corporation the caterer's tax paid in the total amount of
P2,463,576.30 without interest" (p. 39, Rollo).
The respondent Manila Hotel Corporation ("Hotel" for brevity)
operates the Manila Hotel and the service and banquet outlets
therein. During the period from January 20, 1977 to April 29, 1978, it
paid to the petitioner the total sum of P2,463,576.30 as caterer's tax on
the gross receipts from the sale of food in its restaurants.
On December 18, 1978, the Hotel filed a claim for refund of that
amount on the ground that Section 191-A of the National Internal
Revenue Code which was the basis for the assessment and collection
of the caterer's tax against it never became a law because Section 42 of
House Bill 17839 (later R.A. 6110), which inserted in the Tax Code a
new Section 191-A imposing a caterer's tax of 3% on the gross
receipts of restaurant operators, was allegedly vetoed by President
Marcos on August 4, 1969.
The Commissioner of Internal Revenue failed to act on the petitioner's
claim for refund. On January 20, 1979, before the claim had
prescribed, the Manila Hotel Corporation filed CTA Case No. 2991.
The petitioner, on the other hand, alleged that the CTA failed to
consider the then current and subsequent legislations on the caterer's
tax.
We have carefully examined the pleadings and are persuaded that the
petition is meritorious. The Manila Hotel may not claim a refund of
the caterer's tax that it paid on January 20, 1977 to April 20,
1978 because the assessment and collection of the tax were lawful.
The payment of a caterer's tax was first required by law when Rep. Act
No. 2376 was approved on June 2, 1959 (55 O.G. 6936) amending
Section 191 of the Tax Code by providing that caterers in addition to
keepers of restaurants, refreshment parlors and other eating places,
should pay a 3% tax on their gross receipts.
"SEC. 191. x x x xxx xxx
"Keepers of restaurants, refreshment parlors and other eating places,
except those inside public market places, and caterers, shall pay a tax
of three per centum of their gross receipts. Keepers of bars and cafes
where wines or liquors are served shall pay a tax of seven per
centum of their gross receipts: Provided, however, That two sets of
sales or commercial invoices or receipts serially numbered in
duplicate shall be separately prepared and issued, one for each sale of
food or refreshment served and another for each sale of wine or liquor
served, the originals of which shall be issued to the
purchaser or customer. Where such establishments are maintained
within the premises or compound of a race track or jai-alai or are
accessible to patrons of such race track or jai-alai by means of a
connecting door or passage, the keepers of such establishments shall
pay a tax of twenty per centum of their gross receipts. Where the
establishment is maintained within the premises of a cabaret or night
club, or is accessible to patrons thereof by means of a connecting door
or passage, the keeper of the establishment shall pay a tax of ten per
centum of the gross receipts."
In 1969, Congress passed House Bill No. 17839, Section 48 of which
provided as follows:
"Sec. 48. A new section is hereby inserted between sections one
hundred and ninety-one and one hundred ninety-two, to be known as
section one hundred and ninety-one-A which shall read as follows:
'Sec. 191-A. Caterer. A caterer's tax is hereby imposed as follows:
(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
premises 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 rent 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." (pp. 33-34, Rollo.)
In the consolidated tax bill bearing the same number H.B. 17839,
Section 48 was renumbered as Section 42.
On August 4, 1969, the President of the Philippines sent the following
veto message (Exhs. E, E-1), insofar as Sec. 42 is concerned, to
the House of Representatives where the bill originated:
MALACAÑANG
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 on this bill:
"x x x xxx xxx
p. 44, SEC. 42. Inserting a new Section 191-A which imposes 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 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 taxation 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. x x x.’
"This bill, H.[B.] No. 17839, has become Republic Act No. 6110.
"Respectfully,
“(SGD.) FERDINAND E. MARCOS
(pp. 35-36, Rollo.)
Apparently, Congress understood the presidential veto to have referred
only to the higher caterer's tax (20%) on hotels, motels
and resthouses provided in paragraph (3), Section 191-A of the Tax
Code, for when H.B. 17839 was enacted into law (Rep. Act No. 6110)
and published in Volume 66 of the Official Gazette issue of May 4,
1970, pp. 4505, 4531, Section 191-A was there in its entirety, except
the words "hotel, motel and resthouse" which were struck off from
paragraph (3) of Section 191-A. Thus, Section 191-A of Rep. Act No.
6110 provides as follows:
"SEC. 191-A. Caterers. A caterer's tax is hereby imposed as follows:
"(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 each sale of food or
refreshment 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
premises or compound of a cockpit, race track, jai-alai, cabaret, night
or day club or which are accessible to patrons of such 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 enumerated above 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 rates fixed
above."
P.D. 1158, otherwise known as the National Internal Revenue Code of
1977 which was approved on June 3, 1977 (73 O.G. 9093) also
provided for the caterer's tax in Section 206 thereof, as follows:
"SEC. 206. Caterers. – A caterer's tax is hereby imposed as follows:
“(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 each sale of food or
refreshment 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 the proprietors or operators of restaurants, refreshment
parlors, bars, cafes and other eating places which are maintained
within the premises or compound of a cockpit, race track, jai-alai,
cabaret, night or day club or which are accessible to patrons of such
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 enumerated above 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 rates fixed
above.”
On February 8, 1978, the caterer's tax in Section 206 of the Tax Code
was amended by P.D. 1299 which imposed a 10% caterers tax on
operators of restaurants inside a cockpit, 12% on those who operate
inside a cabaret or club, and 20% on those who operate inside a jai-alai
or race track, as follows:
"SEC. 206. Caterers. - A caterer’s tax is hereby imposed as follows:
"(1) On proprietors or operators of restaurants, refreshment parlors
and other eating places, including clubs and caterers, three per cent of
their gross receipt;
“(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
the 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 each sale of food or
refreshment 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 restaurant, refreshment parlors,
bars, cafes and other eating places which are maintained within
the premises or compound of a cockpit, cabaret, night or day club, jai-
alai, race track, or which are accessible to patrons of such cockpit,
cabaret, night or day club, jai-alai, race track by means of a
connecting door or passage, ten per centum in the edge of
cockpit, twelve per centum in the cases of cabaret, night or day club,
and twenty per centum in the case of jai-alai and race track, of their
gross receipts.
“Where the establishments enumerated above are operated or
maintained by clubs of any kind or nature (irrespective of the
disposition of their net income or whether or not they cater exclusively
to members or their guests), the keepers of the
establishments shall pay the corresponding tax at the rates fixed
above."
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.
WHEREFORE, the petition for review is granted. The decision of
the Court of Tax Appeals in CTA Case No. 2991 is annulled and set
aside, and the claim of the respondent Manila Hotel Corporation
for a refund of its payment of the caterer's tax in 1977 to 1978 is
dismissed. Costs against the private respondent.
SO ORDERED.
 E CHAPTER (ARCO-PHIL.), INC., REPRESENTING ITS
MEMBERS: WORLDCARE SERVICES INTERNATIONALE,
INC., STEADFAST INTERNATIONAL RECRUITMENT
CORPORATION, DRAGON INTERNATIONAL MANPOWER
SERVICES CORPORATION, VERDANT MANPOWER
MOBILIZATION CORPORATION, BRENT OVERSEAS
PERSONNEL, INC., ARL MANPOWER SERVICES, INC.,
DAHLZHEN INTERNATIONAL SERVICES, INC.,
INTERWORLD PLACEMENT CENTER, INC., LAKAS TAO
CONTRACT SERVICES, LTD. CO., AND SSC
MULTISERVICES, RESPONDENTS.
DECISION
CALLEJO, SR., J.:
In this petition for review on certiorari, the Executive Secretary of the
President of the Philippines, the Secretary of Justice, the Secretary of
Foreign Affairs, the Secretary of Labor and Employment, the POEA
Administrator and the OWWA Administrator, through the Office of
the Solicitor General, assail the Decision[1] of the Court of Appeals in
CA-G.R. SP No. 38815 affirming the Order [2] of the Regional Trial
Court of Quezon City dated August 21, 1995 in Civil Case No. Q-95-
24401, granting the plea of the petitioners therein for a writ of
preliminary injunction and of the writ of preliminary injunction issued
by the trial court on August 24, 1995.
The Antecedents
Republic Act No. 8042, otherwise known as the Migrant Workers and
Overseas Filipinos Act of 1995, took effect on July 15, 1995. The
Omnibus Rules and Regulations Implementing the Migrant Workers
and Overseas Filipino Act of 1995 was, thereafter, published in the
April 7, 1996 issue of the Manila Bulletin. However, even before the
law took effect, the Asian Recruitment Council Philippine Chapter, Inc.
(ARCO-Phil.) filed, on July 17, 1995, a petition for declaratory relief
under Rule 63 of the Rules of Court with the Regional Trial Court of
Quezon City to declare as unconstitutional Section 2, paragraph (g),
Section 6, paragraphs (a) to (j), (l) and (m), Section 7, paragraphs (a)
and (b), and Sections 9 and 10 of the law, with a plea for the issuance
of a temporary restraining order and/or writ of preliminary injunction
enjoining the respondents therein from enforcing the assailed
provisions of the law.
In a supplement to its petition, the ARCO-Phil. alleged that Rep. Act
No. 8042 was self- executory and that no implementing rules were
needed. It prayed that the court issue a temporary restraining order to
enjoin the enforcement of Section 6, paragraphs (a) to (m) on illegal
recruitment, Section 7 on penalties for illegal recruitment, and Section
9 on venue of criminal actions for illegal recruitments, viz:
Viewed in the light of the foregoing discussions, there appears to be
urgent an imperative need for this Honorable Court to maintain the
status quo by enjoining the implementation or effectivity of the
questioned provisions of RA 8042, by way of a restraining order
otherwise, the member recruitment agencies of the petitioner will
suffer grave or irreparable damage or injury. With the effectivity of
RA 8042, a great majority of the duly licensed recruitment agencies
have stopped or suspended their operations for fear of being
prosecuted under the provisions of a law that are unjust and
unconstitutional. This Honorable Court may take judicial notice of the
fact that processing of deployment papers of overseas workers for the
past weeks have come to a standstill at the POEA and this has affected
thousands of workers everyday just because of the enactment of RA
8042. Indeed, this has far reaching effects not only to survival of the
overseas manpower supply industry and the active participating
recruitment agencies, the country’s economy which has survived
mainly due to the dollar remittances of the overseas workers but more
importantly, to the poor and the needy who are in dire need of income-
generating jobs which can only be obtained from abroad. The loss or
injury that the recruitment agencies will suffer will then be
immeasurable and irreparable. As of now, even foreign employers
have already reduced their manpower requirements from the
Philippines due to their knowledge that RA 8042 prejudiced and
adversely affected the local recruitment agencies.[3]
On August 1, 1995, the trial court issued a temporary restraining order
effective for a period of only twenty (20) days therefrom.
After the petitioners filed their comment on the petition, the ARCO-
Phil. filed an amended petition, the amendments consisting in the
inclusion in the caption thereof eleven (11) other corporations which it
alleged were its members and which it represented in the suit, and a
plea for a temporary restraining order enjoining the respondents from
enforcing Section 6 subsection (i), Section 6 subsection (k) and
paragraphs 15 and 16 thereof, Section 8, Section 10, paragraphs 1 and
2, and Sections 11 and 40 of Rep. Act No. 8042.
The respondent ARCO-Phil. assailed Section 2(g) and (i), Section 6
subsection (a) to (m), Section 7(a) to (b), and Section 10 paragraphs
(1) and (2), quoted as follows:
(g) THE STATE RECOGNIZES THAT THE ULTIMATE
PROTECTION TO ALL MIGRANT WORKERS IS THE
POSSESSION OF SKILLS. PURSUANT TO THIS AND AS SOON
AS PRACTICABLE, THE GOVERNMENT SHALL DEPLOY
AND/OR ALLOW THE DEPLOYMENT ONLY OF SKILLED
FILIPINO WORKERS.[4]
Sec. 2 subsection (i, 2nd par.)
Nonetheless, the deployment of Filipino overseas workers, whether
land-based or sea-based, by local service contractors and manning
agents employing them shall be encourages (sic). Appropriate
incentives may be extended to them.
… harmful to public health or morality or to the dignity of the Republic
II. ILLEGAL RECRUITMENT
SEC. 6. Definition. – For purposes of this Act, illegal recruitment shall
mean any act of canvassing, enlisting, contracting, transporting,
utilizing, hiring, or procuring workers and includes referring, contract
services, promising or advertising for employment abroad, whether for
profit or not, when undertaken by a non-licensee or non-holder of
authority contemplated under Article 13(f) of Presidential Decree No.
442, as amended, otherwise known as the Labor Code of the
Philippines: Provided, That any such non-licensee or non- holder who,
in any manner, offers or promises for a fee employment abroad to two
or more persons shall be deemed so engaged. It shall, likewise, include
the following acts, whether committed by any person, whether a non-
licensee, non-holder, licensee or holder of authority:
(a) To charge or accept directly or indirectly any amount greater than
that specified in the schedule of allowable fees prescribed by the
Secretary of Labor and Employment, or to make a worker pay any
amount greater than that actually received by him as a loan or advance;
(b) To furnish or publish any false notice or information or document
in relation to recruitment or employment;
(c) To give any false notice, testimony, information or document or
commit any act of misrepresentation for the purpose of securing a
license or authority under the Labor Code;
(d) To induce or attempt to induce a worker already employed to quit
his employment in order to offer him another unless the transfer is
designed to liberate a worker from oppressive terms and conditions of
employment;
(e) To influence or attempt to influence any person or entity not to
employ any worker who has not applied for employment through his
agency;
(f) To engage in the recruitment or placement of workers in jobs
of the Philippines;
(g) To obstruct or attempt to obstruct inspection by the Secretary of
Labor and Employment or by his duly authorized representative;
(h) To fail to submit reports on the status of employment, placement
vacancies, remittance of foreign exchange earnings, separation from
jobs, departures and such other matters or information as may be
required by the Secretary of Labor and Employment;
(i) To substitute or alter to the prejudice of the worker, employment
contracts approved and verified by the Department of Labor and
Employment from the time of actual signing thereof by the parties up
to and including the period of the expiration of the same without the
approval of the Department of Labor and Employment;
(j) For an officer or agent of a recruitment or placement agency to
become an officer or member of the Board of any corporation engaged
in travel agency or to be engaged directly or indirectly in the
management of a travel agency;
(k) To withhold or deny travel documents from applicant workers
before departure for monetary or financial considerations other than
those authorized under the Labor Code and its implementing rules and
regulations;
(l) Failure to actually deploy without valid reason as determined by the
Department of Labor and Employment; and
(m) Failure to reimburse expenses incurred by the worker in
connection with his documentation and processing for purposes of
deployment, in cases where the deployment does not actually take
place without the worker’s fault. Illegal recruitment when committed
by a syndicate or in large scale shall be considered an offense
involving economic sabotage.
Illegal recruitment is deemed committed by a syndicate if carried out
by a group of three (3) or more persons conspiring or confederating
with one another. It is deemed committed in large scale if committed
against three (3) or more persons individually or as a group.
The persons criminally liable for the above offenses are the principals,
accomplices and accessories. In case of juridical persons, the officers
having control, management or direction of their business shall be
liable.
… decide, within ninety (90) calendar days after the filing of the
SEC. 7. Penalties. –
(a) Any person found guilty of illegal recruitment shall suffer the
penalty of imprisonment of not less than six (6) years and one (1) day
but not more than twelve (12) years and a fine of not less than two
hundred thousand pesos (P200,000.00) nor more than five hundred
thousand pesos (P500,000.00).
(b) The penalty of life imprisonment and a fine of not less than five
hundred thousand pesos (P500,000.00) nor more than one million
pesos (P1,000,000.00) shall be imposed if illegal recruitment
constitutes economic sabotage as defined herein.
Provided, however, That the maximum penalty shall be imposed if the
person illegally recruited is less than eighteen (18) years of age or
committed by a non-licensee or non- holder of authority.
Sec. 8.
Prohibition on Officials and Employees. – It shall be unlawful for any
official or employee of the Department of Labor and Employment, the
Philippine Overseas Employment Administration (POEA), or the
Overseas Workers Welfare Administration (OWWA), or the
Department of Foreign Affairs, or other government agencies involved
in the implementation of this Act, or their relatives within the fourth
civil degree of consanguinity or affinity, to engage, directly or
indirectly, in the business of recruiting migrant workers as defined in
this Act. The penalties provided in the immediate preceding paragraph
shall be imposed upon them. (underscoring supplied)
…
Sec. 10, pars. 1 & 2.
Money Claims. – Notwithstanding any provision of law to the contrary,
the Labor Arbiters of the National Labor Relations Commission
(NLRC) shall have the original and exclusive jurisdiction to hear and
complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino
workers for overseas deployment including claims for actual, moral,
exemplary and other forms of damages.

