FIRST DIVISION

[G.R. No. L-28896. February 17, 1988.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

SYLLABUS

1. TAXATION; NATIONAL INTERNAL REVENUE CODE; DEFICIENCY INCOME

TAXES; PERIOD TO APPEAL ASSESSMENT, SUSPENDED BY FILING OF
PROTEST. According to Rep. Act No. 1125, the appeal may be made within thirty
days after receipt of the decision or ruling challenged. It is true that as a rule the warrant
of distraint and levy is "proof of the finality of the assessment" and "renders hopeless a
request for reconsideration," being "tantamount to an outright denial thereof and makes
the said request deemed rejected." 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, 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.

2. ID.; ID.; INCOME TAX; DEDUCTION FROM GROSS INCOME; P75,000.00

PROMOTIONAL FEES; FOUND NECESSARY AND REASONABLE IN CASE AT
BAR. 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. 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. 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.

DECISION

CRUZ, J : p

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.

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. 1 On January 18, 1965, Algue filed 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. 3 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" 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 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 P125,000.00, 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 deduction

(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 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 civilized 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.

Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.

(Commissioner of Internal Revenue v. Algue, Inc., G.R. No. L-28896, [February 17,
|||

1988], 241 PHIL 829-836)

 EN BANC

[G.R. No. L-41383. August 15, 1988.]

PHILIPPINE AIRLINES, INC., plaintiff-appellant, vs. ROMEO F.

EDU, in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer,
defendants-appellants.

Ricardo V . Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

SYLLABUS

1. STATUTORY CONSTRUCTION; TERM "FEES" IN REGISTRATION OF

VEHICLES AS REGULATORY TAX; EXPLAINED. It is clear from the provisions
of Section 73 of Commonwealth Act 123 and Section 61 of the Land Transportation and
Traffic Code that the legislative intent and purpose behind the law requiring owners of
vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the operating expenses of
the administering agency. On the other hand, the Philippine Rabbit case mentions a
presumption arising from the use of the term "fees" which appears to have been favored
by the legislature to distinguish fees from other taxes such as those mentioned in Section
13 of Rep. Act 4136 referring to taxes other than those imposed on the registration,
operation or ownership of a motor vehicle (Sec. 89, b, Rep. Act 4136, as amended). Fees
may be properly regarded as taxes even though they also serve as an instrument of
regulation.

2. TAXATION; MOTOR VEHICLE REGISTRATION FEES; IF THE PURPOSE IS

PRIMARILY REVENUE; THEN THE EXACTION IS PROPERLY CALLED A TAX.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98
Phil. 148). If the purpose is primarily revenue, or if revenue is, at least, one of the real
and substantial purposes, then the exaction is properly called a tax. Such is the case of
motor vehicle registration fees. The same provision appears as Section 59(b) in the Land
Transportation Code. It is patent therefrom that the legislators had in mind a regulatory
tax as the law refers to the imposition on the registration, operation or ownership of a
motor vehicle as a "tax or fee." Though nowhere in Rep. Act 4136 does the law
specifically state that the imposition is a tax, Section 59(b) speaks of "taxes or fees . . .
for the registration or operation or on the ownership of any motor vehicle, or for the
exercise of the profession of chauffeur . . ." making the intent to impose a tax more
apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional
tax," where the law could have referred to an original tax and not one in addition to the
tax already imposed on the registration, operation, or ownership of a motor vehicle under
Rep. Act 4136. Simply put, if the exaction under Rep. Act 4136 were merely a regulatory
fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also
speaks of other "fees" such as the special permit fees for certain types of motor vehicles
(Sec. 10) and additional fees for change of registration (Sec. 11). These are not to be
understood as taxes because such fees are very minimal to be revenue-raising. Thus, they
are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle registration
fee and chauffeurs' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61.

3. ID.; ID.; NATURE AND PURPOSE. We rule that motor vehicle registration fees as
at present exacted pursuant to the Land Transportation and Traffic Code are actually
taxes intended for additional revenues of government even if one fifth or less of the
amount collected is set aside for the operating expenses of the agency administering the
program.

4. ID.; ID.; UNDER THE AMENDED FRANCHISE, PHILIPPINE AIRLINES IS NOT

EXEMPTED FROM THE PAYMENT OF ANY TAX, FEE, OR OTHER CHARGES
ON THE REGISTRATION AND LICENSING OF MOTOR VEHICLES. The claim
for refund is made for payments given in 1971. It is not clear from the records as to what
payments were made in succeeding years. Any registration fees collected between June
27,1968 and April 9, 1979, were correctly imposed because the tax exemption in the
franchise of PAL was repealed during that period. However, an amended franchise was
given to PAL in 1979. PAL's current franchise is clear and specific. It has removed the
ambiguity found in the earlier law. Under Section 13 of Presidential Decree No. 1590,
PAL is not exempt from the payment of any tax, fee, or other charge on the registration
and licensing of motor vehicles. Such payments are already included in the basic tax or
franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590 and may no
longer be exacted. Hence, the prayer for refund of registration fees paid in 1991 is
DENIED.

DECISION

GUTIERREZ, JR., J : p

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect,
asking for a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the Court of
Appeals in a case where the then Court of First Instance of Rizal dismissed the plaintiff-
appellant's complaint for refund of registration fees paid under protest. cdrep

The disputed registration fees were imposed by the appellee, Commissioner Romeo F.
Edu, pursuant to Section 8, Republic Act No. 4136, otherwise known as the Land
Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of
the Philippines and engaged in the air transportation business under a legislative
franchise, Act No. 4271, as amended by Republic Act Nos. 2360 and 2667. Under its
franchise, PAL is exempt from the payment of taxes. The pertinent provision of the
franchise provides as follows:

"Section 13. In consideration of the franchise and rights hereby granted, the
grantee shall pay to the National Government during the life of this franchise a
tax of two per cent of the gross revenue or gross earning derived by the grantee
from its operations under this franchise. Such tax shall be due and payable
quarterly and shall be in lieu of all taxes of any kind, nature or description,
levied, established or collected by any municipal, provincial or national
authority; Provided, that if, after the audit of the accounts of the grantee by the
Commissioner of Internal Revenue, a deficiency tax is shown to be due, the
deficiency tax shall be payable within the ten days from the receipt of the
assessment. The grantee shall pay the tax on its real property in conformity with
existing law."

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956)
PAL has, since 1956, not been paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Edu, issued a regulation

requiring all tax exempt entities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor
vehicles unless the amounts imposed under Republic Act 4136 were paid. The appellant
thus paid, under protest, the amount of P19,529.75 as registration fees of its motor
vehicles.
cdrep

After paying under protest, PAL through counsel, wrote a letter dated May 19, 1971, to
Commissioner Edu demanding a refund of the amounts paid, invoking the ruling in
Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held that motor vehicle
registration fees are in reality taxes from the payment of which PAL is exempt by virtue
of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in Republic
v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to the effect that
motor vehicle registration fees are regulatory exactions and not revenue measures and,
therefore, do not come within the exemption granted to PAL under its franchise. Hence,
PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and
National Treasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18
where it was docketed as Civil Case No. Q-15862.

Appellee Romeo F. Edu, in his capacity as LTC Commissioner, and Ubaldo Carbonell, in
his capacity as National Treasurer, filed a motion to dismiss alleging that the complaint
states no cause of action. In support of the motion to dismiss, defendants reiterated the
ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) that registration fees of
motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of
the police power of the state. They contended that while Act 4271 exempts PAL from the
payment of any tax except two per cent on its gross revenue or earnings, it does not
exempt the plaintiff from paying regulatory fees, such as motor vehicle registration fees.
The resolution of the motion to dismiss was deferred by the Court until after trial on the
merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint
"guided by the later ruling laid down by the Supreme Court in the case of Republic v.
Philippine Rabbit Bus Lines, Inc. (supra)." From this judgment, PAL appealed to the
Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra)
cited by PAL and Commissioner Romeo F. Edu respectively, discuss the main points of
contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:

"The registration fee which defendant-appellee had to pay was imposed by

Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its
heading speaks of 'registration fees.' The term is repeated four times in the body
thereof. Equally so, mention is made of the 'fee for registration.' (Ibid.,
Subsection G) A subsection starts with a categorical statement 'No fees shall be
charged.' (Ibid., Subsection H) The conclusion is difficult to resist therefore that
the Motor Vehicle Act requires the payment not of a tax but of a registration fee
under the police power. Hence the inapplicability of the section relied upon by
defendant-appellee under the Back Pay Law. It is not held liable for a tax but for
a registration fee. It therefore cannot make use of a backpay certificate to meet
such an obligation.
 "Any vestige of any doubt as to the correctness of the above conclusion should
be dissipated by Republic Act No. 5448. ([1968]. Section 3 thereof as to the
imposition of additional tax on privately-owned passenger automobiles,
motorcycles and scooters was amended by Republic Act No. 5470 which is (sic)
approved on May 30, 1969.) A special science fund was thereby created and its
title expressly sets forth that a tax on privately-owned passenger automobiles,
motorcycles and scooters was imposed. The rates thereof were provided for in
its Section 3 which clearly specifies that 'additional tax' was to be paid as
distinguished from the registration fee under the Motor Vehicle Act. There
cannot be any clearer expression therefore of the legislative will, even on the
assumption that the earlier legislation could by stretching the point be
susceptible of the interpretation that a tax rather than a fee was levied. What is
thus most apparent is that where the legislative body relies on its authority to tax
it expressly so states, and where it is enacting a regulatory measure, it is equally
explicit." (at p. 216)

In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court, on the
other hand, held:

"The charges prescribed by the Revised Motor Vehicle Law for the registration
of motor vehicles are in section 8 of that law called 'fees.' But the appellation is
no impediment to their being considered taxes if taxes they really are. For not
the name but the object of the charge determines whether it is a tax or a fee.
Generally speaking, taxes are for revenue, whereas fees are exactions for
purposes of regulation and inspection and are for that reason limited in amount
to what is necessary to cover the cost of the services rendered in that
connection. Hence, 'a charge fixed by statute for the service to be performed by
an officer, where the charge has no relation to the value of the services
performed and where the amount collected eventually finds its way into the
treasury of the branch of the government whose officer or officers collected the
charge, is not a fee but a tax.' (Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

"From the data submitted in the court below, it appears that the expenditures of
the Motor Vehicle Office are but a small portion about 5 per centum of
the total collections from motor vehicle registration fees. And as proof that the
money collected is not intended for the expenditures of that office, the law itself
provides that all such money shall accrue to the funds for the construction and
maintenance of public roads, streets and bridges. It is thus obvious that the fees
are not collected for regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor vehicles on public
highways, for their express object is to provide revenue with which the
Government is to discharge one of its principal functions the construction
and maintenance of public highways for everybody's use. They are veritable
taxes, not merely fees. cdphil
 "As a matter of fact, the Revised Motor Vehicle Law itself now regards those
fees as taxes, for it provides that 'no other taxes or fees than those prescribed in
this Act shall be imposed,' thus implying that the charges therein imposed
though called fees are of the category of taxes. The provision is contained in
section 70, of subsection (b), of the law, as amended by section 17 of Republic
Act 587, which reads:

"'Sec. 70 (b) No other taxes or fees than those prescribed in this

Act shall be imposed for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of
chauffeur, by any municipal corporation, the provisions of any city
charter to the contrary notwithstanding: Provided, however, That any
provincial board, city or municipal council or board, or other competent
authority may exact and collect such reasonable and equitable toll fees
for the use of such bridges and ferries, within their respective
jurisdiction, as may be authorized and approved by the Secretary of
Public Works and Communications, and also for the use of such public
roads, as may be authorized by the President of the Philippines upon the
recommendation of the Secretary of Public Works and Communications,
but in none of these cases, shall any toll fees be charged or collected
until and unless the approved schedule of tolls shall have been posted
legibly in a conspicuous place at such toll station.'" (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor
Vehicle Law (Act 3992 [1932] as amended by Commonwealth Act 123 and Republic
Acts Nos. 587 and 1603). LibLex

Today, the matter is governed by Rep. Act 4136 [1964] otherwise known as the Land
Transportation Code, (as amended by Rep. Acts Nos. 5715 and 6374, P.D. Nos. 382, 843,
896, 1057 and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unrevised by Rep. Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected. Twenty per centum of the money
collected under the provisions of this Act shall accrue to the road and bridge
funds of the different provinces and chartered cities in proportion to the cedula
sales during the next previous year and the remaining eighty per centum shall be
deposited in the Philippine Treasury to create a special fund for the construction
and maintenance of national and provincial roads and bridges, as well as the
streets and bridges in the chartered cities to be alloted by the Secretary of Public
Works and Communications for projects recommended by the Director of
Public Works in the different provinces and chartered cities . . ."

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

 "Sec. 61. Disposal of Monies Collected. Monies collected under the
provisions of this Act shall be deposited in a special trust account in the
National Treasury to constitute the Highway Special Fund, which shall be
apportioned and expended in accordance with the provisions of the 'Philippine
Highway Act of 1935.' Provided, however, That the amount necessary to
maintain and equip the Land Transportation Commission but not to exceed
twenty per cent of the total collection during one year, shall be set aside for the
purpose. (As amended by RA 6374, approved August 6 1971)."

It appears clear from the above provisions that the legislative intent and purpose behind
the law requiring owners of vehicles to pay for their registration is mainly to raise funds
for the construction and maintenance of highways and to a much lesser degree, pay for
the operating expenses of the administering agency. On the other hand, the Philippine
Rabbit case mentions a presumption arising from the use of the term "fees" which
appears to have been favored by the legislature to distinguish fees from other taxes such
as those mentioned in Section 13 of Rep. Act 4136 which reads:

"Sec. 13. Payment of taxes upon registration. No original registration of

motor vehicles subject to payment of taxes, customs duties or other charges
shall be accepted unless proof of payment of the taxes due thereon has been
presented to the Commission."

referring to taxes other than those imposed on the registration, operation or ownership
of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended). LLjur

Fees may be properly regarded as taxes even though they also serve as an Instrument of
regulation. As stated by a former presiding judge of the Court of Tax Appeals and writer
on various aspects of taxes:

"It is possible for an exaction to be both tax and regulation. License fees are
often looked to as a source of revenue as well as a means of regulation.
(Sonzinsky v. U.S., 300 U.S. 506) This is true, for example, of automobile
license fees. In such case, the fees may properly be regarded as taxes even
though they also serve as an instrument of regulation. If the purpose is primarily
revenue, or if revenue is at least one of the real and substantial purposes, then
the exaction is properly called a tax. (1955 CCH Fed. Tax Course, Par. 3101,
citing Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo, 97 Phil.
212; Lutz v. Araneta, 98 Phil. 198.) These exactions are sometimes called
regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851, and 4881, U.S.
Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol as
regulatory taxes.)" (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing
Cooley on Taxation, 2nd Edition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta,
98 Phil. 148).
cdll
If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, id.) Such is the
case of motor vehicle registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provision appears
as Section 59(b) in the Land Transportation Code. It is patent therefrom that the
legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or fee." Though nowhere
in Rep. Act 4136 does the law specifically state that the imposition is a tax, Section 59(b)
speaks of "taxes or fees . . . for the registration or operation or on the ownership of any
motor vehicle, or for the exercise of the profession of chauffeur . . ." making the intent to
impose a tax more apparent. Thus, even Rep. Act 5448 cited by the respondents, speak of
an "additional tax," where the law could have referred to an original tax and not one in
addition to the tax already imposed on the registration, operation, or ownership of a
motor vehicle under Rep. Act 4136. Simply put, if the exaction under Rep. Act 4136
were merely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional"
tax. Rep. Act 4136 also speaks of other "fees" such as the special permit fees for certain
types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec. 11).
These are not to be understood as taxes because such fees are very minimal to be
revenue-raising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the
motor vehicle registration fee and chauffeurs' license fee. Such fees are to go into the
expenditures of the Land Transportation Commission as provided for in the last proviso
of sec. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exactions intended
only for regulatory purposes in the exercise of the State's police powers. Over the years,
however, as vehicular traffic exploded in number and motor vehicles became absolute
necessities without which modern life as we know it would stand still, Congress found
the registration of vehicles a very convenient way of raising much needed revenues.
Without changing the earlier denomination of registration payments as "fees," their
nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted
pursuant to the Land Transportation and Traffic Code are actually taxes intended for
additional revenues of government even if one fifth or less of the amount collected is set
aside for the operating expenses of the agency administering the program. LexLib

May the respondent administrative agency be required to refund the amounts stated in the
complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the records
as to what payments were made in succeeding years. We have ruled that Section 24 of
Rep. Act No. 5431, dated June 27, 1968, repealed all earlier tax exemptions of corporate
taxpayers found in legislative franchises similar to that invoked by PAL in this case.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al. (G.R.
No. 60547, July 11, 1985), this Court ruled:

"Under its original franchise, Republic Act No. 2036, enacted in 1957,
petitioner Radio Communications of the Philippines, Inc., was subject to both
the franchise tax and income tax. In 1964, however, petitioner's franchise was
amended by Republic Act No. 4054 to the effect that its franchise tax of one and
one-half percentum (1-1/2%) of all gross receipts was provided as 'in lieu of any
and all taxes of any kind, nature, or description levied, established, or collected
by any authority whatsoever, municipal, provincial, or national from which
taxes the grantee is hereby expressly exempted.' The issue raised to this Court
now is the validity of the respondent court's decision which ruled that the
exemption under Republic Act No. 4054 was repealed by Section 24 of
Republic Act No. 5431, dated June 27, 1968 which reads:

"'(d) The provisions of existing special or general laws to the contrary

notwithstanding, all corporate taxpayers not specifically exempt under Sections
24 (c) (1 ) of this Code shall pay the rates provided in this section. All
corporations, agencies, or instrumentalities owned or controlled by the
government, including the Government Service Insurance System and the
Social Security System but excluding educational institutions, shall pay such
rate of tax upon their taxable net income as are imposed by this section upon
associations or corporations engaged in a similar business or industry.'

