G.R. No.

134062

April 17, 2007

COMMISSIONER
OF
INTERNAL
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

REVENUE,

Petitioner,

This is a petition for review on certiorari 1 of a decision2 of the Court of Appeals (CA) dated May 29,
1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the
Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case
No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR)
assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and
documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax

P
7,
270,892.88

Add: 25% surcharge

1,817,723.2
2

20% interest from 1-21-87 to 3,215,825.0

10-28-88
3
15,000.00

Compromise penalty
TOTAL AMOUNT
COLLECTIBLE

DUE

AND P12,319,441
.13

1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax

P93,723,372.4
0

Add: 25% surcharge

23,430,843.10

Compromise penalty
TOTAL AMOUNT
COLLECTIBLE

DUE

15,000.00
AND P117,169,215.
50.5

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp taxes have] been assessed as
shown above. Said assessment has been based on return (filed by you) (as verified) (made
by this Office) (pending investigation) (after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial
Treasurer of xxx6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1

1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed,
even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a
deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he
can make an intelligent decision on whether to pay or to protest the assessment. This is all
the more so when the assessment involves astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the briefest
form, why he believes the taxpayer has a deficiency documentary and percentage taxes,
and as to the percentage tax, it is important that the taxpayer be informed also as to what
particular percentage tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise
forged between your office and the Bankers Association of the Philippines [BAP] on this
issue and of BPIs submission of its computations under this compromise. There is therefore
no basis whatsoever for this assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary stamp tax on some other
issue, we should like to be informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how such
assessment may be protested since your letter does not even tell the taxpayer what
particular percentage tax is involved and how your examiner arrived at the deficiency. As
soon as this is explained and clarified in a proper letter of assessment, we shall inform you
of the taxpayers decision on whether to pay or protest the assessment. 7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue Regulations No.
12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised
against the validity of our assessment still we obliged to explain the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the matter. 8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8,
1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21,
1992.10
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated November
16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had
become final and unappealable. The CTA ruled that BPI failed to protest on time under Section
270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11
of RA 1125.12 It denied reconsideration in a resolution dated May 27, 1996. 13
On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the
CTA14 for a decision on the merits. 15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those contained in the May 8, 1991 letter which
provided the reasons for the claimed deficiencies. 16 Thus, it held that BPI filed the petition for
review in the CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
2

1) whether or not the assessments issued to BPI for deficiency percentage and
documentary stamp taxes for 1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices 19 were valid
assessments. If they were not, as held by the CA, then the correct assessments were in the May
8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked
for a reconsideration of the findings which the CIR denied in his December 12, 1991 letter,
received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA
on February 18, 1992 would be well within the 30-day period provided by law. 20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid
assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which
was designed for the precise purpose of notifying taxpayers of the assessed amounts due and
demanding payment thereof.21 He contends that there was no law or jurisprudence then that
required notices to state the reasons for assessing deficiency tax liabilities. 22
BPI counters that due process demanded that the facts, data and law upon which the
assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now
(referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what
due process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a preassessment notice shall not be required
in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
3

xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of
the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the
computation of the tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270
prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR v.
Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which the
assessment of estate taxes had been made. She was merely notified of the findings by the CIR,
who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA]
8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment.
The old requirement of merely notifying the taxpayer of the CIR's findings was
changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an
assessment would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate.
On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also
issued. During those dates, RA 8424 was already in effect. The notice required under the old
law was no longer sufficient under the new law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old
law required a written statement to the taxpayer of the law and facts on which the assessments
were based. The Court cannot read into the law what obviously was not intended by Congress.
That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation of
tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met
the requirements of a valid assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in
1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the
aforequoted sentence.27 The fact that the amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely different meaning.
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not
an affirmation of what the law required under the former Section 270. The amendment introduced
by RA 8424 was an innovation and could not be reasonably inferred from the old law. Clearly, the
legislature intended to insert a new provision regarding the form and substance of assessments
issued by the CIR.
4

In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of
the legal and factual basis of the formers decision to charge the latter for deficiency
documentary stamp and gross receipts taxes. 31
In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to
inform it in writing of the factual and legal bases of the assessments even if these were not
called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no
person shall be deprived of his property without due process of law." 32 We note, however, what
the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice
(which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and
we try to [thresh] out the issues, present evidences as to what they need." Now, how can [BPI]
and/or its counsel honestly tell this Court that they did not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,]
contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant
Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared
worksheets which contain his analysis regarding the findings of the [CIRs] examiner, Mr. San
Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the
nature and basis of the assessments, and was given all the opportunity to contest the same but
ignored it despite the notice conspicuously written on the assessments which states that "this
ASSESSMENT becomes final and unappealable if not protested within 30 days after receipt."
Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such
strategy proved fatal to the cause of his client. 33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise on the
subject, and its conclusions will not be overturned unless there has been an abuse or improvident
exercise of authority. Such findings 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]. 34
Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the
adverse decision on the protest was not appealed to the CTA within 30 days from receipt of the
final decision:35
5

Sec. 270. Protesting of assessment.1a\^/phi1.net

xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become
final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from
receipt of the said decision; otherwise, the decision shall become final, executory and
demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have protested
the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did
not qualify as a protest since the letter itself stated that "[a]s soon as this is explained and
clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on
whether to pay or protest the assessment."36 Hence, by its own declaration, BPI did not
regard this letter as a protest against the assessments. As a matter of fact, BPI never deemed this
a protest since it did not even consider the October 28, 1988 notices as valid or proper
assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the
CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from
disputing the correctness of the assessments or invoking any defense that would reopen the
question of its liability on the merits. 37 Not only that. There arose a presumption of correctness
when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer
has the duty to prove otherwise. In the absence of proof of any irregularities in the performance
of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by
his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax
assessments.38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be
deemed to have failed to appeal the CIRs final decision regarding the disputed assessments
within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was
his "final decision on the matter." BPI therefore had 30 days from the time it received the
decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration
and lodged its appeal in the CTA only on February 18, 1992, way beyond the reglementary period.
BPI must now suffer the repercussions of its omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the
basis of his statement indubitably showing that the Commissioner's communicated
action is his final decision on the contested assessment, the aggrieved taxpayer would
then be able to take recourse to the tax court at the opportune time. Without needless
6

difficulty, the taxpayer would be able to determine when his right to appeal to the tax
court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated requests for
recomputation and reconsideration. On the part of the [CIR], this would encourage his office
to conduct a careful and thorough study of every questioned assessment and render a correct and
definite decision thereon in the first instance. This would also deter the [CIR] from unfairly making
the taxpayer grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need
for fair play, regularity, and orderliness in administrative action. 39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the
subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a
considerable amount of money. Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived of the taxes validly due it and the
public will suffer if taxpayers will not be held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from
the very existence of the state whose social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of the power to tax emanates from
necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare
and well-being of the people.
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of
Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. L-28896 February 17, 1988
COMMISSIONER
OF
INTERNAL
REVENUE,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

petitioner,

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real
purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business
expenses in its income tax returns. The corollary issue is whether or not the appeal of the private
respondent from the decision of the Collector of Internal Revenue was made on time and in
accordance with law.
We deal first with the procedural question.
7