The liability of the principal/employer and the recruitment/placement
agency for any and all claims under this section shall be joint and
several. This provision shall be incorporated in the contract for
overseas employment and shall be a condition precedent for its
approval. The performance bond to be filed by the
recruitment/placement agency, as provided by law, shall be answerable
for all money claims or damages that may be awarded to the workers.
If the recruitment/placement agency is a juridical being, the corporate
officers and directors and partners as the case may be, shall themselves
be jointly and solidarily liable with the corporation or partnership for
the aforesaid claims and damages.
… The respondent, likewise, alleged that Section 6, subsections (a) to (m)
SEC. 11. Mandatory Periods for Resolution of Illegal Recruitment
Cases. – The preliminary investigations of cases under this Act shall
be terminated within a period of thirty (30) calendar days from the date
of their filing. Where the preliminary investigation is conducted by a
prosecution officer and a prima facie case is established, the
corresponding information shall be filed in court within twenty-four
(24) hours from the termination of the investigation. If the preliminary
investigation is conducted by a judge and a prima facie case is found
to exist, the corresponding information shall be filed by the proper
prosecution officer within forty-eight (48) hours from the date of
receipt of the records of the case
The respondent averred that the aforequoted provisions of Rep. Act No.
8042 violate Section 1, Article III of the Constitution.[5] According to
the respondent, Section 6(g) and (i) discriminated against unskilled
workers and their families and, as such, violated the equal protection
clause, as well as Article II, Section 12[6] and Article XV, Sections
1[7] and 3(3) of the Constitution.[8] As the law encouraged the
deployment of skilled Filipino workers, only overseas skilled workers
are granted rights. The respondent stressed that unskilled workers also
have the right to seek employment abroad. According to the
respondent, the right of unskilled workers to due process is violated
because they are prevented from finding employment and earning a
living abroad. It cannot be argued that skilled workers are immune
from abuses by employers, while unskilled workers are merely prone
to such abuses. It was pointed out that both skilled and unskilled
workers are subjected to abuses by foreign employers. Furthermore,
the prohibition of the deployment of unskilled workers abroad would
only encourage fly- by-night illegal recruiters.
According to the respondent, the grant of incentives to service
contractors and manning agencies to the exclusion of all other licensed
and authorized recruiters is an invalid classification. Licensed and
authorized recruiters are thus deprived of their right to property and
due process and to the “equality of the person.” It is understandable for
the law to prohibit illegal recruiters, but to discriminate against
licensed and registered recruiters is unconstitutional.
is unconstitutional because licensed and authorized recruitment
agencies are placed on equal footing with illegal recruiters. It
contended that while the Labor Code distinguished between recruiters
who are holders of licenses and non-holders thereof in the imposition
of penalties, Rep. Act No. 8042 does not make any distinction. The
penalties in Section 7(a) and (b) being based on an invalid
classification are, therefore, repugnant to the equal protection clause,
besides being excessive; hence, such penalties are violative of Section
19(1), Article III of the Constitution.[9] It was also pointed out that the
penalty for officers/officials/employees of recruitment agencies who
are found guilty of economic sabotage or large-scale illegal
recruitment under Rep. Act No. 8042 is life imprisonment. Since
recruitment agencies usually operate with a manpower of more than
three persons, such agencies are forced to shut down, lest their officers
and/or employees be charged with large scale illegal recruitment or
economic sabotage and sentenced to life imprisonment. Thus, the
penalty imposed by law, being disproportionate to the prohibited acts,
discourages the business of licensed and registered recruitment
agencies.
The respondent also posited that Section 6(m) and paragraphs (15) and
(16), Sections 8, 9 and 10, paragraph 2 of the law violate Section 22,
Article III of the Constitution[10] prohibiting ex-post facto laws and
bills of attainder. This is because the provisions presume that a
licensed and registered recruitment agency is guilty of illegal
recruitment involving economic sabotage, upon a finding that it
committed any of the prohibited acts under the law. Furthermore,
officials, employees and their relatives are presumed guilty of illegal
recruitment involving economic sabotage upon such finding that they
committed any of the said prohibited acts.
The respondent further argued that the 90-day period in Section 10,
paragraph (1) within which a labor arbiter should decide a money
claim is relatively short, and could deprive licensed and registered
recruiters of their right to due process. The period within which the
summons and the complaint would be served on foreign employees
and, thereafter, the filing of the answer to the complaint would take
more than 90 days. This would thereby shift on local licensed and
authorized recruiters the burden of proving the defense of foreign
employers. Furthermore, the respondent asserted, Section 10,
paragraph 2 of the law, which provides for the joint and several
liability of the officers and employees, is a bill of attainder and a
violation of the right of the said corporate officers and employees to
due process. Considering that such corporate officers and employees
act with prior approval of the board of directors of such corporation,
they should not be liable, jointly and severally, for such corporate acts.
The respondent asserted that the following provisions of the law are
unconstitutional:
SEC. 9. Venue. – A criminal action arising from illegal recruitment as
defined herein shall be filed with the Regional Trial Court of the
province or city where the offense was committed or where the
offended party actually resides at the time of the commission of the
offense: Provided, That the court where the criminal action is first
filed shall acquire jurisdiction to the exclusion of other
courts: Provided, however, That the aforestated provisions shall also
apply to those criminal actions that have already been filed in court at
the time of the effectivity of this Act.
… (Garcia vs. Executive Secretary, 204 SCRA 516 [1991]). Necessarily,
SEC. 10. Money Claims. – Notwithstanding any provision of law to
the contrary, the Labor Arbiters of the National Labor Relations
Commission (NLRC) shall have the original and exclusive jurisdiction
to hear and decide, within ninety (90) calendar days after the filing of
the complaint, the claims arising out of an employer-employee
relationship or by virtue of any law or contract involving Filipino
workers for overseas deployment including claims for actual, moral,
exemplary and other forms of damages.
Sec. 40.
The departments and agencies charged with carrying out the
provisions of this Act shall, within ninety (90) days after the effectiviy
of this Act, formulate the necessary rules and regulations for its
effective implementation.
According to the respondent, the said provisions violate Section 5(5),
Article VIII of the Constitution[11] because they impair the power of
the Supreme Court to promulgate rules of procedure.
In their answer to the petition, the petitioners alleged, inter alia, that
(a) the respondent has no cause of action for a declaratory relief; (b)
the petition was premature as the rules implementing Rep. Act No.
8042 not having been released as yet; (c) the assailed provisions do not
violate any provisions of the Constitution; and, (d) the law was
approved by Congress in the exercise of the police power of the State.
In opposition to the respondent’s plea for injunctive relief, the
petitioners averred that:
As earlier shown, the amended petition for declaratory relief is devoid
of merit for failure of petitioner to demonstrate convincingly that the
assailed law is unconstitutional, apart from the defect and impropriety
of the petition. One who attacks a statute, alleging unconstitutionality
must prove its invalidity beyond reasonable doubt (Caleon v. Agus
Development Corporation, 207 SCRA 748). All reasonable doubts
should be resolved in favor of the constitutionality of a statute (People
v. Vera, 65 Phil. 56). This presumption of constitutionality is based on
the doctrine of separation of powers which enjoin upon each
department a becoming respect for the acts of the other departments
the ancillary remedy of a temporary restraining order and/or a writ of
preliminary injunction prayed for must fall. Besides, an act of
legislature approved by the executive is presumed to be within
constitutional bounds (National Press Club v. Commission on
Elections, 207 SCRA 1).[12]
After the respective counsels of the parties were heard on oral
arguments, the trial court issued on August 21, 1995, an order granting
the petitioner’s plea for a writ of preliminary injunction upon a bond of
P50,000. The petitioner posted the requisite bond and on August 24,
1995, the trial court issued a writ of preliminary injunction enjoining
the enforcement of the following provisions of Rep. Act No. 8042
pending the termination of the proceedings:
… Section 2, subsections (g) and (i, 2nd par.); Section 6, subsections
(a) to (m), and pars. 15 & 16; Section 7, subsections (a) & (b); Section
8; Section 9; Section 10; pars. 1 & 2; Section 11; and Section 40 of
Republic Act No. 8042, otherwise known as the Migrant Workers and
Overseas Filipinos Act of 1995. …[13]
The petitioners filed a petition for certiorari with the Court of Appeals
assailing the order and the writ of preliminary injunction issued by the
trial court on the following grounds:
1. Respondent ARCO-PHIL. had utterly failed to show its clear
right/s or that of its member-agencies to be protected by the
injunctive relief and/or violation of said rights by the
enforcement of the assailed sections of R.A. 8042;
2. Respondent Judge fixed a P50,000 injunction bond which is
grossly inadequate to answer for the damage which petitioner-
officials may sustain, should respondent ARCO- PHIL. be
finally adjudged as not being entitled thereto.[14]
The petitioners asserted that the respondent is not the real party-in-
interest as petitioner in the trial court. It is inconceivable how the
respondent, a non-stock and non- profit corporation, could sustain
direct injury as a result of the enforcement of the law. They argued that
if, at all, any damage would result in the implementation of the law, it
is the licensed and registered recruitment agencies and/or the unskilled
Filipino migrant workers discriminated against who would sustain the
said injury or damage, not the respondent. The respondent, as
petitioner in the trial court, was burdened to adduce preponderant
evidence of such irreparable injury, but failed to do so. The petitioners
further insisted that the petition a quo was premature since the rules
and regulations implementing the law had yet to be promulgated when
such petition was filed. Finally, the petitioners averred that the
respondent failed to establish the requisites for the issuance of a writ of
preliminary injunction against the enforcement of the law and the rules
and regulations issued implementing the same.
On December 5, 1997, the appellate court came out with a four-page
decision dismissing the petition and affirming the assailed order and
writ of preliminary injunction issued by the trial court. The appellate
court, likewise, denied the petitioners’ motion for reconsideration of
the said decision.
The petitioners now come to this Court in a petition for review on
certiorari on the following grounds:
1. Private respondent ARCO-PHIL. had utterly failed to show its
clear right/s or that of its member-agencies to be protected by
the injunctive relief and/or violation of said rights by the
enforcement of the assailed sections of R.A. 8042;
2. The P50,000 injunction bond fixed by the court a quo and
sustained by the Court of Appeals is grossly inadequate to
answer for the damage which petitioners-officials may sustain,
should private respondent ARCO-PHIL. be finally adjudged as
not being entitled thereto.[15]
On February 16, 1998, this Court issued a temporary restraining order
enjoining the respondents from enforcing the assailed order and writ of
preliminary injunction.
The Issues
The core issue in this case is whether or not the trial court committed
grave abuse of its discretion amounting to excess or lack of
jurisdiction in issuing the assailed order and the writ of preliminary
injunction on a bond of only P50,000 and whether or not the appellate
court erred in affirming the trial court’s order and the writ of
preliminary injunction issued by it.
The petitioners contend that the respondent has no locus standi. It is a
non-stock, non- profit organization; hence, not the real party-in-
interest as petitioner in the action. Although the respondent filed the
petition in the Regional Trial Court in behalf of licensed and registered
recruitment agencies, it failed to adduce in evidence a certified copy of
its Articles of Incorporation and the resolutions of the said members
authorizing it to represent the said agencies in the proceedings. Neither
is the suit of the respondent a class suit so as to vest in it a personality
to assail Rep. Act No. 8042; the respondent is service-oriented while
the recruitment agencies it purports to represent are profit- oriented.
The petitioners assert that the law is presumed constitutional and, as
such, the respondent was burdened to make a case strong enough to
overcome such presumption and establish a clear right to injunctive
relief.
The petitioners bewail the P50,000 bond fixed by the trial court for the
issuance of a writ of preliminary injunction and affirmed by the
appellate court. They assert that the amount is grossly inadequate to
answer for any damages that the general public may suffer by reason
of the non-enforcement of the assailed provisions of the law. The trial
court committed a grave abuse of its discretion in granting the
respondent’s plea for injunctive relief, and the appellate court erred in
affirming the order and the writ of preliminary injunction issued by the
trial court.
The respondent, for its part, asserts that it has duly established its locus
standi and its right to injunctive relief as gleaned from its pleadings
and the appendages thereto. Under Section 5, Rule 58 of the Rules of
Court, it was incumbent on the petitioners, as respondents in the RTC,
to show cause why no injunction should issue. It avers that the
injunction bond posted by the respondent was more than adequate to
answer for any injury or damage the petitioners may suffer, if any, by
reason of the writ of preliminary injunction issued by the RTC. In any
event, the assailed provisions of Rep. Act No. 8042 exposed its
members to the immediate and irreparable damage of being deprived
of their right to a livelihood without due process, a property right
protected under the Constitution.
The respondent contends that the commendable purpose of the law to
eradicate illegal recruiters should not be done at the expense and to the
prejudice of licensed and authorized recruitment agencies. The writ of
preliminary injunction was necessitated by the great number of duly
licensed recruitment agencies that had stopped or suspended their
business operations for fear that their officers and employees would be
indicted and prosecuted under the assailed oppressive penal provisions
of the law, and meted excessive penalties. The respondent, likewise,
urges that the Court should take judicial notice that the processing of
deployment papers of overseas workers have come to a virtual
standstill at the POEA.
The Court’s Ruling
The petition is meritorious.
The Respondent Has Locus Standi
To File the Petition in the RTC in
Representation of the Eleven
Licensed and Registered
Recruitment Agencies Impleaded
in the Amended Petition
The modern view is that an association has standing to complain of
injuries to its members. This view fuses the legal identity of an
association with that of its members.[16] An association has standing to
file suit for its workers despite its lack of direct interest if its members
are affected by the action. An organization has standing to assert the
concerns of its constituents.[17]
In Telecommunications and Broadcast Attorneys of the Philippines v.
Commission on Elections,[18] we held that standing jus tertii would be
recognized only if it can be shown that the party suing has some
substantial relation to the third party, or that the right of the third party
would be diluted unless the party in court is allowed to espouse the
third party’s constitutional claims.
In this case, the respondent filed the petition for declaratory relief
under Rule 64 of the Rules of Court for and in behalf of its eleven (11)
licensed and registered recruitment agencies which are its members,
and which approved separate resolutions expressly authorizing the
respondent to file the said suit for and in their behalf. We note that,
under its Articles of Incorporation, the respondent was organized for
the purposes inter alia of promoting and supporting the growth and
development of the manpower recruitment industry, both in the local
and international levels; providing, creating and exploring employment
opportunities for the exclusive benefit of its general membership;
enhancing and promoting the general welfare and protection of
Filipino workers; and, to act as the representative of any individual,
company, entity or association on matters related to the manpower
recruitment industry, and to perform other acts and activities
necessary to accomplish the purposes embodied therein. The
respondent is, thus, the appropriate party to assert the rights of its
members, because it and its members are in every practical sense
identical. The respondent asserts that the assailed provisions violate
the constitutional rights of its members and the officers and employees
thereof. The respondent is but the medium through which its
individual members seek to make more effective the expression of
their voices and the redress of their grievances.[19]
However, the respondent has no locus standi to file the petition for and
in behalf of unskilled workers. We note that it even failed to implead
any unskilled workers in its petition. Furthermore, in failing to implead,
as parties-petitioners, the eleven licensed and registered recruitment
agencies it claimed to represent, the respondent failed to comply with
Section 2 of Rule 63[20] of the Rules of Court. Nevertheless, since the
eleven licensed and registered recruitment agencies for which the
respondent filed the suit are specifically named in the petition, the
amended petition is deemed amended to avoid multiplicity of suits.[21]
The Assailed Order and Writ of
Preliminary Injunction Is Mooted
By Case Law
The respondent justified its plea for injunctive relief on the allegation
in its amended petition that its members are exposed to the immediate
and irreparable danger of being deprived of their right to a livelihood
and other constitutional rights without due process, on its claim that a
great number of duly licensed recruitment agencies have stopped or
suspended their operations for fear that (a) their officers and
employees would be prosecuted under the unjust and unconstitutional
penal provisions of Rep. Act No. 8042 and meted equally unjust and
excessive penalties, including life imprisonment, for illegal
recruitment and large scale illegal recruitment without regard to
whether the recruitment agencies involved are licensed and/or
authorized; and, (b) if the members of the respondent, which are
licensed and authorized, decide to continue with their businesses, they
face the stigma and the curse of being labeled “illegal recruiters.” In
granting the respondent’s plea for a writ of preliminary injunction, the
trial court held, without stating the factual and legal basis therefor, that
the enforcement of Rep. Act No. 8042, pendente lite, would cause
grave and irreparable injury to the respondent until the case is decided
on its merits.
We note, however, that since Rep. Act No. 8042 took effect on July 15,
1995, the Court had, in a catena of cases, applied the penal provisions
in Section 6, including paragraph (m) thereof, and the last two
paragraphs therein defining large scale illegal recruitment committed
by officers and/or employees of recruitment agencies by themselves
and in connivance with private individuals, and imposed the penalties
provided in Section 7 thereof, including the penalty of life
imprisonment.[22] The Informations therein were filed after preliminary
investigations as provided for in Section 11 of Rep. Act No. 8042 and
in venues as provided for in Section 9 of the said act. In People v.
Chowdury,[23] we held that illegal recruitment is a crime of economic
sabotage and must be enforced.
In People v. Diaz,[24] we held that Rep. Act No. 8042 is but an
amendment of the Labor Code of the Philippines and is not an ex- post
facto law because it is not applied retroactively. In JMM Promotion
and Management, Inc. v. Court of Appeals,[25] the issue of the extent of
the police power of the State to regulate a business, profession or
calling vis-à-vis the equal protection clause and the non-impairment
clause of the Constitution were raised and we held, thus:
A profession, trade or calling is a property right within the meaning of
our constitutional guarantees. One cannot be deprived of the right to
work and the right to make a living because these rights are property
rights, the arbitrary and unwarranted deprivation of which normally
constitutes an actionable wrong.
Nevertheless, no right is absolute, and the proper regulation of a
profession, calling, business or trade has always been upheld as a
legitimate subject of a valid exercise of the police power by the state
particularly when their conduct affects either the execution of
legitimate governmental functions, the preservation of the State, the
public health and welfare and public morals. According to the
maxim, sic utere tuo ut alienum non laedas, it must of course be
within the legitimate range of legislative action to define the mode and
manner in which every one may so use his own property so as not to
pose injury to himself or others.
In any case, where the liberty curtailed affects at most the rights of
property, the permissible scope of regulatory measures is certainly
much wider. To pretend that licensing or accreditation requirements
violates the due process clause is to ignore the settled practice, under
the mantle of the police power, of regulating entry to the practice of
various trades or professions. Professionals leaving for abroad are
required to pass rigid written and practical exams before they are
deemed fit to practice their trade. Seamen are required to take tests
determining their seamanship. Locally, the Professional Regulation
Commission has begun to require previously licensed doctors and
other professionals to furnish documentary proof that they had either
re-trained or had undertaken continuing education courses as a
requirement for renewal of their licenses. It is not claimed that these
requirements pose an unwarranted deprivation of a property right
under the due process clause. So long as professionals and other
workers meet reasonable regulatory standards no such deprivation
exists.
Finally, it is a futile gesture on the part of petitioners to invoke the
non-impairment clause of the Constitution to support their argument
that the government cannot enact the assailed regulatory measures
because they abridge the freedom to contract. In Philippine
Association of Service Exporters, Inc. vs. Drilon, we held that “[t]he
non- impairment clause of the Constitution … must yield to the loftier
purposes targeted by the government.” Equally important, into every
contract is read provisions of existing law, and always, a reservation of
the police power for so long as the agreement deals with a subject
impressed with the public welfare.
A last point. Petitioners suggest that the singling out of entertainers
and performing artists under the assailed department orders constitutes
class legislation which violates the equal protection clause of the
Constitution. We do not agree.
The equal protection clause is directed principally against undue favor
and individual or class privilege. It is not intended to prohibit
legislation which is limited to the object to which it is directed or by
the territory in which it is to operate. It does not require absolute
equality, but merely that all persons be treated alike under like
conditions both as to privileges conferred and liabilities imposed. We
have held, time and again, that the equal protection clause of the
Constitution does not forbid classification for so long as such
classification is based on real and substantial differences having a
reasonable relation to the subject of the particular legislation. If
classification is germane to the purpose of the law, concerns all
members of the class, and applies equally to present and future
conditions, the classification does not violate the equal protection
guarantee.[26]
The validity of Section 6 of R.A. No. 8042 which provides that
employees of recruitment agencies may be criminally liable for illegal
recruitment has been upheld in People v. Chowdury:[27]
As stated in the first sentence of Section 6 of RA 8042, the persons
who may be held liable for illegal recruitment are the principals,
accomplices and accessories. An employee of a company or
corporation engaged in illegal recruitment may be held liable as
principal, together with his employer, if it is shown that he actively
and consciously participated in illegal recruitment. It has been held
that the existence of the corporate entity does not shield from
prosecution the corporate agent who knowingly and intentionally
causes the corporation to commit a crime. The corporation obviously
acts, and can act, only by and through its human agents, and it is their
conduct which the law must deter. The employee or agent of a
corporation engaged in unlawful business naturally aids and abets in
the carrying on of such business and will be prosecuted as principal if,
with knowledge of the business, its purpose and effect, he consciously
contributes his efforts to its conduct and promotion, however slight his
contribution may be. …[28]
By its rulings, the Court thereby affirmed the validity of the assailed
penal and procedural provisions of Rep. Act No. 8042, including the
imposable penalties therefor. Until the Court, by final judgment,
declares that the said provisions are unconstitutional, the enforcement
of the said provisions cannot be enjoined.
The RTC Committed Grave Abuse
of Its Discretion Amounting to
Excess or Lack of Jurisdiction in
Issuing the Assailed Order and the
Writ of Preliminary Injunction
The matter of whether to issue a writ of preliminary injunction or not
is addressed to the sound discretion of the trial court. However, if the
court commits grave abuse of its discretion in issuing the said writ
amounting to excess or lack of jurisdiction, the same may be nullified
via a writ of certiorari and prohibition.
In Social Security Commission v. Judge Bayona,[29] we ruled that a law
is presumed constitutional until otherwise declared by judicial
interpretation. The suspension of the operation of the law is a matter of
extreme delicacy because it is an interference with the official acts not
only of the duly elected representatives of the people but also of the
highest magistrate of the land.
In Younger v. Harris, Jr.,[30] the Supreme Court of the United States
emphasized, thus:
Federal injunctions against state criminal statutes, either in their
entirety or with respect to their separate and distinct prohibitions, are
not to be granted as a matter of course, even if such statutes are
unconstitutional. No citizen or member of the community is immune
from prosecution, in good faith, for his alleged criminal acts. The
imminence of such a prosecution even though alleged to be
unauthorized and, hence, unlawful is not alone ground for relief in
equity which exerts its extraordinary powers only to prevent
irreparable injury to the plaintiff who seeks its aid. 752 Beal v.
Missouri Pacific Railroad Corp., 312 U.S. 45, 49, 61 S.Ct. 418, 420,
85 L.Ed. 577.
And similarly, in Douglas, supra, we made clear, after reaffirming this
rule, that:
“It does not appear from the record that petitioners have been
threatened with any injury other than that incidental to every criminal
proceeding brought lawfully and in good faith …” 319 U.S., at 164, 63
S.Ct., at 881.[31]
The possible unconstitutionality of a statute, on its face, does not of
itself justify an injunction against good faith attempts to enforce it,
unless there is a showing of bad faith, harassment, or any other
unusual circumstance that would call for equitable relief. [32] The “on
its face” invalidation of statutes has been described as “manifestly
strong medicine,” to be employed “sparingly and only as a last resort,”
and is generally disfavored.[33]
To be entitled to a preliminary injunction to enjoin the enforcement of
a law assailed to be unconstitutional, the party must establish that it
will suffer irreparable harm in the absence of injunctive relief and
must demonstrate that it is likely to succeed on the merits, or that there
are sufficiently serious questions going to the merits and the balance
of hardships tips decidedly in its favor. [34] The higher standard reflects
judicial deference toward “legislation or regulations developed
through presumptively reasoned democratic processes.” Moreover, an
injunction will alter, rather than maintain, the status quo, or will
provide the movant with substantially all the relief sought and that
relief cannot be undone even if the defendant prevails at a trial on the
merits.[35] Considering that injunction is an exercise of equitable relief
and authority, in assessing whether to issue a preliminary
injunction, the courts must sensitively assess all the equities of the
situation, including the public interest.[36] In litigations between
governmental and private parties, courts go much further both to give
and withhold relief in furtherance of public interest than they are
accustomed to go when only private interests are involved.[37] Before
the plaintiff may be entitled to injunction against future enforcement,
he is burdened to show some substantial hardship.[38]
The fear or chilling effect of the assailed penal provisions of the law
on the members of the respondent does not by itself justify prohibiting
the State from enforcing them against those whom the State believes in
good faith to be punishable under the laws:
… Just as the incidental “chilling effect” of such statutes does not
automatically render them unconstitutional, so the chilling effect that
admittedly can result from the very existence of certain laws on the
statute books does not in itself justify prohibiting the State from
carrying out the important and necessary task of enforcing these laws
against socially harmful conduct that the State believes in good faith to
be punishable under its laws and the Constitution.[39]
It must be borne in mind that subject to constitutional limitations,
Congress is empowered to define what acts or omissions shall
constitute a crime and to prescribe punishments therefor.[40] The power
is inherent in Congress and is part of the sovereign power of the State
to maintain peace and order. Whatever views may be entertained
regarding the severity of punishment, whether one believes in its
efficiency or its futility, these are peculiarly questions of legislative
policy.[41] The comparative gravity of crimes and whether their
consequences are more or less injurious are matters for the State and
Congress itself to determine.[42] Specification of penalties involves
questions of legislative policy.[43]
Due process prohibits criminal stability from shifting the burden of
proof to the accused, punishing wholly passive conduct, defining
crimes in vague or overbroad language and failing to grant fair
warning of illegal conduct.[44] Class legislation is such legislation
which denies rights to one which are accorded to others, or inflicts
upon one individual a more severe penalty than is imposed upon
another in like case offending.[45] Bills of attainder are legislative acts
which inflict punishment on individuals or members of a particular
group without a judicial trial. Essential to a bill of attainder are a
specification of certain individuals or a group of individuals, the
imposition of a punishment, penal or otherwise, and the lack of
judicial trial.[46]
Penalizing unlicensed and licensed recruitment agencies and their
officers and employees and their relatives employed in government
agencies charged with the enforcement of the law for illegal
recruitment and imposing life imprisonment for those who commit
large scale illegal recruitment is not offensive to the Constitution. The
accused may be convicted of illegal recruitment and large scale illegal
recruitment only if, after trial, the prosecution is able to prove all the
elements of the crime charged.[47]
The possibility that the officers and employees of the recruitment
agencies, which are members of the respondent, and their relatives
who are employed in the government agencies charged in the
enforcement of the law, would be indicted for illegal recruitment and,
if convicted sentenced to life imprisonment for large scale illegal
recruitment, absent proof of irreparable injury, is not sufficient on
which to base the issuance of a writ of preliminary injunction to
suspend the enforcement of the penal provisions of Rep. Act No. 8042
and avert any indictments under the law.[48] The normal course of
criminal prosecutions cannot be blocked on the basis of allegations
which amount to speculations about the future.[49]
There is no allegation in the amended petition or evidence adduced by
the respondent that the officers and/or employees of its members had
been threatened with any indictments for violations of the penal
provisions of Rep. Act No. 8042. Neither is there any allegation
therein that any of its members and/or their officers and employees
committed any of the acts enumerated in Section 6(a) to (m) of the law
for which they could be indicted. Neither did the respondent adduce
any evidence in the RTC that any or all of its members or a great
number of other duly licensed and registered recruitment agencies had
to stop their business operations because of fear of indictments under
Sections 6 and 7 of Rep. Act No. 8042. The respondent merely
speculated and surmised that licensed and registered recruitment
agencies would close shop and stop business operations because of the
assailed penal provisions of the law. A writ of preliminary injunction
to enjoin the enforcement of penal laws cannot be based on such
conjectures or speculations. The Court cannot take judicial notice that
the processing of deployment papers of overseas workers have come to
a virtual standstill at the POEA because of the assailed provisions of
Rep. Act No. 8042. The respondent must adduce evidence to prove its
allegation, and the petitioners accorded a chance to adduce
controverting evidence.
The respondent even failed to adduce any evidence to prove
irreparable injury because of the enforcement of Section 10(1)(2) of
Rep. Act No. 8042. Its fear or apprehension that, because of time
constraints, its members would have to defend foreign employees in
cases before the Labor Arbiter is based on speculations. Even if true,
such inconvenience or difficulty is hardly irreparable injury.
provisions of Rep. Act No. 8042 are unconstitutional. The trial court
committed a grave abuse of its discretion amounting to excess or lack
of jurisdiction in issuing the assailed order and writ of preliminary
injunction. It is for this reason that the Court issued a temporary
restraining order enjoining the enforcement of the writ of preliminary
injunction issued by the trial court.

The trial court even ignored the public interest involved in suspending IN LIGHT OF ALL THE FOREGOING, the petition
the enforcement of Rep. Act No. 8042 vis-à-vis the eleven licensed is GRANTED. The assailed decision of the appellate court
and registered recruitment agencies represented by the respondent. In is REVERSED AND SET ASIDE. The Order of the Regional Trial
People v. Gamboa,[50] we emphasized the primary aim of Rep. Act No. Court dated August 21, 1995 in Civil Case No. Q-95-24401 and the
8042: Writ of Preliminary Injunction issued by it in the said case on August
Preliminarily, the proliferation of illegal job recruiters and syndicates 24, 1995 are NULLIFIED. No costs.
preying on innocent people anxious to obtain employment abroad is
one of the primary considerations that led to the enactment of The SO ORDERED.
Migrant Workers and Overseas Filipinos Act of 1995. Aimed at
affording greater protection to overseas Filipino workers, it is a
significant improvement on existing laws in the recruitment and
placement of workers for overseas employment. Otherwise known as
the Magna Carta of OFWs, it broadened the concept of illegal
recruitment under the Labor Code and provided stiffer penalties
thereto, especially those that constitute economic sabotage, i.e., Illegal
Recruitment in Large Scale and Illegal Recruitment Committed by a
Syndicate.[51]
By issuing the writ of preliminary injunction against the petitioners
sans any evidence, the trial court frustrated, albeit temporarily, the
prosecution of illegal recruiters and allowed them to continue
victimizing hapless and innocent people desiring to obtain
employment abroad as overseas workers, and blocked the attainment
of the salutary policies[52] embedded in Rep. Act No. 8042. It bears
stressing that overseas workers, land-based and sea-based, had been
remitting to the Philippines billions of dollars which over the years had
propped the economy.