"An examination of Section 24 of the Tax Code as amended shows clearly that
the law intended all corporate taxpayers to pay income tax as provided by the
statute. There can be no doubt as to the power of Congress to repeal the earlier
exemption it granted. Article XIV, Section 8 of the 1935 Constitution and
Article XIV, Section 5 of the Constitution as amended in 1973 expressly
provide that no franchise shall be granted to any individual, firm, or corporation
except under the condition that it shall be subject to amendment. alteration, or
repeal by the legislature when the public interest so requires. There is no
question as to the public interest involved. The country needs increased
revenues. The repealing clause is clear and unambiguous. There is a listing of
entities entitled to tax exemption. The petitioner is not covered by the provision.
Considering the foregoing, the Court Resolved to DENY the petition for lack of
merit. The decision of the respondent court is affirmed."

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly
imposed because the tax exemption in the franchise of PAL was repealed during the
period. However, an amended franchise was given to PAL in 1979. Section 13 of
Presidential Decree No. 1590 now provides:

"In consideration of the franchise and rights hereby granted, the grantee shall
pay to the Philippine Government during the lifetime of this franchise
whichever of subsections (a) and (b) hereunder will result in a lower tax:

"'(a) The basic corporate income tax based on the grantee's annual net taxable
income computed in accordance with the provisions of the Internal Revenue
Code; or

"'(b) A franchise tax of two per cent (2%) of the gross revenues derived by the
grantees from all sources, without distinction as to transport or nontransport
corporations; provided that with respect to international airtransport service,
only the gross passengers, mail, and freight revenues from its outgoing flights
shall be subject to this law.

"The tax paid by the grantee under either of the above alternatives shall be in
lieu of all other taxes, duties, royalties, registration, license and other fees and
charges of any kind, nature or description imposed, levied, established,
assessed, or collected by any municipal, city, provincial, or national authority or
government agency, now or in the future, including but not limited to the
following:

xxx xxx xxx

"(5) All taxes, fees and other charges on the registration, licensing, acquisition,
and transfer of aircraft, equipment, motor vehicles, and all other personal or real
property of the grantee." (Pres. Decree 1590, 75 OG No. 15, 3259, April 9,
1979).

PAL's current franchise is clear and specific. It has removed the ambiguity found in the
earlier law. PAL is now exempt from the payment of any tax, fee, or other charge on the
registration and licensing of motor vehicles. Such payments are already included in the
basic tax or franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590
and may no longer be exacted. LLpr

WHEREFORE, the petition is hereby partially GRANTED.

The prayed for refund of registration fees paid in 1971 is DENIED. The Land
Transportation Franchising and Regulatory Board (LTFRB) is enjoined from
collecting any tax, fee, or other charge on the registration and licensing of the
petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree No.
1590.
SO ORDERED.

Fernan C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Padilla,

Bidin, Sarmiento, Cortes, Grio-Aquino and Medialdea, JJ., concur.

(Philippine Airlines, Inc. v. Edu, G.R. No. L-41383, [August 15, 1988], 247 PHIL 283-
|||

296)
 FIRST DIVISION

[G.R. Nos. L-28508-9. July 7, 1989.]

ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum

Oil Company), petitioner, vs. THE COMMISSIONER OF
INTERNAL REVENUE, respondent.

Padilla Law Office for petitioner.

SYLLABUS

1.STATUTORY CONSTRUCTION; LEGISLATIVE HISTORY OF AN ACT

RESORTED TO ONLY WHERE THE LANGUAGE OF THE STATUTE IS
AMBIGUOUS. Only in extremely doubtful matters of interpretation does the
legislative history of an act of Congress become important. As a matter of fact, there may
be no resort to the legislative history of the enactment of a statute, the language of which
is plain and unambiguous, since such legislative history may only be resorted to for the
purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]

2.TAXATION; REPUBLIC ACT NO. 2009, MARGIN FEE; NOT A TAX BUT AN
EXACTION. A margin fee is not a tax but an exaction designed to curb the excessive
demands upon our international reserve. (Caltex [Phil.] Inc. v. Acting Commissioner of
Customs, 22 SCRA 779; Chamber of Agriculture and Natural Resources of the
Philippines v. Central Bank, 14 SCRA 630).

3.ID.; ID.; AN EXERCISE OF POLICE POWER. The margin fee under Republic Act
No. 2009 was imposed by the State in the exercise of its police power and not the power
of taxation.

4.ID.; ID.; NOT A DEDUCTIBLE EXPENSE; REASON. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the United States. Such
remittance was an expenditure necessary and proper for the conduct of its corporate
affairs. As stated in the Lopez case, the margin fees are not expenses in connection with
the production or earning of petitioner's incomes in the Philippines. They were expenses
incurred in the disposition of said incomes; expenses for the remittance of funds after
they have already been earned by petitioner's branch in the Philippines for the disposal of
its Head Office in New York which is already another distinct and separate income
taxpayer.
5.ID.; NATIONAL INTERNAL REVENUE CODE; INCOME TAX ON BUSINESS;
CONDITIONS FOR DEDUCTIBILITY OF EXPENSE. We come, then, to the
statutory test of deductibility where it is axiomatic that to be deductible as a business
expense, three conditions are imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid
or incurred in carrying on a trade or business. In addition, not only must the taxpayer
meet the business test, he must substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its deduction.
(Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal
Revenue, 102 SCRA 246)

6.ID.; ID.; CLAIMS FOR DEDUCTIONS, A MATTER OF LEGISLATIVE GRACE

AND CONSTRUED STRICTLY AGAINST THE TAXPAYER. The paramount rule
is that claims for deductions are a matter of legislative grace and do not turn on mere
equitable considerations. . . . The taxpayer in every instance has the burden of justifying
the allowance of any deduction claimed.

DECISION

CRUZ, J : p

On appeal before us is the decision of the Court of Tax Appeals 1 denying petitioner's
claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for
1960 in CTA Cases No. 1251 and 1558 respectively.

In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part
of its ordinary and necessary business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. This claim was disallowed by the respondent
Commissioner of Internal Revenue on the ground that the expenses should be capitalized
and might be written off as a loss only when a "dry hole" should result. ESSO then filed
an amended return where it asked for the refund of P323,279.00 by reason of its
abandonment as dry holes of several of its oil wells. Also claimed as ordinary and
necessary expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New York head
office.

On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the
claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year
1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the
period from April 18, 1961 to April 18, 1964, for a total of P434,232.92. The deficiency
arose from the disallowance of the margin fees of P1,226,647.72 paid by ESSO to the
Central Bank on its profit remittances to its New York head office. LibLex

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit
of P221,033.00 representing its overpayment on its income tax for 1959 and paying under
protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund
of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that
the 18% interest should have been imposed not on the total deficiency of P367,944.00 but
only on the amount of P146,961.00, the difference between the total deficiency and its
tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the
entire amount of the deficiency tax. On May 4, 1965, the CIR also denied the claims of
ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be considered taxes or allowed as
deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending
that the margin fees were deductible from gross income either as a tax or as an ordinary
and necessary business expense. It also claimed an overpayment of its tax by
P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the
amount paid as margin fees were not legally deductible, there was still an overpayment
by P39,787.94 for 1960, representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and
P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This
portion of the decision was appealed by the CIR but was affirmed by this Court in
Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502-03, promulgated on
April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the
refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the
issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the
Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of
Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure,
the margin fees paid by the petitioner to the Central Bank on its profit remittances to its
New York head office should be deductible from ESSO's gross income under Sec. 30(c)
of the National Internal Revenue Code. This provides that all taxes paid or accrued
during or within the taxable year and which are related to the taxpayer's trade, business or
profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and
legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than a
revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a
revenue measure formally proposed by President Carlos P. Garcia to Congress as part of,
and in order to balance, the budget for 1959-1960. It was enacted by Congress as such
and, significantly, properly originated in the House of Representatives. During its two
and a half years of existence, the measure was one of the major sources of revenue used
to finance the ordinary operating expenditures of the government. It was, moreover,
payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established
principles, pointed out that

We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the legislature, may be resorted to as
an aid in the interpretation of a statute which is ambiguous or of doubtful
meaning. The courts may take into consideration the facts leading up to,
confident with, and in any way connected with, the passage of the act, in order
that they may properly interpret the legislative intent. But it is also well-settled
jurisprudence that only in extremely doubtful matters of interpretation does the
legislative history of an act of Congress become important. As a matter of fact,
there may be no resort to the legislative history of the enactment of a statute, the
language of which is plain and unambiguous, since such legislative history may
only be resorted to for the purpose of solving doubt, not for the purpose of
creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held that
a margin fee is not a tax but an exaction designed to curb the excessive demands upon
our international reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through
Justice Jose P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction

designed to discourage imports and encourage exports, and ultimately, `curtail
any excessive demand upon the international reserve' in order to stabilize the
currency. Originally adopted to cope with balance of payment pressures,
exchange restrictions have come to serve various purposes, such as limiting
non-essential imports, protecting domestic industry and when combined with
the use of multiple currency rates providing a source of revenue to the
government, and are in many developing countries regarded as a more or less
 inevitable concomitant of their economic development programs. The different
measures of exchange control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the control is on the
amount of foreign exchange allowable. In the case of the margin levy, the
immediate impact is on the rate of foreign exchange; in fact, its main function is
to control the exchange rate without changing the par value of the peso as fixed
in the Bretton Woods Agreement Act. For a member nation is not supposed to
alter its exchange rate (at par value) to correct a merely temporary
disequilibrium in its balance of payments. By its nature, the margin levy is part
of the rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to state
that We have already held the contrary for the reason that a tax is levied to
provide revenue for government operations, while the proceeds of the margin
fee are applied to strengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central

Bank, 3 the same idea was expressed, though in connection with a different levy, through
Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of exporter's
foreign exchange constitutes an export tax. A tax is a levy for the purpose of
providing revenue for government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the Central Bank's
international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be
considered necessary and ordinary business expenses and therefore still deductible from
its gross income. The fees were paid for the remittance by ESSO as part of the profits to
the head office in the United States. Such remittance was an expenditure necessary and
proper for the conduct of its corporate affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading
as follows:

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; traveling expenses while away from home in the pursuit of a
trade or business; and rentals or other payments required to be made as a
condition to the continued use or possession, for the purpose of the trade or
business, of property to which the taxpayer has not taken or is not taking title or
in which he has no equity.

(2)Expenses allowable to non-resident alien individuals and foreign

corporations. In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or incurred
in carrying on any business or trade conducted within the Philippines
exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner

of Internal Revenue, 4 the Court laid down the rules on the deductibility of business
expenses, thus:

The principle is recognized that when a taxpayer claims a deduction, he must

point to some specific provision of the statute in which that deduction is
authorized and must be able to prove that he is entitled to the deduction which
the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a) (1)
of the National Internal Revenue which allows a deduction of 'all the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on
any trade or business.' An item of expenditure, in order to be deductible under
this section of the statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to

be deductible as a business expense, three conditions are imposed, namely: (1)
the expense must be ordinary and necessary, (2) it must be paid or incurred
within the taxable year, and (3) it must be paid or incurred in carrying on a trade
or business. In addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions claimed under
the law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its
deduction.

While it is true that there is a number of decisions in the United States delving
on the interpretation of the terms 'ordinary and necessary, as used in the federal
tax laws, no adequate or satisfactory definition of those terms is possible.
Similarly, this Court has never attempted to define with precision the terms
'ordinary and necessary.' There are however, certain guiding principles worthy
of serious consideration in the proper adjudication of conflicting claims.
Ordinarily, an expense will be considered `necessary, where the expenditure is
 appropriate and helpful in the development of the taxpayer's business. It is
'ordinary' when it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding circumstances. The term 'ordinary'
does not require that the payments be habitual or normal in the sense that the
same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the payment to
the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of the
taxpayer's business, the answer to the question as to whether the expenditure is
an allowable deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the extent and
permanency of the work accomplished by the expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err
when it held on this issue as follows:

Considering the foregoing test of what constitutes an ordinary and necessary

deductible expense, it may be asked: Were the margin fees paid by petitioner on
its profit remittances to its Head Office in New York appropriate and helpful in
the taxpayer's business in the Philippines? Were the margin fees incurred for
purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for the purpose of realizing a
profit or of minimizing a loss in the Philippines? Obviously not. As stated in the
Lopez case, the margin fees are not expenses in connection with the production
or earning of petitioner's incomes in the Philippines. They were expenses
incurred in the disposition of said incomes; expenses for the remittance of funds
after they have already been earned by petitioner's branch in the Philippines for
the disposal of its Head Office in New York which is already another distinct
and separate income taxpayer.

xxx xxx xxx

Since the margin fees in question were incurred for the remittance of finds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can never
be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of petitioner's branch
in the Philippines exclusively or for the purpose of realizing a profit or of
minimizing a loss in the Philippines exclusively. If at all, the margin fees were
incurred for purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the Philippines.
ESSO has not shown that the remittance to the head office of part of its profits was made
in furtherance of its own trade or business. The petitioner merely presumed that all
corporate expenses are necessary and appropriate in the absence of a showing that they
are illegal or ultra vires. This is error. The public respondent is correct when it asserts
that "the paramount rule is that claims for deductions are a matter of legislative grace and
do not turn on mere equitable considerations . . . The taxpayer in every instance has the
burden of justifying the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office,
cannot now claim this as an ordinary and necessary expense paid or incurred in carrying
on its own trade or business.cdrep

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims
for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs
against the petitioner.

SO ORDERED.

Narvasa, Gancayco, Grio-Aquino and Medialdea, JJ ., concur.

(Esso Standard Eastern, Inc. v. Commissioner of Internal Revenue, G.R. Nos. L-28508-
|||

9, [July 7, 1989], 256 PHIL 601-610)

 EN BANC

[G.R. No. L-10448. August 30, 1957.]

IN THE MATTER OF A PETITION FOR DECLARATORY

JUDGMENT REGARDING THE VALIDITY OF MUNICIPAL
ORDINANCE NO. 3659 OF THE CITY OF MANILA. PHYSICAL
THERAPY ORGANIZATION OF THE PHILIPPINES, INC.,
petitioner-appellant, vs. THE MUNICIPAL BOARD OF THE CITY
OF MANILA and ARSENIO H. LACSON, as Mayor of the City of
Manila, respondents-appellees.

Mariano M. de Joya for appellant.

City Fiscal Eugenio Angeles and Assistant Fiscal Arsenio Naawa for
appellees.