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959. On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2
On March 12, 1965, a warrant of distraint and levy was presented to the private respondent,
through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. A search of the protest in the dockets of the case proved fruitless. Atty. Guevara
produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of
the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any
action on the protest and it was only then that he accepted the warrant of distraint and levy
earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for
review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an
outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office of
the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at
all, considered by the tax authorities. During the intervening period, the warrant was premature
and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not
pro forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on April 7,
1965, when the private respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in the
form of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional
fees to be personal holding company income 12 but later conformed to the decision of the
respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was
earned through the joint efforts of the persons among whom it was distributed It has been
established that the Philippine Sugar Estate Development Company had earlier appointed Algue
as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to
8

such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo
Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other
persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the
said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this commission that the
P75,000.00 promotional fees were paid to the aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members
of the same family in control of Algue. It is argued that no indication was made as to how such
payments were made, whether by check or in cash, and there is not enough substantiation of
such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President,
Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not
made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It
should be remembered that this was a family corporation where strict business procedures were
not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close relationship among the
persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil Investment Corporation to the
actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in
accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance
for salaries or other compensation for personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services
actually rendered. The test of deductibility in the case of compensation payments is
whether they are reasonable and are, in fact, payments purely for service. This test
9

and deductibility in the case of compensation payments is whether they are

reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price
of services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation
having few stockholders, Practically all of whom draw salaries. If in such a case the
salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. .
. . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor
were they its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in a
new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would
be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on
time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by the private respondent was permitted under the Internal Revenue Code and
should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without
costs.
SO ORDERED.

10

G.R. No. 124043 October 14, 1998

COMMISSIONER
OF
INTERNAL
REVENUE,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

petitioner,
MEN'S

CHRISTIAN

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 of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [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
11

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.
xxx xxx xxx
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'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 petitioners, and the income derived therefrom are tax exempt,
must be reversed.
12

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.

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.
xxx xxx xxx
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
13

Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income of
private respondent from rentals of small shops and parking fees [is] exempt from
taxation. 11
This Court's Ruling
The petition is meritorious.
First
Factual Findings of the CTA

Issue:

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 be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts. 14 In the present case, this Court finds that the February
16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to the
facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not the collection
or earnings of rental income from the lease of certain premises and income earned from parking
fees shall fall under the last paragraph of Section 27 of the National Internal Revenue Code of
1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as
indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the law
is on a certain state of facts; there is a question of fact when the doubt or difference arises as to
the truth or falsehood of alleged facts." 16 In the present case, the CA did not doubt, much less
change, the facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second
Is the Rental Income of the YMCA Taxable?

Issue:

14

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
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
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 the tax imposed under this
Code. (as amended by Pres. Decree No. 1457)
Petitioner 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 ". . . 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 . . . ."
Petitioner adds that "rental 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 in
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 tax imposed by the same Code. Because the last paragraph of said section unequivocally
subjects to tax the rent income of the YMCA from its real 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 liberal one
on statutes that grant tax exemptions to "religious, charitable and educational propert[ies] or
institutions." 22
15

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 from the property of the
organization taxable, regardless of how that income is used whether for profit or for lofty nonprofit 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
is 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 one 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 ". . . 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." 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

16

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 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 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 chronologically 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" 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 ". . . school seminary, college or educational establishment . . . ." 46
Therefore, the private respondent cannot be deemed one of the educational institutions covered
by the constitutional provision under consideration.
. . . 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 phases 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
17

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 of 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 has not given any proof that it is an
educational institution, or that part 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 of 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 members 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 REVERSED and SET ASIDE. The Decision of the Court
of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled that the income derived by
petitioner from rentals of its real property is subject to income tax. No pronouncement as to costs.
SO ORDERED.

G.R. No. 115455 August 25, 1994

ARTURO
M.
TOLENTINO,
petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE,
respondents.
18

G.R. No. 115525 August 25, 1994

JUAN
T.
DAVID,
petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as
Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal
Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.
G.R. No. 115543 August 25, 1994
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 August 25, 1994
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA,
petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO
B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115754 August 25, 1994
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 August 25, 1994
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT
COALITION, INC., PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO TAADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF
INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 August 25, 1994
PHILIPPINE
AIRLINES,
INC.,
petitioner,
vs.
THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 115873 August 25, 1994

19

COOPERATIVE
UNION
OF
THE
PHILIPPINES,
petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue,
HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON.
ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115931 August 25, 1994
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF
PHILIPPINE
BOOK-SELLERS,
petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO,
as the Commissioner of Internal Revenue and HON. GUILLERMO PARAYNO, JR., in his
capacity as the Commissioner of Customs, respondents.
The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as
well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or
gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts
from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the
existing VAT system and enhance its administration by amending the National Internal Revenue
Code.
These are various suits for certiorari and prohibition, challenging the constitutionality of Republic
Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as
follows:
I. Procedural Issues:
A. Does Republic Act No. 7716 violate Art. VI, 24 of the Constitution?
B. Does it violate Art. VI, 26(2) of the Constitution?
C. What is the extent of the power of the Bicameral Conference Committee?
II. Substantive Issues:
A. Does the law violate the following provisions in the Bill of Rights (Art. III)?
1. 1
2. 4
3. 5
4. 10
B. Does the law violate the following other provisions of the Constitution?
1. Art. VI, 28(1)
2. Art. VI, 28(3)
20

These questions will be dealt in the order they are stated above. As will presently be explained
not all of these questions are judicially cognizable, because not all provisions of the Constitution
are self executing and, therefore, judicially enforceable. The other departments of the
government are equally charged with the enforcement of the Constitution, especially the
provisions relating to them.
I. PROCEDURAL ISSUES
The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded ValueAdded Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated
in the House of Representatives, it was not passed by the Senate but was simply consolidated
with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the
President signed into law. The following provisions of the Constitution are cited in support of the
proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in
the House of Representatives and it has not thereby become a law:
Art. VI, 24: All appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in
the House of Representatives, but the Senate may propose or concur with
amendments.
Id., 26(2): No bill passed by either House shall become a law unless it has passed
three readings on separate days, and printed copies thereof in its final form have
been distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto shall
be allowed, and the vote thereon shall be taken immediately thereafter, and the
yeas and nays entered in the Journal.
It appears that on various dates between July 22, 1992 and August 31, 1993, several bills 1 were
introduced in the House of Representatives seeking to amend certain provisions of the National
Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the
House Ways and Means Committee which recommended for approval a substitute measure, H.
No. 11197, entitled
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX
BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115
AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS
113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED
The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on
November 17, 1993, it was approved by the House of Representatives after third and final
reading.
It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee
on Ways and Means.
On February 7, 1994, the Senate Committee submitted its report recommending approval of S.
No. 1630, entitled
21