In issuing the writ of preliminary injunction, the trial court considered

paramount the interests of the eleven licensed and registered
recruitment agencies represented by the respondent, and capriciously
overturned the presumption of the constitutionality of the assailed
provisions on the barefaced claim of the respondent that the assailed
 [ G.R. No. 199802, April 10, 2019 ]
CONGRESSMAN HERMILANDO I. MANDANAS; MAYOR
EFREN B. DIONA; MAYOR ANTONINO AURELIO;
KAGAWAD MARIO ILAGAN; BARANGAY CHAIR PERLITO
MANALO; BARANGAY CHAIR MEDEL MEDRANO;
BARANGAY KAGAWAD CRIS RAMOS; BARANGAY
KAGAWAD ELISA D. BALBAGO, AND ATTY. JOSE
MALVAR VILLEGAS, PETITIONERS, V. EXECUTIVE
SECRETARY PAQUITO OCHOA; SECRETARY CESAR
PURISIMA, DEPARTMENT OF FINANCE; SECRETARY
FLORENCIO H. ABAD, DEPARTMENT OF BUDGET AND
MANAGEMENT; COMMISSIONER KIM JACINTO-
HENARES, BUREAU OF INTERNAL REVENUE; AND
NATIONAL TREASURER ROBERTO TAN, BUREAU OF THE
TREASURY, RESPONDENTS.
[G.R. No. 208488, April 10, 2019]
HONORABLE ENRIQUE T. GARCIA, JR., IN HIS PERSONAL
AND OFFICIAL CAPACITY AS REPRESENTATIVE OF THE
2ND DISTRICT OF THE PROVINCE OF BATAAN,
PETITIONER, V. HONORABLE [PAQUITO] N. OCHOA,
EXECUTIVE SECRETARY; HONORABLE CESAR V.
PURISIMA, SECRETARY, DEPARTMENT OF FINANCE;
HONORABLE FLORENCIO H. ABAD, SECRETARY,
DEPARTMENT OF BUDGET AND MANAGEMENT;
HONORABLE KIM JACINTO-HENARES, COMMISSIONER,
BUREAU OF INTERNAL REVENUE; AND HONORABLE
ROZZANO RUFINO B. BIAZON, COMMISSIONER, BUREAU
OF CUSTOMS, RESPONDENTS.
RESOLUTION
BERSAMIN, C.J.:
On July 3, 2018, the Court promulgated its decision, disposing -
WHEREFORE, the petitions in G.R. No. 199802 and G.R. No.
208488 are PARTIALLY GRANTED, and, ACCORDINGLY, the
Court:
1. DECLARES the phrase "internal revenue" appearing in Section
284 of Republic Act No. 7160 (Local Government
Code) UNCONSTITUTIONAL, and DELETES the phrase from
Section 284.
Section 284, as hereby modified, shall henceforth read as follows:
Section 284. Allotment of Taxes. — Local government units shall have
a share in the national taxes based on the collection of the third fiscal
year preceding the current fiscal year as follows:
(a) On the first year of the effectivity of this Code, thirty percent
(30%);
(b) On the second year, thirty-five percent (35%); and
(c) On the third year and thereafter, forty percent (40%).
Provided, That in the event that the national government incurs an
unmanageable public sector deficit, the President of the Philippines is
hereby authorized, upon the recommendation of Secretary of Finance,
Secretary of Interior and Local Government and Secretary of Budget
and Management, and subject to consultation with the presiding
officers of both Houses of Congress and the presidents of the "liga," to
make the necessary adjustments in the allotment of local government
units but in no case shall the allotment be less than thirty percent
(30%) of the collection of national taxes of the third fiscal year
preceding the current fiscal year; Provided, further, That in the first
year of the effectivity of this Code, the local government units shall, in
addition to the thirty percent (30%) allotment which shall include the
cost of devolved functions for essential public services, be entitled to
receive the amount equivalent to the cost of devolved personal services.
The phrase "internal revenue" is likewise hereby DELETED from the
related sections of Republic Act No. 7160 (Local Government Code),
specifically Section 285, Section 287, and Section 290, which
provisions shall henceforth read as follows:
Section 285. Allocation to Local Government Units. — The share of
local government units in the allotment shall be collected in the
following manner:
(a) Provinces — Twenty-three percent (23%);
(b) Cities — Twenty-three percent (23%);
(c) Municipalities — Thirty-four percent (34%); and
(d) Barangays — Twenty percent (20%)
Provided, however, That the share of each province, city, and
municipality shall be determined on the basis of the following formula:
(a) Population — Fifty percent (50%);
(b) Land Area — Twenty-five percent (25%); and
(c) Equal sharing — Twenty-five percent (25%)
Provided, further, That the share of each barangay with a population of
not less than one hundred (100) inhabitants shall not be less than
Eighty thousand (P80,000.00) per annum chargeable against the
twenty percent (20%) share of the barangay from the allotment, and
the balance to be allocated on the basis of the following formula:
(a) On the first year of the effectivity of this Code:
(1) Population — Forty percent (40%); and
(2) Equal sharing — Sixty percent (60%) (b)
On the second year:
(1) Population — Fifty percent (50%); and
(2) Equal sharing — Fifty percent (50%)
(c) On the third year and thereafter:
(1) Population — Sixty percent (60%); and
(2) Equal sharing — Forty percent (40%).
Provided, finally, That the financial requirements of barangays created
by local government units after the effectivity of this Code shall be the
responsibility of the local government unit concerned.
xxx xxx xxx
Section 287. Local Development Projects. — Each local government
unit shall appropriate in its annual budget no less than twenty percent
(20%) of its annual allotment for development projects. Copies of the
development plans of local government units shall be furnished the
Department of the Interior and Local Government.
xxx xxx xxx
Section 290. Amount of Share of Local Government Units. — Local
government units shall, in addition to the allotment, have a share of
forty percent (40%) of the gross collection derived by the national
government from the preceding fiscal year from mining taxes,
royalties, forestry and fishery charges, and such other taxes, fees, or
charges, including related surcharges, interests, or fines, and from its
share in any co-production, joint venture or production sharing
agreement in the utilization and development of the national wealth
within their territorial jurisdiction.
Article 378, Article 379, Article 380, Article 382, Article 409, Article
461, and related provisions of the Implementing Rules and Regulations
of R.A. No. 7160 are hereby MODIFIED to reflect the deletion of the
phrase "internal revenue" as directed herein.
Henceforth, any mention of "Internal Revenue Allotment" or "IRA" in
Republic Act No. 7160 (Local Government Code) and its
Implementing Rules and Regulations shall be understood as pertaining
to the allotment of the Local Government Units derived from the
national taxes;
2. ORDERS the SECRETARY OF THE DEPARTMENT OF
FINANCE; the SECRETARY OF THE DEPARTMENT OF
BUDGET AND MANAGEMENT; the COMMISSIONER OF
INTERNAL REVENUE; the COMMISSIONER OF CUSTOMS;
and the NATIONAL TREASURER to include ALL
COLLECTIONS OF NATIONAL TAXES in the computation of
the base of the just share of the Local Government Units according to
the ratio provided in the now-modified Section 284 of Republic Act
No. 7160 (Local Government Code) except those accruing to special
purpose funds and special allotments for the utilization and
development of the national wealth.
For this purpose, the collections of national taxes for inclusion in the
base of the just share the Local Government Units shall include, but
shall not be limited to, the following:
(a) The national internal revenue taxes enumerated in Section 21 of the
National Internal Revenue Code, as amended, collected by the Bureau
of Internal Revenue and the Bureau of Customs;
(b) Tariff and customs duties collected by the Bureau of Customs;
(c) 50% of the value-added taxes collected in the Autonomous Region
in Muslim Mindanao, and 30% of all other national tax collected in the
Autonomous Region in Muslim Mindanao.
The remaining 50% of the collections of value-added taxes and 70% of
the collections of the other national taxes in the Autonomous Region
in Muslim Mindanao shall be the exclusive share of the Autonomous
Region in Muslim Mindanao pursuant to Section 9 and Section 15 of
Republic Act No. 9054.
(d) 60% of the national taxes collected from the exploitation and
development of the national wealth.
The remaining 40% of the national taxes collected from the
exploitation and development of the national wealth shall exclusively
accrue to the host Local Government Units pursuant to Section 290 of
Republic Act No. 7160 (Local Government Code);
(e) 85% of the excise taxes collected from locally manufactured
Virginia and other tobacco products.
The remaining 15% shall accrue to the special purpose funds created
by Republic Act No. 7171 and Republic Act No. 7227;
(f) The entire 50% of the national taxes collected under Sections 106,
108 and 116 of the NIRC as provided under Section 283 of the NIRC;
and
(g) 5% of the 25% franchise taxes given to the National Government
under Section 6 of Republic Act No. 6631 and Section 8 of Republic
Act No. 6632.
3. DECLARES that:
(a) The apportionment of the 25% of the franchise taxes collected from
the Manila Jockey Club and Philippine Racing Club, Inc. — that is,
five percent (5%) to the National Government; five percent (5%) to the
host municipality or city; seven percent (7%) to the Philippine Charity
Sweepstakes Office; six percent (6%) to the Anti-Tuberculosis
Society; and two percent (2%) to the White Cross pursuant to Section
6 of Republic Act No. 6631 and Section 8 of Republic Act No. 6632
— is VALID;
(b) Section 8 and Section 12 of Republic Act No. 7227 are VALID;
and, ACCORDINGLY, the proceeds from the sale of the former
military bases converted to alienable lands thereunder
are EXCLUDED from the computation of the national tax allocations
of the Local Government Units; and
(c) Section 24 (3) of Presidential Decree No. 1445, in relation to
Section 284 of the National Internal Revenue Code, apportioning one-
half of one percent (1/2 of 1%) of national tax collections as the
auditing fee of the Commission on Audit is VALID;
4. DIRECTS the Bureau of Internal Revenue and the Bureau of
Customs and their deputized collecting agents to certify all national tax
collections, pursuant to Article 378 of the Implementing Rules and
Regulations of R.A. No. 7160;
5. DISMISSES the claims of the Local Government Units for the
settlement by the National Government of arrears in the just share on
the ground that this decision shall have PROSPECTIVE
APPLICATION; and
6. COMMANDS the AUTOMATIC RELEASE WITHOUT NEED
OF FURTHER ACTION of the just shares of the Local Government
Units in the national taxes, through their respective provincial, city,
municipal, or barangay treasurers, as the case may be, on a quarterly
basis but not beyond five (5) days from the end of each quarter, as
directed in Section 6, Article X of the 1987 Constitution and Section
286 of Republic Act No. 7160 (Local Government Code), and
operationalized by Article 383 of the Implementing Rules and
Regulations of RA 7160.
Let a copy of this decision be furnished to the President of the
Republic of the Philippines, the President of the Senate, and the
Speaker of the House of Representatives for their information and
guidance.
SO ORDERED.
The Office of the Solicitor General (OSG), representing all the
respondents, has filed a motion for reconsideration, specifying therein
the following errors, to wit:
I.
THE HONORABLE COURT ERRED IN RULING THAT
ARTICLE X, SECTION 6 OF THE CONSTITUTION
REQUIRES THAT ALL NATIONAL TAXES SHALL BE THE
BASE IN COMPUTING THE INTERNAL REVENUE
ALLOTMENT (IRA) OF THE LOCAL GOVERNMENT UNITS
(LGUs).
II.
THE HONORABLE COURT ERRED IN DELETING THE
PHRASE "INTERNAL REVENUE" IN SECTIONS 284, 285, 287,
AND 290 OF THE LOCAL GOVERNMENT CODE (LGC) AND
IN ARTICLES 378, 379, 380, 382, 409, 461 AND RELATED
PROVISIONS OF THE IMPLEMENTING RULES AND
REGULATIONS OF THE LGC. THIS DELETION AMOUNTS
TO AN ENCROACHMENT ON THE EXCLUSIVE POWER OF
CONGRESS TO DETERMINE THE LGUs' JUST SHARE IN
NATIONAL TAXES.
III.
THE HONORABLE COURT ERRED IN RULING THAT THE
FOLLOWING TAXES SHOULD STILL BE INCLUDED IN
THE BASE USED IN THE COMPUTATION OF THE IRA: (A)
TARRIFF AND CUSTOMS DUTIES COLLECTED BY THE
BUREAU OF CUSTOMS; (B) 50% OF VALUE-ADDED TAXES
COLLECTED IN THE AUTONOMOUS REGION IN MUSLIM
MINDANAO(ARMM); (C) 30% OF ALL OTHER NATIONAL
TAXES COLLECTED IN THE ARMM; (D) 60% OF THE
NATIONAL TAXES COLLECTED FROM THE
EXPLOITATION AND DEVELOPMENT OF NATIONAL
WEALTH; (E) FROM LOCALLY MANUFACTURED
VIRGINIA AND OTHER TOBACCO PRODUCTS; (F) THE
ENTIRE 50% OF THE NATIONAL TAXES UNDER SECTIONS
106, 108, AND 116 OF REPUBLIC ACT NO. 8424; AND (G) 5%
OF THE 25% FRANCHISE TAXES GIVEN THE NATIONAL
GOVERNMENT UNDER SECTION 6 OF R.A. NO. 0631 AND
SECTION 8 OF R.A. NO. 6632.
 IV.
IN THE EVENT THE HONORABLE COURT WILL
MAINTAIN ITS DECISION, THE PROSPECTIVE
APPLICATION OF THE DECISION SHOULD BE CLARIFIED
TO MEAN THAT THE LGUs WILL BEGIN RECEIVING THE
ADJUSTED IRA IN 2022.[1]
In substantiation, the OSG contends that the affected provisions of the
Local Government Code (LGC) are not contrary to Section 6, Article
X of the Constitution, under which the plenary power of Congress
extends nut only to the determination of they just share of local
government units (LGUs) but also to the determination of which
national taxes serve as base for the computation of such just share.
The OSG premises its contention on the fact that the article "the"
immediately precedes the phrase "national taxes" in Section 6, thereby
manifesting the intent to give Congress the discretion to determine
which national taxes the just share will be based on considering that
the qualifier "the" signals that the succeeding phrase "national taxes"
is a specific class of taxes; that if it was the intention of the framers to
include all national taxes, the Constitution should have so stated; that
the phrase internal revenue should be restored in the affected
provisions of the LGC considering that the deletion of the phrase
constitutes an undue encroachment on the power of Congress to
determine the LGUs' just share; that the effect of broadening the base
for computing the just share is to modify Congress' internal revenue
allocations (IRA) in favor of the LGUs, which the Court cannot do
because imposing the new base was not intended by Congress; that it
is more prudent for the Court to nullify Section 284 of the LGC in its
entirety and to allow Congress to make the necessary adjustments; that,
indeed, the Court, its awesome powers notwithstanding, cannot
supplant Congress' discretion to determine the amount of the just
share the LGUs are entitled to; that certain taxes (i.e., those under
Republic Act No. 9054, Republic Act No. 6631, and Republic Act No.
6632) that the Court has ordered to be included in the reckoning of the
base amount of the fair share of the LGUs should be excluded because
including them will result to double sharing on the part of host LGUs
which are already given particular shares by virtue of the Court's
directive to include in the base the national government share; that the
double sharing is not intended by Congress; that the inclusion of the
other taxes, particularly the taxes under Republic Act No. 7171 and
Republic Act No. 8240, the national taxes on utilization and
development of the national wealth under Section 289 of the LGC, the
value added tax (VAT) collections under Section 106, Section 108 and
Section 116 of the National Internal Revenue Code (NIRC) will
deprive the National Government of much needed funds for essential
services; and that the collections of the Bureau of Customs should be
excluded from the base amount because of the nature of tariffs as
being for the regulation of goods coming in and going out of the
country instead of being just for income generation.
The OSG interposes that should the Court nonetheless affirm the
decision of July 3, 2018, it should expressly declare the effects of the
decision to be prospective following the operative fact doctrine,
resulting in the base amount decreed herein to start only in Fiscal Year
2022.
On his part, petitioner Garcia seeks partial reconsideration to pray that
all the arrears from 1992 resulting from the new computation of the
base amount of the fair share be given to the LGUs.[2]
Ruling of the Court
The Court denies both motions for their lack of merit.
In the July 3, 2018 decision, the Court has held that the Constitution
itself set national taxes as the base amount from which to reckon
the just share of the LGUs, viz.:
Section 6, Article X the 1987 Constitution textually commands the
allocation to the LGUs of a just share in the national taxes, viz.:
Section 6. Local government units shall have a just share, as
determined by law, in the national taxes which shall be automatically
released to them.
Section 6, when parsed, embodies three mandates, namely: (1) the
LGUs shall have a just share in the national taxes; (2) the just
share shall be determined by law; and (3) the just share shall
be automatically released to the LGUs.
Congress has sought to carry out the second mandate of Section 6 by
enacting Section 284, Title III (Shares of Local Government Units in
the Proceeds of National Taxes), of the LGC, which is again quoted
for ready reference:
Section 284. Allotment of Internal Revenue Taxes. — Local
government units shall have a share in the national internal revenue
taxes based on the collection of the third fiscal year preceding the
current fiscal year as follows:
(a) On the first year of the effectivity of this Code, thirty percent
(30%);
(b) On the second year, thirty-five percent (35%); and
(c) On the third year and thereafter, forty percent (40%).
Provided, That in the event that the national government incurs an
unmanageable public sector deficit, the President of the Philippines is
hereby authorized, upon the recommendation of Secretary of Finance,
Secretary of Interior and Local Government and Secretary of Budget
and Management, and subject to consultation with the presiding
officers of both Houses of Congress and the presidents of the "liga," to
make the necessary adjustments in the internal revenue allotment of
local government units but in no case shall the allotment be less than
thirty percent (30%) of the collection of national internal revenue taxes
of the third fiscal year preceding the current fiscal year: Provided,
further, That in the first year of the effectivity of this Code, the local
government units shall, in addition to the thirty percent (30%) internal
revenue allotment which shall include the cost of devolved functions
for essential public services, be entitled to receive the amount
equivalent to the cost of devolved personal services.
There is no issue as to what constitutes the LGUs' just share expressed
in percentages of the national taxes (i.e., 30%, 35% and 40% stipulated
in subparagraphs (a), (b), and (c) of Section 284). Yet, Section
6, supra, mentions national taxes as the source of the just share of the
LGUs while Section 284 ordains that the share of the LGUs be taken
from national internal revenue taxes instead.
Has not Congress thereby infringed the constitutional provision?
Garcia contends that Congress has exceeded its constitutional
boundary by limiting to the NIRTs the base from which to compute
the just share of the LGUs.
We agree with Garcia's contention.
Although the power of Congress to make laws is plenary in nature,
congressional lawmaking remains subject to the limitations stated in
the 1987 Constitution. The phrase national internal revenue
taxes engrafted in Section 284 is undoubtedly more restrictive than the
term national taxes written in Section 6. As such, Congress has
actually departed from the letter of the 1987 Constitution stating
that national taxes should be the base from which the just share of the
LGU comes. Such departure is impermissible. Verba legis non est
recedendum (from the words of a statute there should be no departure).
Equally impermissible is that Congress has also thereby curtailed the
guarantee of fiscal autonomy in favor of the LGUs under the 1987
Constitution.
Taxes are the enforced proportional contributions exacted by the State
from persons and properties pursuant to its sovereignty in order to
support the Government and to defray all the public needs. Every tax
has three elements, namely: (a) it is an enforced proportional
contribution from persons and properties; (b) it is imposed by the State
by virtue of its sovereignty; and (c) it is levied for the support of the
Government. Taxes are classified into national and local. National
taxes are those levied by the National Government, while local taxes
are those levied by the LGUs.
What the phrase national internal revenue taxes as used in Section 284
included are all the taxes enumerated in Section 21 of the National
Internal Revenue Code (NIRC), as amended by R.A. No. 8424, viz.:
Section 21. Sources of Revenue. — The following taxes, fees and
charges are deemed to be national internal revenue taxes:
(a) Income tax;
(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected
by the Bureau of Internal Revenue.
In view of the foregoing enumeration of what are the national internal
revenue taxes, Section 284 has effectively deprived the LGUs from
deriving their just share from other national taxes, like the customs
duties.
Strictly speaking, customs duties are also taxes because they are
exactions whose proceeds become public funds. According to Garcia v.
Executive Secretary, customs duties is the nomenclature given to taxes
imposed on the importation and exportation of commodities and
merchandise to or from a foreign country. Although customs duties
have either or both the generation of revenue and the regulation of
economic or social activity as their moving purposes, it is often
difficult to say which of the two is the principal objective in a
particular instance, for, verily, customs duties, much like internal
revenue taxes, are rarely designed to achieve only one policy objective.
We further note that Section 102 (oo) of R.A. No. 10863 (Customs
Modernization and Tariff Act) expressly includes all fees and charges
imposed under the Act under the blanket term of taxes.
It is clear from the foregoing clarification that the exclusion
of other national taxes like customs duties from the base for
determining the just share of the LGUs contravened the express
constitutional edict in Section 6, Article X the 1987 Constitution.
Still, the OSG posits that Congress can manipulate, by law, the base of
the allocation of the just share in the national taxes of the LGUs.
The position of the OSG cannot be sustained. Although it has the
primary discretion to determine and fix the just share of the LGUs in
the national taxes (e.g., Section 284 of the LGC), Congress cannot
disobey the express mandate of Section 6, Article X of the 1987
Constitution for the just share of the LGUs to be derived from
the national taxes. The phrase as determined by law in Section 6
follows and qualifies the phrase just share, and cannot be construed as
qualifying the succeeding phrase in the national taxes. The intent of
the people in respect of Section 6 is really that the base for reckoning
the just share of the LGUs should includes all national taxes. To read
Section 6 differently as requiring that the just share of LGUs in the
national taxes shall be determined by law is tantamount to the
unauthorized revision of the 1987 Constitution. [Bold emphasis
supplied; italicized portions are part of the original text]
We reiterate that Congress, in limiting the base amount to national
internal revenue taxes, gravely abused its discretion. What the
Constitution extended to Congress was the power to determine, by law,
the just share. The Constitution did not empower Congress to
determine the just share and the base amount other than national taxes.
The respondents' construction of Section 6, Article X of the
Constitution can lead to empowering Congress to change the base
amount despite the Constitution having already pegged it to national
taxes. We should remember that between two possible interpretations
one of which will be free from constitutional infirmity and the other
tainted by such grave defect, the former is to be preferred. A
construction that will save rather than one that will affix the seal of
doom certainly commends itself.[3] Moreover, it is a rule in statutory
construction that every part of the law must be interpreted with
reference to the context, i.e., every part of the law must be considered
together with the other parts, and kept subservient to the general intent
of the whole enactment. The law must not be read in truncated parts;
its provisions must be read in relation to its entirety. The particular
words, clauses and phrases should not be studied as detached and
isolated expressions, but the whole and every part of the statute must
be considered in fixing the meaning of any of its parts and in order to
produce a harmonious whole.[4] Accordingly, between the Court's
construction that is consistent with the constitutional policy on local
autonomy and decentralization, on one hand, and the OSG's
construction that seemingly rejects the constitutional policy, the
former is to be desired.
Conformably with the foregoing, the Court sees no reason to exclude
the national taxes mentioned in the July 3, 2018 decision. Indeed,
Section 6, Article X of the Constitution expressly states that national
taxes shall constitute the base amount from which the just share shall
be computed. Without the Constitution itself excluding such national
taxes from the computation of the base amount, the rule will be that
such national taxes are to be included. This has been made clear in the
decision, where the Court explains -
Garcia submits that even assuming that the present version of Section
284 of the LGC is constitutionally valid, the implementation thereof
has been erroneous because Section 284 does not authorize any
exclusion or deduction from the collections of the NIRTs for purposes
of the computation of the allocations to the LGUs. He further submits
that the exclusion of certain NIRTs diminishes the fiscal autonomy
granted to the LGUs. He claims that the following NIRTs have been
illegally excluded from the base for determining the fair share of the
LGUs in the IRA, to wit:
(1) NIRTs collected by the cities and provinces and divided
exclusively among the LGUs of the Autonomous Region for
Muslim Mindanao (ARMM), the regional government and the
central government, pursuant to Section 15 in relation to Section 9,
Article IX of R.A. No. 9054 (An Act to Strengthen and Expand the
Organic Act for the Autonomous Region in Muslim Mindanao,
amending for the purpose Republic Act No. 6734, entitled An Act
providing for an Organic Act for the Autonomous Region in
Muslim Mindanao);
(2) The shares in the excise taxes on mineral products of the different
LGUs, as provided in Section 287 of the NIRC in relation to
Section 290 of the LGC;
(3) The shares of the relevant LGUs in the franchise taxes paid by
Manila Jockey Club, Inc. and Philippine Racing Club, Inc.;
(4) The shares of various municipalities in VAT collections under 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) as embodied in Section 283 of
the NIRC;
(5) The shares of relevant LGUs in the proceeds of the sale and
conversion of former military bases in accordance with R.A. No.
7227 (Bases Conversion and Development Act of 1992);
(6) The shares of different LGUs in the excise taxes imposed on
locally manufactured Virginia tobacco products as provided in
Section 3 of R.A. No. 7171 (An Act to Promote the Development of
the Farmers in the Virginia Tobacco Producing Provinces), and as
now provided in Section 289 of the NIRC;
(7) The shares of different LGUs in the incremental revenues from
Burley and native tobacco products under Section 8 of R.A. No.
8240 (An Act Amending Sections 138, 140 and 142 of the National
Internal Revenue Code as Amended and for Other Purposes) and
as now provided in Section 288 of the NIRC; and
(8) The share of the Commission on Audit (COA) in the NIRTs as
provided in Section 24(3) of P.D. No. 1445 (Government Auditing
Code of the Philippines) in relation to Section 284 of the NIRC.
Garcia insists that the foregoing taxes and revenues should have been
included by Congress and, by extension, the BIR in the base for
computing the IRA on the strength of the cited provisions; that the
LGC did not authorize such exclusion; and that the continued
exclusion has undermined the fiscal autonomy guaranteed by the 1987
Constitution.
The insistence of Garcia is valid to an extent.
An examination of the above-enumerated laws confirms that the
following have been excluded from the base for reckoning the just
share of the LGUs as required by Section 6, Article X of the 1987
Constitution, namely:
(a) The share of the affected LGUs in the proceeds of the sale and
conversion of former military bases in accordance with R.A. No.
7227;
(b) The share of the different LGUs in the excise taxes imposed on
locally manufactured Virginia tobacco products as provided for in
Section 3, R.A. No. 7171, and as now provided in Section 289 of
the NIRC;
(c) The share of the different LGUs in incremental revenues from
Burley and native tobacco products under Section 8 of R.A. No.
8240, and as now provided for in Section 288 of the NIRC;
(d) The share of the COA in the NIRTs as provided in Section 24(3) of
P.D. No. 1445 in relation to Section 284 of the NIRC;
(e) The shares of the different LGUs in the excise taxes on mineral
products, as provided in Section 287 of the NIRC in relation to
Section 290 of the LGC;
(f) The NIRTs collected by the cities and provinces and divided
exclusively among the LGUs of the ARMM, the regional
government and the central government, pursuant to Section 15 in
relation to Section 9, Article IX of R.A. No. 9054; and
(g) The shares of the relevant LGUs in the franchise taxes paid by
Manila Jockey Club, Inc., and the Philippine Racing Club, Inc.
Anent the share of the affected LGUs in the proceeds of the sale and
conversion of the former military bases pursuant to R.A. No. 7227, the
exclusion is warranted for the reason that such proceeds do not come
from a tax, fee or exaction imposed on the sale and conversion.
As to the share of the affected LGUs in the excise taxes imposed on
locally manufactured Virginia tobacco products under R.A. No. 7171
(now Section 289 of the NIRC); the share of the affected LGUs in
incremental revenues from Burley and native tobacco products under
Section 8, R.A. No. 8240 (now Section 288 of the NIRC); the share of
the COA in the NIRTs pursuant to Section 24 (3) of P.D. No. 1445 in
relation to Section 284 of the NIRC; and the share of the host LGUs in
the franchise taxes paid by the Manila Jockey Club, Inc., and
Philippine Racing Club, Inc., under Section 6 of R.A. No. 6631 and
Section 8 of R.A. No. 6632, respectively, the exclusion is also justified.
Although such shares involved national taxes as defined under the
NIRC, Congress had the authority to exclude them by virtue of their
being taxes imposed for special purposes. A reading of Section 288
and Section 289 of the NIRC and Section 24 (3) of P.D. No. 1445 in
relation to Section 284 of the NIRC reveals that all such taxes are
levied and collected for a special purpose. The same is true for the
franchise taxes paid under Section 6 of R.A. No. 6631 and Section 8 of
R.A. No. 6632, inasmuch as certain percentages of the franchise taxes
go to different beneficiaries. The exclusion conforms to Section 29 (3),
Article VI of the 1987 Constitution, which states:
Section 29. x x x
xxxx
(3) All money collected on any tax levied for a special purpose
shall be treated as a special fund and paid out for such purpose
only. If the purpose for which a special fund was created has been
fulfilled or abandoned, the balance, if any, shall be transferred to the
general funds of the Government. [Bold emphasis supplied]
The exclusion of the share of the different LGUs in the excise taxes
imposed on mineral products pursuant to Section 287 of the NIRC in
relation to Section 290 of the LGC is premised on a different
constitutional provision. Section 7, Article X of the 1987 Constitution
allows affected LGUs to have an equitable share in the proceeds of the
utilization of the nation's national wealth "within their respective
areas," to wit:
Section 7. Local governments shall be entitled to an equitable share in
the proceeds of the utilization and development of the national wealth
within their respective areas, in the manner provided by law, including
sharing the same with the inhabitants by way of direct benefits.
This constitutional provision is implemented by Section 287 of the
NIRC and Section 290 of the LGC thusly:
SEC. 287. Shares of Local Government Units in the Proceeds from the
Development and Utilization of the National Wealth. — Local
Government units shall have an equitable share in the proceeds derived
from the utilization and development of the national wealth, within
their respective areas, including sharing the same with the inhabitants
by way of direct benefits.
(A) Amount of Share a Local Government Units. — Local
government units shall, in addition to the internal revenue
allotment, have a share of forty percent (40%) of the gross
collection derived by the national government from the preceding
fiscal year from excise taxes on mineral products, royalties, and
such other taxes, fees or charges, including related surcharges,
interests or fines, and from its share in any co-production, joint
venture or production sharing agreement in the utilization and
development of the national wealth within their territorial
jurisdiction.
(B) Share of the Local Governments from Any Government Agency or
Government-owned or -Controlled Corporation. — Local Government
Units shall have a share, based on the preceding fiscal year, from the
proceeds derived by any government agency or government-owned or
controlled corporation engaged in the utilization and development of
the national wealth based on the following formula, whichever will
produce a higher share for the local government unit:
(1) One percent (1%) of the gross sales or receipts of the preceding
calendar year, or
(2) Forty percent (40%) of the excise taxes on mineral products,
royalties, and such other taxes, fees or charges, including related
surcharges, interests or fines the government agency or government-
owned or -controlled, corporations would have paid if it were not
otherwise exempt. [Bold emphasis supplied]
SEC. 290. Amount of Share of Local Government Units. — Local
government units shall, in addition to the internal revenue
allotment, have a share of forty percent (40%) of the gross
collection derived by the national government from the preceding
fiscal year from mining taxes, royalties, forestry and fishery
charges, and such other taxes, fees, or charges, including related
surcharges, interests, or fines, and from its share in any co-production,
joint venture or production sharing agreement in the utilization and
development of the national wealth within their territorial jurisdiction.
[Bold emphasis supplied]
Lastly, the NIRTs collected by the provinces and cities within the
ARMM whose portions are distributed to the ARMM's provincial, city
and regional governments are also properly excluded for such taxes are
intended to truly enable a sustainable and feasible autonomous region
as guaranteed by the 1987 Constitution. The mandate under Section 15
to Section 21, Article X of the 1987 Constitution is to allow the
separate development of peoples with distinctive cultures and
traditions in the autonomous areas. The grant of autonomy to the
autonomous regions includes the right of self-determination — which
in turn ensures the right of the peoples residing therein to the necessary
level of autonomy that will guarantee the support of their own cultural
identities, the establishment of priorities by their respective
communities' internal decision-making processes and the management
of collective matters by themselves. As such, the NIRTs collected by
the provinces and cities within the ARMM will ensure local autonomy
and their very existence with a continuous supply of funding sourced
from their very own areas. The ARMM will become self-reliant and
dynamic consistent with the dictates of the 1987 Constitution.
The shares of the municipalities in the VATs collected pursuant to R.A.
No. 7643 should be included in determining the base for computing
the just share because such VATs are national taxes, and nothing can
validly justify their exclusion.
In recapitulation, the national taxes to be included in the base for
computing the just share the LGUs shall henceforth be, but shall not
be limited to, the following:
1. The NIRTs enumerated in Section 21 of the NIRC, as
amended, to be inclusive of the VATs, excise taxes, and
DSTs collected by the BIR and the BOC, and their
deputized agents;
2. Tariff and customs duties collected by the BOC;
3. 50% of the VATs collected in the ARMM, and 30% of
all other national taxes collected in the ARMM; the
remaining 50% of the VATs and 70% of the collections
of the other national taxes in the ARMM shall be the
exclusive share of the ARMM pursuant to Section 9
and Section 15 of R.A. No. 9054;
4. 60% of the national taxes collected from the
exploitation and development of the national wealth;
the remaining 40% will exclusively accrue to the host
LGUs pursuant to Section 290 of the LGC;
5. 85% of the excise taxes collected from locally
manufactured Virginia and other tobacco products; the
remaining 15% shall accrue to the special purpose
funds pursuant created in R.A. No. 7171 and R.A. No.
7227;
6. The entire 50% of the national taxes collected under
Section 106, Section 108 and Section 116 of the NIRC
in excess of the increase in collections for the
immediately preceding year; and
7. 5% of the franchise taxes in favor of the national
government paid by franchise holders in accordance
with Section 6 of R.A. No. 6631 and Section 8 of R.A.
No. 6632.
While the Court understands the financial implications that may result
from the July 3, 2018 decision, it is not within the power of the Court
to adjust the purportedly exorbitant rate of the fair share of the LGUs.
In striking down the affected provisions of the LGC, the Court is only
exercising and discharging its constitutional duty of judicial review.
The duty does not allow the Court to mark time and await the
rectification to be made by Congress of the unconstitutional situation,
as the OSG seems to suggest, considering that the Court has to
intervene and act once its power of judicial review has been properly
and duly invoked.
Lastly, petitioner Garcia argues that because portions of Section 284 of
the LGC are found and declared to be unconstitutional, the LGUs are
entitled to recover the arrears in their just share. In contrast, the OSG
wants the ruling to have a prospective application.
Both positions have been fully considered and settled by the decision
of July 3, 2018, as borne out by the following excerpts of the relevant
portions of the decision, viz.:
The petitioners' prayer for the payment of the arrears of the LGUs' just
share on the theory that the computation of the base amount had been
unconstitutional all along cannot be granted.
It is true that with our declaration today that the IRA is not in
accordance with the constitutional determination of the just share of
the LGUs in the national taxes, logic demands that the LGUs should
receive the difference between the just share they should have
received had the LGC properly reckoned such just share from all
national taxes, on the one hand, and the share — represented by the
IRA — the LGUs have actually received since the effectivity of the
IRA under the LGC, on the other. This puts the National Government
in arrears as to the just share of the LGUs. A legislative or executive
act declared void for being unconstitutional cannot give rise to any
right or obligation.
Yet, the Court has conceded in Araullo v. Aquino III that:
x x x the generality of the rule makes us ponder whether rigidly
applying the rule may at times be impracticable or wasteful.
Should we not recognize the need to except from the rigid
application of the rule the instances in which the void law or
executive act produced an almost irreversible result?
The need is answered by the doctrine of operative fact. The
doctrine, definitely not a novel one, has been exhaustively explained
in De Agbayani v. Philippine National Bank:
The decision now on appeal reflects the orthodox view that an
unconstitutional act, for that matter an executive order or a municipal
ordinance likewise suffering from that infirmity, cannot be the source
of any legal rights or duties. Nor can it justify any official act taken
under it. Its repugnancy to the fundamental law once judicially
declared results in its being to all intents and purposes a mere scrap of
paper. As the new Civil Code puts it: 'When the courts declare a law to
be inconsistent with the Constitution, the former shall be void and the
latter shall govern.' Administrative or executive acts, orders and
regulations shall be valid only when they are not contrary to the laws
of the Constitution. It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or
executive act contrary to its terms cannot survive.
Such a view has support in logic and possesses the merit of
simplicity. It may not however be sufficiently realistic. It does not
admit of doubt that prior to the declaration of nullity such
challenged legislative or executive act must have been in force and
had to be complied with. This is so as until after the judiciary, in
an appropriate case, declares its invalidity, it is entitled to
obedience and respect. Parties may have acted under it and may
have changed their positions. What could be more fitting than that
in a subsequent litigation regard be had to what has been done
while such legislative or executive act was in operation and
presumed to be valid in all respects. It is now accepted as a
doctrine that prior to its being nullified, its existence as a fact must
be reckoned with. This is merely to reflect awareness that
precisely because the judiciary is the governmental organ which
has the final say on whether or not a legislative or executive
measure is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a
declaration of nullity. It would be to deprive the law of its quality
of fairness and justice then, if there be no recognition of what had
transpired prior to such adjudication.
In the language of an American Supreme Court decision: 'The actual
existence of a statute, prior to such a determination [of
unconstitutionality], is an operative fact and may have consequences
which cannot justly be ignored. The past cannot always be erased by a
new judicial declaration. The effect of the subsequent ruling as to
invalidity may have to be considered in various aspects, with respect to
particular relations, individual and corporate, and particular conduct,
private and official.'
The doctrine of operative fact recognizes the existence of the law
or executive act prior to the determination of its
unconstitutionality as an operative fact that produced
consequences that cannot always be erased, ignored or
disregarded. In short, it nullifies the void law or executive act but
sustains its effects. It provides an exception to the general rule that
a void or unconstitutional law produces no effect. But its use must
be subjected to great scrutiny and circumspection, and it cannot be
invoked to validate an unconstitutional law or executive act, but is
resorted to only as a matter of equity and fair play. It applies only to
cases where extraordinary circumstances exist, and only when the
extraordinary circumstances have met the stringent conditions that will
permit its application.