SYLLABUS

1. MUNICIPAL CORPORATION; MASSAGE CLINICS; PURPOSE OF

ORDINANCE No. 3659 CITY OF MANILA. The purpose of Ordinance No. 3659
promulgated by the Municipal Board of the City of Manila is not to regulate the
practice of licensed and qualified massagists of therapeutic massage in the
Philippines. What the Ordinance tries to avoid is that the massage clinic ran by a
masseur or massagista may be used as cover for the running or maintaining a house of
prostitution,
2. ID.; AUTHORITY OF CITY BOARD TO ENACT ORDINANCE.
Under the General Welfare Clause, municipal corporations are authorized to enact
ordinances to provide for the health and safety, and promote the morality, peace and
general welfare of its inhabitants.
3. ID; AMOUNT OF LICENSE FEES; USEFUL OCCUPATION; INIMICAL
OCCUPATION. The amount of the fee or charge is properly considered in
determining whether it is a tax or an exercise of the police power. The amount may be
so large as to itself show that the purpose was to raise revenue and not to regulate, but
in regard to this matter there is a marked distinction between license fees imposed
upon useful and beneficial occupations which the sovereign wishes to regulate but not
restrict, and those which are inimical and dangerous to the public, health, morals or
safety. In the latter case the fee maybe very large without necessarily being a tax
(Cooley on taxation Vol. IV pp. 3516- 17; italics supplied.)
4. ID; ID; PRACTICE OF HYGIENIC AND AESTHETIC MASSAGE
INIMICAL OCCUPATION. The practice of hygienic and aesthetic massage is not
a useful and beneficial occupation which will promote and is conducive to public
morals and the amount of P100 permit fee imposed for its regulation is not considered
as a tax for revenue purposes.

DECISION

MONTEMAYOR, J : p

The petitioner-appellant, an association of registered massagists and licensed

operators of massage clinics in the City of Manila and other parts of the country, filed
an action in the Court of First Instance of Manila for declaratory judgment regarding
the validity of Municipal Ordinance No. 3659, promulgated by the Municipal Board
and approved by the City Mayor. To stop the City from enforcing said ordinance, the
petitioner secured an injunction upon filing of a bond in the sum of P1,000.00. A
hearing was held, but the parties without introducing any evidence submitted the case
for decision on the pleadings, although they submitted written memoranda.
Thereafter, the trial court dismissed the petition and later dissolved the writ of
injunction previously issued.

The petitioner appealed said order of dismissal directly to this Court. In

support of its appeal, petitioner-appellant contends among other things that the trial
court erred in holding that the Ordinance in question has not restricted the practice of
massotherapy in massage clinics to hygienic and aesthetic massage, that the
Ordinance is valid as it does not regulate the practice of massage, that the Municipal
Board of Manila has the power to enact the Ordinance in question by virtue of Section
18, Subsection (kk), Republic Act 409, and that the permit fee of P100.00 is moderate
and not unreasonable. Inasmuch as the appellant assails and discusses certain
provisions regarding the ordinance in question, and it is necessary to pass upon the
same, for purposes of ready reference, we are reproducing said ordinance in toto.
ORDINANCE NO. 3659
AN ORDINANCE REGULATING THE OPERATION OF MASSAGE
CLINICS IN THE CITY OF MANILA AND PROVIDING PENALTIES FOR
VIOLATIONS THEREOF.
Be it ordained by the Municipal Board of the City of Manila, that:
SECTION 1. Definition. For the purpose of this Ordinance the
following words and phrases shall be taken in the sense hereinbelow indicated:
 (a) Massage clinic shall include any place or establishment used in the
practice of hygienic and aesthetic massage;
(b) Hygienic and aesthetic massage shall include any system of
manipulation or treatment of the superficial parts of the human body for
hygienic and aesthetic purposes by rubbing, stroking, kneading, or tapping with
the hand or an instrument;
(c) Massagist shall include any person who shall have passed the
required examination and shall have been issued a massagist certificate by the
Committee of Examiners for Massagist, or by the Director of Health or his
authorized representative;
(d) Attendant or helper shall include any person employed by a duly
qualified massagist in any massage clinic to assist the latter in the practice of
hygienic and aesthetic massage;
(e) Operator shall include the owner, manager, administrator, or any
person who operates or is responsible for the operation of a massage clinic.
SEC. 2. Permit Fees. No person shall engage in the operation of a
massage clinic or in the occupation of attendant or helper therein without first
having obtained a permit therefor from the Mayor. For every permit granted
under the provisions of this Ordinance, there shall be paid to the City Treasurer
the following annual fees:
(a) Operator of a massage P100.00
(b) Attendant or helper 5.00
Said permit, which shall be renewed every year, may be revoked by the Mayor
at any time for violation of this Ordinance.
SEC. 3. Building requirement. (a) In each massage clinic, there shall
be separate rooms for the male and female customers. Rooms where massage
operations are performed shall be provided with sliding curtains only instead of
swinging doors. The clinic shall be properly ventilated, well lighted and
maintained under sanitary conditions at all times while the establishment is open
for business and shall be provided with the necessary toilet and washing
facilities.
(b) In every clinic there shall be no private rooms or separated
compartment except those assigned for toilet, lavatories, dressing room, office
or kitchen.
(c) Every massage clinic shall be provided with only one entrance and it
shall have no direct or indirect communication whatsoever with any dwelling
place, house or building.
Sec. 4. Regulations for the operation of massage clinics. (a) It shall
be unlawful for any operator, massagist, attendant or helper to use, or allow the
use of, a massage clinic as a place of assignation or permit the commission
therein of any indecent or immoral act. Massage clinics shall be used only for
hygienic and aesthetic message.
 (b) Massage clinics shall open at eight o'clock a.m. and shall close at
eleven o'clock p.m.
(c) While engaged in the actual performance of their duties, massagists,
attendants and helpers in a massage clinic shall be as properly and sufficiently
clad as to avoid suspicion of intent to commit an indecent or immoral act;
(d) Attendants or helpers may render service to any individual customer
only for hygienic and aesthetic purposes under the order, direction, supervision,
control and responsibility of a qualified massagist.
SEC. 5. Qualifications No person who has previously been convicted
by final judgment of competent court of any violation of the provisions of
paragraphs 3 and 5 of Art. 202 and Arts. 335, 336, 340 and 342 of the Revised
Penal Code, or Secs. 819 of the City of Manila, or who is suffering from any
venereal or communicable disease shall engage in the occupation of massagist,
attendant or helper in any massage clinic. Applicants, for Mayor's permit shall
attach to their application a police clearance and health certificate duly issued
by the City Health Officers as well as a massagist certificate duly issued by the
Committee or Examiners for Massagists or by the Director of Health or his
authorized representatives, in case of massagist.
SEC. 6. Duty of operator of massage clinic. No operator of massage
clinic shall allow such clinic to operate without a duly qualified massagist nor
allow any man or woman to act as massagist, attendant or helper therein without
the Mayor's permit provided for in the preceding sections. He shall submit
whenever required by the Mayor or his authorized representative the persons
acting as massagists, attendants or helpers in his clinic. He shall place the
massage clinic open to inspection at all times by the police, health officers, and
other law enforcement agencies of the government, shall be held liable for
anything which may happen within the premises of the massage clinic.
SEC. 7. Penalty. Any person violating any of the provisions of this
Ordinance shall upon conviction, be punished by a fine of not less than fifty
pesos nor more than two hundred pesos or by imprisonment for not less than six
days nor more than six months, or both such fine and imprisonment, at the
discretion of the court.
SEC. 8. Repealing Clause. All ordinances or parts of ordinances,
which are inconsistent herewith, are hereby repealed.
SEC. 9. Effectivity. This Ordinance shall take effect upon its
approval.
Enacted, August 27, 1954.
Approved, September 7, 1954.
The main contention of the appellant in its appeal and the principal ground of
its petition for declaratory judgment is that the City of Manila is without authority to
regulate the operation of massagists and the operation of massage clinics within its
jurisdiction; that whereas under the Old City Charter, particularly, Section 2444 (e) of
the Revised Administrative Code, the Municipal Board was expressly granted the
power to regulate and fix the license fee for the occupation of massagists, under the
New Charter of Manila, Republic Act 409, said power has been withdrawn or omitted
and that now the Director of Health, pursuant to authority conferred by Section 938 of
the Revised Administrative Code and Executive Order No. 317, series of 1941, as
amended by Executive Order No. 392, series, 1951, is the one who exercises
supervision over the practice of massage and over massage clinics in the Philippines;
that the Director of Health has issued Administrative Order No. 10, dated May 5,
1953, prescribing "rules and regulations governing the examination for admission to
the practice of massage, and the operation of massage clinics, offices, or
establishments in the Philippines", which order was approved by the Secretary of
Health and duly published in the Official Gazette; that Section 1 (a) of Ordinance No.
3659 has restricted the practice of massage to only hygienic and aesthetic massage
prohibits or does not allow qualified massagists to practice therapeutic massage in
their massage clinics. Appellant also contends that the license fee of P100.00 for
operator in Section 2 of the Ordinance is unreasonable, may, unconscionable.

If we can ascertain the intention of the Manila Municipal Board in

promulgating the Ordinance in question, much of the objection of appellant to its
legality may be solved. It would appear to us that the purpose of the Ordinance is not
to regulate the practice of massage, much less to restrict the practice of licensed and
qualified massagists of therapeutic massage in the Philippines. The end sought to be
attained in the Ordinance is to prevent the commission of immorality and the practice
of prostitution in an establishment masquerading as a massage clinic where the
operators thereof offer to massage or manipulate superficial parts of the bodies of
customers for hygienic and aesthetic purposes. This intention can readily be
understood by the building requirements in Section 3 of the Ordinance, requiring that
there be separate rooms for male and female customers; that instead of said rooms
being separated by permanent partitions and swinging doors, there should only be
sliding curtains between them; that there should be "no private rooms or separated
compartments, except those assigned for toilet, lavatories, dressing room, office or
kitchen"; that every massage clinic should be provided with only one entrance and
shall have no direct or indirect communication whatsoever with any dwelling place,
house or building; and that no operator, massagist, attendant or helper will be allowed
"to use or allow the use of a massage clinic as a place of assignation or permit the
commission therein of any immoral or indecent act", and in fixing the operating hours
of such clinic between 8:00 a.m. and 11:00 p.m. This intention of the Ordinance was
correctly ascertained by Judge Hermogenes Concepcion, presiding in the trial court,
in his order of dismissal where he said: "What the Ordinance tries to avoid is that the
massage clinic run by an operator who may not be a masseur or massagista may be
used as cover for the running or maintaining a house of prostitution."
 Ordinance No. 3659, particularly, Sections 1 to 4, should be considered as
limited to massage clinics used in the practice of hygienic and aesthetic massage. We
do not believe that the Municipal Board of the City of Manila and the Mayor wanted
or intended to regulate the practice of massage in general or restrict the same to
hygienic and aesthetic only.
As to the authority of the City Board to enact the Ordinance in question, the
City Fiscal, in representation of the appellees, calls our attention to Section 18 of the
New Charter of the City of Manila, Republic Act No. 409, which gives legislative
powers to the Municipal Board to enact all ordinances it may deem necessary and
proper for the promotion of the morality, peace, good order, comfort, convenience and
general welfare of the City and its inhabitants. This is generally referred to as the
General Welfare Clause, a delegation in statutory form of the police power, under
which municipal corporations are authorized to enact ordinances to provide for the
health and safety, and promote the morality, peace and general welfare of its
inhabitants. We agree with the City Fiscal.
As regards the permit fee of P100.00, it will be seen that said fee is made
payable not by the masseur or massagist, but by the operator of a massage clinic who
may not be a massagist himself. Compared to permit fees required in other operations,
P100.00 may appear to be too large and rather unreasonable. However, much
discretion is given to municipal corporations in determining the amount of said fee
without considering it as a tax for revenue purposes:
"The amount of the fee or charge is properly considered in determining
whether it is a tax or an exercise of the police power. The amount may be so
large as to itself show that the purpose was to raise revenue and not to regulate,
but in regard to this matter there is a marked distinction between license fees
imposed upon useful and beneficial occupations which the sovereign wishes to
regulate but not restrict, and those which are inimical and dangerous to public
health, morals or safety. In the latter case the fee may be very large without
necessarily being a tax." (Cooley on Taxation, Vol. IV, pp. 3516-17;
underlining supplied.)
Evidently, the Manila Municipal Board considered the practice of hygienic and
aesthetic massage not as a useful and beneficial occupation which will promote and is
conducive to public morals, and consequently, imposed the said permit fee for its
regulation.
In conclusion, we find and hold that the Ordinance in question as we interpret
it and as intended by the appellees is valid. We deem it unnecessary to discuss and
pass upon the other points raised in the appeal. The order appealed from is hereby
affirmed. No costs.
Paras, C.J., Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur.
 (In re Physical Therapy Organization of the Phil., Inc. v. Municipal Board of the City of
|||

Manila, G.R. No. L-10448, [August 30, 1957], 101 PHIL 1142-1149)
 EN BANC

[G.R. No. L-17725. February 28, 1962.]

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.

MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

SYLLABUS

1. PUBLIC FORESTS; REFORESTATION CHARGES; NATURE OF FUND

COLLECTED. Under Section 1 of Republic Act No. 115 the amount collected as
reforestation charges from a timber licensee or concessionaire, reforestation charges from
a timber licensee or concessionaire, shall constitute a fund to be known as the
Reforestation Fund, and the same shall be expanded by the Director of Forestry, with the
approval of the Secretary of Agriculture and Natural Resources for the reforestation or
afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation.

2. ID.; ID.; ID.; The amount paid by a licensee as reforestation or afforestation charges, is
in the nature of a tax which forms part of the Reforestation Fund, payable by him,
irrespective of whether the area covered by his license is reforested or not. Said Fund, as
the law expressly provides, shall be expended in carrying out the purposes provided for
thereunder, namely, the reforestation or afforestation, among others, of denuded areas
needing reforestation or afforestation.

3. OBLIGATIONS AND CONTRACTS; COMPENSATION WHEN PARTIES ARE

NOT CREDITOR OR DEBTOR OF EACH OTHER. Where appellant and appellee
are not mutually creditors and debtors of each other, the law on compensation is
inapplicable.

4. ID.; ID.; INTERNAL REVENUE TAXES. Internal Revenue Taxes, such as forest
charges, cannot be the subject of set-off or compensation. It is because taxes are not in
the nature of contracts between the parties but grow out of a duty to, and are positive acts
of, the government, to the making and enforcing of which, the personal consent of the
individual taxpayer is not required.
 DECISION

BARRERA, J : p

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100)
ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6%
interest thereon from the date of the filing of the complaint until fully paid, plus costs,
defendant Mambulao Lumber Company interposed the present appeal. 1

The facts of the case are briefly stated in the decision of the trial court, to wit:

"The facts of this case are not contested and may be briefly summarized as
follows: (a) under the first cause of action, for forest charges covering the
period from September 10, 1952 to May 24, 1953, defendants admitted that they
have a liability of P587.37, which liability is covered by a bond executed by
defendant General Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character, on July 29, 1953, in favor of herein
plaintiff; (b) under the second cause of action, both defendants admitted a joint
and several liability in favor of plaintiff in the sum of P286.70, also covered by
a bond dated November 27, 1953; and (c) under the third cause of action, both
defendants admitted a joint and several liability in favor of plaintiff for
P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities
aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the
amount already mentioned is admitted, then what is the defense interposed by
the defendants? The defense presented by the defendants is quite unusual in
more ways than one. It appears from Exh. 3 that from July 21, 1948 to
December 29, 1956, defendant Mambulao Lumber Company paid to the
Republic of the Philippines P8,200.52 for `reforestation charges' and for the
period commencing from April 30, 1947 to June 24, 1948, said defendant paid
P927.08 to the Republic of the Philippines for `reforestation charges'. These
reforestation charges were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the
regular forest charges provided under Section 264 of Commonwealth Act 466
known as the National Internal Revenue Code, the amount of P0.50 on each
cubic meter of timber . . . cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the director
of forestry, with the approval of the secretary of agriculture and commerce, for
reforestation and afforestation of water sheds, denuded areas . . . and other
public forest lands, which upon investigation, are found needing reforestation or
afforestation . . . . The total amount of the reforestation charges paid by
Mambulao Lumber Company is P9,127.50, and it is the contention of defendant
Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the
denuded area of the land covered by its license, the Republic of the Philippines
should refund said amount, or, if it cannot be refunded, at least it should be
 compensated with what Mambulao Lumber Company owed the Republic of the
Philippines for reforestation charges. In line with these thought, defendant
Mambulao Lumber Company wrote the director of forestry, on February 21,
1957 letter Exh. 1, in paragraph 4 of which said defendant requested `that our
account with your bureau be credited with all the reforestation charges that you
have imposed on us from July 1, 1947 to June 14, 1956, amounting to around
P2,988.62. . . . ". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in
which the director of forestry quoted an opinion of the secretary of justice, to
the effect that he has no discretion to extend the time for paying the
reforestation charges and also explained why not all denuded areas are being
reforested."