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX
BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES
SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE
V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116
OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND
FOR OTHER PURPOSES
It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197."
On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates
on the bill and approved it on second reading on March 24, 1994. On the same day, it approved
the bill on third reading by the affirmative votes of 13 of its members, with one abstention.
H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee
which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill
No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the
attached copy of the bill as reconciled and approved by the conferees."
The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT)
SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the
House of Representatives on April 27, 1994 and by the Senate on May 2, 1994. The enrolled bill
was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became
Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two newspapers
of general circulation and, on May 28, 1994, it took effect, although its implementation was
suspended until June 30, 1994 to allow time for the registration of business entities. It would have
been enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of
11 to 4 of its members, granted a temporary restraining order on June 30, 1994.
First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the
House of Representatives as required by Art. VI, 24 of the Constitution, because it is in fact the
result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection,
petitioners point out that although Art. VI, SS 24 was adopted from the American Federal
Constitution, 2 it is notable in two respects: the verb "shall originate" is qualified in the Philippine
Constitution by the word "exclusively" and the phrase "as on other bills" in the American version
is omitted. This means, according to them, that to be considered as having originated in the
House, Republic Act No. 7716 must retain the essence of H. No. 11197.
This argument will not bear analysis. To begin with, it is not the law but the revenue bill
which is required by the Constitution to "originate exclusively" in the House of Representatives. It
is important to emphasize this, because a bill originating in the House may undergo such
extensive changes in the Senate that the result may be a rewriting of the whole. The possibility of
a third version by the conference committee will be discussed later. At this point, what is
important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist
that a revenue statute and not only the bill which initiated the legislative process culminating
in the enactment of the law must substantially be the same as the House bill would be to deny
the Senate's power not only to "concur with amendments" but also to "propose amendments." It
would be to violate the coequality of legislative power of the two houses of Congress and in fact
make the House superior to the Senate.
22

The contention that the constitutional design is to limit the Senate's power in respect of revenue
bills in order to compensate for the grant to the Senate of the treaty-ratifying power 3 and thereby
equalize its powers and those of the House overlooks the fact that the powers being compared
are different. We are dealing here with the legislative power which under the Constitution is
vested not in any particular chamber but in the Congress of the Philippines, consisting of "a
Senate and a House of Representatives." 4 The exercise of the treaty-ratifying power is not the
exercise of legislative power. It is the exercise of a check on the executive power. There is,
therefore, no justification for comparing the legislative powers of the House and of the Senate on
the basis of the possession of such nonlegislative power by the Senate. The possession of a
similar power by the U.S. Senate 5 has never been thought of as giving it more legislative powers
than the House of Representatives.
In the United States, the validity of a provision ( 37) imposing an ad valorem tax based on the
weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against
the claim that the provision was a revenue bill which originated in the Senate in contravention of
Art. I, 7 of the U.S. Constitution. 6 Nor is the power to amend limited to adding a provision or two
in a revenue bill emanating from the House. The U.S. Senate has gone so far as changing the
whole of bills following the enacting clause and substituting its own versions. In 1883, for
example, it struck out everything after the enacting clause of a tariff bill and wrote in its place its
own measure, and the House subsequently accepted the amendment. The U.S. Senate likewise
added 847 amendments to what later became the Payne-Aldrich Tariff Act of 1909; it dictated the
schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and
recast most of the tariff bill of 1922. 7 Given, then, the power of the Senate to propose
amendments, the Senate can propose its own version even with respect to bills which are
required by the Constitution to originate in the House.
It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of
another Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H.
No. 11197] into consideration" in enacting S. No. 1630. There is really no difference between the
Senate preserving H. No. 11197 up to the enacting clause and then writing its own version
following the enacting clause (which, it would seem, petitioners admit is an amendment by
substitution), and, on the other hand, separately presenting a bill of its own on the same subject
matter. In either case the result are two bills on the same subject.
Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax
bills, bills authorizing an increase of the public debt, private bills and bills of local application must
come from the House of Representatives on the theory that, elected as they are from the districts,
the members of the House can be expected to be more sensitive to the local needs and problems.
On the other hand, the senators, who are elected at large, are expected to approach the same
problems from the national perspective. Both views are thereby made to bear on the enactment
of such laws.
Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its
receipt of the bill from the House, so long as action by the Senate as a body is withheld pending
receipt of the House bill. The Court cannot, therefore, understand the alarm expressed over the
fact that on March 1, 1993, eight months before the House passed H. No. 11197, S. No. 1129 had
been filed in the Senate. After all it does not appear that the Senate ever considered it. It was
only after the Senate had received H. No. 11197 on November 23, 1993 that the process of
legislation in respect of it began with the referral to the Senate Committee on Ways and Means of
H. No. 11197 and the submission by the Committee on February 7, 1994 of S. No. 1630. For that
matter, if the question were simply the priority in the time of filing of bills, the fact is that it was in
the House that a bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several
23

other bills had been filed in the House before S. No. 1129 was filed in the Senate, and H. No.
11197 was only a substitute of those earlier bills.
Second. Enough has been said to show that it was within the power of the Senate to propose S.
No. 1630. We now pass to the next argument of petitioners that S. No. 1630 did not pass three
readings on separate days as required by the Constitution 8 because the second and third
readings were done on the same day, March 24, 1994. But this was because on February 24, 1994
9
and again on March 22, 1994, 10 the President had certified S. No. 1630 as urgent. The
presidential certification dispensed with the requirement not only of printing but also that of
reading the bill on separate days. The phrase "except when the President certifies to the
necessity of its immediate enactment, etc." in Art. VI, 26(2) qualifies the two stated conditions
before a bill can become a law: (i) the bill has passed three readings on separate days and (ii) it
has been printed in its final form and distributed three days before it is finally approved.
In other words, the "unless" clause must be read in relation to the "except" clause, because the
two are really coordinate clauses of the same sentence. To construe the "except" clause as simply
dispensing with the second requirement in the "unless" clause (i.e., printing and distribution three
days before final approval) would not only violate the rules of grammar. It would also negate the
very premise of the "except" clause: the necessity of securing the immediate enactment of a bill
which is certified in order to meet a public calamity or emergency. For if it is only the printing that
is dispensed with by presidential certification, the time saved would be so negligible as to be of
any use in insuring immediate enactment. It may well be doubted whether doing away with the
necessity of printing and distributing copies of the bill three days before the third reading would
insure speedy enactment of a law in the face of an emergency requiring the calling of a special
election for President and Vice-President. Under the Constitution such a law is required to be
made within seven days of the convening of Congress in emergency session. 11
That upon the certification of a bill by the President the requirement of three readings on separate
days and of printing and distribution can be dispensed with is supported by the weight of
legislative practice. For example, the bill defining the certiorari jurisdiction of this Court which, in
consolidation with the Senate version, became Republic Act No. 5440, was passed on second and
third readings in the House of Representatives on the same day (May 14, 1968) after the bill had
been certified by the President as urgent. 12
There is, therefore, no merit in the contention that presidential certification dispenses only with
the requirement for the printing of the bill and its distribution three days before its passage but
not with the requirement of three readings on separate days, also.
It is nonetheless urged that the certification of the bill in this case was invalid because there was
no emergency, the condition stated in the certification of a "growing budget deficit" not being an
unusual condition in this country.
It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis
of the certification. To the contrary, by passing S. No. 1630 on second and third readings on March
24, 1994, the Senate accepted the President's certification. Should such certification be now
reviewed by this Court, especially when no evidence has been shown that, because S. No. 1630
was taken up on second and third readings on the same day, the members of the Senate were
deprived of the time needed for the study of a vital piece of legislation?
The sufficiency of the factual basis of the suspension of the writ of habeas corpus or declaration
of martial law under Art. VII, 18, or the existence of a national emergency justifying the
delegation of extraordinary powers to the President under Art. VI, 23(2), is subject to judicial
24