Conformably with the foregoing pronouncements in Araullo v. Aquino

III, the effect of our declaration through this decision of the
unconstitutionality of Section 284 of the LGC and its related laws as
far as they limited the source of the just share of the LGUs to the
NIRTs is prospective. It cannot be otherwise. (Bold underscoring is
part of the original)

As the foregoing excerpts indicate, the Court has expressly mandated

the prospective application of its ruling.

It becomes unavoidable to ask when the adjusted amounts will be

granted in favor of LGUs. The OSG suggests that the adjusted
amounts be given to the LGUs starting with the 2022 budget cycle.

The suggestion of the OSG is well taken.

The adjusted amounts can be deemed effective only after this ruling
has lapsed into finality, which is procedurally to be reckoned only
from the denial of the OSG's motion for reconsideration through this
resolution. From then onwards, and as ruled herein, the just
share should be based on all national taxes collected on "the third
fiscal year preceding." In the absence of any amendment by Congress,
the rates fixed in Section 284 of the LGC, as herein modified, shall
control.

WHEREFORE, the Court DENIES the motion for reconsideration of

the respondents, and the motion for partial reconsideration of the
petitioner in G.R. No. 208488.

SO ORDERED.
G.R. No. L-19201 June 16, 1965
which are quoted below:
REV. FR. CASIMIRO LLADOC, petitioner,
vs.
The COMMISSIONER OF INTERNAL REVENUE and The
COURT of TAX APPEALS, respondents.
Hilado and Hilado for petitioner.
Office of the Solicitor General for respondents.
PAREDES, J.:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated
P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish priest of
Victorias, Negros Occidental, and predecessor of herein petitioner, for
the construction of a new Catholic Church in the locality. The total
amount was actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor's gift
tax return. Under date of April 29, 1960, the respondent Commissioner
of Internal Revenue issued an assessment for donee's gift tax against
the Catholic Parish of Victorias, Negros Occidental, of which
petitioner was the priest. The tax amounted to P1,370.00 including
surcharges, interests of 1% monthly from May 15, 1958 to June 15,
1960, and the compromise for the late filing of the return.
Petitioner lodged a protest to the assessment and requested the
withdrawal thereof. The protest and the motion for reconsideration
presented to the Commissioner of Internal Revenue were denied. The
petitioner appealed to the Court of Tax Appeals on November 2, 1960.
In the petition for review, the Rev. Fr. Casimiro Lladoc claimed,
among others, that at the time of the donation, he was not the parish
priest in Victorias; that there is no legal entity or juridical person
known as the "Catholic Parish Priest of Victorias," and, therefore, he
should not be liable for the donee's gift tax. It was also asserted that
the assessment of the gift tax, even against the Roman Catholic Church,
would not be valid, for such would be a clear violation of the
provisions of the Constitution.
After hearing, the CTA rendered judgment, the pertinent portions of
... . Parish priests of the Roman Catholic Church under canon
laws are similarly situated as its Archbishops and Bishops with
respect to the properties of the church within their parish. They
are the guardians, superintendents or administrators of these
properties, with the right of succession and may sue and be
sued.
xxx xxx xxx
The petitioner impugns the, fairness of the assessment with the
argument that he should not be held liable for gift taxes on
donation which he did not receive personally since he was not
yet the parish priest of Victorias in the year 1957 when said
donation was given. It is intimated that if someone has to pay
at all, it should be petitioner's predecessor, the Rev. Fr. Crispin
Ruiz, who received the donation in behalf of the Catholic
parish of Victorias or the Roman Catholic Church. Following
petitioner's line of thinking, we should be equally unfair to hold
that the assessment now in question should have been
addressed to, and collected from, the Rev. Fr. Crispin Ruiz to
be paid from income derived from his present parish where
ever it may be. It does not seem right to indirectly burden the
present parishioners of Rev. Fr. Ruiz for donee's gift tax on a
donation to which they were not benefited.
xxx xxx xxx
We saw no legal basis then as we see none now, to include
within the Constitutional exemption, taxes which partake of the
nature of an excise upon the use made of the properties or upon
the exercise of the privilege of receiving the properties. (Phipps
vs. Commissioner of Internal Revenue, 91 F [2d] 627; 1938,
302 U.S. 742.)
It is a cardinal rule in taxation that exemptions from payment
thereof are highly disfavored by law, and the party claiming
 exemption must justify his claim by a clear, positive, or
express grant of such privilege by law. (Collector vs. Manila
Jockey Club, G.R. No. L-8755, March 23, 1956; 53 O.G.
3762.)
The phrase "exempt from taxation" as employed in Section
22(3), Article VI of the Constitution of the Philippines, should
not be interpreted to mean exemption from all kinds of taxes.
Statutes exempting charitable and religious property from
taxation should be construed fairly though strictly and in such
manner as to give effect to the main intent of the lawmakers.
(Roman Catholic Church vs. Hastrings 5 Phil. 701.)
xxx xxx xxx
WHEREFORE, in view of the foregoing considerations, the
decision of the respondent Commissioner of Internal Revenue
appealed from, is hereby affirmed except with regard to the
imposition of the compromise penalty in the amount of P20.00
(Collector of Internal Revenue v. U.S.T., G.R. No. L-11274,
Nov. 28, 1958); ..., and the petitioner, the Rev. Fr. Casimiro
Lladoc is hereby ordered to pay to the respondent the amount
of P900.00 as donee's gift tax, plus the surcharge of five per
centum (5%) as ad valorem penalty under Section 119 (c) of
the Tax Code, and one per centum (1%) monthly interest from
May 15, 1958 to the date of actual payment. The surcharge of
25% provided in Section 120 for failure to file a return may not
be imposed as the failure to file a return was not due to willful
neglect.( ... ) No costs.
The above judgment is now before us on appeal, petitioner assigning
two (2) errors allegedly committed by the Tax Court, all of which
converge on the singular issue of whether or not petitioner should be
liable for the assessed donee's gift tax on the P10,000.00 donated for
the construction of the Victorias Parish Church.
Section 22 (3), Art. VI of the Constitution of the Philippines, exempts
from taxation cemeteries, churches and parsonages or convents,
appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious purposes. The exemption is only from the
payment of taxes assessed on such properties enumerated, as property
taxes, as contra distinguished from excise taxes. In the present case,
what the Collector assessed was a donee's gift tax; the assessment was
not on the properties themselves. It did not rest upon general
ownership; it was an excise upon the use made of the properties, upon
the exercise of the privilege of receiving the properties (Phipps vs.
Com. of Int. Rec. 91 F 2d 627). Manifestly, gift tax is not within the
exempting provisions of the section just mentioned. A gift tax is not a
property tax, but an excise tax imposed on the transfer of property by
way of gift inter vivos, the imposition of which on property used
exclusively for religious purposes, does not constitute an impairment
of the Constitution. As well observed by the learned respondent Court,
the phrase "exempt from taxation," as employed in the Constitution
(supra) should not be interpreted to mean exemption from all kinds of
taxes. And there being no clear, positive or express grant of such
privilege by law, in favor of petitioner, the exemption herein must be
denied.
The next issue which readily presents itself, in view of petitioner's
thesis, and Our finding that a tax liability exists, is, who should be
called upon to pay the gift tax? Petitioner postulates that he should not
be liable, because at the time of the donation he was not the priest of
Victorias. We note the merit of the above claim, and in order to put
things in their proper light, this Court, in its Resolution of March 15,
1965, ordered the parties to show cause why the Head of the Diocese
to which the parish of Victorias pertains, should not be substituted in
lieu of petitioner Rev. Fr. Casimiro Lladoc it appearing that the Head
of such Diocese is the real party in interest. The Solicitor General, in
representation of the Commissioner of Internal Revenue, interposed no
objection to such a substitution. Counsel for the petitioner did not also
offer objection thereto.
On April 30, 1965, in a resolution, We ordered the Head of the
Diocese to present whatever legal issues and/or defenses he might
wish to raise, to which resolution counsel for petitioner, who also
appeared as counsel for the Head of the Diocese, the Roman Catholic
Bishop of Bacolod, manifested that it was submitting itself to the
jurisdiction and orders of this Court and that it was presenting, by
reference, the brief of petitioner Rev. Fr. Casimiro Lladoc as its own
and for all purposes.

In view here of and considering that as heretofore stated, the

assessment at bar had been properly made and the imposition of the
tax is not a violation of the constitutional provision exempting
churches, parsonages or convents, etc. (Art VI, sec. 22 [3],
Constitution), the Head of the Diocese, to which the parish Victorias
Pertains, is liable for the payment thereof.