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by
defendant-appellant company to plaintiff-appellee as reforestation charges from 1947 to
1956 may be set off or applied to the payment of the sum of P4,802.37 as forest charges
due and owing from appellant to appellee. It is appellant's contention that said sum of
P9,127.50, not having been used in the reforestation of the area covered by its license, the
same is refundable to it or may be applied in compensation of said sum of P4,802.37 due
from it as forest charges.

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115,
provides:

"SECTION 1. There shall be collected, in addition to the regular forest charges

provided for under section two hundred and sixty-four of Commonwealth Act
Numbered Four Hundred sixty-six, known as the National Internal Revenue
Code, the amount of fifty centavos on each cubic meter of timber for the first
and second groups and forty centavos for the third and fourth groups cut out and
removed from any public forest for commercial purposes. The amount collected
shall be expended by the Director of Forestry, with the approval of the Secretary
of Agriculture and Natural Resources (Commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within
forest reserves, communal forest, national parks, timber lands, sand dunes, and
other public forest lands, which, upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the
growing of economic trees for timber, tannin, oils, gums, and other minor forest
products or medicinal plants, or for watersheds protection, or for prevention of
erosion and floods and preparation of necessary plans and estimate of costs and
for reconnaissance survey of public forest lands and for such other expenses as
may be deemed necessary for the proper carrying out of the purposes of this
Act.

"All revenues collected by virtue of, and pursuant to, the provisions of the
preceding paragraph and from the sale of barks, medicinal plants and other
products derived from plantations as herein provided shall constitute a fund to
 be known as Reforestation Fund, to be expended exclusively in carrying out the
purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the
revenues or incomes derived from the provisions of this Act." (Emphasis
supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation
charges from a timber licensee or concessionaire shall constitute a fund to be known as
the Reforestation Fund, and that the same shall be expended by the Director of Forestry,
with the approval of the Secretary of Agriculture and Natural Resources for the
reforestation or afforestation, among others, of denuded areas which, upon investigation,
are found to be needing reforestation or afforestation. Note that there is nothing in the law
which requires that the amount collected as reforestation charges should be used
exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same should be refunded to him. Observe too,
that the licensee's area may or may not be reforested at all, depending on whether the
investigation thereof by the Director of Forestry shows that said area needs reforestation.
The conclusion seems to be that the amount paid by a licensee as reforestation charges is
in the nature of a tax which forms a part of the Reforestation Fund, payable by him
irrespective of whether the area covered by his license is reforested or not. Said fund, as
the law expressly provides, shall be expended in carrying out the purposes provided for
thereunder, namely, the reforestation or afforestation, among others, of denuded areas
needing reforestation or afforestation.

Appellant maintains that the principle of compensation in Article 1278 of the new Civil
Code 2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges
may compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges.
But in the view we take of this case, appellant and appellee are not mutually creditors and
debtors of each other. Consequently, the law on compensation is inapplicable. On this
point, the trial court correctly observed:

"Under Article 1278, NCC, compensation should take place when two persons
in their own right are creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to the
government, they are in the coffers of the government as taxes collected, and the
government does not owe anything to defendant Mambulao Lumber Company.
So, it is crystal clear that the Republic of the Philippines and the Mambulao
Lumber Company are not creditors and debtors of each other, because
compensation refers to mutual debts. . . . ."

And the weight of authority is to the effect that internal revenue taxes, such as the
forest charges in question, can not be the subject of set-off or compensation.
 "A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. . . . ." (80 C.J.S. 73-
74.)

"The general rule, based on grounds of public policy is well- settled that no set-
off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow out
of a duty to, and are the positive acts of the government, to the making and
enforcing of which, the personal consent of individual taxpayers is not required.
. . . If the taxpayer can properly refuse to pay his tax when called upon by the
Collector, because he has a claim against the governmental body which is not
included in the tax levy, it is plain that some legitimate and necessary
expenditure must be curtailed. If the taxpayer's claim is disputed, the collection
of the tax must await and abide the result of a lawsuit, and meanwhile the
financial affairs of the government will be thrown into great confusion." (47
Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all
respects, with costs against the defendant- appellant. So ordered.

Bengzon, C . J ., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J. B. L.,

Paredes, Dizon and De Leon, JJ ., concur.

(Republic v. Mambulao Lumber Co., G.R. No. L-17725, [February 28, 1962], 114 PHIL
|||

549-555)
 THIRD DIVISION

[G.R. No. 67649. June 28, 1988.]

ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE

APPELLATE COURT and HO FERNANDEZ, respondents.

DECISION

GUTIERREZ, JR., J : p

The petitioner invokes legal and equitable grounds to reverse the questioned decision of
the Intermediate Appellate Court, to set aside the auction sale of his property which took
place on December 5, 1977, and to allow him to recover a 203 square meter lot which
was sold at public auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built
upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro
Manila. The lot, with an area of about 328 square meters, is described and covered by
Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated
by the Republic of the Philippines for the sum of P4,116.00 representing the estimated
amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay
City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property
Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the
highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time
helping his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the
cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate
of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale
had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978.
The auction sale and the final bill of sale were both annotated at the back of TCT No.
4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended
his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which
reads:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered

dismissing the amended complaint and ordering:

"(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of
Title in favor of the defendant Ho Fernandez over the parcel of land including
the improvements thereon, subject to whatever encumbrances appearing at the
back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795)
cancelled.

"(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as

attorney's fees." (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A

GRAVE ERROR OF LAW IN NOT HOLDING THAT PETITIONER'S
OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY
WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE
GOVERNMENT IS INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A

GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER
WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION
SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5,
1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
 III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER

COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID
BY RESPONDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS
TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A
DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND
CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp.
10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that the
price paid for the property was shockingly inadequate, amounting to fraud and
deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems
raised in his petition upon himself. While we commiserate with him at the loss of his
property, the law and the facts militate against the grant of his petition. We are
constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his
land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons,
who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit: LLpr

"(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;

xxx xxx xxx

"(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have against
the government. A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected. The collection of a
tax cannot await the results of a lawsuit against the government.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that:

"A claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state or
municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. . . . . (80 C.J.S., 73-
74). "The general rule based on grounds of public policy is well-settled that no
set-off admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is that
taxes are not in the nature of contracts between the party and party but grow out
of duty to, and are the positive acts of the government to the making and
enforcing of which, the personal consent of individual taxpayers is not required.
. . .'"

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector
because he has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Cordero v. Gonda (18 SCRA 331) where we stated
that: ". . . internal revenue taxes can not be the subject of compensation: Reason:
government and taxpayer 'are not mutually creditors and debtors of each other' under
Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to
the city government while the expropriation was effected by the national government.
Moreover, the amount of P4,116.00 paid by the national government for the 125 square
meter portion of his lot was deposited with the Philippine National Bank long before the
sale at public auction of his remaining property. Notice of the deposit dated September
28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted
in his testimony that he knew about the P4,116.00 deposited with the bank but he did not
withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit
so that he could pay the tax obligation thus aborting the sale at public auction. llcd

Petitioner had one year within which to redeem his property although, as will be shown
later, he claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with
the mandatory provisions of the statute governing tax sale. No evidence, oral or
otherwise, was presented that the procedure outlined by law on sales of property for tax
delinquency was followed. . . . Since defendant Ho Fernandez has the affirmative of this
issue, the burden of proof therefore rests upon him to show that plaintiff was duly and
properly notified . . . ." (Petition for Review, Rollo p. 18; italics supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale,
has the burden of proof to show that there was compliance with all the prescribed
requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

". . . [D]ue process of law to be followed in tax proceedings must be established

by proof and the general rule is that the purchaser of a tax title is bound to take
upon himself the burden of showing the regularity of all proceedings leading up
to the sale." (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in

depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil.
437; Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the
rule that administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites
have been complied with, the petitioner can not, however, deny that he did receive the
notice for the auction sale. The records sustain the lower court's finding that:

"[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was
not properly notified of the auction sale. Surprisingly, however, he admitted in
his testimony that he received the letter dated November 21, 1977 (Exhibit "I")
as shown by his signature (Exhibit "I-A") thereof. He claimed further that he
was not present on December 5, 1977 the date of the auction sale because he
went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed. . .
.."

We quote the following testimony of the petitioner on cross-examination, to wit:

"Q. My question to you is this letter marked as Exhibit I for Ho Fernandez

notified you that the property in question shall be sold at public auction
to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD
464. Will you tell the Court whether you received the original of this
letter?
 "A. I just signed it because I was not able to read the same. It was just sent
by mail carrier.

"Q. So you admit that you received the original of Exhibit I and you signed
upon receipt thereof but you did not read the contents of it?

"A. Yes, sir, as I was in a hurry.

"Q. After you received that original where did you place it?

"A. I placed it in the usual place where I place my mails."

Petitioner, therefore, was notified about the auction sale. It was negligence on his part
when he ignored such notice. By his very own admission that he received the notice, his
now coming to court assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon
v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917
Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held
that "alleged gross inadequacy of price is not material when the law gives the owner the
right to redeem as when a sale is made at public auction, upon the theory that the lesser
the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5
SCRA 985), this Court held: LLpr

". . . [R]espondent treasurer now claims that the prices for which the lands were
sold are unconscionable considering the wide divergence between their assessed
values and the amounts for which they had been actually sold. However, while
in ordinary sales for reasons of equity a transaction may be invalidated on the
ground of inadequacy of price, or when such inadequacy shocks one's
conscience as to justify the courts to interfere, such does not follow when the
law gives to the owner the right to redeem, as when a sale is made at public
auction, upon the theory that the lesser the price the easier it is for the owner to
effect the redemption. And so it was aptly said: 'When there is the right to
redeem, inadequacy of price should not be material, because the judgment
debtor may reacquire the property or also sell his right to redeem and thus
recover the loss he claims to have suffered by reason of the price obtained at the
auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De
Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

"If mere inadequacy of price is held to be a valid objection to a sale for taxes,
the collection of taxes in this manner would be greatly embarrassed, if not
rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
 correct rule is stated as follows: 'where land is sold for taxes, the inadequacy of
the price given is not a valid objection to the sale.' This rule arises from
necessity, for, if a fair price for the land were essential to the sale, it would be
useless to offer the property. Indeed, it is notorious that the prices habitually
paid by purchasers at tax sales are grossly out of proportion to the value of the
land." (Rothschild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et
al. (267 P. 555):

"Like most cases of this character there is here a certain element of hardship
from which we would be glad to relieve, but to do so would unsettle long-
established rules and lead to uncertainty and difficulty in the collection of taxes
which are the life blood of the state. We are convinced that the present rules are
just, and that they bring hardship only to those who have invited it by their own
neglect."

We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay
City, which necessitated the expropriation of adjoining areas, real estate values have gone
up in the area. However, the price quoted by the petitioner for a 203 square meter lot
appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition. cdrep

And finally, even if we are inclined to give relief to the petitioner on equitable grounds,
there are no strong considerations of substantial justice in his favor. Mr. Francia failed to
pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have
pocketed the notice of sale without reading it which, if true, is still an act of inexplicable
negligence. He did not withdraw from the expropriation payment deposited with the
Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner
did not pay attention to another notice sent by the City Treasurer on November 3, 1978,
during the period of redemption, regarding his tax delinquency. There is furthermore no
showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The
petitioner has no standing to invoke equity in his attempt to regain the property by
belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is

DISMISSED. The decision of the respondent court is affirmed.

SO ORDERED.

Fernan, Feliciano, Bidin and Cortes, JJ., concur.

 (Francia v. Intermediate Appellate Court, G.R. No. 67649, [June 28, 1988], 245 PHIL
|||

717-727)
 EN BANC

[G.R. No. L-18994. June 29, 1963.]

MELECIO R. DOMINGO, as Commissioner of Internal Revenue,

petitioner, vs. HON. LORENZO C. GARLITOS, in his capacity as
Judge of the Court of First Instance of Leyte, and SIMEONA K.
PRICE, as administratrix of the Intestate Estate of the late Walter
Scott Price, respondents.

Solicitor General and Atty. G. H . Mantolino for petitioner.

Benedicto & Martinez for respondents.

SYLLABUS

1. TAXATION; INHERITANCE TAX; PROCEDURE IN ENFORCEMENT AGAINST

ESTATE OF DECEASED; CLAIM MUST BE FILED BEFORE PROBATE COURT.
The ordinary procedure by which to settle claims or indebtedness against the estate of
a deceased person, as an inheritance tax, is for the claimant to present a claim before the
probate court so that said court may order the administrator to pay the amount thereof
(Aldamiz vs. Judge of the Court of First Instance of Mindoro, 85 Phil., 228).

2. ID.; ID.; ID.; ID.; LEGAL BASIS. The legal basis for such a procedure is the fact
that in the testate or intestate proceedings to settle the estate of a deceased person, the
properties belonging to the estate are under the jurisdiction of the court and such
jurisdiction continues until said properties have been distributed among the heirs entitled
thereto. During the pendency of the proceedings all the estate is in custodia legis and the
proper procedure is not to allow the sheriff, in case of a court judgment, to seize the
properties but to ask the court for an order to require the administrator to pay the amount
due from the estate and required to be paid.

3. ID.; ID.; COMPENSATION BETWEEN TAXES AND CLAIMS OF INTESTATE

RECOGNIZED AND APPROPRIATED FOR BY LAW. The fact that the court
having jurisdiction of the estate had found that the claim of the estate against the
Government has been appropriated for the purpose by a corresponding law (Rep Act No.
2700) shows that both the claim of the Government for inheritance taxes and the claim of
the intestate for services rendered have already become overdue and demandable as well
as fully liquidated. Compensation, therefore, takes place by operation of law, in
accordance with the Provisions of Articles 1279 and 1290 of the Civil Code, and both
debts are extinguished to the concurrent amount.

DECISION

LABRADOR, J : p

This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Hon. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of
the court and for an order in this Court directing the respondent court below to execute
the judgment in favor of the Government against the estate of Walter Scott Price for
internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, 106 Phil., 1138,
this Court declared as final and executory the order for the payment by the estate of the
estate and inheritance taxes, charges and penalties amounting to P40,058.55, issued by
the Court of First Instance of Leyte in special proceedings No. 14 entitled "In the Matter
of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims
against the estate the fiscal presented a petition dated June 21, 1961, to the court below
for the execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below dated August
20, 1960 and September 28, 1960, respectively, are as follows:

"Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K.

Price, Administratrix of the estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in
Malacaang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2,
1958, directing the latter to pay to Mrs. Price the sum of P368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262,200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by
the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal
Revenue as ordered paid by this Court on July 5, 1960 in accordance with the
order of the Supreme Court promulgated July 30, 1960 in 106 Phil., 1138, be
deducted from the amount of P262,200.00 due and payable to the administratrix
Simeona K. Price, in this estate, the balance to be paid by the Government to
her without further delay." (Order of August 20, 1960)aisa dc
 "The Court has nothing further to add to its order dated August 20, 1960 and it
orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only
fair for the Government. as a debtor, to pay its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially
taking into consideration that the amount due the Government draws interests
while the credit due to the present estate does not accrue any interest." (Order of
September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the
claims of the Government against the estate must be denied for lack of merit. The
ordinary procedure by which to settle claims or indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to present a claim before the
probate court so that said court may order the administrator to pay the amount thereof. To
such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First
Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

". . . a writ of execution is not the proper procedure allowed by the Rules of
Court for the payment of debts and expenses of administration. The proper
procedure is for the court to order the sale of personal estate or the sale or
mortgage of real property of the deceased and all debts or expenses of
administration should be paid out of the proceeds of the sale or mortgage. The
order for the sale or mortgage should be issued upon motion of the administrator
and with the written notice to all the heirs, legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when
sale or mortgage of real estate is to be made, the regulations contained in Rule
90, section 7, should be complied with.

"Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case 'the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and may issue execution if circumstances
require' (Rule 89 section 6; see also Rule 74, section 4; Emphasis ours.) And
this is not the instant case."