review because basic rights of individuals may be at hazard. But the factual basis of presidential
certification of bills, which involves doing away with procedural requirements designed to insure
that bills are duly considered by members of Congress, certainly should elicit a different standard
of review.
Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No.
11197. That is because S. No. 1630 was what the Senate was considering. When the matter was
before the House, the President likewise certified H. No. 9210 the pending in the House.
Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the
Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that
the Conference Committee report included provisions not found in either the House bill or the
Senate bill and that these provisions were "surreptitiously" inserted by the Conference
Committee. Much is made of the fact that in the last two days of its session on April 21 and 25,
1994 the Committee met behind closed doors. We are not told, however, whether the provisions
were not the result of the give and take that often mark the proceedings of conference
committees.
Nor is there anything unusual or extraordinary about the fact that the Conference Committee met
in executive sessions. Often the only way to reach agreement on conflicting provisions is to meet
behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be
made. The Court is not about to take the suggestion of a cabal or sinister motive attributed to the
conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read
anything into the incomplete remarks of the members, marked in the transcript of stenographic
notes by ellipses. The incomplete sentences are probably due to the stenographer's own
limitations or to the incoherence that sometimes characterize conversations. William Safire noted
some such lapses in recorded talks even by recent past Presidents of the United States.
In any event, in the United States conference committees had been customarily held in executive
sessions with only the conferees and their staffs in attendance. 13 Only in November 1975 was a
new rule adopted requiring open sessions. Even then a majority of either chamber's conferees
may vote in public to close the meetings. 14
As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been
explained:
Under congressional rules of procedure, conference committees are not expected to
make any material change in the measure at issue, either by deleting provisions to
which both houses have already agreed or by inserting new provisions. But this is a
difficult provision to enforce. Note the problem when one house amends a proposal
originating in either house by striking out everything following the enacting clause
and substituting provisions which make it an entirely new bill. The versions are now
altogether different, permitting a conference committee to draft essentially a new
bill. . . . 15
The result is a third version, which is considered an "amendment in the nature of a substitute,"
the only requirement for which being that the third version be germane to the subject of the
House and Senate bills. 16
Indeed, this Court recently held that it is within the power of a conference committee to include in
its report an entirely new provision that is not found either in the House bill or in the Senate bill. 17
If the committee can propose an amendment consisting of one or two provisions, there is no
25

reason why it cannot propose several provisions, collectively considered as an "amendment in the
nature of a substitute," so long as such amendment is germane to the subject of the bills before
the committee. After all, its report was not final but needed the approval of both houses of
Congress to become valid as an act of the legislative department. The charge that in this case the
Conference Committee acted as a third legislative chamber is thus without any basis. 18
Nonetheless, it is argued that under the respective Rules of the Senate and the House of
Representatives a conference committee can only act on the differing provisions of a Senate bill
and a House bill, and that contrary to these Rules the Conference Committee inserted provisions
not found in the bills submitted to it. The following provisions are cited in support of this
contention:
Rules of the Senate
Rule XII:
26. In the event that the Senate does not agree with the House of Representatives
on the provision of any bill or joint resolution, the differences shall be settled by a
conference committee of both Houses which shall meet within ten days after their
composition.
The President shall designate the members of the conference committee in
accordance with subparagraph (c), Section 3 of Rule III.
Each Conference Committee Report shall contain a detailed and sufficiently explicit
statement of the changes in or amendments to the subject measure, and shall be
signed by the conferees.
The consideration of such report shall not be in order unless the report has been filed
with the Secretary of the Senate and copies thereof have been distributed to the
Members.
(Emphasis added)
Rules of the House of Representatives
Rule XIV:
85. Conference Committee Reports. In the event that the House does not agree
with the Senate on the amendments to any bill or joint resolution, the differences
may be settled by conference committees of both Chambers.
The consideration of conference committee reports shall always be in order, except
when the journal is being read, while the roll is being called or the House is dividing
on any question. Each of the pages of such reports shall be signed by the conferees.
Each report shall contain a detailed, sufficiently explicit statement of the changes in
or amendments to the subject measure.
The consideration of such report shall not be in order unless copies thereof are
distributed to the Members: Provided, That in the last fifteen days of each session
period it shall be deemed sufficient that three copies of the report, signed as above
provided, are deposited in the office of the Secretary General.
26

(Emphasis added)
To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting
provisions. But Rule XLIV, 112 of the Rules of the Senate is cited to the effect that "If there is no
Rule applicable to a specific case the precedents of the Legislative Department of the Philippines
shall be resorted to, and as a supplement of these, the Rules contained in Jefferson's Manual." The
following is then quoted from the Jefferson's Manual:
The managers of a conference must confine themselves to the differences
committed to them. . . and may not include subjects not within disagreements, even
though germane to a question in issue.
Note that, according to Rule XLIX, 112, in case there is no specific rule applicable, resort must
be to the legislative practice. The Jefferson's Manual is resorted to only as supplement. It is
common place in Congress that conference committee reports include new matters which, though
germane, have not been committed to the committee. This practice was admitted by Senator
Raul S. Roco, petitioner in G.R. No. 115543, during the oral argument in these cases. Whatever,
then, may be provided in the Jefferson's Manual must be considered to have been modified by the
legislative practice. If a change is desired in the practice it must be sought in Congress since this
question is not covered by any constitutional provision but is only an internal rule of each house.
Thus, Art. VI, 16(3) of the Constitution provides that "Each House may determine the rules of its
proceedings. . . ."
This observation applies to the other contention that the Rules of the two chambers were likewise
disregarded in the preparation of the Conference Committee Report because the Report did not
contain a "detailed and sufficiently explicit statement of changes in, or amendments to, the
subject measure." The Report used brackets and capital letters to indicate the changes. This is a
standard practice in bill-drafting. We cannot say that in using these marks and symbols the
Committee violated the Rules of the Senate and the House. Moreover, this Court is not the proper
forum for the enforcement of these internal Rules. To the contrary, as we have already ruled,
"parliamentary rules are merely procedural and with their observance the courts have no
concern." 19 Our concern is with the procedural requirements of the Constitution for the
enactment of laws. As far as these requirements are concerned, we are satisfied that they have
been faithfully observed in these cases.
Nor is there any reason for requiring that the Committee's Report in these cases must have
undergone three readings in each of the two houses. If that be the case, there would be no end to
negotiation since each house may seek modifications of the compromise bill. The nature of the
bill, therefore, requires that it be acted upon by each house on a "take it or leave it" basis, with
the only alternative that if it is not approved by both houses, another conference committee must
be appointed. But then again the result would still be a compromise measure that may not be
wholly satisfying to both houses.
Art. VI, 26(2) must, therefore, be construed as referring only to bills introduced for the first time
in either house of Congress, not to the conference committee report. For if the purpose of
requiring three readings is to give members of Congress time to study bills, it cannot be gainsaid
that H. No. 11197 was passed in the House after three readings; that in the Senate it was
considered on first reading and then referred to a committee of that body; that although the
Senate committee did not report out the House bill, it submitted a version (S. No. 1630) which it
had prepared by "taking into consideration" the House bill; that for its part the Conference
Committee consolidated the two bills and prepared a compromise version; that the Conference
Committee Report was thereafter approved by the House and the Senate, presumably after
27