The decision appealed from should be, as it is hereby affirmed insofar

as tax liability is concerned; it is modified, in the sense that petitioner
herein is not personally liable for the said gift tax, and that the Head of
the Diocese, herein substitute petitioner, should pay, as he is presently
ordered to pay, the said gift tax, without special, pronouncement as to
costs.
G.R. No. 144104 June 29, 2004
LUNG CENTER OF THE PHILIPPINES, petitioner,
vs.
QUEZON CITY and CONSTANTINO P. ROSAS, in his capacity
as City Assessor of Quezon City, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the Rules of
Court, as amended, of the Decision1 dated July 17, 2000 of the Court
of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of
the Central Board of Assessment Appeals holding that the lot owned
by the petitioner and its hospital building constructed thereon are
subject to assessment for purposes of real property tax.
The Antecedents
The petitioner Lung Center of the Philippines is a non-stock and non-
profit entity established on January 16, 1981 by virtue of Presidential
Decree No. 1823.2 It is the registered owner of a parcel of land,
particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495,
located at Quezon Avenue corner Elliptical Road, Central District,
Quezon City. The lot has an area of 121,463 square meters and is
covered by Transfer Certificate of Title (TCT) No. 261320 of the
Registry of Deeds of Quezon City. Erected in the middle of the
aforesaid lot is a hospital known as the Lung Center of the Philippines.
A big space at the ground floor is being leased to private parties, for
canteen and small store spaces, and to medical or professional
practitioners who use the same as their private clinics for their patients
whom they charge for their professional services. Almost one-half of
the entire area on the left side of the building along Quezon Avenue is
vacant and idle, while a big portion on the right side, at the corner of
Quezon Avenue and Elliptical Road, is being leased for commercial
purposes to a private enterprise known as the Elliptical Orchids and
Garden Center.
The petitioner accepts paying and non-paying patients. It also renders
medical services to out-patients, both paying and non-paying. Aside
from its income from paying patients, the petitioner receives annual
subsidies from the government.
On June 7, 1993, both the land and the hospital building of the
petitioner were assessed for real property taxes in the amount of
₱4,554,860 by the City Assessor of Quezon City.3 Accordingly, Tax
Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-
A) were issued for the land and the hospital building, respectively.4 On
August 25, 1993, the petitioner filed a Claim for Exemption5 from real
property taxes with the City Assessor, predicated on its claim that it is
a charitable institution. The petitioner’s request was denied, and a
petition was, thereafter, filed before the Local Board of Assessment
Appeals of Quezon City (QC-LBAA, for brevity) for the reversal of
the resolution of the City Assessor. The petitioner alleged that under
Section 28, paragraph 3 of the 1987 Constitution, the property is
exempt from real property taxes. It averred that a minimum of 60% of
its hospital beds are exclusively used for charity patients and that the
major thrust of its hospital operation is to serve charity patients. The
petitioner contends that it is a charitable institution and, as such, is
exempt from real property taxes. The QC-LBAA rendered judgment
dismissing the petition and holding the petitioner liable for real
property taxes.6
The QC-LBAA’s decision was, likewise, affirmed on appeal by the
Central Board of Assessment Appeals of Quezon City (CBAA, for
brevity)7 which ruled that the petitioner was not a charitable institution
and that its real properties were not actually, directly and exclusively
used for charitable purposes; hence, it was not entitled to real property
tax exemption under the constitution and the law. The petitioner
sought relief from the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.8
Undaunted, the petitioner filed its petition in this Court contending
that:
A. THE COURT A QUO ERRED IN DECLARING
PETITIONER AS NOT ENTITLED TO REALTY TAX
 EXEMPTIONS ON THE GROUND THAT ITS LAND,
BUILDING AND IMPROVEMENTS, SUBJECT OF
ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE
PURPOSES.
B. WHILE PETITIONER IS NOT DECLARED AS REAL
PROPERTY TAX EXEMPT UNDER ITS CHARTER, PD
1823, SAID EXEMPTION MAY NEVERTHELESS BE
EXTENDED UPON PROPER APPLICATION.
The petitioner avers that it is a charitable institution within the context
of Section 28(3), Article VI of the 1987 Constitution. It asserts that its
character as a charitable institution is not altered by the fact that it
admits paying patients and renders medical services to them, leases
portions of the land to private parties, and rents out portions of the
hospital to private medical practitioners from which it derives income
to be used for operational expenses. The petitioner points out that for
the years 1995 to 1999, 100% of its out-patients were charity patients
and of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is
allotted to charity patients. It asserts that the fact that it receives
subsidies from the government attests to its character as a charitable
institution. It contends that the "exclusivity" required in the
Constitution does not necessarily mean "solely." Hence, even if a
portion of its real estate is leased out to private individuals from whom
it derives income, it does not lose its character as a charitable
institution, and its exemption from the payment of real estate taxes on
its real property. The petitioner cited our ruling in Herrera v. QC-
BAA9 to bolster its pose. The petitioner further contends that even if
P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987
Constitution.
In their comment on the petition, the respondents aver that the
petitioner is not a charitable entity. The petitioner’s real property is not
exempt from the payment of real estate taxes under P.D. No. 1823 and
even under the 1987 Constitution because it failed to prove that it is a
charitable institution and that the said property is actually, directly and
exclusively used for charitable purposes. The respondents noted that in
a newspaper report, it appears that graft charges were filed with the
Sandiganbayan against the director of the petitioner, its administrative
officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids
and Garden Center, for entering into a lease contract over 7,663.13
square meters of the property in 1990 for only ₱20,000 a month, when
the monthly rental should be ₱357,000 a month as determined by the
Commission on Audit; and that instead of complying with the directive
of the COA for the cancellation of the contract for being grossly
prejudicial to the government, the petitioner renewed the same on
March 13, 1995 for a monthly rental of only ₱24,000. They assert that
the petitioner uses the subsidies granted by the government for charity
patients and uses the rest of its income from the property for the
benefit of paying patients, among other purposes. They aver that the
petitioner failed to adduce substantial evidence that 100% of its out-
patients and 170 beds in the hospital are reserved for indigent patients.
The respondents further assert, thus:
13. That the claims/allegations of the Petitioner LCP do not
speak well of its record of service. That before a patient is
admitted for treatment in the Center, first impression is that it is
pay-patient and required to pay a certain amount as deposit.
That even if a patient is living below the poverty line, he is
charged with high hospital bills. And, without these bills being
first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills
or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that
even the remains of deceased poor patients suffered the same
fate. Moreover, before a patient is admitted for treatment as
free or charity patient, one must undergo a series of interviews
and must submit all the requirements needed by the Center,
usually accompanied by endorsement by an influential agency
or person known only to the Center. These facts were heard
and admitted by the Petitioner LCP during the hearings before
the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with
the Center, they prefer to be treated at the Quezon Institute.
Can such practice by the Center be called charitable?10
 The Issues
The issues for resolution are the following: (a) whether the petitioner
is a charitable institution within the context of Presidential Decree No.
1823 and the 1973 and 1987 Constitutions and Section 234(b) of
Republic Act No. 7160; and (b) whether the real properties of the
petitioner are exempt from real property taxes.
The Court’s Ruling
The petition is partially granted.
On the first issue, we hold that the petitioner is a charitable institution
within the context of the 1973 and 1987 Constitutions. To determine
whether an enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute creating the
enterprise, its corporate purposes, its constitution and by-laws, the
methods of administration, the nature of the actual work performed,
the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.11
In the legal sense, a charity may be fully defined as a gift, to be
applied consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of
government.12 It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the
improvement and promotion of the happiness of man.13 The word
"charitable" is not restricted to relief of the poor or sick.14 The test of a
charity and a charitable organization are in law the same. The test
whether an enterprise is charitable or not is whether it exists to carry
out a purpose reorganized in law as charitable or whether it is
maintained for gain, profit, or private advantage.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock
corporation which, subject to the provisions of the decree, is to be
administered by the Office of the President of the Philippines with the
Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally
to help combat the high incidence of lung and pulmonary diseases in
the Philippines. The raison d’etre for the creation of the petitioner is
stated in the decree, viz:
Whereas, for decades, respiratory diseases have been a priority
concern, having been the leading cause of illness and death in
the Philippines, comprising more than 45% of the total annual
deaths from all causes, thus, exacting a tremendous toll on
human resources, which ailments are likely to increase and
degenerate into serious lung diseases on account of unabated
pollution, industrialization and unchecked cigarette smoking in
the country;lavvph!l.net
Whereas, the more common lung diseases are, to a great extent,
preventable, and curable with early and adequate medical care,
immunization and through prompt and intensive prevention
and health education programs;
Whereas, there is an urgent need to consolidate and reinforce
existing programs, strategies and efforts at preventing, treating
and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of
lung diseases, through a Lung Center which will house and
nurture the above and related activities and provide tertiary-
level care for more difficult and problematical cases;
Whereas, to achieve this purpose, the Government intends to
provide material and financial support towards the
establishment and maintenance of a Lung Center for the
welfare and benefit of the Filipino people.15
The purposes for which the petitioner was created are spelled out in its
Articles of Incorporation, thus:
SECOND: That the purposes for which such corporation is
formed are as follows:
1. To construct, establish, equip, maintain, administer
and conduct an integrated medical institution which
shall specialize in the treatment, care, rehabilitation
and/or relief of lung and allied diseases in line with the
concern of the government to assist and provide
material and financial support in the establishment and
maintenance of a lung center primarily to benefit the
people of the Philippines and in pursuance of the policy
of the State to secure the well-being of the people by
providing them specialized health and medical services
and by minimizing the incidence of lung diseases in the
country and elsewhere.
2. To promote the noble undertaking of scientific
research related to the prevention of lung or pulmonary
ailments and the care of lung patients, including the
holding of a series of relevant congresses, conventions,
seminars and conferences;
3. To stimulate and, whenever possible, underwrite
scientific researches on the biological, demographic,
social, economic, eugenic and physiological aspects of
lung or pulmonary diseases and their control; and to
collect and publish the findings of such research for
public consumption;
4. To facilitate the dissemination of ideas and public
acceptance of information on lung consciousness or
awareness, and the development of fact-finding,
information and reporting facilities for and in aid of the
general purposes or objects aforesaid, especially in
human lung requirements, general health and physical
fitness, and other relevant or related fields;
5. To encourage the training of physicians, nurses,
health officers, social workers and medical and
technical personnel in the practical and scientific
implementation of services to lung patients;
6. To assist universities and research institutions in their
studies about lung diseases, to encourage advanced
training in matters of the lung and related fields and to
support educational programs of value to general
health;
7. To encourage the formation of other organizations on
the national, provincial and/or city and local levels; and
to coordinate their various efforts and activities for the
purpose of achieving a more effective programmatic
approach on the common problems relative to the
objectives enumerated herein;
8. To seek and obtain assistance in any form from both
international and local foundations and organizations;
and to administer grants and funds that may be given to
the organization;
9. To extend, whenever possible and expedient, medical
services to the public and, in general, to promote and
protect the health of the masses of our people, which
has long been recognized as an economic asset and a
social blessing;
10. To help prevent, relieve and alleviate the lung or
pulmonary afflictions and maladies of the people in any
and all walks of life, including those who are poor and
needy, all without regard to or discrimination, because
of race, creed, color or political belief of the persons
helped; and to enable them to obtain treatment when
such disorders occur;
11. To participate, as circumstances may warrant, in
any activity designed and carried on to promote the
general health of the community;
12. To acquire and/or borrow funds and to own all
funds or equipment, educational materials and supplies
by purchase, donation, or otherwise and to dispose of
 and distribute the same in such manner, and, on such
basis as the Center shall, from time to time, deem
proper and best, under the particular circumstances, to
serve its general and non-profit purposes and
objectives;lavvphil.net
13. To buy, purchase, acquire, own, lease, hold, sell,
exchange, transfer and dispose of properties, whether
real or personal, for purposes herein mentioned; and
14. To do everything necessary, proper, advisable or
convenient for the accomplishment of any of the
powers herein set forth and to do every other act and
thing incidental thereto or connected therewith.16
Hence, the medical services of the petitioner are to be rendered to the
public in general in any and all walks of life including those who are
poor and the needy without discrimination. After all, any person, the
rich as well as the poor, may fall sick or be injured or wounded and
become a subject of charity.17
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or confined
in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable
object which it is intended to achieve; and no money inures to the
private benefit of the persons managing or operating the
institution.18 In Congregational Sunday School, etc. v. Board of
Review,19 the State Supreme Court of Illinois held, thus:
… [A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the fact that
those recipients of its benefits who are able to pay are required
to do so, where no profit is made by the institution and the
amounts so received are applied in furthering its charitable
purposes, and those benefits are refused to none on account of
inability to pay therefor. The fundamental ground upon which
all exemptions in favor of charitable institutions are based is
the benefit conferred upon the public by them, and a
consequent relief, to some extent, of the burden upon the state
to care for and advance the interests of its citizens.20
As aptly stated by the State Supreme Court of South Dakota
in Lutheran Hospital Association of South Dakota v. Baker:21
… [T]he fact that paying patients are taken, the profits derived
from attendance upon these patients being exclusively devoted
to the maintenance of the charity, seems rather to enhance the
usefulness of the institution to the poor; for it is a matter of
common observation amongst those who have gone about at all
amongst the suffering classes, that the deserving poor can with
difficulty be persuaded to enter an asylum of any kind confined
to the reception of objects of charity; and that their honest pride
is much less wounded by being placed in an institution in
which paying patients are also received. The fact of receiving
money from some of the patients does not, we think, at all
impair the character of the charity, so long as the money thus
received is devoted altogether to the charitable object which
the institution is intended to further.22
The money received by the petitioner becomes a part of the trust fund
and must be devoted to public trust purposes and cannot be diverted to
private profit or benefit.23
Under P.D. No. 1823, the petitioner is entitled to receive donations.
The petitioner does not lose its character as a charitable institution
simply because the gift or donation is in the form of subsidies granted
by the government. As held by the State Supreme Court of Utah
in Yorgason v. County Board of Equalization of Salt Lake County:24
Second, the … government subsidy payments are provided to
the project. Thus, those payments are like a gift or donation of
any other kind except they come from the government. In
both Intermountain Health Care and the present case, the crux
is the presence or absence of material reciprocity. It is entirely
irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from
 the exchange between St. Mark’s Tower and the tenants by
making a contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the patients’
income supplements had come from private individuals rather
than the government.
Therefore, the fact that subsidization of part of the cost of
furnishing such housing is by the government rather than
private charitable contributions does not dictate the denial of a
charitable exemption if the facts otherwise support such an
exemption, as they do here.25
In this case, the petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and
1992 for its patients and for the operation of the hospital. It even
incurred a net loss in 1991 and 1992 from its operations.
Even as we find that the petitioner is a charitable institution, we hold,
anent the second issue, that those portions of its real property that are
leased to private entities are not exempt from real property taxes as
these are not actually, directly and exclusively used for charitable
purposes.
The settled rule in this jurisdiction is that laws granting exemption
from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to
an appropriation. Hence, a claim for exemption from tax payments
must be clearly shown and based on language in the law too plain to be
mistaken.26 As held in Salvation Army v. Hoehn:27
An intention on the part of the legislature to grant an
exemption from the taxing power of the state will never be
implied from language which will admit of any other
reasonable construction. Such an intention must be expressed
in clear and unmistakable terms, or must appear by necessary
implication from the language used, for it is a well settled
principle that, when a special privilege or exemption is claimed
under a statute, charter or act of incorporation, it is to be
construed strictly against the property owner and in favor of the
public. This principle applies with peculiar force to a claim of
exemption from taxation . …28
Section 2 of Presidential Decree No. 1823, relied upon by the
petitioner, specifically provides that the petitioner shall enjoy the tax
exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a
non-profit, non-stock corporation organized primarily to help
combat the high incidence of lung and pulmonary diseases in
the Philippines, all donations, contributions, endowments and
equipment and supplies to be imported by authorized entities or
persons and by the Board of Trustees of the Lung Center of the
Philippines, Inc., for the actual use and benefit of the Lung
Center, shall be exempt from income and gift taxes, the same
further deductible in full for the purpose of determining the
maximum deductible amount under Section 30, paragraph (h),
of the National Internal Revenue Code, as amended.
The Lung Center of the Philippines shall be exempt from the
payment of taxes, charges and fees imposed by the
Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or for
the Lung Center.29
It is plain as day that under the decree, the petitioner does not enjoy
any property tax exemption privileges for its real properties as well as
the building constructed thereon. If the intentions were otherwise, the
same should have been among the enumeration of tax exempt
privileges under Section 2:
It is a settled rule of statutory construction that the express
mention of one person, thing, or consequence implies the
exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.
The rule of expressio unius est exclusio alterius is formulated
in a number of ways. One variation of the rule is the principle
 that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum. Thus, where a
statute, by its terms, is expressly limited to certain matters, it
may not, by interpretation or construction, be extended to other
matters.
...
The rule of expressio unius est exclusio alterius and its
variations are canons of restrictive interpretation. They are
based on the rules of logic and the natural workings of the
human mind. They are predicated upon one’s own voluntary
act and not upon that of others. They proceed from the premise
that the legislature would not have made specified enumeration
in a statute had the intention been not to restrict its meaning
and confine its terms to those expressly mentioned.30
The exemption must not be so enlarged by construction since the
reasonable presumption is that the State has granted in express terms
all it intended to grant at all, and that unless the privilege is limited to
the very terms of the statute the favor would be intended beyond what
was meant.31
Section 28(3), Article VI of the 1987 Philippine Constitution provides,
thus:
(3) Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit cemeteries,
and all lands, buildings, and
improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt
from taxation.32
The tax exemption under this constitutional provision
covers property taxes only.33 As Chief Justice Hilario G. Davide, Jr.,
then a member of the 1986 Constitutional Commission, explained: ". . .
what is exempted is not the institution itself . . .; those exempted from
real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational
purposes."34
Consequently, the constitutional provision is implemented by Section
234(b) of Republic Act No. 7160 (otherwise known as the Local
Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. – The
following are exempted from payment of the real property tax:
...
(b) Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-profit or
religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used
for religious, charitable or educational purposes.35
We note that under the 1935 Constitution, "... all lands, buildings, and
improvements used ‘exclusively’ for … charitable … purposes shall
be exempt from taxation."36 However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the
charitable institution to be considered exempt, the same should not
only be "exclusively" used for charitable purposes; it is required that
such property be used "actually" and "directly" for such purposes.37
In light of the foregoing substantial changes in the Constitution, the
petitioner cannot rely on our ruling in Herrera v. Quezon City Board
of Assessment Appeals which was promulgated on September 30, 1961
before the 1973 and 1987 Constitutions took effect.38 As this Court
held in Province of Abra v. Hernando:39
… Under the 1935 Constitution: "Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from
taxation." The present Constitution added "charitable
institutions, mosques, and non-profit cemeteries" and required
that for the exemption of "lands, buildings, and
 improvements," they should not only be "exclusively" but also
"actually" and "directly" used for religious or charitable
purposes. The Constitution is worded differently. The change
should not be ignored. It must be duly taken into consideration.
Reliance on past decisions would have sufficed were the words
"actually" as well as "directly" not added. There must be proof
therefore of the actual and direct use of the lands, buildings,
and improvements for religious or charitable purposes to be
exempt from taxation. …
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. "Exclusive" is defined as possessed and enjoyed
to the exclusion of others; debarred from participation or enjoyment;
and "exclusively" is defined, "in a manner to exclude; as enjoying a
privilege exclusively."40 If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation.41 The words "dominant use" or
"principal use" cannot be substituted for the words "used exclusively"
without doing violence to the Constitutions and the law.42 Solely is
synonymous with exclusively.43
enterprise under the business name "Elliptical Orchids and Garden
Center." Indeed, the petitioner’s evidence shows that it collected
₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28 for 1992 from the
said lessees.
Accordingly, we hold that the portions of the land leased to private
entities as well as those parts of the hospital leased to private
individuals are not exempt from such taxes.45 On the other hand, the
portions of the land occupied by the hospital and portions of the
hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.
IN LIGHT OF ALL THE FOREGOING, the petition
is PARTIALLY GRANTED. The respondent Quezon City Assessor
is hereby DIRECTED to determine, after due hearing, the precise
portions of the land and the area thereof which are leased to private
persons, and to compute the real property taxes due thereon as
provided for by law.
SO ORDERED.

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

The petitioner failed to discharge its burden to prove that the entirety
of its real property is actually, directly and exclusively used for
charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased
to private individuals for their clinics and a canteen. Further, a portion
of the land is being leased to a private individual for her business
 [ G.R. No. 124043, October 14, 1998 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
VS. COURT OF APPEALS, COURT OF TAX APPEALS AND
YOUNG MEN’S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., RESPONDENTS.
DECISION
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the
Young Men’s 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 Resolutions affirmed the Decision of the
Court of Tax Appeals (CTA) allowing the YMCA to claim tax
exemption on the latter’s 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 respondent’s 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.
"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]
contractor’s 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 Contractor’s 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 petitioner’s
(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 Contractor’s Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20,
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
"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 CTA’s 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 CTA’s decision is AFFIRMED in toto."[9]
The internal revenue commissioner’s 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 1977, as amended."[15]
"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 Court’s 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 respondent’s facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are
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
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 non-profitable 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)"
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
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.
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 "By-Laws"[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 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
Court’s 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.
 [ G.R. No. 196596, November 09, 2016 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
VS. DE LA SALLE UNIVERSITY, INC., RESPONDENT.
[G.R. No. 198841]
DE LA SALLE UNIVERSITY INC., PETITIONER, VS.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
[G.R. No. 198941]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER,
VS. DE LA SALLE UNIVERSITY, INC., RESPONDENT.
DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:[1]
1. G.R. No. 196596 filed by the Commissioner of Internal
Revenue (Commissioner) to assail the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax
Appeals (CTA) in En Banc Case No. 622;[2]
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU)
to assail the June 8, 2011 decision and October 4, 2011
resolution in CTA En Banc Case No. 671;[3] and
3. G.R. No. 198941 filed by the Commissioner to assail the June
8, 2011 decision and October 4, 2011 resolution in CTA En
Banc Case No. 671.[4]
G.R. Nos. 196596, 198841 and 198941 all originated from CTA
Special First Division (CTA Division) Case No. 7303. G.R.
No. 196596 stemmed from CTA En Banc Case No. 622 filed by the
Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and
198941 both stemmed from CTA En Banc Case No. 671 filed by
DLSU to also challenge CTA Case No. 7303.
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to
DLSU Letter of Authority (LOA) No. 2794 authorizing its revenue
officers to examine the latter's books of accounts and other accounting
records for all internal revenue taxes for the period Fiscal Year Ending
2003 and Unverified Prior Years.[5]
On May 19, 2004, BIR issued a Preliminary Assessment Notice to
DLSU.[6]
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income
tax on rental earnings from restaurants/canteens and bookstores
operating within the campus; (2) value-added tax (VAT) on business
income; and (3) documentary stamp tax (DST) on loans and lease
contracts. The BIR demanded the payment of P17,303,001.12,
inclusive of surcharge, interest and penalty for taxable years 2001,
2002 and 2003.[7]
DLSU protested the assessment. The Commissioner failed to act on
the protest; thus, DLSU filed on August 3, 2005 a petition for review
with the CTA Division.[8]
DLSU, a non-stock, non-profit educational institution, principally
anchored its petition on Article XIV, Section 4 (3) of the Constitution,
which reads:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's
petition for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY
GRANTED. The DST assessment on the loan transactions of [DLSU]
in the amount of P1,1681,774.00 is hereby CANCELLED. However,
[DLSU] is ORDERED TO PAY deficiency income tax, VAT and
DST on its lease contracts, plus 25% surcharge for the fiscal years
2001, 2002 and 2003 in the total amount of P18,421,363.53...xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency
interest on the total amount due computed from September 30, 2004
until full payment thereof pursuant to Section 249(C)(3) of the
[National Internal Revenue Code]. Further, the compromise penalties
imposed by [the Commissioner] were excluded, there. being no
compromise agreement between the parties.
SO ORDERED.[9]
Both the Commissioner and DLSU moved for the reconsideration of
the January 5, 2010 decision.[10] On April 6, 2010, the CTA Division
denied the Commissioner's motion for reconsideration while it held in
abeyance the resolution on DLSU's motion for reconsideration.[11]
On May 13, 2010, the Commissioner appealed to the CTA En
Banc (CTA En Banc Case No. 622) arguing that DLSU's use of its
revenues and assets for non-educational or commercial purposes
removed these items from the exemption coverage under the
Constitution.[12]
On May 18, 2010, DLSU formally offered to the CTA Division
supplemental pieces of documentary evidence to prove that its rental
income was used actually, directly and exclusively for educational
purposes.[13] The Commissioner did not promptly object to the formal
offer of supplemental evidence despite notice.[14]
On July 29, 2010, the CTA Division, in view of the supplemental
evidence submitted, reduced the amount of DLSU's tax deficiencies.
The dispositive portion of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is
hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED
TO PAY for deficiency income tax, VAT and DST plus 25%
surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted
amount of P5,506,456.71...xxx.
In addition, [DLSU] is hereby held liable to pay 20% per
annum deficiency interest on the...basic deficiency taxes...until full
payment thereof pursuant to Section 249(B) of the [National Internal
Revenue Code]...xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum
delinquency interest on the deficiency taxes, surcharge and deficiency
interest which have accrued...from September 30, 2004 until fully
paid.[15]
Consequently, the Commissioner supplemented its petition with the
CTA En Banc and argued that the CTA Division erred in admitting
DLSU's additional evidence.[16]
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed
a separate petition for review with the CTA En Banc (CTA En
Banc Case No. 671) on the following grounds: (1) the entire
assessment should have been cancelled because it was based on an
invalid LOA; (2) assuming the LOA was valid, the CTA Division
should still have cancelled the entire assessment because DLSU
submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled
Ateneo's tax assessment;[17] and (3) the CTA Division erred in finding
that a portion of DLSU's rental income was not proved to have been
used actually, directly and exclusively for educational purposes.[18]
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review
and sustained the findings of the CTA Division.[19]
Tax on rental income
Relying on the findings of the court-commissioned Independent
Certified Public Accountant (Independent CPA), the CTA En
Banc found that DLSU was able to prove that a portion of the assessed
rental income was used actually, directly and exclusively for
educational purposes; hence, exempt from tax.[20] The CTA En
Banc was satisfied with DLSU's supporting evidence confirming that
part of its rental income had indeed been used to pay the loan it
obtained to build the university's Physical Education - Sports
Complex.[21]
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the
part of its income that was not shown by supporting documents to have
been actually, directly and exclusively used for educational purposes,
must be subjected to income tax and VAT.[22]
DST on loan and mortgage transactions
Contrary to the Commissioner's contention,
DLSU proved its remittance of the DST due on its loan and mortgage
documents.[23] The CTA En Banc found that DLSU's DST payments
had been remitted to the BIR, evidenced by the stamp on the
documents made by a DST imprinting machine, which is allowed
under Section 200 (D) of the National Internal Revenue Code (Tax
Code)[24] and Section 2 of Revenue Regulations (RR) No. 15-2001.[25]
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary
evidence were admissible even if DLSU formally offered them only
when it moved for reconsideration of the CTA Division's original
decision. Notably, the law creating the CTA provides that proceedings
before it shall not be governed strictly by the technical rules of
evidence.[26]
The Commissioner moved but failed to obtain a reconsideration of the
CTA En Banc's December 10, 2010 decision.[27] Thus, she came to this
court for relief through a petition for review on certiorari (G.R.
No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and
further reduced its tax liabilities to P2,554,825.47 inclusive of
surcharge.[28]
On the validity of the Letter of Authority
The issue of the LOA's validity was raised during trial;[29] hence, the
issue was deemed properly submitted for decision and reviewable on
appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover
only one taxable period and that the practice of issuing a LOA
covering audit of unverified prior years is prohibited.[30] The
prohibition is consistent with Revenue Memorandum Order (RMO)
No. 43-90, which provides that if the audit includes more than one
taxable period, the other periods or years shall be specifically indicated
in the LOA.[31]
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. Hence, the assessments for
deficiency income tax, VAT and DST for taxable years 2001 and
2002 are void, but the assessment for taxable year 2003 is valid.[32]
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent
because it involved different parties, factual settings, bases of
assessments, sets of evidence, and defenses.[33]
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of
DLSU's evidence. It held that while DLSU successfully proved that a
portion of its rental income was transmitted and used to pay the loan
obtained to fund the construction of the Sports Complex, the rental
income from other sources were not shown to have been actually,
directly and exclusively used for educational purposes.[34]
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No.
198841) and the Commissioner (G.R. No. 198941) came to this Court
for relief.
The Consolidated Petitions