The legal basis for such a procedure is the fact that in the testate or intestate proceedings
to settle the estate of a deceased person, the properties belonging to the estate are under
the jurisdiction of the court and such jurisdiction continues until said properties have
been distributed among the heirs entitled thereto. During the pendency of the proceedings
all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in
case of a court judgment, to seize the properties but to ask the court for an order to
require the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court
having jurisdiction of the estate had found that the claim of the estate against the
Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and demandable
as well as fully liquidated. Compensation, therefore, takes place by operation of law, in
accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both
debts are extinguished to the concurrent amount, thus:

"Art. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors and debtors are not aware of
the compensation."

It is clear, therefore, that the petitioner has no clear right to execute the judgment for
taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition for
certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the
remedy. llcd

The petition is, therefore, dismissed, without costs.

Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal,
JJ ., concur.

Bengzon, C . J ., took no part.

Reyes, J.B.L., J ., concurs in the result.

||| (Domingo v. Garlitos, G.R. No. L-18994, [June 29, 1963], 118 PHIL 456-460)
 EN BANC

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

DAVAO GULF LUMBER CORPORATION, petitioner, vs.

COMMISSIONER OF INTERNAL REVENUE and COURT OF
APPEALS, respondents.

Carpio, Villaraza & Cruz for petitioner.

The Solicitor General for respondents.

SYNOPSIS

This is a petition for review filed by Davao Gulf Lumber Corporation challenging the
decision of respondent Court of Appeals (CA) in affirming the Court of Tax Appeals'
(CTA) decision which granted the claim of refund of herein petitioner, but based on the
rates provided under Republic Act 1435, and not on the higher rates prescribed by
Sections 153 and 156 of the NIRC. In so ruling, CA held that the claim should be
computed under Section 1 and 2 of R.A. 1435 citing the pronouncement in Commissioner
of Internal Revenue v. Rio Tuba Nickel Mining Corporation case and the subsequent
resolution clarifying said decision. Hence, this petition for review.TcDIaA

The Supreme Court finds the petition not meritorious. It is basic that a claim of
exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken. Since the partial refund authorized under Section 5, R.A. 1435
is in the nature of a tax exemption, it must be construed strictissimi juris against the
grantee. Hence, petitioners claim of refund must expressly be granted in a statute stated in
the language too clear to be mistaken. The Court after reviewing R.A. 1435 and the
subsequent pertinent statutes found no expression of a legislative will authorizing a
refund based on the higher rates claimed by petitioner. When the law itself does not
explicitly provide that a refund under R.A. 1435 may be based on higher rates, which
were nonexistent at the time of its enactment, the Court cannot presume otherwise. A
legislative lacuna cannot be filled by judicial fiat. In view thereof, the petition is denied
and the assailed decision is affirmed.

SYLLABUS
1. TAXATION; REFUND; REPUBLIC ACT 1435; GRANTING OF PARTIAL
REFUND IS A TAX EXEMPTION BY NATURE AND SHOULD BE CONSTRUED
IN STRICTISSIMI JURIS AGAINST THE GRANTEE; CASE AT BAR. A tax cannot
be imposed unless it is supported by the clear and express language of a statute; on the
other hand, once the tax is unquestionably imposed, "[a] claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken." Since the partial refund authorized under Section 5, R.A. 1435, is in the nature
of tax exemption, it must be construed strictissimi juris against the grantee. Hence,
petitioner's claim of refund on the basis of the specific taxes it actually paid must
expressly be granted in a statute stated in a language too clear to be mistaken.

2. ID.; ID.; WHEN THE LAW ITSELF DOES NOT EXPLICITLY PROVIDE THAT A
REFUND UNDER REPUBLIC ACT 1435 MAY BE BASED ON HIGHER RATES,
THE COURT CANNOT PRESUME OTHERWISE; CASE AT BAR. The Court has
carefully scrutinized R.A. 1435 and the subsequent pertinent statutes and found no
expression of a legislative will authorizing a refund based on the higher rates claimed by
petitioner. The mere fact that the privilege of refund was included in Section 5, and not in
Section 1, is insufficient to support petitioner's claim. When the law itself does not
explicitly provide that a refund under R.A. 1435 may be based on higher rates which
were nonexistent at the time of its enactment, this Court cannot presume otherwise. A
legislative lacuna cannot be filled by judicial fiat.
acHCSD

3. ID.; TAX EXEMPTION; THERE IS NO TAX EXEMPTION SOLELY ON THE

GROUND OF EQUITY. Petitioner asserts that "equity and justice demand that the
computation of the tax refunds be based on actual amounts paid under Sections 153 and
156 of the NIRC. We disagree. According to an eminent authority on taxation, "there is
no tax exemption solely on the ground of equity."

DECISION

PANGANIBAN, J : p

Because taxes are the lifeblood of the nation, statutes that allow exemptions are construed
strictly against the grantee and liberally in favor of the government. Otherwise stated, any
exemption from the payment of a tax must be clearly stated in the language of the law; it
cannot be merely implied therefrom.

Statement of the Case

This principium is applied by the Court in resolving this petition for review under Rule
45 of the Rules of Court, assailing the Decision 1of Respondent Court of Appeals 2 in
CA-GR SP No. 34581 dated September 26, 1994, which affirmed the June 21, 1994
Decision 3 of the Court of Tax Appeals 4 in CTA Case No. 3574. The dispositive portion
of the CTA Decision affirmed by Respondent Court reads: dcta

"WHEREFORE, judgment is hereby rendered ordering the respondent to refund

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

The Antecedent Facts

The facts are undisputed. 6 Petitioner is a licensed forest concessionaire possessing a

Timber License Agreement granted by the Ministry of Natural Resources (now
Department of Environment and Natural Resources). From July 1, 1980 to January 31,
1982 petitioner purchased, from various oil companies, refined and manufactured mineral
oils as well as motor and diesel fuels, which it used exclusively for the exploitation and
operation of its forest concession. Said oil companies paid the specific taxes imposed,
under Sections 153 and 156 7 of the 1977 National Internal Revenue Code (NIRC), on
the sale of said products. Being included in the purchase price of the oil products, the
specific taxes paid by the oil companies were eventually passed on to the user, the
petitioner in this case.

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

Revenue (CIR) a claim for refund in the amount of P120,825.11, representing 25% of the
specific taxes actually paid on the above-mentioned fuels and oils that were used by
petitioner in its operations as forest concessionaire. The claim was based on Insular
Lumber Co. vs. Court of Tax Appeals 8 and Section 5 of RA 1435 which reads:

"Section 5. The proceeds of the additional tax on manufactured oils shall accrue
to the road and bridge funds of the political subdivision for whose benefit the
tax is collected: Provided, however, That whenever any oils mentioned above
are used by miners or forest concessionaires in their operations, twenty-five per
centum of the specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon submission of proof of actual use of oils and under
similar conditions enumerated in subparagraphs one and two of section one
hereof, amending section one hundred forty-two of the Internal Revenue Code:
Provided, further, That no new road shall be constructed unless the routes or
location thereof shall have been approved by the Commissioner of Public
Highways after a determination that such road can be made part of an integral
and articulated route in the Philippine Highway System, as required in section
twenty-six of the Philippine Highway Act of 1953."

It is an unquestioned fact that petitioner complied with the procedure for refund,
including the submission of proof of the actual use of the aforementioned oils in its forest
concession as required by the above-quoted law. Petitioner, in support of its claim for
refund, submitted to the CIR the affidavits of its general manager, the president of the
Philippine Wood Products Association, and three disinterested persons all attesting that
the said manufactured diesel and fuel oils were actually used in the exploitation and
operation of its forest concession.

On January 20, 1983, petitioner filed at the CTA a petition for review docketed as CTA
Case No. 3574. On June 21, 1994, the CTA rendered its decision finding petitioner
entitled to a partial refund of specific taxes the latter had paid in the reduced amount of
P2,923.15. The CTA ruled that the claim on purchases of lubricating oil (from July 1,
1980 to January 19, 1981) and on manufactured oils other than lubricating oils (from July
1, 1980 to January 4, 1981) had prescribed. Disallowed on the ground that they were not
included in the original claim filed before the CIR were the claims for refund on
purchases of manufactured oils from January 1, 1980 to June 30, 1980 and from February
1, 1982 to June 30, 1982. In regard to the other purchases, the CTA granted the claim, but
it computed the refund based on rates deemed paid under RA 1435, and not on the higher
rates actually paid by petitioner under the NIRC.

Insisting that the basis for computing the refund should be the increased rates prescribed
by Sections 153 and 156 of the NIRC, petitioner elevated the matter to the Court of
Appeals. As noted earlier, the Court of Appeals affirmed the CTA Decision. Hence, this
petition for review. 9

Public Respondent's Ruling

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

"I. The respondent Court of Tax Appeals failed to apply the Supreme Court's
Decision in Insular Lumber Co. v. Court of Tax Appeals which granted the
claim for partial refund of specific taxes paid by the claimant, without
qualification or limitation.

"II. The respondent Court of Tax Appeals ignored the increase in rates imposed
by succeeding amendatory laws, under which the petitioner paid the specific
taxes on manufactured and diesel fuels.

"III. In its decision, the respondent Court of Tax Appeals ruled contrary to
established tenets of law when it lent itself to interpreting Section 5 of R.A.
1435, when the construction of said law is not necessary.

"IV. Sections 1 and 2 of R.A. 1435 are not the operative provisions to be
applied but rather, Sections 153 and 156 of the National Internal Revenue Code,
as amended.

"V. To rule that the basis for computation of the refunded taxes should be
Sections 1 and 2 of R.A. 1435 rather than Section 153 and 156 of the National
 Internal Revenue Code is unfair, erroneous, arbitrary, inequitable and
oppressive." 10

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

The Issue

In its Memorandum, petitioner raises one critical issue:

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

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

The Court's Ruling

The petition is not meritorious.

Petitioner Entitled to Refund Under Sec. 5 of RA 1435

At the outset, it must be stressed that petitioner is entitled to a partial refund under
Section 5 of RA 1435, which was enacted to provide means for increasing the Highway
Special Fund.

The rationale for this grant of partial refund of specific taxes paid on purchases of
manufactured diesel and fuel oils rests on the character of the Highway Special Fund.
The specific taxes collected on gasoline and fuel accrue to the Fund, which is to be used
for the construction and maintenance of the highway system. But because the gasoline
and fuel purchased by mining and lumber concessionaires are used within their own
compounds and roads, and their vehicles seldom use the national highways, they do not
directly benefit from the Fund and its use. Hence, the tax refund gives the mining and the
logging companies a measure of relief in light of their peculiar situation. 13 When the
Highway Special Fund was abolished in 1985, the reason for the refund likewise ceased
to exist. 14 Since petitioner purchased the subject manufactured diesel and fuel oils from
July 1, 1980 to January 31, 1982 and submitted the required proof that these were
actually used in operating its forest concession, it is entitled to claim the refund under
Section 5 of RA 1435.

Tax Refund Strictly Construed Against the Grantee

Petitioner submits that it is entitled to the refund of 25 percent of the specific taxes it had
actually paid for the petroleum products used in its operations. In other words, it claims a
refund based on the increased rates under Sections 153 and 156 of the NIRC. 15
Petitioner argues that the statutory grant of the refund privilege, specifically the phrase
"twenty-five per centum of the specific tax paid thereon shall be refunded by the
Collector of Internal Revenue," is "clear and unambiguous" enough to require
construction or qualification thereof. 16 In addition, it cites our pronouncement in Insular
Lumber vs. Court of Tax Appeals: 17

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

Section 1 only for the purpose of prescribing the procedure for refund. This
express reference cannot be expanded in scope to include the limitation of the
period of refund. If the limitation of the period of refund of specific taxes paid
on oils used in aviation and agriculture is intended to cover similar taxes paid on
oil used by miners and forest concessionaires, there would have been no need of
dealing with oil used by miners and forest concessions separately and Section 5
would very well have been included in Section 1 of Republic Act No. 1435,
notwithstanding the different rate of exemption." dctai

Petitioner then reasons that "the express mention of Section 1 of RA 1435 in Section 5
cannot be expanded to include a limitation on the tax rates to be applied . . . [otherwise,]
Section 5 should very well have been included in Section 1 . . ." 18

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

"SEC. 1. Section one hundred and forty-two of the National Internal Revenue
Code, as amended, is further amended to read as follows:

"SEC. 142. Specific tax on manufactured oils and other fuels. On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes:

"(a) Kerosene or petroleum, per liter of volume capacity, two and one-half
centavos;
"(b) Lubricating oils, per liter of volume capacity, seven centavos;

"(c) Naptha, gasoline, and all other similar products of distillation, per liter of
volume capacity, eight centavos; and

"(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That if the denatured alcohol is mixed with
gasoline, the specific tax on which has already been paid, only the alcohol
content shall be subject to the tax herein prescribed. For the purpose of this
subsection, the removal of denatured alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) shall be deemed to have
been removed for motive power, unless shown to the contrary.

"Whenever any of the oils mentioned above are, during the five years from June
eighteen, nineteen hundred and fifty two, used in agriculture and aviation, fifty
per centum of the specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon the submission of the following:

"(1) A sworn affidavit of the producer and two disinterested persons proving
that the said oils were actually used in agriculture, or in lieu thereof

"(2) Should the producer belong to any producers association or federation, duly
registered with the Securities and Exchange Commission, the affidavit of the
president of the association or federation, attesting to the fact that the oils were
actually used in agriculture.

"(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector
proving that the said oils were actually used in aviation: Provided, That no such
refunds shall be granted in respect to the oils used in aviation by citizens and
corporations of foreign countries which do not grant equivalent refunds or
exemptions in respect to similar oils used in aviation by citizens and
corporations of the Philippines."

"SEC. 2. Section one hundred and forty-five of the National Internal Revenue
Code, as amended, is further amended to read as follows:

"SEC. 145. Specific Tax on Diesel fuel oil. On fuel oil, commercially known
as diesel fuel oil, and on all similar fuel oils, having more or less the same
generating power, there shall be collected, per metric ton, one peso."

xxx xxx xxx

Section 5. The proceeds of the additional tax on manufactured oils shall accrue
to the road and bridge funds of the political subdivision for whose benefit the
tax is collected: Provided, however, That whenever any oils mentioned above
are used by miners or forest concessionaires in their operations, twenty-five per
 centum of the specific tax paid thereon shall be refunded by the Collector of
Internal Revenue upon submission of proof of actual use of oils and under
similar conditions enumerated in subparagraphs one and two of section one
hereof, amending section one hundred forty-two of the Internal Revenue Code:
Provided, further, That no new road shall be constructed unless the route or
location thereof shall have been approved by the Commissioner of Public
Highways after a determination that such road can be made part of an integral
and articulated route in the Philippine Highway System, as required in section
twenty-six of the Philippine Highway Act of 1953."

Subsequently, the 1977 NIRC, PD 1672 and EO 672 amended the first two provisions,
renumbering them and prescribing higher rates. Accordingly, petitioner paid specific
taxes on petroleum products purchased from July 1, 1980 to January 31, 1982 under the
following statutory provisions.

From February 8, 1980 to March 20, 1981, Sections 153 and 156 provided as follows:

"SEC. 153. Specific tax on manufactured oils and other fuels. On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes which shall attach to the articles hereunder enumerated as soon
as they are in existence as such:

"(a) Kerosene, per liter of volume capacity, seven centavos;

"(b) Lubricating oils, per liter of volume capacity, eighty centavos;

"(c) Naphtha, gasoline and all other similar products of distillation, per liter of
volume capacity, ninety-one centavos: Provided, That, on premium and aviation
gasoline, the tax shall be one peso per liter of volume capacity;

"(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo: Provided, That, unless otherwise provided for by special
laws, if the denatured alcohol is mixed with gasoline, the specific tax on which
has already been paid, only the alcohol content shall be subject to the tax herein
prescribed. For the purposes of this subsection, the removal of denatured
alcohol of not less than one hundred eighty degrees proof (ninety per centum
absolute alcohol) shall be deemed to have been removed for motive power,
unless shown to the contrary;

"(e) Processed gas, per liter of volume capacity, three centavos;

"(f) Thinners and solvents, per liter of volume capacity, fifty-seven centavos;

"(g) Liquefied petroleum gas, per kilogram, fourteen centavos: Provided, That,
liquefied petroleum gas used for motive power shall be taxed at the equivalent
rate as the specific tax on diesel fuel oil;
 "(h) Asphalts, per kilogram, eight centavos;

"(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

"(j) Aviation turbo jet fuel, per liter of volume capacity, fifty-five centavos."
(As amended by Sec. 1, P.D. No. 1672.)

xxx xxx xxx

"SEC. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known
as diesel fuel oil, and on all similar fuel oils, having more or less the same
generating power, per liter of volume capacity, seventeen and one-half centavos,
which tax shall attach to this fuel oil as soon as it is in existence as such."