appropriate study by their members. We cannot say that, as a matter of fact, the members of
Congress were not fully informed of the provisions of the bill. The allegation that the Conference
Committee usurped the legislative power of Congress is, in our view, without warrant in fact and
in law.
Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be
resolved in its favor. Our cases 20 manifest firm adherence to the rule that an enrolled copy of a
bill is conclusive not only of its provisions but also of its due enactment. Not even claims that a
proposed constitutional amendment was invalid because the requisite votes for its approval had
not been obtained 21 or that certain provisions of a statute had been "smuggled" in the printing of
the bill 22 have moved or persuaded us to look behind the proceedings of a coequal branch of the
government. There is no reason now to depart from this rule.
No claim is here made that the "enrolled bill" rule is absolute. In fact in one case 23 we "went
behind" an enrolled bill and consulted the Journal to determine whether certain provisions of a
statute had been approved by the Senate in view of the fact that the President of the Senate
himself, who had signed the enrolled bill, admitted a mistake and withdrew his signature, so that
in effect there was no longer an enrolled bill to consider.
But where allegations that the constitutional procedures for the passage of bills have not been
observed have no more basis than another allegation that the Conference Committee
"surreptitiously" inserted provisions into a bill which it had prepared, we should decline the
invitation to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in such
cases would be to disregard the respect due the other two departments of our government.
Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the
Philippine Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, 26(1) which
provides that "Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided
for removal of exemption of PAL transactions from the payment of the VAT and that this was made
only in the Conference Committee bill which became Republic Act No. 7716 without reflecting this
fact in its title.
The title of Republic Act No. 7716 is:
AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX
BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES.
Among the provisions of the NIRC amended is 103, which originally read:
103. Exempt transactions. The following shall be exempt from the value-added
tax:
....
(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory. Among the transactions exempted from the VAT
were those of PAL because it was exempted under its franchise (P.D. No. 1590) from
the payment of all "other taxes . . . now or in the near future," in consideration of the
payment by it either of the corporate income tax or a franchise tax of 2%.
28

As a result of its amendment by Republic Act No. 7716, 103 of the NIRC now provides:
103. Exempt transactions. The following shall be exempt from the value-added
tax:
....
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is
concerned.
The question is whether this amendment of 103 of the NIRC is fairly embraced in the title of
Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among those
which the statute amends. We think it is, since the title states that the purpose of the statute is to
expand the VAT system, and one way of doing this is to widen its base by withdrawing some of
the exemptions granted before. To insist that P.D. No. 1590 be mentioned in the title of the law, in
addition to 103 of the NIRC, in which it is specifically referred to, would be to insist that the title
of a bill should be a complete index of its content.
The constitutional requirement that every bill passed by Congress shall embrace only one subject
which shall be expressed in its title is intended to prevent surprise upon the members of Congress
and to inform the people of pending legislation so that, if they wish to, they can be heard
regarding it. If, in the case at bar, petitioner did not know before that its exemption had been
withdrawn, it is not because of any defect in the title but perhaps for the same reason other
statutes, although published, pass unnoticed until some event somehow calls attention to their
existence. Indeed, the title of Republic Act No. 7716 is not any more general than the title of PAL's
own franchise under P.D. No. 1590, and yet no mention is made of its tax exemption. The title of
P.D. No. 1590 is:
AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH,
OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND
BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.
The trend in our cases is to construe the constitutional requirement in such a manner that courts
do not unduly interfere with the enactment of necessary legislation and to consider it sufficient if
the title expresses the general subject of the statute and all its provisions are germane to the
general subject thus expressed. 24
It is further contended that amendment of petitioner's franchise may only be made by special
law, in view of 24 of P.D. No. 1590 which provides:
This franchise, as amended, or any section or provision hereof may only be modified,
amended, or repealed expressly by a special law or decree that shall specifically
modify, amend, or repeal this franchise or any section or provision thereof.
This provision is evidently intended to prevent the amendment of the franchise by mere
implication resulting from the enactment of a later inconsistent statute, in consideration of the
fact that a franchise is a contract which can be altered only by consent of the parties. Thus in
Manila
Railroad
Co.
v.
Rafferty, 25 it was held that an Act of the U.S. Congress, which provided for the payment of tax on
29

certain goods and articles imported into the Philippines, did not amend the franchise of plaintiff,
which exempted it from all taxes except those mentioned in its franchise. It was held that a
special law cannot be amended by a general law.
In contrast, in the case at bar, Republic Act No. 7716 expressly amends PAL's franchise (P.D. No.
1590) by specifically excepting from the grant of exemptions from the VAT PAL's exemption under
P.D. No. 1590. This is within the power of Congress to do under Art. XII, 11 of the Constitution,
which provides that the grant of a franchise for the operation of a public utility is subject to
amendment, alteration or repeal by Congress when the common good so requires.
II. SUBSTANTIVE ISSUES
A. Claims of Press Freedom, Freedom of Thought and
Religious Freedom
The Philippine Press Institute (PPI), petitioner in G.R. No. 115544, is a nonprofit organization of
newspaper publishers established for the improvement of journalism in the Philippines. On the
other hand, petitioner in G.R. No. 115781, the Philippine Bible Society (PBS), is a nonprofit
organization engaged in the printing and distribution of bibles and other religious articles. Both
petitioners claim violations of their rights under 4 and 5 of the Bill of Rights as a result of the
enactment of the VAT Law.
The PPI questions the law insofar as it has withdrawn the exemption previously granted to the
press under 103 (f) of the NIRC. Although the exemption was subsequently restored by
administrative regulation with respect to the circulation income of newspapers, the PPI presses its
claim because of the possibility that the exemption may still be removed by mere revocation of
the regulation of the Secretary of Finance. On the other hand, the PBS goes so far as to question
the Secretary's power to grant exemption for two reasons: (1) The Secretary of Finance has no
power to grant tax exemption because this is vested in Congress and requires for its exercise the
vote of a majority of all its members 26 and (2) the Secretary's duty is to execute the law.
103 of the NIRC contains a list of transactions exempted from VAT. Among the transactions
previously granted exemption were:
(f) Printing, publication, importation or sale of books and any newspaper, magazine,
review, or bulletin which appears at regular intervals with fixed prices for
subscription and sale and which is devoted principally to the publication of
advertisements.
Republic Act No. 7716 amended 103 by deleting (f) with the result that print media became
subject to the VAT with respect to all aspects of their operations. Later, however, based on a
memorandum of the Secretary of Justice, respondent Secretary of Finance issued Revenue
Regulations No. 11-94, dated June 27, 1994, exempting the "circulation income of print media
pursuant to 4 Article III of the 1987 Philippine Constitution guaranteeing against abridgment of
freedom of the press, among others." The exemption of "circulation income" has left income from
advertisements still subject to the VAT.
It is unnecessary to pass upon the contention that the exemption granted is beyond the authority
of the Secretary of Finance to give, in view of PPI's contention that even with the exemption of the
circulation revenue of print media there is still an unconstitutional abridgment of press freedom
because of the imposition of the VAT on the gross receipts of newspapers from advertisements
and on their acquisition of paper, ink and services for publication. Even on the assumption that no
30