G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income
is derived, used or disposed of.[35] DLSU's operations of canteens and
bookstores within its campus even though exclusively serving the
university community do not negate income tax liability.[36]
The Commissioner contends that Article XIV, Section 4 (3) of the
Constitution must be harmonized with Section 30 (H) of the Tax Code,
which states among others, that the income of whatever kind and
character of [a non-stock and non-profit educational institution] from
any of [its] properties, real or personal, or from any of (its] activities
conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed by this Code.[37]
The Commissioner argues that the CTA En Banc misread and
misapplied the case of Commissioner of Internal Revenue v.
YMCA[38] to support its conclusion that revenues however generated
are covered by the constitutional exemption, provided that, the
revenues will be used for educational purposes or will be held in
reserve for such purposes.[39]
On the contrary, the Commissioner posits that a tax-exempt
organization like DLSU is exempt only from property tax but not from
income tax on the rentals earned from property.[40] Thus, DLSU's
income from the leases of its real properties is not exempt from
taxation even if the income would be used for educational purposes.[41]
Second, the Commissioner insists that DLSU did not prove the fact of
DST payment[42] and that it is not qualified to use the On-Line
Electronic DST Imprinting Machine, which is available only to certain
classes of taxpayers under RR No. 9-2000.[43]
Finally, the Commissioner objects to the admission of DLSU's
supplemental offer of evidence. The belated submission of
supplemental evidence reopened the case for trial, and worse, DLSU
offered the supplemental evidence only after it received the
unfavorable CTA Division's original decision.[44] In any case, DLSU's
submission of supplemental documentary evidence was unnecessary
since its rental income was taxable regardless of its disposition.[45]
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with
any indication of unverified prior years. A LOA issued contrary to
RMO No. 43-90 is void, thus, an assessment issued based on such
defective LOA must also be void.[46]
DLSU points out that the LOA issued to it covered the Fiscal Year
Ending 2003 and Unverified Prior Years. On the basis of this defective
LOA, the Commissioner assessed DLSU for deficiency income tax,
VAT and DST for taxable years 2001, 2002 and 2003.[47] DLSU
objects to the CTA En Banc's conclusion that the LOA is valid for
taxable year 2003. According to DLSU, when RMO No. 43-90
provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior
years' is hereby prohibited.
it refers to the LOA which has the format "Base Year + Unverified
Prior Years." Since the LOA issued to DLSU follows this format, then
any assessment arising from it must be entirely voided.[48]
Second, DLSU invokes the principle of uniformity in taxation, which
mandates that for similarly situated parties, the same set of
evidence should be appreciated and weighed in the same
manner.[49] The CTA En Banc erred when it did not similarly
appreciate DLSU's evidence as it did to the pieces of evidence
submitted by Ateneo, also a non-stock, non-profit educational
institution.[50]
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No.
198941 petition are exactly the same as those she raised in her: (1)
petition docketed as G.R. No. 196596 and (2) comment on DLSU's
petition docketed as G.R. No. 198841.[51]
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the
petition.[52]
Second, DLSU stresses that Article XIV, Section 4 (3) of the
Constitution is clear that all assets and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively
for educational purposes are exempt from taxes and duties.[53]
On this point, DLSU explains that: (1) the tax exemption of nonstock,
non-profit educational institutions is novel to the 1987
Constitution and that Section 30 (H) of the 1997 Tax Code cannot
amend the 1987 Constitution;[54] (2) Section 30 of the 1997 Tax Code
is almost an exact replica of Section 26 of the 1977 Tax Code - with
the addition of non-stock, non-profit educational institutions to the list
of tax-exempt entities; and (3) that the 1977 Tax Code was
promulgated when the 1973 Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private
educational institution under the 1973 Constitution was only for real
property tax. Back then, the special tax treatment on income of private
educational institutions only emanates from statute, i.e., the 1977 Tax
Code. Only under the 1987 Constitution that exemption from tax of all
the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational
purposes, was expressly and categorically enshrined.[55]
DLSU thus invokes the doctrine of constitutional supremacy, which
renders any subsequent law that is contrary to the Constitution void
and without any force and effect.[56] Section 30 (H) of the 1997 Tax
Code insofar as it subjects to tax the income of whatever kind and
character of a nonstock and non-profit educational institution from any
of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income,
should be declared without force and effect in view of the
constitutionally granted tax exemption on "all revenues and assets of
non-stock, non-profit educational institutions used actually, directly,
and exclusively for educational purposes."[57]
DLSU further submits that it complies with the requirements
enunciated in the YMCA case, that for an exemption to be granted
under Article XIV, Section 4 (3) of the Constitution, the taxpayer must
prove 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.[58] Unlike YMCA, which is not an educational institution,
DLSU is undisputedly a non-stock, non-profit educational institution.
It had also submitted evidence to prove that it actually, directly and
exclusively used its income for educational purposes.[59]
DLSU also cites the deliberations of the 1986 Constitutional
Commission where they recognized that the tax exemption was
granted "to incentivize private educational institutions to share with
the State the responsibility of educating the youth."[60]
Third, DLSU highlights that both the CTA En Banc and Division
found that the bank that handled DLSU's loan and mortgage
transactions had remitted to the BIR the DST through an imprinting
machine, a method allowed under RR No. 15-2001.[61] In any case,
DLSU argues that it cannot be held liable for DST owmg to the
exemption granted under the Constitution.[62]
Finally, DLSU underscores that the Commissioner, despite notice, did
not oppose the formal offer of supplemental evidence. Because of the
Commissioner's failure to timely object, she became bound by the
results of the submission of such supplemental evidence.[63]
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning
the LOA's validity because it failed to raise this issue in both the
administrative and judicial proceedings.[64] That it was asked on cross-
examination during the trial does not make it an issue that the CTA
could resolve.[65] The Commissioner also maintains that DLSU's rental
income is not tax-exempt because an educational institution is only
exempt from property tax but not from tax on the income earned from
the property.[66]
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.[67]
In addition, DLSU prays that the Court award attorney's fees in its
favor because it was constrained to unnecessarily retain the services of
counsel in this separate petition.[68]
Issues
Although the parties raised a number of issues, the Court shall decide
only the pivotal issues, which we summarize as follows:
I. Whether DLSU's income and revenues proved to have been
used actually, directly and exclusively for educational purposes
are exempt from duties and taxes;
II. Whether the entire assessment should be voided because of the
defective LOA;
III. Whether the CTA correctly admitted DLSU's supplemental
pieces of evidence; and
IV. Whether the CTA's appreciation of the sufficiency ofDLSU's
evidence may be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, revenues and assets of non-stock, non-profit
educational institutions proved to have been used actually,
directly and exclusively for educational purposes are exempt
from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment
for taxable year 2003 is valid.
III. The CTA correctly admitted DLSU's formal offer of
supplemental evidence; and
IV. The CTA's appreciation of evidence is conclusive unless the
CTA is shown to have manifestly overlooked certain relevant
facts not disputed by the parties and which, if properly
considered, would justify a different conclusion.
The parties failed to convince the Court that the CTA
overlooked or failed to consider relevant facts. We thus sustain
the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was
used actually, directly and exclusively for educational
purposes; and
b. DLSU proved the payment of the DST through its
bank's on-line imprinting machine.
I. The revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly, and
exclusively for educational purposes are exempt from duties and
taxes.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987
Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for
educational purposes shall be exempt from taxes and duties.
Upon the dissolution or cessation of the corporate existence of such
institutions, their assets shall be disposed of in the manner
 provided by law. Proprietary educational institutions, including
those cooperatively owned, may likewise be entitled to such
exemptions subject to the limitations provided by law including
restrictions on dividends and provisions for reinvestment
[underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:
First, the constitutional provision refers to two kinds of educational
institutions: (1) non-stock, non-profit educational institutions and (2)
proprietary educational institutions.[69]
Second, DLSU falls under the first category. Even the Commissioner
admits the status of DLSU as a non-stock, non-profit educational
institution.[70]
Third, while DLSU's claim for tax exemption arises from and is based
on the Constitution, the Constitution, in the same provision, also
imposes certain conditions to avail of the exemption. We discuss
below the import of the constitutional text vis-a-vis the
Commissioner's counter-arguments.
Fourth, there is a marked distinction between the treatment of non-
stock, non-profit educational institutions and proprietary educational
institutions. The tax exemption granted to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and
exclusive use of their revenues and assets for educational purposes.
While tax exemptions may also be granted to proprietary educational
institutions, these exemptions may be subject to limitations imposed
by Congress.
As we explain below, the marked distinction between a non-stock,
non-profit and a proprietary educational institution is crucial in
determining the nature and extent of the tax exemption granted to non-
stock, non-profit educational institutions.
The Commissioner opposes DLSU's claim for tax exemption on the
basis of Section 30 (H) of the Tax Code. The relevant text reads:
The following organizations shall not be taxed under this Title [Tax
on Income] in respect to income received by them as such:
xxxx
(H) A non-stock and non-profit educational institution
xxxx
Notwithstanding the provisions in the preceding paragraphs,
the income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the
disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]
The Commissioner posits that the 1997 Tax Code qualified the tax
exemption granted to non-stock, non-profit educational institutions
such that the revenues and income they derived from their assets, or
from any of their activities conducted for profit, are taxable even
if these revenues and income are used for educational purposes.
Did the 1997 Tax Code qualifY the tax exemption constitutionally-
granted to non-stock, non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first
impression,[71] the Court in the YMCA case had in fact already
analyzed and explained the meaning of Article XIV, Section 4 (3) of
the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of
real property owned by the YMCA, established as a "welfare,
educational and charitable non-profit corporation," was subject to
income tax under the Tax Code and the Constitution.[72]
The Court denied YMCA's claim for exemption on the ground that as
a charitable institution falling under Article VI, Section 28 (3) of the
Constitution,[73] the YMCA is not tax-exempt per se; "what is
exempted is not the institution itself...those exempted from real estate
taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes."[74]
The Court held that the exemption claimed by the YMCA is expressly
disallowed by the last paragraph of then Section 27 (now Section 30)
of the Tax Code, which mandates that the income of exempt
organizations from any of their properties, real or personal, are subject
to the same tax imposed by the Tax Code, regardless of how that
income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its
property.[75]
In short, the YMCA is exempt only from property tax but not from
income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the
YMCA invoked the tax privilege granted under Article XIV, Section 4
(3) of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV,
Section 4 (3) of the Constitution holding that the term educational
institution, when used in laws granting tax exemptions, refers to the
school system (synonymous with formal education); it includes a
college or an educational establishment; it refers to the hierarchically
structured and chronologically graded learnings organized and
provided by the formal school system.[76]
The Court then significantly laid down the requisites for availing the
tax exemption under Article XIV, Section 4 (3), namely: (1) the
taxpayer falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted
from taxation is used actually, directly and exclusively for
educational purposes.[77]
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without
force and effect with respect to non-stock, non-profit
educational institutions, provided, that the non-stock, non-
profit educational institutions prove that its assets and revenues
are used actually, directly and exclusively for educational
purposes.
2. The tax-exemption constitutionally-granted to non-stock, non
profit educational institutions, is not subject to limitations
imposed by law.
The tax exemption granted by the Constitution to non-stock, non-
profit educational institutions is conditioned only on the actual,
direct and exclusive use of their assets, revenues and income[78] for
educational purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution
(pertaining to charitable institutions, churches, parsonages or convents,
mosques, and non-profit cemeteries), which exempts from
tax only the assets, i.e., "all lands, buildings, and improvements,
actually, directly, and exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section 4 (3) categorically
states that "[a]ll revenues and assets... used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and
duties."
The addition and express use of the word revenues in Article XIV,
Section 4 (3) of the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution,
discernible from the records of the 1986 Constitutional
Commission[79] to provide broader tax privilege to non-stock, non-
profit educational institutions as recognition of their role in assisting
the State provide a public good. The tax exemption was seen as
beneficial to students who may otherwise be charged unreasonable
tuition fees if not for the tax exemption extended to all revenues and
assets of non-stock, non-profit educational institutions.[80]
Further, a plain reading of the Constitution would show that Article
XIV, Section 4 (3) does not require that the revenues and income must
have also been sourced from educational activities or activities related
to the purposes of an educational institution. The phrase all revenues is
unqualified by any reference to the source of revenues. Thus, so long
as the revenues and income are used actually, directly and exclusively
for educational purposes, then said revenues and income shall be
exempt from taxes and duties.[81]
We find it helpful to discuss at this point the taxation
of revenues versus the taxation of assets.
Revenues consist of the amounts earned by a person or entity from the
conduct of business operations.[82] It may refer to the sale of goods,
rendition of services, or the return of an investment. Revenue is a
component of the tax base in income tax,[83] VAT,[84] and local
business tax (LBT).[85]
Assets, on the other hand, are the tangible and intangible properties
owned by a person or entity.[86] It may refer to real estate, cash deposit
in a bank, investment in the stocks of a corporation, inventory of goods,
or any property from which the person or entity may derive income or
use to generate the same. In Philippine taxation, the fair market value
of real property is a component of the tax base in real property tax
(RPT).[87] Also, the landed cost of imported goods is a component of
the tax base in VAT on importation[88] and tariff duties.[89]
Thus, when a non-stock, non-profit educational institution proves that
it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On
the other hand, when it also shows that it uses its assets in the form of
real property for educational purposes, it shall be exempted from RPT.
To be clear, proving the actual use of the taxable item will result in an
exemption, but the specific tax from which the entity shall be
exempted from shall depend on whether the item is an item of revenue
or asset.
To illustrate, if a university leases a portion of its school building to a
bookstore or cafeteria, the leased portion is not actually, directly and
exclusively used for educational purposes, even if the bookstore or
canteen caters only to university students, faculty and staff.
The leased portion of the building may be subject to real property tax,
as held in Abra Valley College, Inc. v. Aquino.[90] We ruled in that case
that the test of exemption from taxation is the use of the property for
purposes mentioned in the Constitution. We also held that the
exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes.
In concrete terms, the lease of a portion of a school building for
commercial purposes, removes such asset from the property
tax exemption granted under the Constitution.[91] There is no
exemption because the asset is not used actually, directly and
exclusively for educational purposes. The commercial use of the
property is also not incidental to and reasonably necessary for the
accomplishment of the main purpose of a university, which is to
educate its students.
However, if the university actually, directly and exclusively uses for
educational purposes the revenues earned from the lease of its school
building, such revenues shall be exempt from taxes and duties. The tax
exemption no longer hinges on the use of the asset from which the
revenues were earned, but on the actual, direct and exclusive use of the
revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit
educational institution not used actually, directly and exclusively for
educational purposes are not exempt from duties and taxes. To avail of
the exemption, the taxpayer must factually prove that it used actually,
directly and exclusively for educational purposes the revenues or
income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on
the use of the revenues. These are two things that must be viewed and
treated separately. But so long as the assets or revenues are used
actually, directly and exclusively for educational purposes, they are
exempt from duties and taxes.
The tax exemption granted by the Constitution to non-stock, non-
profit educational institutions, unlike the exemption that may be
availed of by proprietary educational institutions, is not subject to
limitations imposed by law.

That the Constitution treats non-stock, non-profit educational
institutions differently from proprietary educational institutions cannot
be doubted. As discussed, the privilege granted to the former is
conditioned only on the actual, direct and exclusive use of their
revenues and assets for educational purposes. In clear contrast, the tax
privilege granted to the latter may be subject to limitations imposed by
law.
We spell out below the difference in treatment if only to highlight the
privileged status of non-stock, non-profit educational institutions
compared with their proprietary counterparts.
While a non-stock, non-profit educational institution is classified as a
tax-exempt entity under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary educational institution is
covered by Section 27 (Rates of Income Tax on Domestic
Corporations).
To be specific, Section 30 provides that exempt organizations like
non-stock, non-profit educational institutions shall not be taxed on
income received by them as such.
Section 27 (B), on the other hand, states that [p]roprietary educational
institutions...which are nonprofit shall pay a tax of ten percent (10%)
on their taxable income...Provided, that if the gross income from
unrelated trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such educational institutions...[the
regular corporate income tax of 30%] shall be imposed on the entire
taxable income...[92]
By the Tax Code's clear terms, a proprietary educational institution is
entitled only to the reduced rate of 10% corporate income tax. The
reduced rate is applicable only if: (1) the proprietary educational
institution is non profit and (2) its gross income from unrelated trade,
business or activity does not exceed 50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these
limitations do not apply to non-stock, non-profit educational
institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code
without force and effect for being contrary to the Constitution insofar
as it subjects to tax the income and revenues of non-stock, non-profit
educational institutions used actually, directly and exclusively for
educational purpose. We make this declaration in the exercise of and
consistent with our duty[93] to uphold the primacy of the
Constitution.[94]
Finally, we stress that our holding here pertains only to non-stock,
non-profit educational institutions and does not cover the other exempt
organizations under Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of
DLSU proven to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment
for taxable year 2003 is valid.
DLSU objects to the CTA En Banc's conclusion that the LOA is valid
for taxable year 2003 and insists that the entire LOA should be voided
for being contrary to RMO No. 43-90, which provides that if tax audit
includes more than one taxable period, the other periods or years shall
be specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to
examine the books of account and other accounting records of the
taxpayer in order to determine the taxpayer's correct internal revenue
liabilities[95] and for the purpose of collecting the correct amount
oftax,[96] in accordance with Section 5 of the Tax Code, which gives
the CIR the power to obtain information, to summon/examine, and
take testimony of persons. The LOA commences the audit
process[97] and informs the taxpayer that it is under audit for possible
deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the
LOA issued to DLSU, and consequently, disregard the BIR and the
CTA's findings of tax deficiency for taxable year 2003?
We answer in the negative.
The relevant provision is Section C of RMO No. 43-90, the pertinent
portion of which reads:
3. A Letter of Authority [LOA] should cover a taxable period not
exceeding one taxable year. The practice of issuing [LOAs]
covering audit of unverified prior years is hereby prohibited. If
the audit of a taxpayer shall include more than one taxable
period, the other periods or years shall be specifically indicated
in the [LOA].[98]
What this provision clearly prohibits is the practice of issuing LOAs
covering audit of unverified prior years. RMO 43-90 does not say that
a LOA which contains unverified prior years is void. It merely
prescribes that if the audit includes more than one taxable period, the
other periods or years must be specified. The provision read as a whole
requires that if a taxpayer is audited for more than one taxable year,
the BIR must specify each taxable year or taxable period on separate
LOAs.
Read in this light, the requirement to specify the taxable period
covered by the LOA is simply to inform the taxpayer of the extent of
the audit and the scope of the revenue officer's authority. Without this
rule, a revenue officer can unduly burden the taxpayer by demanding
random accounting records from random unverified years, which may
include documents from as far back as ten years in cases
of fraud audit.[99]
In the present case, the LOA issued to DLSU is for Fiscal Year Ending
2003 and Unverified Prior Years. The LOA does not strictly comply
with RMO 43-90 because it includes unverified prior years. This does
not mean, however, that the entire LOA is void.
As the CTA correctly held, the assessment for taxable year 2003 is
valid because this taxable period is specified in the LOA. DLSU was
fully apprised that it was being audited for taxable year 2003.
Corollarily, the assessments for taxable years 2001 and 2002 are void
for having been unspecified on separate LOAs as required under RMO
No. 43-90.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of
the LOA's validity at the CTA Division, and thus, should not have
been entertained on appeal, is not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's
validity came up during the trial.[100] DLSU then raised the issue in
its memorandum and motion for partial reconsideration with the CTA
Division. DLSU raised it again on appeal to the CTA En Banc. Thus,
the CTA En Banc could, as it did, pass upon the validity of the
LOA.[101] Besides, the Commissioner had the opportunity to argue for
the validity of the LOA at the CTA En Banc but she chose not to file
her comment and memorandum despite notice.[102]
III. The CTA correctly admitted the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of
DLSU's supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon
filing its motion for reconsideration with the CTA Division.[103] The
CTA Division admitted the supplemental evidence, which proved that
a portion of DLSU's rental income was used actually, directly and
exclusively for educational purposes. Consequently, the CTA Division
reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental
evidence on distinct but mutually reinforcing grounds, to wit: (1) the
Commissioner failed to timely object to the formal offer of
supplemental evidence; and (2) the CTA is not governed strictly by the
technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible,
and the court cannot, on its own, disregard such evidence.[104]
The Court has held that if a party desires the court to reject the
evidence offered, it must so state in the form of a timely objection and
it cannot raise the objection to the evidence for the first time on
appeal.[105]
Because of a party's failure to timely object, the evidence offered
becomes part of the evidence in the case. As a consequence, all the
parties are considered bound by any outcome arising from the offer of
evidence properly presented.[106]
As disclosed by DLSU, the Commissioner did not oppose the
supplemental formal offer of evidence despite notice.[107] The
Commissioner objected to the admission of the supplemental evidence
only when the case was on appeal to the CTA En Banc. By the time
the Commissioner raised her objection, it was too late; the formal
offer, admission and evaluation of the supplemental evidence were
all fait accompli.
We clarify that while the Commissioner's failure to promptly object
had no bearing on the materiality or sufficiency of the supplemental
evidence admitted, she was bound by the outcome of the CTA
Division's assessment of the evidence.[108]
Second, the CTA is not governed strictly by the technical rules of
evidence. The CTA Division's admission of the formal offer of
supplemental evidence, without prompt objection from the
Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence
attached to the taxpayers' motion for reconsideration.
In the case of BPI-Family Savings Bank v. Court of Appeals,[109] the
tax refund claimant attached to its motion for reconsideration with the
CTA its Final Adjustment Return. The Commissioner, as in the present
case, did not oppose the taxpayer's motion for reconsideration and the
admission of the Final Adjustment Return.[110] We thus admitted and
gave weight to the Final Adjustment Return although it was only
submitted upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown
upon the submission of documents after the trial, the law creating the
CTA specifically provides that proceedings before it shall not be
governed strictly by the technical rules of evidence[111] and that the
paramount consideration remains the ascertainment of truth. We ruled
that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a
controversy.[112]
We applied the same reasoning in the subsequent cases of Filinvest
Development Corporation v. Commissioner of Internal
Revenue[113] and Commissioner of Internal Revenue v. PERF Realty
Corporation,[114] where the taxpayers also submitted the supplemental
supporting document only upon filing their motions for
reconsideration.
Although the cited cases involved claims for tax refunds, we also
dispense with the strict application of the technical rules of evidence in
the present tax assessment case. If anything, the liberal application of
the rules assumes greater force and significance in the case of a
taxpayer who claims a constitutionally granted tax exemption. While
the taxpayers in the cited cases claimed refund of excess tax payments
based on the Tax Code,[115] DLSU is claiming tax exemption based on
the Constitution. If liberality is afforded to taxpayers who paid more
than they should have under a statute, then with more reason that we
should allow a taxpayer to prove its exemption from tax based on the
Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer
of evidence not only because the Commissioner failed to promptly
object, but more so because the strict application of the technical tules
of evidence may defeat the intent of the Constitution.
IV. The CTA's appreciation of evidence is generally binding on the
Court unless compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its function of being
dedicated exclusively to the resolution of tax problems, has developed
an expertise on the subject, unless there has been an abuse or
improvident exercise of authority.[116] We thus accord the findings of
fact by the CTA with the highest respect. These findings of facts can
only be disturbed on appeal if they are not supported by substantial
evidence or there is a showing of gross error or abuse on the part of the
CTA. In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CTA rendered a decision which is
valid in every respect.[117]
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's
findings that DLSU had used actually, directly and exclusively for
educational purposes a portion of its assessed income and that it had
remitted the DST payments though an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational
purposes a portion of its assessed income.
To see how the CTA arrived at its factual findings, we review the
process undertaken, from which it deduced that DLSU successfully
proved that it used actually, directly and exclusively for educational
purposes a portion of its rental income.
The CTA reduced DLSU's deficiency income tax and VAT liabilities
in view of the submission of the supplemental evidence, which
consisted of statement of receipts, statement of disbursement and fund
balance and statement of fund changes.[118]
These documents showed that DLSU borrowed P93.86
Million,[119] which was used to build the university's Sports Complex.
Based on these pieces of evidence, the CTA found that DLSU's rental
income from its concessionaires were indeed transmitted and used for
the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct
and exclusive use for educational purposes.
The CTA also found that DLSU's rental income
from other concessionaires, which were allegedly deposited to
a fund (CF-CPA Account),[120] intended for the university's capital
projects, was not proved to have been used actually, directly and
exclusively for educational purposes. The CTA observed that
"[DLSU]...failed to fully account for and substantiate all the
disbursements from the [fund]." Thus, the CTA "cannot ascertain
whether rental income from the [other] concessionaires was indeed
used for educational purposes."[121]
To stress, the CTA's factual findings were based on and supported by
the report of the Independent CPA who reviewed, audited and
examined the voluminous documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions
include: (a) examination and verification of receipts, invoices,
vouchers and other long accounts; (b) reproduction of, and comparison
of such reproduction with, and certification that the same are faithful
copies of original documents, and pre-marking of documentary
exhibits consisting of voluminous documents; (c) preparation of
schedules or summaries containing a chronological listing of the
numbers, dates and amounts covered by receipts or invoices or other
relevant documents and the amount(s) of taxes paid; (d) making
findings as to compliance with substantiation requirements under
pertinent tax laws, regulations and jurisprudence; (e) submission
of a formal report with certification of authenticity and veracity of
findings and conclusions in the performance of the audit; (f) testifying
on such formal report; and (g) performing such other functions as the
CTA may direct.[122]
Based on the Independent CPA's report and on its own appreciation of
the evidence, the CTA held that only the portion of the rental income
pertaining to the substantiated disbursements (i.e., proved by receipts,
vouchers, etc.) from the CF-CPA Account was considered as used
actually, directly and exclusively for educational purposes.
Consequently, the unaccounted and unsubstantiated disbursements
must be subjected to income tax and VAT.[123]
The CTA then further reduced DLSU's tax liabilities by cancelling the
assessments for taxable years 2001 and 2002 due to the defective
LOA.[124]

The Court finds that the above fact-finding process undertaken by the
CTA shows that it based its ruling on the evidence on record, which
we reiterate, were examined and verified by the Independent CPA.
Thus, we see no persuasive reason to deviate from these factual
findings.
However, while we generally respect the factual findings of the CTA,
it does not mean that we are bound by its conclusions. In the present
case, we do not agree with the method used by the CTA to arrive at
DLSU's unsubstantiated rental income (i.e., income not proved to have
been actually, directly and exclusively used for educational purposes).
To recall, the CTA found that DLSU earned a rental
income of P10,610,379.00 in taxable year 2003.[125] DLSU earned this
income from leasing a portion of its premises to: 1) MTO-Sports
Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri
International, and 6) MTO Bookstore.[126]
To prove that its rental income was used for educational purposes,
DLSU identified the transactions where the rental income was
expended, viz.: 1) P4,007,724.00[127] used to pay the loan obtained by
DLSU to build the Sports Complex; and 2) P6,602,655.00 transferred
to the CF-CPA Account.[128]
DLSU also submitted documents to the Independent CPA to prove that
the P6,602,655.00 transferred to the CF-CPA Account was used
actually, directly and exclusively for educational purposes. According
to the Independent CPA' findings, DLSU was able to substantiate
disbursements from the CF-CPA Account amounting to P6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA
concluded that out of the P10,610,379.00 rental
income, P4,841,066.65 was unsubstantiated, and thus, subject to
income tax and VAT.[129]
The CTA then concluded that the ratio of substantiated disbursements
to the total disbursements from the CF-CPA Account for taxable year
2003 is only 26.68%.[130] The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc.,
Zaide Food Corp., Capri International and MTO Bookstore, which
were transmitted to the CF-CPA Account, petitioner again failed to
fully account for and substantiate all the disbursements from the CF-
CPA Account; thus failing to prove that the rental income derived
therein were actually, directly and exclusively used for educational
purposes. Likewise, the findings of the Court-Commissioned
Independent CPA show that the disbursements from the CF-CPA
Account for fiscal year 2003 amounts to P-6,259,078.30 only. Hence,
this portion of the rental income, being the substantiated disbursements
of the CF-CPA Account, was considered by the Special First Division
as used actually, directly and exclusively for educational purposes.
Since for fiscal year 2003, the total disbursements per voucher is
P6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per
subsidiary ledger amounts to P23,463,543.02 (Exhibit "LL-29-C"), the
ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(P6,259,078.30/P23,463,543.02). Thus, the substantiated portion of
CF-CPA Disbursements for fiscal year 2003, arrived at by multiplying
the ratio of 26.68% with the total rent income added to and used in the
CF-CPA Account in the amount of P6,602,655.00 ts
P1,761,588.35.[131] (emphasis supplied)
For better understanding, we summarize the CTA's computation as
follows:
1. The CTA subtracted the rent income used in the construction of
the Sports Complex (P4,007,724.00) from the rental income
(P10,610,379.00) earned from the abovementioned
concessionaries. The difference (P6,602,655.00) was the
portion claimed to have been deposited to the CF-CPA
Account.
2. The CTA then subtracted the supposed substantiated portion of
CF-CPA disbursements (P1,761,308.37) from the
P6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income
(P4,841,066.65).[132]
3. The substantiated portion of CF-CPA disbursements
(P1,761,308.37)[133] was derived by multiplying the rental
 income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio
of substantiated disbursements to total
disbursements (P23,463,543.02).
4. The 26.68% ratio[134] was the result of dividing the
substantiated disbursements from the CF-CPA Account as
found by the Independent CPA (P6,259,078.30) by the total
disbursements (P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly
give effect to the constitutional grant of tax exemption to non-stock,
nonprofit educational institutions. The CTA's reasoning is flawed
because it required DLSU to substantiate an amount that is greater
than the rental income deposited in the CF-CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving
that the proceeds of its rental income (which amounted to a total of
P10.61 million)[135] were used for educational purposes. This amount
was divided into two parts: (a) the P4.01 million, which was used to
pay the loan obtained for the construction of the Sports Complex; and
(b) the P6.60 million,[136] which was transferred to the CF-CPA
account.
For year 2003, the total disbursement from the CF-CPA account
amounted to P23.46 million.[137] These figures, read in light of the
constitutional exemption, raises the question: does DLSU claim that
the whole total CF-CPA disbursement of P23.46 million is tax-
exempt so that it is required to prove that all these disbursements
had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA
disbursements of P23.46 million had been for educational purposes
and should thus be tax-exempt; DLSU only claimed P10.61 million for
taxexemption and should thus be required to prove that this amount
had been used as claimed.
Of this amount, P4.01 had been proven to have been used for
educational purposes, as confirmed by the Independent CPA. The
amount in issue is therefore the balance of P6.60 million which was
transferred to the CF-CPA which in turn made disbursements of
P23.46 million for various general purposes, among them the P6.60
million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made
disbursements for educational purposes in year 2003 in the amount
P6.26 million. Based on these given figures, the CTA concluded that
the expenses for educational purposes that had been coursed through
the CF-CPA should be prorated so that only the portion that P6.26
million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional
requirement that revenues actually and directly used for educational
purposes should be tax-exempt. As already mentioned above, DLSU is
not claiming that the whole P23.46 million CF-CPA disbursement had
been used for educational purposes; it only claims that P6.60 million
transferred to CF-CPA had been used for educational purposes. This
was what DLSU needed to prove to have actually and directly used for
educational purposes.
That this fund had been first deposited into a separate fund (the CF-
CPA established to fund capital projects) lends peculiarity to the facts
of this case, but does not detract from the fact that the deposited funds
were DLSU revenue funds that had been confirmed and proven to
have been actually and directly used for educational purposes via the
CF-CPA. That the CF-CPA might have had other sources of funding is
irrelevant because the assessment in the present case pertains only to
the rental income which DLSU indisputably earned as revenue in 2003.
That the proven CF-CPA funds used for educational purposes should
not be prorated as part of its total CF-CPA disbursements for purposes
of crediting to DLSU is also logical because no claim whatsoever had
been made that the totality of the CF-CPA disbursements had been for
educational purposes. No prorating is necessary; to state the obvious,
exemption is based on actual and direct use and this DLSU has
indisputably proven.