Then on March 21, 1981, these provisions were amended by EO 672 to read:

"SEC. 153. Specific tax on manufactured oils and other fuels. On refined and
manufactured mineral oils and motor fuels, there shall be collected the
following taxes which shall attach to the articles hereunder enumerated as soon
as they are in existence as such:

"(a) Kerosene, per liter of volume capacity, nine centavos;

"(b) Lubricating oils, per liter of volume capacity, eighty centavos;

"(c) Naphtha, gasoline and all other similar products of distillation, per liter of
volume capacity, one peso and six centavos: Provided, That on premium and
aviation gasoline, the tax shall be one peso and ten centavos and one peso,
respectively, per liter of volume capacity;

"(d) On denatured alcohol to be used for motive power, per liter of volume
capacity, one centavo; Provided, That unless otherwise provided for by special
laws, if the denatured alcohol is mixed with gasoline, the specific tax on which
has already been paid, only the alcohol content shall be subject to the tax herein
prescribed. For the purpose of this subsection, the removal of denatured alcohol
of not less than one hundred eighty degrees proof (ninety per centum absolute
alcohol) shall be deemed to have been removed for motive power, unless shown
to the contrary;

"(e) Processed gas, per liter of volume capacity, three centavos;

"(f) Thinners and solvents, per liter of volume capacity, sixty-one centavos;
 "(g) Liquefied petroleum gas, per kilogram, twenty-one centavos: Provided,
That, liquefied petroleum gas used for motive power shall be taxed at the
equivalent rate as the specific tax on diesel fuel oil;

"(h) Asphalts, per kilogram, twelve centavos;

"(i) Greases, waxes and petrolatum, per kilogram, fifty centavos;

"(j) Aviation turbo-jet fuel, per liter of volume capacity, sixty-four centavos."

xxx xxx xxx

"SEC. 156. Specific tax on diesel fuel oil. On fuel oil, commercially known
as diesel fuel oil, and all similar fuel oils, having more or less the same
generating power, per liter of volume capacity, twenty-five and one-half
centavos, which tax shall attach to this fuel oil as soon as it is in existence as
such."

A tax cannot be imposed unless it is supported by the clear and express language of a
statute; 19on the other hand, once the tax is unquestionably imposed, "[a] claim of
exemption from tax payments must be clearly shown and based on language in the law
too plain to be mistaken." 20 Since the partial refund authorized under Section 5, RA
1435, is in the nature of a tax exemption, 21 it must be construed strictissimi juris against
the grantee. Hence, petitioner's claim of refund on the basis of the specific taxes it
actually paid must expressly be granted in a statue stated in a language too clear to be
mistaken.

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

The issue is not really novel. In Commissioner of Internal Revenue vs. Court of Appeals
and Atlas Consolidated Mining and Development Corporation 23 (the second Atlas case),
the CIR contended that the refund should be based on Sections 1 and 2 of RA 1435, not
Sections 153 and 156 of the NIRC of 1977. In categorically ruling that Private
Respondent Atlas Consolidated Mining and Development Corporation was entitled to a
refund based on Sections 1 and 2 of RA 1435, the Court, through Mr. Justice Hilario G.
Davide, Jr., reiterated our pronouncement in Commissioner of Internal Revenue vs. Rio
Tuba Nickel and Mining Corporation:
 "Our Resolution of 25 March 1992 modifying our 30 September 1991 Decision
in the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we
stated:

'Since the private respondent's claim for refund covers specific taxes
paid from 1980 to July 1983 then we find that the private respondent is
entitled to a refund. It should be made clear, however, that Rio Tuba is
not entitled to the whole amount it claims as refund. LibLex

The specific taxes on oils which Rio Tuba paid for the aforesaid period
were no longer based on the rates specified by Sections 1 and 2 of R.A.
No. 1435 but on the increased rates mandated under Sections 153 and
156 of the National Internal Revenue Code of 1977. We note however,
that the latter law does not specifically provide for a refund to these
mining and lumber companies of specific taxes paid on manufactured
and diesel fuel oils.

In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]),
the Court held that the authorized partial refund under Section 5 of R.A.
No. 1435 partakes of the nature of a tax exemption and therefore cannot
be allowed unless granted in the most explicit and categorical language.
Since the grant of refund privileges must be strictly construed against
the taxpayer, the basis for the refund shall be the amounts deemed paid
under Sections 1 and 2 of R.A. No. 1435.

ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby

MODIFIED. The private respondent's CLAIM for REFUND is
GRANTED, computed on the basis of the amounts deemed paid under
Sections 1 and 2 of R.A. No. 1435, without interest.' 24

We rule, therefore, that since Atlas's claims for refund cover specific taxes paid
before 1985, it should be granted the refund based on the rates specified by
Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under Sections
153 and 156 of the Tax Code of 1977, provided the claims are not yet barred by
prescription." (Emphasis supplied.)

Insular Lumber Co. and First Atlas Case Not Inconsistent With Rio Tuba and Second
Atlas Case

Petitioner argues that the applicable jurisprudence in this case should be Commissioner of
Internal Revenue vs. Atlas Consolidated and Mining Corp. (the first Atlas case), an
unsigned resolution, and Insular Lumber Co. vs. Court of Tax Appeals, an en banc
decision. 25 Petitioner also asks the Court to take a "second look" at Rio Tuba and the
second Atlas case, both decided by Divisions, in view of Insular which was decided en
banc. Petitioner posits that "[I]n view of the similarity of the situation of herein petitioner
with Insular Lumber Company (claimant in Insular Lumber) and Rio Tuba Nickel
Mining Corporation (claimant in Rio Tuba), a dilemma has been created as to whether or
not Insular Lumber, which has been decided by the Honorable Court en banc, or Rio
Tuba, which was decided only [by] the Third Division of the Honorable Court, should
apply." 26

We find no conflict between these two pairs of cases. Neither Insular Lumber Co. nor the
first Atlas case ruled on the issue of whether the refund privilege under Section 5 should
be computed based on the specific tax deemed paid under Sections 1 and 2 of RA 1435,
regardless of what was actually paid under the increased rates. Rio Tuba and the second
Atlas case did.

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum
products purchased in the year 1963, when the increased rates under the NIRC of 1977
were not yet in effect. Thus, the issue now before us did not exist at the time, since the
applicable rates were still those prescribed under Sections 1 and 2 of RA 1435.

On the other hand, the issue raised in the first Atlas case was whether the claimant was
entitled to the refund under Section 5, notwithstanding its failure to pay any additional
tax under a municipal or city ordinance. Although Atlas purchased petroleum products in
the years 1976 to 1978 when the rates had already been changed, the Court did not decide
or make any pronouncement on the issue in that case.

Clearly, it is impossible for these two decisions to clash with our pronouncement in Rio
Tuba and second Atlas case, in which we ruled that the refund granted be computed on
the basis of the amounts deemed paid under Sections 1 and 2 of RA 1435. In this light,
we find no basis for petitioner's invocation of the constitutional proscription that "no
doctrine or principle of law laid down by the Court in a decision rendered en banc or in
division may be modified or reversed except by the Court sitting en banc." 27

Finally, petitioner asserts that "equity and justice demand that the computation of the tax
refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC." 28
We disagree. According to an eminent authority on taxation, "there is no tax exemption
solely on the ground of equity." 29

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

SO ORDERED. LexLib

Narvasa, C .J ., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan,
Mendoza, Martinez, Quisumbing and Purisima, JJ ., concur.
 (Davao Gulf Lumber Corp. v. Commissioner of Internal Revenue, G.R. No. 117359,
|||

[July 23, 1998], 354 PHIL 879-895)

 EN BANC

[G.R. No. 92585. May 8, 1992.]

CALTEX PHILIPPINES, INC., petitioner, vs. THE HONORABLE

COMMISSION ON AUDIT, HONORABLE COMMISSIONER
BARTOLOME C. FERNANDEZ and HONORABLE
COMMISSIONER ALBERTO P. CRUZ, respondents.

SYLLABUS

1. CONSTITUTIONAL LAW; COMMISSION ON AUDIT; POWER; 1987

CONSTITUTION GRANT BROADER AND MORE EXTENSIVE POWER. The
present powers, as provided in Section 2, Subdivision D, Article IX of the 1987
Constitution, consistent with the declared independence of the Commission, are broader
and more extensive than that conferred by the 1973 Constitution. Indeed, when the
framers of the last two (2) Constitutions conferred upon the COA a more active role and
invested it with broader and more extensive powers, they did not intend merely to make
the COA a toothless tiger, but rather envisioned a dynamic, effective, efficient and
independent watchdog of the Government.

2. ID.; ID.; ID.; 1935 CONSTITUTION MERELY GRANTED THE AUDITOR

GENERAL TO BRING MATTER TO ATTENTION OF PROPER ADMINISTRATIVE
OFFICE. under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was
markedly passive. In respect to irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same. His was merely to bring that
matter to the attention of the proper administrative officer.

3. ID.; ID.; ID.; PRESENT CONSTITUTION RETAINS SAME POWER AND

AUTHORITY GRANTED IN PAST CONSTITUTIONS; FAILURE TO COMPLY
WITH COMMISSION ON AUDIT RULE AND REGULATIONS, A GROUND FOR
DISAPPROVAL OF PAYMENT. There can be no doubt, however, that the audit
power of the Auditor General under the 1935 Constitution and the Commission on Audit
under the 1973 Constitution authorized them to disallow illegal expenditures of funds or
uses of funds and property. Our present Constitution retains that same power and
authority, further strengthened by the definition of the COA's general jurisdiction in
Section 26 of the Government Auditing Code of the Philippines and Administrative Code
of 1987. Pursuant to its power to promulgate accounting and auditing rules and
regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, the COA promulgated on 29 March 1977 COA Circular
No. 77-55. Since the COA is responsible for the enforcement of the rules and regulations,
it goes without saying that failure to comply with them is a ground for disapproving the
payment of the proposed expenditure.

4. ID.; ID.; ID.; COST UNDERRECOVERY; "OTHER FACTORS" DETERMINED BY

PARAGRAPH 2 OF SECTION 8 OF P.D. 1956. The rule of ejusdem generis states
that "[w]here general words follow an enumeration of persons or things, by words of a
particular and specific meaning, such general words are not to be construed in their
widest extent, but are held to be as applying only to persons or things of the same kind or
class as those specifically mentioned." A reading of subparagraphs (i) and (ii) easily
discloses that they do not have a common characteristic. The first relates to price
reduction as directed by the Board of Energy while the second refers to reduction in
internal ad valorem taxes. Therefore, subparagraph (iii) cannot be limited by the
enumeration in these subparagraphs. What should be considered for purposes of
determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2)
of the Section which explicitly allows cost underrecovery only if such were incurred as a
result of the reduction of domestic prices of petroleum products.

5. ID.; ID.; ID.; ID.; FINANCING LOSSES, A RESULT OF REDUCTION OF

DOMESTIC PRICE OF PETROLEUM PRODUCTS. Although petitioner's financing
losses, if indeed incurred, may constitute cost underrecovery in the sense that such were
incurred as a result of the inability to fully offset financing expenses from yields in
money market placements, they do not, however, fall under the foregoing provision of
P.D. No. 1956, as amended, because the same did not result from the reduction of the
domestic price of petroleum products. Until paragraph (2), Section 8 of the decree, as
amended, is further amended by Congress, this Court can do nothing. The duty of this
Court is not to legislate, but to apply or interpret the law.

6. ID.; ID.; ID.; ID.; ID.; EQUITY CONSIDERATIONS ALLOWED PETITIONER TO

RECOVER FINANCING LOSSES IN CASE AT BAR. Be that as it may, this Court
wishes to emphasize that as the facts in this case have shown, it was at the behest of the
Government that petitioner refinanced its oil import payments from the normal 30-day
trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that
owing to the extended period for payment, the financial institution which refinanced said
payments charged a higher interest, thereby resulting in higher financing expenses for the
petitioner. It would appear then that equity considerations dictate that petitioner should
somehow be allowed to recover its financing losses, if any, which may have been
sustained because it accommodated the request of the Government. Although under
Section 29 of the National Internal Revenue Code such losses may be deducted from
gross income, the effect of that loss would be merely to reduce its taxable income, but not
to actually wipe out such losses. The Government then may consider some positive
measures to help petitioner and others similarly situated to obtain substantial relief. An
amendment, as aforestated, may then be in order.

7. ID.; ID.; ID.; ID.; PETITIONERS CAN RECOVER CLAIM ARISING FROM
SALES TO NPC. Petitioner can recover its claim arising from sales of petroleum
products to the National Power Corporation. The respondents themselves admit in their
Comment that underrecovery arising from sales to NPC are reimbursable because NPC
was granted full exemption from the payment of taxes pursuant to Fiscal Incentives
Regulatory Board's Resolution No. 17-87 of 24 June 1987 and to Republic Act No. 6952
establishing the Petroleum Price Standby Fund to support the OPSF.

8. ID.; ID.; ID.; ID.; LOI 1416 HAS NO BINDING FORCE. It is apparent that LOI
1416 was never published in the Official Gazette as required by Article 2 of the Civil
Code. LOI 1416 has, therefore, no binding force or effect as it was never published in the
Official Gazette after its issuance or at any time after the decision in the abovementioned
cases.

9. ID.; DELEGATION OF LEGISLATIVE POWER; STANDARD FOR ITS

EXERCISE MUST BE PROVIDED AND LEGISLATURE HAS PRESCRIBED THE
MANNER OF EXERCISE OF DELEGATED AUTHORITY. Upon the other hand, to
accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of
legislative power, it clearly appearing that the subject provision does not provide any
standard for the exercise of the authority. It is a fundamental rule that delegation of
legislative power may be sustained only upon the ground that some standard for its
exercise is provided and that the legislature, in making the delegation, has prescribed the
manner of the exercise of the delegated authority.

10. TAXATION; TAX EXEMPTION; CONSTRUED AGAINST GRANTEE AND

LIBERALLY IN FAVOR OF TAXING AUTHORITY. Tax exemptions as a general
rule are construed strictly against the grantee and liberally in favor of the taxing
authority. The burden proof rests upon the party claiming exemption to prove that it in
fact covered by the exemption so claimed. The party claiming exemption must therefore
be expressly mentioned in the exempting law or at least be within its purview by clear
legislative intent.

11. ID.; NOT MERELY AS A MEASURE TO RAISE REVENUE; LEVIED ALSO

FOR REGULATORY PURPOSE. We find no merit in petitioner's contention that the
OPSF contributions are not for a public purpose because they go to a special fund of the
government. Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the government; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a threatened industry which is
affected with public interest as to be within the police power of the state.

12. ID.; ID.; ID.; CASE AT BAR. There can be no doubt that the oil industry is
greatly imbued with public interest as it vitally affects the general welfare. Any
unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of,
among others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is one of prime concern which the state,
via its police power, may properly address. Also, P.D. No. 1956, as amended by E.O. No.
137, explicitly provides that the source of OPSF is taxation. No amount of semantical
juggleries could dim this fact.

13. ID.; TAXES MAY NOT BE OFFSET AND SUBJECT TO COMPENSATION. It

is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim
for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

14. ID.; ID.; CASE AT BAR. We may even further state that technically, in respect to
the taxes for the OPSF, the oil companies merely act as agents for the Government in the
latter's collection since the taxes are, in reality, passed unto the end-users the
consuming public. In that capacity, the petitioner, as one of such companies, has the
primary obligation to account for and remit the taxes collected to the administrator of the
OPSF. This duty stems from the fiduciary relationship between the two; petitioner
certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally
feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors
and creditors of each other. Secondly, there is no proof that petitioner's claim is already
due and liquidated.