exemption has effectively been granted to print media transactions, we find no violation of press
freedom in these cases.
To be sure, we are not dealing here with a statute that on its face operates in the area of press
freedom. The PPI's claim is simply that, as applied to newspapers, the law abridges press
freedom. Even with due recognition of its high estate and its importance in a democratic society,
however, the press is not immune from general regulation by the State. It has been held:
The publisher of a newspaper has no immunity from the application of general laws.
He has no special privilege to invade the rights and liberties of others. He must
answer for libel. He may be punished for contempt of court. . . . Like others, he must
pay equitable and nondiscriminatory taxes on his business. . . . 27
The PPI does not dispute this point, either.
What it contends is that by withdrawing the exemption previously granted to print media
transactions involving printing, publication, importation or sale of newspapers, Republic Act No.
7716 has singled out the press for discriminatory treatment and that within the class of mass
media the law discriminates against print media by giving broadcast media favored treatment. We
have carefully examined this argument, but we are unable to find a differential treatment of the
press by the law, much less any censorial motivation for its enactment. If the press is now
required to pay a value-added tax on its transactions, it is not because it is being singled out,
much less targeted, for special treatment but only because of the removal of the exemption
previously granted to it by law. The withdrawal of exemption is all that is involved in these cases.
Other transactions, likewise previously granted exemption, have been delisted as part of the
scheme to expand the base and the scope of the VAT system. The law would perhaps be open to
the charge of discriminatory treatment if the only privilege withdrawn had been that granted to
the press. But that is not the case.
The situation in the case at bar is indeed a far cry from those cited by the PPI in support of its
claim that Republic Act No. 7716 subjects the press to discriminatory taxation. In the cases cited,
the discriminatory purpose was clear either from the background of the law or from its operation.
For example, in Grosjean v. American Press Co., 28 the law imposed a license tax equivalent to 2%
of the gross receipts derived from advertisements only on newspapers which had a circulation of
more than 20,000 copies per week. Because the tax was not based on the volume of
advertisement alone but was measured by the extent of its circulation as well, the law applied
only to the thirteen large newspapers in Louisiana, leaving untaxed four papers with circulation of
only slightly less than 20,000 copies a week and 120 weekly newspapers which were in serious
competition with the thirteen newspapers in question. It was well known that the thirteen
newspapers had been critical of Senator Huey Long, and the Long-dominated legislature of
Louisiana respondent by taxing what Long described as the "lying newspapers" by imposing on
them "a tax on lying." The effect of the tax was to curtail both their revenue and their circulation.
As the U.S. Supreme Court noted, the tax was "a deliberate and calculated device in the guise of
a tax to limit the circulation of information to which the public is entitled in virtue of the
constitutional guaranties." 29 The case is a classic illustration of the warning that the power to tax
is the power to destroy.
In the other case 30 invoked by the PPI, the press was also found to have been singled out
because everything was exempt from the "use tax" on ink and paper, except the press. Minnesota
imposed a tax on the sales of goods in that state. To protect the sales tax, it enacted a
complementary tax on the privilege of "using, storing or consuming in that state tangible personal
property" by eliminating the residents' incentive to get goods from outside states where the sales
31

tax might be lower. The Minnesota Star Tribune was exempted from both taxes from 1967 to
1971. In 1971, however, the state legislature amended the tax scheme by imposing the "use tax"
on the cost of paper and ink used for publication. The law was held to have singled out the press
because (1) there was no reason for imposing the "use tax" since the press was exempt from the
sales tax and (2) the "use tax" was laid on an "intermediate transaction rather than the ultimate
retail sale." Minnesota had a heavy burden of justifying the differential treatment and it failed to
do so. In addition, the U.S. Supreme Court found the law to be discriminatory because the
legislature, by again amending the law so as to exempt the first $100,000 of paper and ink used,
further narrowed the coverage of the tax so that "only a handful of publishers pay any tax at all
and even fewer pay any significant amount of tax." 31 The discriminatory purpose was thus very
clear.
More recently, in Arkansas Writers' Project, Inc. v. Ragland, 32 it was held that a law which taxed
general interest magazines but not newspapers and religious, professional, trade and sports
journals was discriminatory because while the tax did not single out the press as a whole, it
targeted a small group within the press. What is more, by differentiating on the basis of contents
(i.e., between general interest and special interests such as religion or sports) the law became
"entirely incompatible with the First Amendment's guarantee of freedom of the press."
These cases come down to this: that unless justified, the differential treatment of the press
creates risks of suppression of expression. In contrast, in the cases at bar, the statute applies to a
wide range of goods and services. The argument that, by imposing the VAT only on print media
whose gross sales exceeds P480,000 but not more than P750,000, the law discriminates 33 is
without merit since it has not been shown that as a result the class subject to tax has been
unreasonably narrowed. The fact is that this limitation does not apply to the press along but to all
sales. Nor is impermissible motive shown by the fact that print media and broadcast media are
treated differently. The press is taxed on its transactions involving printing and publication, which
are different from the transactions of broadcast media. There is thus a reasonable basis for the
classification.
The cases canvassed, it must be stressed, eschew any suggestion that "owners of newspapers are
immune from any forms of ordinary taxation." The license tax in the Grosjean case was declared
invalid because it was "one single in kind, with a long history of hostile misuse against the
freedom
of
the
press." 34 On the other hand, Minneapolis Star acknowledged that "The First Amendment does not
prohibit all regulation of the press [and that] the States and the Federal Government can subject
newspapers to generally applicable economic regulations without creating constitutional
problems." 35
What has been said above also disposes of the allegations of the PBS that the removal of the
exemption of printing, publication or importation of books and religious articles, as well as their
printing and publication, likewise violates freedom of thought and of conscience. For as the U.S.
Supreme Court unanimously held in Jimmy Swaggart Ministries v. Board of Equalization, 36 the
Free Exercise of Religion Clause does not prohibit imposing a generally applicable sales and use
tax on the sale of religious materials by a religious organization.
This brings us to the question whether the registration provision of the law, 37 although of general
applicability, nonetheless is invalid when applied to the press because it lays a prior restraint on
its essential freedom. The case of American Bible Society v. City of Manila 38 is cited by both the
PBS and the PPI in support of their contention that the law imposes censorship. There, this Court
held that an ordinance of the City of Manila, which imposed a license fee on those engaged in the
business of general merchandise, could not be applied to the appellant's sale of bibles and other
religious literature. This Court relied on Murdock v. Pennsylvania, 39 in which it was held that, as a
32

license fee is fixed in amount and unrelated to the receipts of the taxpayer, the license fee, when
applied to a religious sect, was actually being imposed as a condition for the exercise of the sect's
right under the Constitution. For that reason, it was held, the license fee "restrains in advance
those constitutional liberties of press and religion and inevitably tends to suppress their exercise."
40

But, in this case, the fee in 107, although a fixed amount (P1,000), is not imposed for the
exercise of a privilege but only for the purpose of defraying part of the cost of registration. The
registration requirement is a central feature of the VAT system. It is designed to provide a record
of tax credits because any person who is subject to the payment of the VAT pays an input tax,
even as he collects an output tax on sales made or services rendered. The registration fee is thus
a mere administrative fee, one not imposed on the exercise of a privilege, much less a
constitutional right.
For the foregoing reasons, we find the attack on Republic Act No. 7716 on the ground that it
offends the free speech, press and freedom of religion guarantees of the Constitution to be
without merit. For the same reasons, we find the claim of the Philippine Educational Publishers
Association (PEPA) in G.R. No. 115931 that the increase in the price of books and other
educational materials as a result of the VAT would violate the constitutional mandate to the
government to give priority to education, science and technology (Art. II, 17) to be untenable.