Based on these considerations, DLSU should therefore be liable only
for the difference between what it claimed and what it has proven. In
more concrete terms, DLSU only had to prove that its rental income
for taxable year 2003 (P10,610,379.00) was used for educational
purposes. Hence, while the total disbursements from the CF-CPA
Account amounted to P23,463,543.02, DLSU only had to substantiate
its P10.6 million rental income, part of which was the P6,602,655.00
transferred to the CF-CPA account. Of this latter amount, P6.259
million was substantiated to have been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax
and VAT for taxable year 2003 as follows:
CTA
Revised
Decision[138]
Rental income 10,610,379.00 10,610,379.00
Less: Rent income used in
4,007,724.00 4,007,724.00
construction of the Sports Complex
Rental income deposited to the CF-
6,602,655.00 6,602.655.00
CPA Account
Less: Substantiated portion of CF-
1,761,588.35 6,259,078.30
CPA disbursements
Tax base for deficiency income
4,841,066.65 343,576.70
tax and VAT
On DLSU's argument that the CTA should have appreciated its
evidence in the same way as it did with the evidence submitted by
Ateneo in another separate case, the CTA explained that the issue in
the Ateneo case was not the same as the issue in the present case.
The issue in the Ateneo case was whether or not Ateneo could be held
liable to pay income taxes and VAT under certain BIR and
Department of Finance issuances[139] that required the educational
institution to own and operate the canteens, or other commercial
enterprises within its campus, as condition for tax exemption. The
CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail
of the exemption.[140]
Given the lack of complete identity of the issues involved, the CTA
held that it had to evaluate the separate sets of evidence differently.
The CTA likewise stressed that DLSU and Ateneo gave distinct
defenses and that its wisdom "cannot be equated on its decision on two
different cases with two different issues."[141]
DLSU disagrees with the CTA and argues that the entire assessment
must be cancelled because it submitted similar, if not stronger sets of
evidence, as Ateneo. We reject DLSU's argument for being non
sequitur. Its reliance on the concept of uniformity of taxation is also
incorrect.
First, even granting that Ateneo and DLSU submitted similar evidence,
the sufficiency and materiality of the evidence supporting their
respective claims for tax exemption would necessarily differ because
their attendant issues and facts differ.
To state the obvious, the amount of income received by DLSU and by
Ateneo during the taxable years they were assessed varied. The
amount of tax assessment also varied. The amount of income proven
to have been used for educational purposes also varied because the
amount substantiated varied.[142] Thus, the amount of tax assessment
cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency
of P17,303,001.12 for taxable years 2001, 2002 and 2003. On the
other hand, the BIR assessed Ateneo a total deficiency tax
of P8,864,042.35 for the same period. Notably, DLSU was assessed
deficiency DST, while Ateneo was not.[143]
Thus, although both Ateneo and DLSU claimed that they used their
rental income actually, directly and exclusively for educational
purposes by submitting similar evidence, e.g., the testimony of their
employees on the use of university revenues, the report of the
Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a
portion of its income and revenues had indeed been used for
educational purposes.
The CTA significantly found that some documents that could have fully
supported DLSU's claim were not produced in court. Indeed, the
Independent CPA testified that some disbursements had not been
proven to have been used actually, directly and exclusively for
educational purposes.[144]
The final nail on the question of evidence is DLSU's
own admission that the original of these documents had not in fact
been produced before the CTA although it claimed that there was no
bad faith on its part.[145] To our mind, this admission is a good
indicator of how the Ateneo and the DLSU cases varied, resulting in
DLSU's failure to substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised
Rules on Evidence, that the contents of the missing supporting
documents were proven by its recital in some other authentic
documents on record,[146] can no longer be entertained at this late stage
of the proceeding. The CTA did not rule on this particular claim. The
CTA also made no finding on DLSU's assertion of lack of bad faith.
Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity oftaxation.
Equality and uniformity of taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same
rate.[147] A tax is uniform when it operates with the same force and
effect in every place where the subject of it is found.[148] The concept
requires that all subjects of taxation similarly situated should
be treated alike and placed in equal footing.[149]
In our view, the CTA placed Ateneo and DLSU in equal footing. The
CTA treated them alike because their income proved to have been
used actually, directly and exclusively for educational purposes were
exempted from taxes. The CTA equally applied the requirements in
the YMCA case to test if they indeed used their revenues for
educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it
can show that, despite proving that it used actually, directly and
exclusively for educational purposes its income and revenues, the CTA
still affirmed the imposition of taxes. That the DLSU secured a
different result happened because it failed to fully prove that it used
actually, directly and exclusively for educational purposes its revenues
and income.
On this point, we remind DLSU that the rule on uniformity of taxation
does not mean that subjects of taxation similarly situated are treated
in literally the same way in all and every occasion. The fact that the
Ateneo and DLSU are both non-stock, non-profit educational
institutions, does not mean that the CTA or this Court would similarly
decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the
sufficiency of evidence. DLSU's evidence was wanting, thus, the CTA
was correct in not fully cancelling its tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage
and loan transactions were paid and remitted through its bank's On-
Line Electronic DST Imprinting Machine. The Commissioner argues
that DLSU is not allowed to use this method of payment because an
educational institution is excluded from the class of taxpayers who can
use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument
lacks basis in both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied,
collected and paid for by the person making, signing, issuing,
accepting, or transferring the same.[150] The Tax Code provides that
whenever one party to the document enjoys exemption from DST, the
other party not exempt from DST shall be directly liable for the tax.
Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean
the full settlement of the DST due on the document.
In the present case, DLSU entered into mortgage and loan agreements
with banks. These agreements are subject to DST.[151] For the purpose
of showing that the DST on the loan agreement has been paid, DLSU
presented its agreements bearing the imprint showing that DST on the
document has been paid by the bank, its counterparty. The imprint
should be sufficient proof that DST has been paid. Thus, DLSU cannot
be further assessed for deficiency DST on the said documents.

Finally, it is true that educational institutions are not included in the

class of taxpayers who can pay and remit DST through the On-Line
Electronic DST Imprinting Machine under RR No. 9-2000. As
correctly held by the CTA, this is irrelevant because it was not DLSU
who used the On-Line Electronic DST Imprinting Machine but the
bank that handled its mortgage and loan transactions. RR No. 9-2000
expressly includes banks in the class of taxpayers that can use the On-
Line Electronic DST Imprinting Machine.

Thus, the Court sustains the finding of the CTA that DLSU proved the
payment of the assessed DST deficiency, except for the unpaid balance
of P13,265.48.[152]

WHEREFORE, premises considered, we DENY the petition of the

Commissioner of Internal Revenue in G.R.
No. 196596 and AFFIRM the December 10, 2010 decision and March
29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax
liabilities of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in

G.R. No. 198841 and the petition of the Commissioner of Internal
Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
decision and October 4, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATION that the base for the deficiency income tax and
VAT for taxable year 2003 is P343,576.70.

SO ORDERED.
 [ G.R. No. 202792, February 27, 2019 ] Add: Adjustments Per
Investigation
LA SALLIAN EDUCATIONAL INNOVATORS FOUNDATION Interest Expense
(DE LA SALLE UNIVERSITY-COLLEGE OF ST. BENILDE) - Disallowed (Sec. 34 P
INC., PETITIONER, VS. COMMISIONER OF INTERNAL (B) NIRC) 21,827,506.66
REVENUE, RESPONDENT. Provision For
Retirement
DECISION - Not Deductible (Sec.
27,059,453.34
34 NIRC)
Provision For Doubtful
A. REYES, JR., J.: Accounts
- Not Deductible (Sec.
4,252,393.73
Before this Court is a Petition for Review on Certiorari[1] taken under 34 NIRC)
Rule 16 of the Revised Rules of the Court of Tax Appeals, in relation Not Subject to
to Rule 45 of the Rules of Court seeking to nullify the Withholding Tax
Decision[2] dated April 19, 2012 and Resolution[3] promulgated on July - Sec. 34 NIRC
17, 2012 of the Court of Tax Appeals (CTA) En Banc. Rental 123,147.00
Income Not Subjected
The Factual Antecedents to Income Tax
- Depository Accounts
Petitioner La Sallian Educational Innovators Foundation, Inc. (De La 575,702,650.00
(Sec. 32 NIRC)
Salle University-College of St. Benilde Foundation)/for brevity) is a
non-stock, non-profit domestic corporation duly organized and Unlocated/Unsupported
existing under the laws of the Philippines.[4] Respondent is the Invoices & Vouchers 2,150,270.66 631,170,895.82
Commissioner of Internal Revenue who has the power to decide, (Sec. 34 NIRC)
cancel, and abate tax liabilities pursuant to Section 204(B) of the Tax Adjusted Taxable P
Code, as amended.[5] Income 789,771,107.82

On June 17, 2005, respondent issued two (2) Assessment Notices, both Tax Due P 78,977,110.78
numbered 33-FY 05-31-02, for fiscal year ending May 31, 2002. The Less: Tax due per return -
notices have demand letters against petitioner for deficiency income Deficiency Income Tax
tax. The alleged deficiency income tax is in the amount of P 78,977,110.78
(subject to increments)
P122,414,521.70, inclusive of interest, computed as follows:[6] Add: 25% surcharge
Gross Income Per P (Sec. 248)
Return on Educational 618,449,079.00 20% interest from __ to
Less: Expenses Per P 43,437,410.92
459,848,867.00 06-20-05 (Sec. 249)
Return on Educational Compromise Penalty
P ______________
Net Income Per Return (Sec. 254)
158,600,212.00 TOTAL AMOUNT P
DUE & 122,414,521.70 1,720,142.84
COLLECTIBLE Add: 25% surcharge (Sec. 248)
The other Assessment Notice is for a deficiency value-added tax 20% interest from __ to 06-20-
1,032,085.70
(VAT) in the amount of P2,752,228.54, inclusive of interest, computed 05 (Sec. 249)
as follows: Compromise Penalty (Sec. 254)
Taxable Income Subject to VAT __________________________
P ___
ICC Revenue 24,830,069.0 P
TOTAL AMOUNT DUE &
0 2,752,228.54[
COLLECTIBLE 7]
Auxiliary Service Income 637,280.35
Concessionaire 606,726.00 On the same date, a separate demand letter was also sent by
Mimeo/Xerox 425,489.60 respondent to petitioner for a compromise penalty in deficiency VAT
Book store-School Supplies 559,140.96 in the amount of P25,000.00.[8]
Parking Fund 2,729,330.75
Boarding House 2,513,338.02 To contest the deficiency taxes assessed, petitioner Foundation filed a
32,610,546.6 Protest or Request for Reconsideration to respondent on July 20,
Locker Rental 309,172.00
8 2005.[9] After the petitioner Foundation has submitted all the
documents in support of its protest, and in view of respondent's
VAT Output Tax Due - Sec. P inaction thereto, petitioner Foundation filed a Petition for Review
106/08 NIRC 3,261,054.67 before the Special First Division of the CTA Division. It was sent
Less: Creditable Input Tax through registered mail on April 17, 2006, the last day of filing the
Carried Over from Previous appeal.[10] However, petitioner was only able to pay the docket and
P770,351.28
Quarter other legal fees nine days after or on April 26, 2006.[11]
Current Input Tax 943,242.91
Total Notably, petitioner Foundation executed an Agreement Form with the
Less: Excess/To be Applied to Bureau of Internal Revenue (BIR) on April 21, 2006, and paid the
P deficiency VAT liability of P601,487.70 on May 9, 2006.[12]
Succeeding Year - Sec. 110
121,991.5
NIRC
3 However, respondent alleged that the petitioner Foundation has
393,240.7 already lost its tax-exempt status, malting it liable to deficiency
Unsupported - Sec. 110 NIRC
4 income tax. The Details of Discrepancies issued by the BIR
Pro-rated between Hotel & enumerated the following findings, to wit:[13]
School a. The foundation may be a non-stock entity but it is definitely a profit-
309,956.1 oriented organization wherein majority of its revenue-operating
- Sec. 110, NIRC 825,188.40 888,405.79
3 activities are generating huge amount of profit amounting to P643
P million that earned from expensive tuition fees collected from its
VAT Due
2,372,648.88 students, mostly belong to a [sic] upper class family.
Less: Payment 652,506.04
Deficiency VAT P b. The foundation's Cash in Bank in the amount of P775 million
comprise of investing activities and has significant movement in
relation to its charitable purposes, which mean that the foundation are
[sic] not giving sufficient donations which is the main reasons [sic] for
its qualification[s] [sic] for exemption. During the school year the
foundations [sic] has a total cash receipts of approximately 1.222
Billion out of which only 77 Million goes to the revolving fund.
c. Based on the Cash Flow of the foundation activities the taxpayer has
used 583 Million for operating activities, 54 Million interest/settlement
of loan and 203 Million for investing activities or 70% of foundation's
earnings goes to the administrative purposes and improvement of the
school to increase number of its enrollees and increase further its profit
and not to further its charitable purposes.
Pursuant to section 30 of the NIRC, "Notwithstanding the provisions
in the preceding Paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties,
real or personal, or from any of their activities conducted for profit
[r]egardless of the disposition made by such income, shall be subject
to tax imposed under this Code."
d. The taxpayer's Ruling for exemption from the BIR was obtained in
1988, hence, all Ruling issued before the implementations or RA No.
8424 or CTRP was repealed, thereby, requiring the taxpayer to apply
for new Revenue Ruling for exemption taking consideration of its
income earning activities.
On the other hand, petitioner Foundation consistently argued that it
enjoys a tax-exempt status from all taxes as a non-stock, non-profit
educational institution as expressly provided under Paragraph 4,
Section 4, Article XIV of the 1987 Constitution, which reads:
ARTICLE XIV
EDUCATION, SCIENCE AND TECHNOLOGY, ARTS, CULTURE
AND SPORTS
EDUCATION
xxxx
Section 4. x x x.
xxxx
(3) All revenues and assets of non-stock, non-profit educational
institution used actually, directly and exclusively for educational
purposes shall be exempt from taxes and duties. x x x.
Moreover, petitioner Foundation denied the respondent's allegations
that it engaged in disproportionate profit-earning activities contrary to
its educational purpose. Contrary to the allegations, it explained that
the sum of P643,279,148.00 is not profit, but merely the gross receipts
from school-year 2002.[14]
Bearing in mind that the total expenses of the Foundation is in the
amount of P582,903,965.00, the net receipt of petitioner Foundation is
only P60,375,183.[15] This was corroborated by the Foundation's
Audited Financial Statement.[16] Remarkably, this amount is equivalent
to just 9.38% of its total operating receipts.[17]
Furthermore, petitioner Foundation's claim that all the said income is
actually, directly and exclusively used or earmarked for promoting its
educational purpose and not a single centavo inure to the benefit of
any of the Foundation's members, trustees and officers.[18] The
Independent Certified Public Accountant, Mr. Edwin Ramos, also
testified and explained that the administrative expenses of the
Foundation would necessarily be lower than 27.35%.
Thereafter, respondent filed its Answer on June 15, 2006,[19] and
petitioner Foundation filed its Reply on June 30, 2006[20] to the CTA
Division.
Ruling of CTA Division
On July 16, 2010, the CTA Division promulgated a Decision[21] ruling
in favor of petitioner Foundation, and cancelling Assessment Notice
No. 33-FY 05-31-02 for fiscal year ending May 31, 2002, with
demand letter. The dispositive portion reads:
WHEREFORE, the Petition for Review is hereby GRANTED. The
Assessment Notice No. 33-FY 05-31-02 for fiscal year ending May 31,
2002, with demand letter, against petitioner for deficiency income tax
in the amount of ONE HUNDRED TWENTY-TWO MILLION FOUR
HUNDRED FOURTEEN THOUSAND FIVE HUNDRED
TWENTY-ONE PESOS & 70/100 (P122,414,521.70) is hereby
CANCELLED.
SO ORDERED.[22]
The CTA Division also ruled that there's nothing in the Foundation's
books that will show that it operated for profit or that any of its income
inured to the benefit of its members or trustees.[23] The CTA Division
found that (1) petitioner Foundation maintained its tax-exempt status
under Section 4, Article XIV of the 1987 Constitution, and (2) the
Final Assessment Notices issued by respondent against petitioner
Foundation are not valid for failing to state their legal and factual basis
hence, all other issues raised are moot and academic.[24]
Dissatisfied with CTA Division's decision, respondent filed a Motion
for Reconsideration dated August 3, 2010,[25] which petitioner
Foundation opposed by filing an Opposition to Motion for
Reconsideration dated August 16, 2010.[26]
The CTA Division resolved it by promulgating a Resolution dated
November 18, 2010 denying respondent's motion for reconsideration
for lack of merit.[27] In the body of the resolution, the CTA Division
agreed with petitioner Foundation that respondent's motion for
reconsideration merely raised the same arguments which have been
sufficiently addressed and passed by the CTA Division in the assailed
decision.[28]
Thereafter, respondent filed a petition for review before the CTA En
Banc dated December 21, 2010 against the resolution denying its
Motion for Reconsideration,[29] to which petitioner Foundation filed its
Comment on February 3, 2011.[30]
Ruling of the CTA En Banc
On April 19, 2012, the CTA En Banc promulgated a
Decision[31] granting respondent's petition for review and reversing the
decision of the CTA Division, to wit:
WHEREFORE, the Petition for Review dated December 21, 2010,
filed by the Commissioner of Internal Revenue, is hereby GRANTED.
The Decision dated July 16, 2010 and the Resolution dated November
18, 2010 are REVERSED and SET ASIDE. Consequently, the Petition
for Review dated April 17, 2006 filed before the Court in Division is
DISMISSED, on jurisdictional grounds.
SO ORDERED.[32]
The CTA En Banc ruled that the CTA Division should not have given
due course to petitioner Foundation's petition for review.[33] Payment
of docket fees and other legal fees within the thirty (30)-day
reglementary period to appeal is mandatory and jurisdictional. The late
payment of docket fees prevented the CTA Division from acquiring
jurisdiction.[34] Petitioner Foundation's appeal was allegedly not
perfected because the payment of the docket fees was made only on
April 26, 2006 or nine (9) days after April 17, 2006, the last day for
filing the appeal.[35] As a result, the assailed assessment has allegedly
become final and executory.[36]
Moreover, even assuming that the CTA Division had jurisdiction over
the petition, the latter allegedly erred in cancelling the assessment
notice because the presumption of its correctness has not been
overturned. The CTA En Banc emphasized that petitioner Foundation's
tax exempt status has been impliedly revoked due to its excessive
profit-earning activities.[37]
Aggrieved, petitioner Foundation filed its Motion for
Reconsideration[38] dated May 18, 2012, but it was likewise denied by
the CTA En Banc.[39]
Hence, this petition for review on certiorari.[40]
The Issues
Although the parties raised a number of issues, this Court shall decide
only the pivotal issues which we summarized as follows:[41]
I. WHETHER THE PETITIONER FOUNDATION HAS LOST
ITS TAX-EXEMPT STATUS UNDER THE 1987
CONSTITUTION
II. WHETHER THE CTA EN BANG COMMITTED A
REVERSIBLE ERROR WHEN IT REVERSED AND SET
ASIDE THE DECISION OF THE CTA DIVISION DATED
JULY 16, 2010 AND RESOLUTION DATED NOVEMBER
18, 2010
Ruling of the Court
The petition is meritorious.
No less than the 1987 Constitution expressly exempt all revenues and
assets of non-stock, non-profit educational institutions from taxes
provided that they are actually, directly and exclusively used for
educational purposes, to wit:[42]
Section 4.(1) The State recognizes the complementary roles of public
and private institutions in the educational system and shall exercise
reasonable supervision and regulation of all educational institutions.
xxxx
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. (Emphasis and
underscoring supplied)
This constitutional exemption is reiterated in Section 30 (H) of the
1997 Tax Code, as amended, which provides as follows:
Sec. 30. Exemptions from Tax on Corporations. - The following
organizations shall not be taxed under this Title in respect to income
received by them as such:
xxxx
(H) A non[-]stock and non[-]profit educational institution[.]
Clearly, non-stock, non-profit educational institutions are not required
to pay taxes on all their revenues and assets if they are used actually,
directly and exclusively for educational purposes.
According to the BIR, petitioner Foundation has failed to comply with
the constitutional requirements for being a profit-oriented educational
institution. Hence, it is no longer a tax-exempt entity, and is subject to
a 10% income tax rate as a taxable proprietary educational
institution.[43]
The Court disagrees.
Petitioner Foundation has presented adequate legal and factual basis to
prove that it remains as a tax exempt entity under Article XIV, Section
4, Paragraph 3 of the 1987 Constitution.
Based on jurisprudence and tax rulings, a taxpayer shall be granted
with this tax exemption after proving that: (1) it falls under the
classification of 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.[44]
Petitioner Foundation has fulfilled both of the abovementioned
requirements.
For the first requirement, there is no contest as both the parties have
stipulated that petitioner Foundation is a non-stock, non-profit
educational institution.[45]
Nonetheless, the Petitioner Foundation's primary and secondary
purposes in its Amended Articles of Incorporation clearly provide that
it is a non-stock, non-profit educational entity, to wit:[46]
SECOND: That the purposes and objectives for which such
corporation is incorporated are:
That the primary purpose for which said corporation is formed is to
establish a school that will offer elementary, secondary, collegiate and
post graduate courses of study, as well as technical, vocational and
special courses under one campus with emphasis on its being
innovative in its approach to undergraduate education through self-
learning devices, kits, individually guided teaching, credit by
equivalence, credited internships, and practicism, as the Board of
Trustees may determine, the primary intention being to form the whole
man through integration of a liberal Christian education with
professional competence for participation in Philippine development.
AND IN THE FURTHERANCE OF THE FOREGOING, the
institution shall:
xxxx
8. Any profits derived from activities and undertakings described in
paragraph 2, 3, 5 and 6 immediately preceding shall not inure to any of
the members, trustees or officers but shall be used exclusively for the
maintenance of the Corporation.
Moreover, petitioner Foundation has no capital divided into
shares.[47] No part of its income can be distributed as dividends to its
members, trustees and officers.[48] The members of the Board of
Trustees do not receive any compensation for the performance of their
duties, including attendance in meetings.[49]
It is also important to mention that in BIR Ruling No. 176-88 dated
August 23, 1988, the BIR already declared that petitioner Foundation
is a non-stock, non-profit educational institution that is exempt from
certain taxes.[50]
As pointed out by respondent, petitioner Foundation did not secure a
new BIR Ruling on its claim for exemption after the Tax Code has
been amended. However, this Court finds such fact insignificant. The
application for a new BIR Ruling is unnecessary considering that the
BIR Ruling was never revoked, and the primary purpose of petitioner
Foundation remained the same. Notably, respondent also failed to
mention any legal basis that will require petitioner Foundation to
secure a new BIR Ruling to confirm its tax exempt status.
Furthermore, the respondent claimed that petitioner Foundation is not
a non-profit educational institution anymore due to its alleged
enormous profits. Respondent accused it of operating contrary to the
nature of a non-profit educational institution by generating massive
profits in the amount of P643,000,000.00 from tuition fees, and having
cash worth P775,000,000 in its bank.[51]
However, these allegations were completely unsupported by facts and
evidence.
Based on the evidence presented, the P643,000,000.00 is not petitioner
Foundation's profit as it is just the gross receipt from school year
2002.[52] Unfortunately, respondent easily overlooked petitioner
Foundation's administrative and non-administrative expenses
amounting to P582,903,965.00.[53] This sum constituted the total
operating expenses of petitioner Foundation for the fiscal year ended
May 31, 2002.[54] Thus, the income of petitioner Foundation is only
P60,375,183.00 or 9.38% of its operating receipts.[55] This is way
below the average gross profit margin rate of 20% for most business
enterprises.[56]
Furthermore, the alleged P775,000,000 cash of petitioner Foundation
is in reality a part of its Cash and Cash Equivalents account. The
amount of P575,700,000.00 therein constitutes Funds Held in Trust to
finance capital improvements, scholarship, faculty development,
retirement and for other restricted uses.[57] The rest of the account
consists of highly liquidated debt instruments purchased with a short
term maturity.[58] Clearly, there is nothing in the petitioner
Foundation's books that will indicate that it is driven by profit or that
its income is used for anything but in pursuit of its primary purpose.
In several cases, this Court has ruled that a non-profit institution will
not be considered profit driven simply because of generating
profits.[59] The reason behind this was explained by this Court in its
earlier ruling in Jesus Sacred Heart College v. Collector of Internal
Revenue,[60] to wit:
To hold that an educational Institution is subject to income tax
whenever it is so administered as to reasonably assure that it will not
incur in deficit, is to nullify and defeat the aforementioned exemption.
Indeed, the effect, in general, of the interpretation advocated by
appellant would be to deny the exemption whenever there is net
income, contrary to the tenor of said section 27(e) which positively
exempts from taxation those corporations or associations which,
otherwise, would be subject thereto, because of the existence of said
net income.
Needless to say, every responsible organization must be so run as
to, at least insure its existence by operating within the limits of its
own resources, especially its regular income. In other words, it
should always strive, whenever possible, to have a
surplus.[61] (Emphasis and underscoring supplied)
Considering the clear explanation of the nature of the money involved,
it is evident that all of petitioner Foundation's income is actually,
directly and exclusively used or earmarked for promoting its
educational purpose.[62] To reiterate, respondent never argued that the
income of petitioner Foundation was used in any manner other than for
promoting its purpose as a non-stock, non-profit educational institution,
hi fact, there is not even a single argument or evidence presented to
cast a doubt in the proper usage of petitioner Foundation's income.
Furthermore, a simple reading of the Constitution would show that
Article XIV, Section 4 (3) does not require that the revenues and
income must have also been earned from educational activities or
activities related to the purposes of an educational institution. The
phrase "all revenues" is unqualified by any reference to the source of
revenues.[63] Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then said
revenues and income shall be exempt from taxes and duties.[64]
In the instant case, petitioner Foundation firmly and adequately argued
that none of its income inured to the benefit of any officer or entity.
Instead, its income has been actually, exclusively and directly used for
performing its purpose as an educational institution. Undoubtedly,
petitioner Foundation has also proven this second requisite.
Thus, the tax exempt status of petitioner Foundation under the 1987
Constitution is clear.
It can be recalled that the questioned CTA En Banc decision only ruled
on the procedural aspect of the case on the ground that it is
jurisdictional and determinative of the validity of the whole
process.[65] The late payment of docket fees allegedly divested the
CTA Division of jurisdiction or authority to take cognizance of the
petition for review filed before it.[66] As a result, the decision of the
CTA Division was rendered without jurisdiction, and is totally null
and void. Thus, the impugned tax deficiency assessment has become
final and executory, and its correctness cannot be disputed anymore.[67]
This Court cannot agree.
The tax exemption expressly granted by the 1987 Constitution, the
supreme law of the land, cannot be set aside by any statute, especially
by a mere technicality in procedure. While payment of docket fee and
other legal fees within the thirty (30)-day reglementary period to
appeal a tax assessment to the CTA is mandatory and jurisdictional,
this Court will not hesitate to exercise its equity jurisdiction and allow
a liberal interpretation of the rules of procedure if a rigid application
will defeat substantial justice.
This Court has ruled in the past that if a rigid application of the rules
of procedure will tend to obstruct rather than serve the broader
interests of justice and depending on the prevailing circumstances of
the case, such as where strong considerations of substantive justice are
manifest ill the petition, the Court may relax the strict application of
the rules of procedure in the exercise of its equity jurisdiction.[68]
The Court's pronouncement in Heirs of Amada Zaulda v. Zaulda[69] is
instructive on this matter, to wit:
The reduction in the number of pending cases is laudable, but if it
would be attained by precipitate, if not preposterous, application of
technicalities, justice would not be served. The law abhors
technicalities that impede the cause of justice. The court's primary duty
is to render or dispense justice. "It is a more prudent course of
action for the court to excuse a technical lapse and afford the
parties a review of the case on appeal rather than dispose of the
case on technicality and cause a grave injustice to the parties,
giving a false impression of speedy disposal of cases while actually
resulting in more delay, if not miscarriage of justice." x x x
What should guide judicial action is the principle that a party-
litigant should be given the fullest opportunity to establish the
merits of his complaint or defense rather than for him to lose life,
liberty, honor, or property on technicalities. The rules of
procedure should be viewed as mere tools designed to facilitate the
attainment of justice. Their strict and rigid application, which would
result in technicalities that tend to frustrate rather than promote
substantial justice, must always be eschewed. At this juncture, the
Court reminds all members of the bench and bar of the admonition in
the often-cited case of Alonso v. Villamar[70] (Emphasis and
underscoring supplied; citation omitted)
Otherwise stated, procedural rules are important tools designed to
facilitate the dispensation of justice, but legal technicalities may be
excused when strict adherence thereto will impede the achievement of
justice it seeks to serve.
In the present case, petitioner Foundation timely opposed the tax
deficiency assessments against it by filing a Protest or Request for
Reconsideration, the proper remedy, before the BIR. Due to
respondent's inaction, it filed a petition for review, also the proper
remedy, within the reglementary period required by law. In addition, it
completely paid the required docket and legal fees in the amount of
P861,178.34.
However, a procedural controversy arose because the payment of the
required docket and legal fees was done nine (9) days after the last day
for filing the petition for review. To recall, petitioner Foundation's
petition for review was filed through a registered mail on April 17,
2006, the last day of filing. It was not able to pay the docket and legal
fees on the day of filing because the CTA received the petition and
made a computation of the required fees only on April 26, 2006 or
nine (9) days after.
The question now is: should the late payment of the docket fees divest
the CTA Division of jurisdiction over petitioner Foundation's petition
for review making the VAT deficiency assessment of P122,414,521.70
against a tax-exempt entity final and executory?
This Court answers in the negative.
Indeed, the general rule is that a petition for review is perfected by
timely filing it and paying the requisite docket fees and other lawful
fees. However, all general rules admit of certain exceptions.[71]
In Mactan Cebu International Airport Authority v. Mangubat[72] where
the docket fees were paid six (6) days late, this Court said that where
the party immediately paid the required fees showing willingness to
abide by the rules, and in view of the significance of the issues raised
in the cask the same calls for judicial leniency, thus:
In all, what emerges from all of the above is that the rules of procedure
in the matter of paying the docket fees must be followed. However,
there are exceptions to the stringent requirement as to call for a
relaxation of the application of the rules, such as: (1) most persuasive
and weighty reasons; (2) to relieve a litigant from an injustice not
commensurate with his failure to comply with the prescribed
procedure; (3) good faith of the defaulting party by immediately
paying within a reasonable time from the time of the default; (4)
the existence of special or compelling circumstances; (5) the merits of
the case; (6) a cause not entirely attributable to the fault or negligence
of the party favored by the suspension of the rules; (7) a lack of any
showing that the review sought is merely frivolous and dilatory; (8)
the other party will not be unjustly prejudiced thereby; (9) fraud,
accident, mistake or excusable negligence without appellant's fault;
(10) peculiar legal and equitable circumstances attendant to each case;
(11) in the name of substantial justice and fair play; (12) importance of
the issues involved; and (13) exercise of sound discretion by the judge
guided by all the attendant circumstances. Concomitant to a liberal
interpretation of the rules of procedure should be an effort on the part
of the party invoking liberality to adequately explain his failure to
abide by the rules. Anyone seeking exemption from the application of
the Rule has the burden of proving that exceptionally meritorious
instances exist which warrant such departure.[73] (Emphasis and
underscoring supplied)
In other words, while procedural rules are important in the
administration of justice, they may be excused for the most persuasive
and meritorious reasons in order to relieve a litigant of an injustice that
is not commensurate with the degree of his thoughtlessness in not
complying with the procedure prescribed.[74]
To reiterate, petitioner Foundation was able to establish that it is a tax
exempt entity under the 1987 Constitution. It has timely filed its
Protest to the tax deficiency assessment. It was also able to actually
pay the full amount of the required docket and legal fees in the amount
of P861,178.34, but it was nine (9) days late. Evidently, petitioner
Foundation immediately paid the docket and legal fees upon the CTA's
assessment of the proper amount which showed petitioner's good faith.
Moreover, the issue involved in this case is no less than the tax
assessment over a non-stock, non-profit educational institution, which
the 1987 Constitution mandated to be tax exempt. Otherwise stated,
what is at stake is the opportunity for the proper and just determination
of petitioner Foundation's status as a tax-exempt entity under the 1987
Constitution, and a deprivation of a substantial amount of property.
Taking into account the importance of the issues raised in the petition
filed before the CTA Division, and what petitioner stands to lose, the
CTA En Banc should have considered the merits of said petition. By
ruling for the denial of the said petition solely based on technicalities,
the CTA En Banc absolutely foreclosed the resolution of the issues
raised therein. Definitely, justice would have been better served if the
CTA En Banc allowed the resolution of the issues that were raised in
the petition.
This Court agrees with the decision of the CTA Division to give due
course to the petition. Consequently, the CTA Division acquired
jurisdiction to examine the assailed VAT deficiency assessment, and
the latter did not become final and executory.
Furthermore, the Court finds petitioner Foundation's procedural
mistake incommensurate to the grave injustice to be made in violation
of the 1987 Constitution's mandate, and petitioner Foundation's
payment of P122,414,521.70, representing the VAT deficiency.
It is worthy to note that this kind of lenient application of the rules of
procedure for exceptionally persuasive and meritorious reasons is not
novel. In fact, in the case of Tanenglian v. Lorenzo, et al.,[75] this Court
gave due course to the appeal which was not only made through a
wrong mode but was even filed beyond the reglementary period. This
Court recognized the broader interest of justice and reasoned that:[76]
We have not been oblivious to or unmindful of the extraordinary
situations that merit liberal application of the Rules, allowing us,
depending on the circumstances, to set aside technical infirmities and
give due course to the appeal. In cases where we dispense with the
technicalities, we do not mean to undermine the force and effectivity
of the periods set by law. I those rare cases where we did not
stringently apply the procedural rules, there always existed a clear
need to prevent the commission of a grave injustice. Our judicial
system and the courts have always tried to maintain a healthy
balance between the strict enforcement o procedural laws and the
guarantee that every litigant be given the full opportunity for the
just and proper disposition of his cause. x x x.
xxxx
In Sebastian v. Morales, we ruled that rules of procedure must b
faithfully followed except only when, for persuasive reasons, they
may be relaxed to relieve a litigant of an injustice not
commensurate with his failure to comply with the prescribed
procedure, thus:
xxxx
The Court has allowed some meritorious cases to proceed despite
inherent procedural defects and lapses. This is in keeping with the
principle that rules of procedure are mere tools designed to facilitate
the attainment of justice and that strict and rigid application of rules
which would result in technicalities that tend to frustrate rather than
promote substantial justice must always be avoided. It is a far better
and more prudent cause o action for the court to excuse a
technical lapse and afford the parties a review of the case to attain
the ends of justice, rather than dispose of the case on technicality
and cause grave injustice to the parties, giving false impression of
speedy disposal of cases while actually resulting in more delay, if
not a miscarriage of justice. (Emphasis supplied; citation, omitted).
Finally, it is crucial to be reminded that the constitutionally mandated
tax privilege granted to non-stock non-profit educational institutions
plays an important role in promoting quality and affordable education
in the country. In the consolidated cases of Commissioner of Internal
Revenue v. De La Salle University Inc.,[77] this Court discussed the
important role of this tax privilege for educating the students, to wit:
We find that the text demonstrates the policy of the 1987 Constitution,
discernible from the records of the 1986 Constitutional Commission to
provide broader tax privilege to non-stock, non-profit educational
institutions as recognition of their role in assisting the State
provide a public good. The tax exemption was seen as beneficial to
students who may otherwise be charged unreasonable tuition fees
if not for the tax exemption extended to all revenues and assets of
non-stock, non-profit educational institutions. (Emphasis and
underscoring supplied; citations omitted).
Evidently, petitioner Foundation, being a non-stock, non-profit
educational institution, is not liable to the payment of VAT deficiency
assessment, and the CTA En Banc erred in finding otherwise and in
reversing the CTA Division.