15. ID.; ID.; PRACTICE OF ALLOWING COMPENSATION HAS NO LEGAL

BASIS; OIL COMPANIES NOT TO OFFSET THEIR CLAIMS AGAINST OPSF
CONTRIBUTIONS. That compensation had been the practice in the past can set no
valid precedent. Such a practice has no legal basis. Lastly, R.A. No. 6952 does not
authorize oil companies to offset their claims against their OPSF contributions. Instead, it
prohibits the government from paying any amount from the Petroleum Price Standby
Fund to oil companies which have outstanding obligations with the government, without
said obligation being offset first subject to the rules on compensation in the Civil Code.
 DECISION

DAVIDE, JR., J : p

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning
the authority of the Commission on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of
said Commission's decision denying its claims for recovery of financing charges from the
Fund and reimbursement of underrecovery arising from sales to the National Power
Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and
Marcopper Mining Corporation (MARCOPPER), preventing it from exercising the right
to offset its remittances against its reimbursement vis-a-vis the OPSF and disallowing its
claims which are still pending resolution before the Office of Energy Affairs (OEA) and
the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within
thirty (30) days from receipt of a copy thereof. The certiorari referred to is the special
civil action for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with: (a) total lack of
jurisdiction in completely ignoring and showing absolutely no respect for the findings
and rulings of the administrator of the fund itself and in disallowing a claim which is still
pending resolution at the OEA level, and (b) "grave abuse of discretion and completely
without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any
amount that it may be required under the law to remit to the OPSF against any amount
that it may receive by way of reimbursement therefrom are sufficient to bring this petition
within Rule 65 of the Rules of Court, and, considering further the importance of the
issues raised, the error in the designation of the remedy pursued will, in this instance, be
excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential
Decree (P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended,
said Section 8 reads as follows:

"SECTION 8. There is hereby created a Trust Account in the books of accounts

of the Ministry of Energy to be designated as Oil Price Stabilization Fund
(OPSF) for the purpose of minimizing frequent price changes brought about by
exchange rate adjustments and/or changes in world market prices of crude oil
and imported petroleum products. The Oil Price Stabilization Fund may be
sourced from any of the following:
 a) Any increase in the tax collection from ad valorem tax or
customs duty imposed on petroleum products subject to tax under this
Decree arising from exchange rate adjustment, as may be determined by
the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of

tax exemptions of government corporations, as may be determined by
the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products

to augment the resources of the Fund through an appropriate Order that
may be issued by the Board of Energy requiring payment by persons or
companies engaged in the business of importing, manufacturing and/or
marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso

costs paid by oil companies in the importation of crude oil and
petroleum products is less than the peso costs computed using the
reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and
imported petroleum products resulting from exchange rate adjustment
and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost underrecovery

incurred as a result of the reduction of domestic prices of petroleum
products. The magnitude of the underrecovery, if any, shall be
determined by the Ministry of Finance. 'Cost underrecovery' shall
include the following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost of
oil inventories in the possession of the oil companies at the time
of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;

iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry
of Energy."
The material operative facts of this case, as gathered from the pleadings of the parties, are
not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter
referred to as Petitioner, directing the latter to remit to the OPSF its collection, excluding
that unremitted for the years 1986 and 1988, of the additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December
1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all of
its claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial
verification with the OEA showed that the grand total of its unremitted collections of the
above tax is P1,287,668,820.00, broken down as follows:

1986 P233,190,916.00
1987 335,065,650.00
1988 719,412,254.00;
directing it to remit the same, with interest and surcharges thereon, within sixty (60)
days from receipt of the letter; advising it that the COA will hold in abeyance the
audit of all its claims for reimbursement from the OPSF; and directing it to desist
from further offsetting the taxes collected against outstanding claims in 1989 and
subsequent period. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its
reimbursement certificates from the OPSF covering claims with the Office of Energy
Affairs since June 1987 up to March 1989, invoking in support thereof COA Circular No.
89-299 on the lifting of pre-audit of government transactions of national government
agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release
of the reimbursement certificates from the OPSF and repeated its earlier directive to
petitioner to forward payment of the latter's unremitted collections to the OPSF to
facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a
proposal for the payment of the collections and the recovery of claims, since the outright
payment of the sum of P1.287 billion to the OEA as a prerequisite for the processing of
said claims against the OPSF will cause a very serious impairment of its cash position. 10
The proposal reads:

"We, therefore, very respectfully propose the following:

 (1) Any procedural arrangement acceptable to COA to facilitate monitoring of
payments and reimbursements will be administered by the ERB/Finance
Dept./OEA, as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as
payment to OPSF, similarly OEA will deliver to Caltex the same amount in
cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted
expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to

preclude further accumulation of reimbursement from OPSF."

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No.
921 accepting the above-stated proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing years. 11 Decision No. 921
reads:

"This pertains to the within separate requests of Mr. Manuel A. Estrella,

President, Petron Corporation, and Mr. Francis Ablan, President and Managing
Director, Caltex (Philippines) Inc., for reconsideration of this Commission's
adverse action embodied in its letters dated February 2, 1989 and March 9,
1989, the former directing immediate remittance to the Oil Price Stabilization
fund of collections made by the firms pursuant to P.D. 1956, as amended by
E.O. No. 137, S. 1987, and the latter reiterating the same directive but further
advising the firms to desist from offsetting collections against their claims with
the notice that 'this Commission will hold in abeyance the audit of all . . . claims
for reimbursement from the OPSF'.

It appears that under letters of authority issued by the Chairman, Energy

Regulatory Board, the aforenamed oil companies were allowed to offset the
amounts due to the Oil Price Stabilization Fund against their outstanding claims
from the said Fund for the calendar years 1987 and 1988, pending with the then
Ministry of Energy, the government entity charged with administering the
OPSF. This Commission, however, expressing serious doubts as to the propriety
of the offsetting of all types of reimbursements from the OPSF against all
categories of remittances, advised these oil companies that such offsetting was
bereft of legal basis. Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly manifest their intent to make
arrangements for the remittance to the Office of Energy Affairs of the amount of
collections equivalent to what has been previously offset, provided that this
Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is alleged
that the implementation of such an arrangement, whereby the remittance of
collections due to the OPSF and the reimbursement of claims from the Fund
 shall be made within a period of not more than one week from each other, will
benefit the Fund and not unduly jeopardize the continuing daily cash
requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this

Commission perceives no further objectionable feature in the proposed
arrangement, provided that 15% of whatever amount is due from the Fund is
retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without prejudice to similar
future retentions to answer for any deficiency in such surcharges, and provided
further that no offsetting of remittances and reimbursements for the current and
ensuing years shall be allowed."prcd

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to
Executive Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

"Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and
based on our initial verification of documents submitted to us by your Office in
support of Caltex (Philippines), Inc. offsets (sic) for the year 1986 to May 31,
1989, as well as its outstanding claims against the Oil Price Stabilization Fund
(OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex
(Philippines), Inc. shall be required to remit to OPSF an amount of
P1,505,668,906, representing remittances to the OPSF which were offset against
its claims reimbursements (net of unsubmitted claims). In addition, the
Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to cause
payment of P1,959,182,612 to Caltex, representing claims initially allowed in
audit, the details of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled

P387,683,535, which included P130,420,235 representing those claims
disallowed by OEA, details of which is (sic) shown in Schedule 1 as
summarized as follows:

Disallowance of COA

Particulars Amount

Recovery or financing charges P162,728,475 /a

Product sales 48,402,398 /b

Inventory losses

Borrow loan arrangement 14,034,786 /c

Sales to Atlas/Marcopper 32,097,083 /d

Sales to NPC 558

_____________

P257,263,300

Disallowances of OEA 130,420,235

_________________ ______________

Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to

indicate that recovery or financing charges by oil companies is not among the
items for which the OPSF may be utilized. Therefore, it is our view that
recovery of financing charges has no legal basis. The mechanism for such
claims is provided in DOF Circular 1-87.

b. Product Sales Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA

Order No. 87-03-095 indicating that (sic) February 7, 1987 as the effectivity
date that (sic) oil companies should pay OPSF impost on export sales of
petroleum products. Effective February 7, 1987 sales to international
vessels/airlines should not be included as part of its domestic sales. Changing
the effectivity date of the resolution from February 7, 1987 to October 20, 1987
as covered by subsequent ERB Resolution No. 88-12 dated November 18, 1988
has allowed Caltex to include in their domestic sales volumes to international
vessels/airlines and claim the corresponding reimbursements from OPSF during
the period. It is our opinion that the effectivity of the said resolution should be
February 7, 1987.

c. Inventory losses Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions

including the related BLA agreement, as they affect the claims for
 reimbursements of ad valorem taxes. We observed that oil companies
immediately settle ad valorem taxes for BLA transaction (sic). Loan balances
therefore are not tax paid inventories of Caltex subject to reimbursements but
those of the borrower. Hence, we recommend reduction of the claim for July,
August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that 'I hereby order and direct the
suspension of payment of all taxes, duties, fees, imposts and other charges
whether direct or indirect due and payable by the copper mining companies in
distress to the national and local governments'. It is our opinion that LOI 1416
which implements the exemption from payment of OPSF imposts as effected by
OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the

amount as herein authorized shall be subject to availability of funds of OPSF as
of May 31, 1989 and applicable auditing rules and regulations. With regard to
the disallowances, it is further informed that the aggrieved party has 30 days
within which to appeal the decision of the Commission in accordance with law."

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the
decision based on the following grounds: 13

"A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING

RULES, ORDERS, RESOLUTIONS, CIRCULARS ISSUED BY THE
DEPARTMENT OF FINANCE AND THE ENERGY REGULATORY
BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF

EXERCISE OF EXECUTIVE POWER BY DEPARTMENT OF FINANCE
AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD BE
RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS

AUTHORIZED BY THE EXECUTIVE BRANCH OF GOVERNMENT,
REMAINS VALID."

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request
for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with
Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming
the disallowance for recovery of financing charges, inventory losses, and sales to
MARCOPPER and ATLAS, while allowing the recovery of product sales or those arising
from export sales. 15 Decision No. 1171 reads as follows:

"Anent the recovery of financing charges, you contend that Caltex Phil. Inc. has
the authority to recover financing charges from the OPSF on the basis of
Department of Finance (DOF) Circular 1-87, dated February 18, 1987, which
allowed oil companies to 'recover cost of financing working capital associated
with crude oil shipments' and provided a schedule of reimbursement in terms of
peso per barrel. It appears that on November 6, 1989, the DOF issued a
memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

'As part of your program to promote economic recovery, . . . oil

companies (were authorized) to refinance their imports of crude oil and
petroleum products from the normal trade credit of 30 days up to 360
days from date of loading . . . Conformably . . ., the oil companies
deferred their foreign exchange remittances for purchases by refinancing
their import bills from the normal 30-day payment term up to the desired
360 days. This refinancing of importations carried additional costs
(financing charges) which then became, due to government mandate, an
inherent part of the cost of the purchases of our country's oil
requirement.'

We beg to disagree with such contention. The justification that financing

charges increased oil costs and the schedule of reimbursement rate in peso per
barrel (Exhibit 1) used to support alleged increase (sic) were not validated in our
independent inquiry. As manifested in Exhibit 2, using the same formula which
the DOF used in arriving at the reimbursement rate but using comparable
percentages instead of pesos, the ineluctable conclusion is that the oil
companies are actually gaining rather than losing from the extension of credit
because such extension enables them to invest the collections in marketable
securities which have much higher rates than those they incur due to the
extension. The Data we used were obtained from CPI (CALTEX) Management
and can easily be verified from our records.

With respect to product sales or those arising from sales to international vessels
or airlines, . . ., it is believed that export sales (product sales) are entitled to
claim refund from the OPSF. cdphil
 As regard your claim for underrecovery arising from inventory losses, . . . It is
the considered view of this Commission that the OPSF is not liable to refund
such surtax on inventory losses because these are paid to BIR and not to OPSF,
in view of which CPI (CALTEX) should seek refund from BIR . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you
are entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on
July 17, 1984, since these copper mining companies did not pay CPI
(CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the
CPI (CALTEX) has no authority to claim reimbursement for this uncollected
OPSF impost because LOI 1416 dated July 17, 1984, which exempts distressed
mining companies from 'all taxes, duties, import fees and other charges' was
issued when OPSF was not yet in existence and could not have contemplated
OPSF imposts at the time of its formulation. Moreover, it is evident that OPSF
was not created to aid distressed mining companies but rather to help the
domestic oil industry by stabilizing oil prices."

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition
wherein it imputes to the COA the commission of the following errors: 16

"I

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY

OF FINANCING CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's 1 7

CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM
SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR

REIMBURSEMENT ON SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM

EXERCISING ITS LEGAL RIGHT TO OFFSET ITS REMITTANCES
AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.
 V

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS

WHICH ARE STILL PENDING RESOLUTION BY (SIC) THE OEA AND
THE DOF."

In the Resolution of 5 April 1990, this Court required the respondents to comment on the
petition within ten (10) days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz,

assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the
parties to file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be considered as the Memorandum for respondents.
21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof,
that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137,
which added a second purpose, to wit:

"2) To reimburse the oil companies for possible cost underrecovery incurred as
a result of the reduction of domestic prices of petroleum products. The
magnitude of the underrecovery, if any, shall be determined by the Ministry of
Finance. 'Cost underrecovery' shall include the following:

i. Reduction in oil company take as directed by the Board of

Energy without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the price
change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;

iii. Other factors as may be determined by the Ministry of

Finance to result in cost underrecovery."

the "other factors" mentioned therein that may be determined by the Ministry (now
Department) of Finance may include financing charges for "in essence, financing
 charges constitute unrecovered cost of acquisition of crude oil incurred by the oil
companies," as explained in the 6 November 1989 Memorandum to the President of
the Department of Finance; they "directly translate to cost underrecovery in cases
where the money market placement rates decline and at the same time the tax on
interest income increases. The relationship is such that the presence of underrecovery
or overrecovery is directly dependent on the amount and extent of financing charged."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was
filed on the basis of Department of Finance Circular No. 1-87, dated 18 February 1987,
which provides: LexLib

"To allow oil companies to recover the costs of financing working capital
associated with crude oil shipments, the following guidelines on the utilization
of the Oil Price Stabilization Fund pertaining to the payment of the foregoing
(sic) exchange risk premium and recovery of financing charges will be
implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of

one (1) percent for the first (6) months and 1/32 of one percent per
month thereafter up to a maximum period of one year, to be applied on
crude oil' shipments from January 1, 1987. Shipments with outstanding
financing as of January 1, 1987 shall be charged on the basis of the fee
applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil

companies shall be allowed to recover financing charges directly from
the OPSF per barrel of crude oil based on the following schedule:

Financing Period Reimbursement Rate

Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90

241 (sic) days to 299 4.02

300 days to 369 (sic) days 6.16

360 days or more 8.28

The above rates shall be subject to review every sixty days." 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987,
advised the Office of Energy Affairs as follows:

"HON. VICENTE T. PATERNO

Deputy Executive Secretary

For Energy Affairs

Office of the President

Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and
February 5, 1987 and subsequent discussions held by the Price Review
committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes

the necessity to reduce the foreign exchange risk premium accruing to the Oil
Price Stabilization Fund (OPSF). Such a reduction would allow the industry to
recover partly associated financing charges on crude oil imports. Accordingly,
the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1% for
the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum
period of one year, effective January 1, 1987. In addition, since the prevailing
company take would still leave unrecovered financing charges, reimbursement
may be secured from the OPSF in accordance with the provisions of the
attached Department of Finance circular." 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which
contains the guidelines for the computation of the foreign exchange risk fee and the
recovery of financing charges from the OPSF, to wit:

"B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the
OPSF for both crude and product shipments loaded after January 1, 1987 based
on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

 180 days to 239 days 1.90

240 days to 229 (sic) days 4.02

300 days to 359 days 6.16

360 days to more 8.28

2. The above rates shall be subject to review every sixty days." 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88
imposing further guidelines on the recoverability of financing charges, to wit:

"Following are the supplemental rules to Department of Finance Circular No. 1-

87 dated February 18, 1987 which allowed the recovery of financing charges
directly from the Oil Price Stabilization Fund. (OPSF):

1. The claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs

together with the claim on peso cost differential for a particular shipment
and duly certified supporting documents provided for under Ministry of
Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement

certificate (Annex A) to be issued by the Office of Energy Affairs. The
said certificate may be used to offset against amounts payable to the
OPSF. The oil companies may also redeem said certificates in cash if not
utilized, subject to availability of funds." 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular
No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the
laws in the light of the determination of executive agencies. The determination by the
Department of Finance and the OEA that financing charges are recoverable from the
OPSF is entitled to great weight and consideration. 27 The function of the COA,
particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of
irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of
government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally,

COA's claim that petitioner is gaining, instead of losing, from the extension of credit, is
belatedly raised and not supported by expert analysis. llcd
In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular

or unnecessary government expenditures and as the monetary claims of
petitioner are not allowed by law, the COA acted within its jurisdiction in
denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing
charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the
second purpose of the OPSF pursuant to E.O. No. 137 can only include "factors
which are of the same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-

87 of the Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do

not likewise allow reimbursement of financing charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find
the theory of petitioner that such does not extend to the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or use of
government funds and properties, but only to the promulgation of accounting and
auditing rules for, among others, such disallowance to be untenable in the light of the
provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

"SECTION 2(1). The Commission on Audit shall have the power, authority, and
duty to examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies,
or instrumentalities, including government-owned and controlled corporations
with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity, directly or
indirectly, from or through the government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity.
However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or
special pre-audit, as are necessary and appropriate to correct the deficiencies. It
 shall keep the general accounts of the Government and, for such period as may
be provided by law, preserve the vouchers and other supporting papers
pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in
this Article, to define the scope of its audit and examination, establish the
techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of government funds and properties."