B. Claims of Regressivity, Denial of Due Process, Equal

Protection,
and
Impairment
of Contracts
There is basis for passing upon claims that on its face the statute violates the guarantees of
freedom of speech, press and religion. The possible "chilling effect" which it may have on the
essential freedom of the mind and conscience and the need to assure that the channels of
communication are open and operating importunately demand the exercise of this Court's power
of review.
There is, however, no justification for passing upon the claims that the law also violates the rule
that taxation must be progressive and that it denies petitioners' right to due process and that
equal protection of the laws. The reason for this different treatment has been cogently stated by
an eminent authority on constitutional law thus: "[W]hen freedom of the mind is imperiled by law,
it is freedom that commands a momentum of respect; when property is imperiled it is the
lawmakers' judgment that commands respect. This dual standard may not precisely reverse the
presumption of constitutionality in civil liberties cases, but obviously it does set up a hierarchy of
values within the due process clause." 41
Indeed, the absence of threat of immediate harm makes the need for judicial intervention less
evident and underscores the essential nature of petitioners' attack on the law on the grounds of
regressivity, denial of due process and equal protection and impairment of contracts as a mere
academic discussion of the merits of the law. For the fact is that there have even been no notices
of assessments issued to petitioners and no determinations at the administrative levels of their
claims so as to illuminate the actual operation of the law and enable us to reach sound judgment
regarding so fundamental questions as those raised in these suits.
Thus, the broad argument against the VAT is that it is regressive and that it violates the
requirement that "The rule of taxation shall be uniform and equitable [and] Congress shall evolve
33

a progressive system of taxation." 42 Petitioners in G.R. No. 115781 quote from a paper, entitled
"VAT Policy Issues: Structure, Regressivity, Inflation and Exports" by Alan A. Tait of the
International Monetary Fund, that "VAT payment by low-income households will be a higher
proportion of their incomes (and expenditures) than payments by higher-income households. That
is, the VAT will be regressive." Petitioners contend that as a result of the uniform 10% VAT, the tax
on consumption goods of those who are in the higher-income bracket, which before were taxed at
a rate higher than 10%, has been reduced, while basic commodities, which before were taxed at
rates ranging from 3% to 5%, are now taxed at a higher rate.
Just as vigorously as it is asserted that the law is regressive, the opposite claim is pressed by
respondents that in fact it distributes the tax burden to as many goods and services as possible
particularly to those which are within the reach of higher-income groups, even as the law exempts
basic goods and services. It is thus equitable. The goods and properties subject to the VAT are
those used or consumed by higher-income groups. These include real properties held primarily for
sale to customers or held for lease in the ordinary course of business, the right or privilege to use
industrial, commercial or scientific equipment, hotels, restaurants and similar places, tourist
buses, and the like. On the other hand, small business establishments, with annual gross sales of
less than P500,000, are exempted. This, according to respondents, removes from the coverage of
the law some 30,000 business establishments. On the other hand, an occasional paper 43 of the
Center for Research and Communication cities a NEDA study that the VAT has minimal impact on
inflation and income distribution and that while additional expenditure for the lowest income class
is only P301 or 1.49% a year, that for a family earning P500,000 a year or more is P8,340 or 2.2%.
Lacking empirical data on which to base any conclusion regarding these arguments, any
discussion whether the VAT is regressive in the sense that it will hit the "poor" and middle-income
group in society harder than it will the "rich," as the Cooperative Union of the Philippines (CUP)
claims in G.R. No. 115873, is largely an academic exercise. On the other hand, the CUP's
contention that Congress' withdrawal of exemption of producers cooperatives, marketing
cooperatives, and service cooperatives, while maintaining that granted to electric cooperatives,
not only goes against the constitutional policy to promote cooperatives as instruments of social
justice (Art. XII, 15) but also denies such cooperatives the equal protection of the law is actually
a policy argument. The legislature is not required to adhere to a policy of "all or none" in choosing
the subject of taxation. 44
Nor is the contention of the Chamber of Real Estate and Builders Association (CREBA), petitioner
in G.R. 115754, that the VAT will reduce the mark up of its members by as much as 85% to 90%
any more concrete. It is a mere allegation. On the other hand, the claim of the Philippine Press
Institute, petitioner in G.R. No. 115544, that the VAT will drive some of its members out of
circulation because their profits from advertisements will not be enough to pay for their tax
liability, while purporting to be based on the financial statements of the newspapers in question,
still falls short of the establishment of facts by evidence so necessary for adjudicating the
question whether the tax is oppressive and confiscatory.
Indeed, regressivity is not a negative standard for courts to enforce. What Congress is required by
the Constitution to do is to "evolve a progressive system of taxation." This is a directive to
Congress, just like the directive to it to give priority to the enactment of laws for the enhancement
of human dignity and the reduction of social, economic and political inequalities (Art. XIII, 1), or
for the promotion of the right to "quality education" (Art. XIV, 1). These provisions are put in the
Constitution as moral incentives to legislation, not as judicially enforceable rights.
At all events, our 1988 decision in Kapatiran 45 should have laid to rest the questions now raised
against the VAT. There similar arguments made against the original VAT Law (Executive Order No.
273) were held to be hypothetical, with no more basis than newspaper articles which this Court
34

found to be "hearsay and [without] evidentiary value." As Republic Act No. 7716 merely expands
the base of the VAT system and its coverage as provided in the original VAT Law, further debate
on the desirability and wisdom of the law should have shifted to Congress.
Only slightly less abstract but nonetheless hypothetical is the contention of CREBA that the
imposition of the VAT on the sales and leases of real estate by virtue of contracts entered into
prior to the effectivity of the law would violate the constitutional provision that "No law impairing
the obligation of contracts shall be passed." It is enough to say that the parties to a contract
cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of
the State. For not only are existing laws read into contracts in order to fix obligations as between
parties, but the reservation of essential attributes of sovereign power is also read into contracts
as a basic postulate of the legal order. The policy of protecting contracts against impairment
presupposes the maintenance of a government which retains adequate authority to secure the
peace and good order of society. 46
In truth, the Contract Clause has never been thought as a limitation on the exercise of the State's
power of taxation save only where a tax exemption has been granted for a valid consideration. 47
Such is not the case of PAL in G.R. No. 115852, and we do not understand it to make this claim.
Rather, its position, as discussed above, is that the removal of its tax exemption cannot be made
by a general, but only by a specific, law.
The substantive issues raised in some of the cases are presented in abstract, hypothetical form
because of the lack of a concrete record. We accept that this Court does not only adjudicate
private cases; that public actions by "non-Hohfeldian" 48 or ideological plaintiffs are now
cognizable provided they meet the standing requirement of the Constitution; that under Art. VIII,
1, 2 the Court has a "special function" of vindicating constitutional rights. Nonetheless the
feeling cannot be escaped that we do not have before us in these cases a fully developed factual
record that alone can impart to our adjudication the impact of actuality 49 to insure that decisionmaking is informed and well grounded. Needless to say, we do not have power to render advisory
opinions or even jurisdiction over petitions for declaratory judgment. In effect we are being asked
to do what the Conference Committee is precisely accused of having done in these cases to sit
as a third legislative chamber to review legislation.
We are told, however, that the power of judicial review is not so much power as it is duty imposed
on this Court by the Constitution and that we would be remiss in the performance of that duty if
we decline to look behind the barriers set by the principle of separation of powers. Art. VIII, 1,
2 is cited in support of this view:
Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the
Government.
To view the judicial power of review as a duty is nothing new. Chief Justice Marshall said so in
1803, to justify the assertion of this power in Marbury v. Madison:
It is emphatically the province and duty of the judicial department to say what the law is.
Those who apply the rule to particular cases must of necessity expound and interpret that
rule. If two laws conflict with each other, the courts must decide on the operation of each.
Justice Laurel echoed this justification in 1936 in Angara v. Electoral Commission:

35

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

judicial

power

has

been

affirmed

in

several

It does not add anything, therefore, to invoke this "duty" to justify this Court's intervention in what is
essentially a case that at best is not ripe for adjudication. That duty must still be performed in the context
of a concrete case or controversy, as Art. VIII, 5(2) clearly defines our jurisdiction in terms of "cases," and
nothing but "cases." That the other departments of the government may have committed a grave abuse of
discretion is not an independent ground for exercising our power. Disregard of the essential limits imposed
by the case and controversy requirement can in the long run only result in undermining our authority as a
court of law. For, as judges, what we are called upon to render is judgment according to law, not according
to what may appear to be the opinion of the day.
_______________________________
In the preceeding pages we have endeavored to discuss, within limits, the validity of Republic Act No. 7716
in its formal and substantive aspects as this has been raised in the various cases before us. To sum up, we
hold:
(1) That the procedural requirements of the Constitution have been complied with by Congress in the
enactment of the statute;
(2) That judicial inquiry whether the formal requirements for the enactment of statutes beyond those
prescribed by the Constitution have been observed is precluded by the principle of separation of powers;
(3) That the law does not abridge freedom of speech, expression or the press, nor interfere with the free
exercise of religion, nor deny to any of the parties the right to an education; and
(4) That, in view of the absence of a factual foundation of record, claims that the law is regressive,
oppressive and confiscatory and that it violates vested rights protected under the Contract Clause are
prematurely raised and do not justify the grant of prospective relief by writ of prohibition.
WHEREFORE, the petitions in these cases are DISMISSED.

G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio
Jayme
Ledesma,
plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the
taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due
to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in
the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States
market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits
derived from the sugar industry by the component elements thereof" and "to stabilize the sugar
36

industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the
manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3
levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded
to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration
collected and the amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine
Treasury, to be known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid
out only for any or all of the following purposes or to attain any or all of the following
objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of
the preferntial position of the Philippine sugar in the United States market, and ultimately
to insure its continued existence notwithstanding the loss of that market and the
consequent necessity of meeting competition in the free markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component
elements thereof the mill, the landowner, the planter of the sugar cane, and the laborers
in the factory and in the field so that all might continue profitably to engage
therein;lawphi1.net
Third, to limit the production of sugar to areas more economically suited to the production
thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living
and working conditions: Provided, That the President of the Philippines may, until the
adjourment of the next regular session of the National Assembly, make the necessary
disbursements from the fund herein created (1) for the establishment and operation of
sugar experiment station or stations and the undertaking of researchers (a) to increase the
recoveries of the centrifugal sugar factories with the view of reducing manufacturing costs,
(b) to produce and propagate higher yielding varieties of sugar cane more adaptable to
different district conditions in the Philippines, (c) to lower the costs of raising sugar cane,
(d) to improve the buying quality of denatured alcohol from molasses for motor fuel, (e) to
determine the possibility of utilizing the other by-products of the industry, (f) to determine
what crop or crops are suitable for rotation and for the utilization of excess cane lands, and
(g) on other problems the solution of which would help rehabilitate and stabilize the
industry, and (2) for the improvement of living and working conditions in sugar mills and
sugar plantations, authorizing him to organize the necessary agency or agencies to take
charge of the expenditure and allocation of said funds to carry out the purpose
hereinbefore enumerated, and, likewise, authorizing the disbursement from the fund herein
created of the necessary amount or amounts needed for salaries, wages, travelling
expenses, equipment, and other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio
Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40
37

paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 19491950; alleging that such tax is unconstitutional and void, being levied for the aid and support of
the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax
may be constitutioally levied. The action having been dismissed by the Court of First Instance, the
plaintifs appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in
Commonwealth Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and
particularly of section 6 (heretofore quoted in full), will show that the tax is levied with a
regulatory purpose, to provide means for the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries
of our nation, sugar occupying a leading position among its export products; that it gives
employment to thousands of laborers in fields and factories; that it is a great source of the state's
wealth, is one of the important sources of foreign exchange needed by our government, and is
thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion,
protection and advancement, therefore redounds greatly to the general welfare. Hence it was
competent for the legislature to find that the general welfare demanded that the sugar industry
should be stabilized in turn; and in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted among its components to enable
it to resist the added strain of the increase in taxes that it had to sustain (Sligh vs. Kirkwood, 237
U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy Inc. vs.
Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida
The protection of a large industry constituting one of the great sources of the state's wealth
and therefore directly or indirectly affecting the welfare of so great a portion of the
population of the State is affected to such an extent by public interests as to be within the
police power of the sovereign. (128 Sp. 857).
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a
matter of public concern, it follows that the Legislature may determine within reasonable bounds
what is necessary for its protection and expedient for its promotion. Here, the legislative
discretion must be allowed fully play, subject only to the test of reasonableness; and it is not
contended that the means provided in section 6 of the law (above quoted) bear no relation to the
objective pursued or are oppressive in character. If objective and methods are alike
constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their
prosecution and attainment. Taxation may be made the implement of the state's police power
(Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S. 412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1,
80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed. 579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground
of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to
be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the
power to tax that a state be free to select the subjects of taxation, and it has been repeatedly
held that "inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U.
S. 495, 81 L. Ed. 1245, citing numerous authorities, at p. 1251).

38

From the point of view we have taken it appears of no moment that the funds raised under the
Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry,
since it is that very enterprise that is being protected. It may be that other industries are also in
need of similar protection; that the legislature is not required by the Constitution to adhere to a
policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L.
Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative
authority, exerted within its proper field, need not embrace all the evils within its reach" (N. L. R.
B. vs. Jones & Laughlin Steel Corp. 301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of
tax money to experimental stations to seek increase of efficiency in sugar production, utilization
of by-products and solution of allied problems, as well as to the improvements of living and
working conditions in sugar mills or plantations, without any part of such money being channeled
directly to private persons, constitutes expenditure of tax money for private purposes, (compare
Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.

ARTICLE 6, Section 28.

39

1. The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation.
2. The Congress may, by law, authorize the President to fix within specified limits, and subject
to such limitations and restrictions as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within the framework of the
national development program of the Government.
3. Charitable institutions, churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall be
exempt from taxation.
4. No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress.
ARTICLE 10, SECTION 5
Section 5. Each local government unit shall have the power to create its own sources of revenues
and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress
may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.

40