WHEREFORE, premises considered, the petition is GRANTED. The

assailed Decision dated April 19, 2012 and Resolution promulgated on
July 17, 2012 of the Court of Tax Appeals En Banc in C.T.A. EB Case
No. 703 are ANULLED and SET ASIDE. Assessment Notice No. 33-
FY 05-31-02 for fiscal year ending May 31, 2002 against petitioner La
Sallian Educational Innovators Foundation (De La Salle University-
College of St. Benilde), Inc. for deficiency income tax in the amount
of ONE HUNDRED TWENTY-TWO MILLION FOUR
HUNDRED FOURTEEN THOUSAND FIVE HUNDRED
TENTY-ONE PESOS & 70/100 (P122,414,521.70) is
hereby CANCELLED.

SO ORDERED.
G.R. No. 78780 July 23, 1987
DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO
A. SAVELLANO, JR., petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE and THE
FINANCIAL OFFICER, SUPREME COURT OF THE
PHILIPPINES, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
Petitioners, the duly appointed and qualified Judges presiding over
Branches 52, 19 and 53, respectively, of the Regional Trial Court,
National Capital Judicial Region, all with stations in Manila, seek to
prohibit and/or perpetually enjoin respondents, the Commissioner of
Internal Revenue and the Financial Officer of the Supreme Court, from
making any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their
emoluments or compensation as judicial officers constitutes a decrease
or diminution of their salaries, contrary to the provision of Section 10,
Article VIII of the 1987 Constitution mandating that "(d)uring their
continuance in office, their salary shall not be decreased," even as it is
anathema to the Ideal of an independent judiciary envisioned in and by
said Constitution."
It may be pointed out that, early on, the Court had dealt with the matter
administratively in response to representations that the Court direct its
Finance Officer to discontinue the withholding of taxes from salaries
of members of the Bench. Thus, on June 4, 1987, the Court en
banc had reaffirmed the Chief Justice's directive as follows:
RE: Question of exemption from income taxation. — The Court
REAFFIRMED the Chief Justice's previous and standing
directive to the Fiscal Management and Budget Office of this
Court to continue with the deduction of the withholding taxes
from the salaries of the Justices of the Supreme Court as well
as from the salaries of all other members of the judiciary.
That should have resolved the question. However, with the filing of
this petition, the Court has deemed it best to settle the legal issue
raised through this judicial pronouncement. As will be shown
hereinafter, the clear intent of the Constitutional Commission was to
delete the proposed express grant of exemption from payment of
income tax to members of the Judiciary, so as to "give substance to
equality among the three branches of Government" in the words of
Commissioner Rigos. In the course of the deliberations, it was further
expressly made clear, specially with regard to Commissioner Joaquin
F. Bernas' accepted amendment to the amendment of Commissioner
Rigos, that the salaries of members of the Judiciary would be subject
to the general income tax applied to all taxpayers.
This intent was somehow and inadvertently not clearly set forth in the
final text of the Constitution as approved and ratified in February,
1987 (infra, pp. 7-8). Although the intent may have been obscured by
the failure to include in the General Provisions a proscription against
exemption of any public officer or employee, including constitutional
officers, from payment of income tax, the Court since then has
authorized the continuation of the deduction of the withholding tax
from the salaries of the members of the Supreme Court, as well as
from the salaries of all other members of the Judiciary. The Court
hereby makes of record that it had then discarded the ruling
in Perfecto vs. Meer and Endencia vs. David, infra, that declared the
salaries of members of the Judiciary exempt from payment of the
income tax and considered such payment as a diminution of their
salaries during their continuance in office. The Court hereby reiterates
that the salaries of Justices and Judges are properly subject to a general
income tax law applicable to all income earners and that the payment
of such income tax by Justices and Judges does not fall within the
constitutional protection against decrease of their salaries during their
continuance in office.
A comparison of the Constitutional provisions involved is called for.
The 1935 Constitution provided:
 ... (The members of the Supreme Court and all judges of
inferior courts) shall receive such compensation as may be
fixed by law, which shall not be diminished during their
continuance in office ... 1 (Emphasis supplied).
Under the 1973 Constitution, the same provision read:
The salary of the Chief Justice and of the Associate Justices of
the Supreme court, and of judges of inferior courts shall be
fixed by law, which shall not be decreased during their
continuance in office. ... 2 (Emphasis ours).
And in respect of income tax exemption, another provision in the same
1973 Constitution specifically stipulated:
No salary or any form of emolument of any public officer or
employee, including constitutional officers, shall be exempt
from payment of income tax. 3
The provision in the 1987 Constitution, which petitioners rely on,
reads:
The salary of the Chief Justice and of the Associate Justices of
the Supreme Court, and of judges of lower courts shall be fixed
by law. During their continuance in office, their salary shall not
be decreased. 4 (Emphasis supplied).
The 1987 Constitution does not contain a provision similar to Section
6, Article XV of the 1973 Constitution, for which reason, petitioners
claim that the intent of the framers is to revert to the original concept
of "non-diminution "of salaries of judicial officers.
The deliberations of the 1986 Constitutional Commission relevant to
Section 10, Article VIII, negate such contention.
The draft proposal of Section 10, Article VIII, of the 1987 Constitution
read:
Section 13. The salary of the Chief Justice and the Associate
Justices of the Supreme Court and of judges of the lower courts
shall be fixed by law. During their continuance in office,
their salary shall not be diminished nor subjected to income
tax. Until the National Assembly shall provide otherwise, the
Chief Justice shall receive an annual salary of _____________
and each Associate Justice ______________
pesos. 5 (Emphasis ours)
During the debates on the draft Article (Committee Report No. 18),
two Commissioners presented their objections to the provision on tax
exemption, thus:
MS. AQUINO. Finally, on the matter of exemption from tax of
the salary of justices, does this not violate the principle of the
uniformity of taxation and the principle of equal protection of
the law? After all, tax is levied not on the salary but on the
combined income, such that when the judge receives a salary
and it is comingled with the other income, we tax the income,
not the salary. Why do we have to give special privileges to the
salary of justices?
MR. CONCEPCION. It is the independence of the judiciary.
We prohibit the increase or decrease of their salary during their
term. This is an indirect way of decreasing their salary and
affecting the independence of the judges.
MS. AQUINO. I appreciate that to be in the nature of a clause
to respect tenure, but the special privilege on taxation might, in
effect, be a violation of the principle of uniformity in taxation
and the equal protection clause. 6
xxx xxx xxx
MR. OPLE. x x x
Of course, we share deeply the concern expressed by the
sponsor, Commissioner Roberto Concepcion, for whom we
have the highest respect, to surround the Supreme Court and
 the judicial system as a whole with the whole armor of defense
against the executive and legislative invasion of their
independence. But in so doing, some of the citizens outside,
especially the humble government employees, might say that in
trying to erect a bastion of justice, we might end up with the
fortress of privileges, an island of extra territoriality under the
Republic of the Philippines, because a good number of powers
and rights accorded to the Judiciary here may not be enjoyed in
the remotest degree by other employees of the government.
An example is the exception from income tax, which is a kind
of economic immunity, which is, of course, denied to the entire
executive department and the legislative. 7
And during the period of amendments on the draft Article, on July 14,
1986, Commissioner Cirilo A. Rigos proposed that the term
"diminished" be changed to "decreased" and that the words "nor
subjected to income tax" be deleted so as to "give substance to equality
among the three branches in the government.
Commissioner Florenz D. Regalado, on behalf of the Committee on
the Judiciary, defended the original draft and referred to the ruling of
this Court in Perfecto vs. Meer 8 that "the independence of the judges
is of far greater importance than any revenue that could come from
taxing their salaries." Commissioner Rigos then moved that the matter
be put to a vote. Commissioner Joaquin G. Bernas stood up "in support
of an amendment to the amendment with the request for a modification
of the amendment," as follows:
FR. BERNAS. Yes. I am going to propose an amendment to
the amendment saying that it is not enough to drop the phrase
"shall not be subjected to income tax," because if that is all that
the Gentleman will do, then he will just fall back on the
decision in Perfecto vs. Meer and in Dencia vs. David [should
be Endencia and Jugo vs. David, etc., 93 Phil. 696[ which
excludes them from income tax, but rather I would propose that
the statement will read: "During their continuance in office,
their salary shall not be diminished BUT MAY BE SUBJECT
TO GENERAL INCOME TAX."IN support of this position, I
would say that the argument seems to be that the justice and
judges should not be subjected to income tax because they
already gave up the income from their practice. That is true
also of Cabinet members and all other employees. And I know
right now, for instance, there are many people who have
accepted employment in the government involving a reduction
of income and yet are still subject to income tax. So, they are
not the only citizens whose income is reduced by accepting
service in government.
Commissioner Rigos accepted the proposed amendment to the
amendment. Commissioner Rustico F. de los Reyes, Jr. then moved for
a suspension of the session. Upon resumption, Commissioner Bernas
announced:
During the suspension, we came to an understanding with the
original proponent, Commissioner Rigos, that his amendment
on page 6,. line 4 would read: "During their continuance in
office, their salary shall not be DECREASED."But this is on
the understanding that there will be a provision in the
Constitution similar to Section 6 of Article XV, the General
Provisions of the 1973 Constitution, which says:
No salary or any form of emolument of any public
officer or employee, including constitutional officers,
shall be exempt from payment of income tax.
So, we put a period (.) after "DECREASED" on the
understanding that the salary of justices is subject to tax.
When queried about the specific Article in the General Provisions on
non-exemption from tax of salaries of public officers, Commissioner
Bernas replied:
FR BERNAS. Yes, I do not know if such an article will be
found in the General Provisions. But at any rate, when we put a
period (.) after "DECREASED," it is on the understanding that
the doctrine in Perfecto vs. Meer and Dencia vs. David will not
apply anymore.
The amendment to the original draft, as discussed and understood, was
finally approved without objection.
THE PRESIDING OFFICER (Mr. Bengzon). The
understanding, therefore, is that there will be a provision under
the Article on General Provisions. Could Commissioner
Rosario Braid kindly take note that the salaries of officials of
the government including constitutional officers shall not be
exempt from income tax? The amendment proposed herein and
accepted by the Committee now reads as follows: "During their
continuance in office, their salary shall not be DECREASED";
and the phrase "nor subjected to income tax" is deleted.9
approval. It would be a strained construction to read into the provision
an exemption from taxation in the light of the discussion in the
Constitutional Commission.
With the foregoing interpretation, and as stated heretofore, the ruling
that "the imposition of income tax upon the salary of judges is a
dimunition thereof, and so violates the Constitution" in Perfecto vs.
Meer,13 as affirmed in Endencia vs. David 14 must be declared
discarded. The framers of the fundamental law, as the alter ego of the
people, have expressed in clear and unmistakable terms the meaning
and import of Section 10, Article VIII, of the 1987 Constitution that
they have adopted

The debates, interpellations and opinions expressed regarding the Stated otherwise, we accord due respect to the intent of the people,
constitutional provision in question until it was finally approved by the through the discussions and deliberations of their representatives, in
Commission disclosed that the true intent of the framers of the 1987 the spirit that all citizens should bear their aliquot part of the cost of
Constitution, in adopting it, was to make the salaries of members of maintaining the government and should share the burden of general
the Judiciary taxable. The ascertainment of that intent is but in keeping income taxation equitably.
with the fundamental principle of constitutional construction that the
intent of the framers of the organic law and of the people adopting it WHEREFORE, the instant petition for Prohibition is hereby dismissed.
should be given effect.10 The primary task in constitutional
construction is to ascertain and thereafter assure the realization of the
purpose of the framers and of the people in the adoption of the
Constitution.11 it may also be safely assumed that the people in
ratifying the Constitution were guided mainly by the explanation
offered by the framers.12 1avvphi1

Besides, construing Section 10, Articles VIII, of the 1987 Constitution,

which, for clarity, is again reproduced hereunder:

The salary of the Chief Justice and of the Associate Justices of

the Supreme Court, and of judges of lower courts shall be fixed
by law. During their continuance in office, their salary shall not
be decreased. (Emphasis supplied).

it is plain that the Constitution authorizes Congress to pass a law fixing

another rate of compensation of Justices and Judges but such rate must
be higher than that which they are receiving at the time of enactment,
or if lower, it would be applicable only to those appointed after its