These present powers, consistent with the declared independence of the Commission, 30
are broader and more extensive than that conferred by the 1973 Constitution. Under the
latter, the Commission was empowered to:

"Examine, audit, and settle, in accordance with law and regulations, all accounts
pertaining to the revenues, and receipts of, and expenditures or uses of funds
and property, owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities including government-
owned or controlled corporations; keep the general accounts of the Government
and, for such period as may be provided by law, preserve the vouchers
pertaining thereto; and promulgate accounting and auditing rules and
regulations including those for the prevention of irregular, unnecessary,
excessive, or extravagant expenditures or uses of funds and property." 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereof provided:

"SECTION 2. The Auditor General shall examine, audit, and settle all accounts
pertaining to the revenues and receipts from whatever source, including trust
funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or
held in trust by the Government or the provinces or municipalities thereof. He
shall keep the general accounts of the Government and preserve the vouchers
pertaining thereto. It shall be the duty of the Auditor General to bring to the
attention of the proper administrative officer expenditures of funds or property
which, in his opinion, are irregular, unnecessary, excessive, or extravagant. He
shall also perform such other functions as may be prescribed by law."

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant

expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same. His was merely to bring that
matter to the attention of the proper administrative officer. cdrep

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs.
Gimenez 32 and Ramos vs. Aquino, 33 are no longer controlling as the two (2) were
decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the
1935 Constitution and the Commission on Audit under the 1973 Constitution authorized
them to disallow illegal expenditures of funds or uses of funds and property. Our present
Constitution retains that same power and authority, further strengthened by the definition
of the COA's general jurisdiction in Section 26 of the Government Auditing Code of the
Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate
accounting and auditing rules and regulations for the prevention of irregular,
unnecessary, excessive or extravagant expenditures or uses of funds, 36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible
for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure.
As observed by one of the Commissioners of the 1986 Constitutional Commission, Fr.
Joaquin G. Bernas: 37

"It should be noted, however, that whereas under Article XI, Section 2, of the
1935 Constitution the Auditor General could not correct 'irregular, unnecessary,
excessive or extravagant' expenditures of public funds but could only 'bring [the
matter] to the attention of the proper administrative officer.' under the 1987
Constitution, as also under the 1973 Constitution, the Commission on Audit can
promulgate accounting and auditing rules and regulations including those for
the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and
properties.' Hence, since the Commission on Audit must ultimately be
responsible for the enforcement of these rules and regulations, the failure to
comply with these regulations can be a ground for disapproving the payment of
a proposed expenditure."

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a
more active role and invested it with broader and more extensive powers, they did not
intend merely to make the COA a toothless tiger, but rather envisioned a dynamic,
effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance
Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing
circulars of the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O.
No. 137, authorizing it to determine "other factors" which may result in cost
underrecovery and a consequent reimbursement from the OPSF.
The Solicitor General maintains that, following the doctrine of ejusdem generis,
financing charges are not included in "cost underrecovery" and, therefore, cannot be
considered as one of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O.
No. 137, does not explicitly define what "cost underrecovery" is. It merely states what it
includes. Thus:

". . . 'Cost underrecovery' shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of
the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in

cost underrecovery."

These "other factors" can include only those which are of the same class or nature as
the two specifically enumerated in subparagraphs (i) and (ii). A common
characteristic of both is that they are in the nature of government mandated price
reductions. Hence, any other factor which seeks to be a part of the enumeration, or
which could qualify as a cost underrecovery, must be of the same class or nature as
those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of
Finance broad and unrestricted authority to determine or define "other factors." cdphil

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words are
not to be construed in their widest extent, but are held to be as applying only to persons
or things of the same kind or class as those specifically mentioned." 38 A reading of
subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic.
The first relates to price reduction as directed by the Board of Energy while the second
refers to reduction in internal ad valorem taxes. Therefore, subparagraph (iii) cannot be
limited by the enumeration in these subparagraphs. What should be considered for
purposes of determining the "other factors" in subparagraph (iii) is the first sentence of
paragraph (2) of the Section which explicitly allows cost underrecovery only if such were
incurred as a result of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost

underrecovery in the sense that such were incurred as a result of the inability to fully
offset financing expenses from yields in money market placements, they do not, however,
fall under the foregoing provision of P.D. No. 1956, as amended, because the same did
not result from the reduction of the domestic price of petroleum products. Until paragraph
(2), Section 8 of the decree, as amended, is further amended by Congress, this Court can
do nothing. The duty of this Court is not to legislate, but to apply or interpret the law. Be
that as it may, this Court wishes to emphasize that as the facts in this case have shown, it
was at the behest of the Government that petitioner refinanced its oil import payments
from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be
correct in its assertion that owing to the extended period for payment, the financial
institution which refinanced said payments charged a higher interest, thereby resulting in
higher financing expenses for the petitioner. It would appear then that equity
considerations dictate that petitioner should somehow be allowed to recover its financing
losses, if any, which may have been sustained because it accommodated the request of
the Government. Although under Section 29 of the National Internal Revenue Code such
losses may be deducted from gross income, the effect of that loss would be merely to
reduce its taxable income, but not to actually wipe out such losses. The Government then
may consider some positive measures to help petitioner and others similarly situated to
obtain substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part
of the Department of Finance to determine or define "other factors" is to uphold an undue
delegation of legislative power, it clearly appearing that the subject provision does not
provide any standard for the exercise of the authority. It is a fundamental rule that
delegation of legislative power may be sustained only upon the ground that some
standard for its exercise is provided and that the legislature, in making the delegation, has
prescribed the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered
irrelevant, by reason of the foregoing disquisitions. It may nevertheless be stated that
petitioner failed to disprove COA's claim that it had in fact gained in the process.
Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being
the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it
too.

II. Anent the claims arising from sales to the National Power Corporation, We find for
the petitioner. The respondents themselves admit in their Comment that underrecovery
arising from sales to NPC are reimbursable because NPC was granted full exemption
from the payment of taxes; to prove this, respondents trace the laws providing for such
exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution
No. 17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption
privileges of the National Power Corporation, including those pertaining to its domestic
purchases of petroleum and petroleum products . . . are restored effective March 10,
1987." In a Memorandum issued on 5 October 1987 by the Office of the President, NPC's
tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum

products to the NPC is evident in the recently passed Republic Act No. 6952 establishing
the Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part of Section
2, Republic Act No. 6952 provides:

"SECTION 2. Application of the Fund shall be subject to the following

conditions:

(1) That the Fund shall be used to reimburse the oil companies
for (a) cost increases of imported crude oil and finished petroleum
products resulting from foreign exchange rate adjustments and/or
increases in world market prices of crude oil; (b) cost underrecovery
incurred as a result of fuel oil sales to the National Power Corporation
(NPC); and (c) other cost underrecoveries incurred as may be finally
decided by the Supreme Court; . . ."

Hence, petitioner can recover its claim arising from sales of petroleum products to the
National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER,
petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered
the suspension of payments of all taxes, duties, fees and other charges, whether direct or
indirect, due and payable by the copper mining companies in distress to the national
government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco,
issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas
Consolidated Mining Corporation and Marcopper Mining Corporation are among those
declared to be in distress.
LexLib

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its
18 August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our
opinion that LOI 1416 which implements the exemption from payment of OPSF imposts
as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI
(CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in
existence and could not have contemplated OPSF imposts at the time of its formulation."
43 It is further stated that: "Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil
prices."
In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not
have intended to exempt said distressed mining companies from the payment of OPSF
dues for the following reasons:

"a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D.
1956 creating the OPSF was promulgated on October 10, 1984, while E.O. 137,
amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in
line with the government's effort to prevent the collapse of the copper industry.
P.D. 1956, as amended, was issued for the purpose of 'minimizing frequent
price changes brought about by exchange rate adjustments and/or changes in
world market prices of crude oil and imported petroleum products'; and

c. LOI 1416 caused the 'suspension of all taxes, duties, fees, imposts and other
charges, whether direct or indirect, due and payable by the copper mining
companies in distress to the National and Local Governments . . .' On the other
hand, OPSF dues are not payable by (sic) distressed copper companies but by
oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the
prices of oil products." 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by
distressed mining companies, it does not accord petitioner the same privilege with respect
to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however,
it is apparent that LOI 1416 was never published in the Official Gazette 45 as required by
Article 2 of the Civil Code, which reads:

"Laws shall take effect after fifteen days following the completion of their
publication in the Official Gazette, unless it is otherwise provided . . ."

In applying said provision, this Court ruled in the case of Taada vs. Tuvera:
46

"WHEREFORE, the Court hereby orders respondents to publish in the Official

Gazette all unpublished presidential issuances which are of general application,
and unless so published they shall have no binding force and effect."

Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

"We hold therefore that all statutes, including those of local application and
private laws, shall be published as a condition for their effectivity, which shall
 begin fifteen days after publication unless a different effectivity date is fixed by
the legislature.

Covered by this rule are presidential decrees and executive orders promulgated
by the President in the exercise of legislative powers whenever the same are
validly delegated by the legislature or, at present, directly conferred by the
Constitution. Administrative rules and regulations must also be published if
their purpose is to enforce or implement existing laws pursuant also to a valid
delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall

immediately upon their approval, or as soon thereafter as possible, be published
in full in the Official Gazette, to become effective only after fifteen days from
their publication, or on another date specified by the legislature, in accordance
with Article 2 of the Civil Code."

LOI 1416 has, therefore, no binding force or effect as it was never published in the
Official Gazette after its issuance or at any time after the decision in the abovementioned
cases.cdll

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200,
issued on 18 June 1987. As amended, the said provision now reads:

"Laws shall take effect after fifteen days following the completion of their
publication either in the Official Gazette or in a newspaper of general
circulation in the Philippines, unless it is otherwise provided."

We are not aware of the publication of LOI 1416 in any newspaper of general circulation
pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's
claim must still fail. Tax exemptions as a general rule are construed strictly against the
grantee and liberally in favor of the taxing authority. 48 The burden proof rests upon the
party claiming exemption to prove that it in fact covered by the exemption so claimed.
The party claiming exemption must therefore be expressly mentioned in the exempting
law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales
to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416.
Though LOI 1416 may suspend the payment of taxes by copper mining companies, it
does not give petitioner the same privilege with respect to the payment of OPSF dues.
IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains
that the Department of Finance has still to issue a final and definitive ruling thereon;
accordingly, it was premature for COA to disallow it. By doing so, the latter acted
beyond its jurisdiction. 49 Respondents, on the other hand, contend that said amount was
already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA
submitted the claims of petitioner for pre-audit, the abovementioned amount was already
excluded.

An examination of the records of this case shows that petitioner failed to prove or
substantiate its contention that the amount of P130,420,235.00 is still pending before the
OEA and the DOF. Additionally, We find no reason to doubt the submission of
respondents that said amount has already been passed upon by the OEA. Hence, the
ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the
OPSF from petitioner may be offset against petitioner's outstanding claims from said
fund. Petitioner contends that it should be allowed to offset its claims from the OPSF
against its contributions to the fund as this has been allowed in the past, particularly in
the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil
Code on compensation and Section 21, Book V, Title I-B of the Revised Administrative
Code which provides for "Retention of Money for Satisfaction of Indebtedness to
Government." 52 Petitioner also mentions communications from the Board of Energy and
the Department of Finance that supposedly authorize compensation. cdrep

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that
there can be no offsetting of taxes against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon the will of the taxpayer,
but are imposed by law. Respondents also allege that petitioner's reliance on Section 21,
Book V, Title I-B of the Revised Administrative Code is misplaced because "while this
provision empowers the COA to withhold payment of a government indebtedness to a
person who is also indebted to the government and apply the government indebtedness to
the satisfaction of the obligation of the person to the government, like authority or right to
make compensation is not given to the private person." 54 The reason for this, as stated in
Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government,
either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's
indebtedness to the OPSF.
Refuting respondents' contention, petitioner claims that the amounts due from it do not
arise as a result of taxation because "P.D. 1956, as amended, did not create a source of
taxation; it instead established a special fund . . .," 56 and that the OPSF contributions do
not go to the general fund of the state and are not used for public purpose, i.e., not for the
support of the government, the administration of law, or the payment of public expenses.
This alleged lack of a public purpose behind OPSF exactions distinguishes such from a
tax. Hence, the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to
support the OPSF; the said law provides in part that:

"SECTION 2. Application of the fund shall be subject to the following

conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be

used to pay any oil company which has an outstanding obligation to the
Government without said obligation being offset first, subject to the
requirements of compensation or offset under the Civil Code."

We find no merit in petitioner's contention that the OPSF contributions are not for a
public purpose because they go to a special fund of the government. Taxation is no longer
envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state. 57 There can be no doubt that the oil
industry is greatly imbued with public interest as it vitally affects the general welfare.
Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of,
among others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is one of prime concern which the state,
via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of
OPSF is taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government. 58 Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim
for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection since the
taxes are, in reality, passed unto the end-users the consuming public. In that capacity,
the petitioner, as one of such companies, has the primary obligation to account for and
remit the taxes collected to the administrator of the OPSF. This duty stems from the
fiduciary relationship between the two; petitioner certainly cannot be considered merely
as a debtor. In respect, therefore, to its collection for the OPSF vis-a-vis its claims for
reimbursement, no compensation is likewise legally feasible. Firstly, the Government and
the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly,
there is no proof that petitioner's claim is already due and liquidated. Under Article 1279
of the Civil Code, in order that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;

(2) both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by

third persons and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a
practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to
offset their claims against their OPSF contributions. Instead, it prohibits the government
from paying any amount from the Petroleum Price Standby Fund to oil companies which
have outstanding obligations with the government, without said obligation being offset
first subject to the rules on compensation in the Civil Code. LexLib

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the

challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National
Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Narvasa, C .J ., Melencio-Herrera, Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin,

Grio-Aquino, Medialdea, Regalado, Romero and Nocon, JJ ., concur.

Cruz and Bellosillo, JJ ., took no part.

||| (Caltex Phil., Inc. v. Commission on Audit, G.R. No. 92585, [May 8, 1992])
 FIRST DIVISION

[G.R. No. 124043. October 14, 1998.]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG
MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES,
INC., respondents.

SYLLABUS

1. TAXATION; COURT OF TAX APPEALS; FACTUAL FINDINGS, WHEN

SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE DISTURBED ON
APPEAL; CASE AT BAR. It is a basic rule in taxation that the factual findings of the
CTA, when supported by substantial evidence, will not be disturbed on appeal unless it is
shown that the said court committed gross error in the appreciation of facts. 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." 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. cdasia

2. ID.; APPEAL; QUESTION OF LAW AND QUESTION OF FACT,

DISTINGUISHED. 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." 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.

3. ID.; TAX EXEMPTION; COURT HAS ALWAYS APPLIED THE DOCTRINE OF

STRICT INTERPRETATION IN CONSTRUING THEREOF; APPLICATION IN
CASE AT BAR. Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict interpretation in construing tax exemptions. 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." 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, 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. 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." The
phrase "any of their activities conducted for profit" does not qualify the word
"properties." This makes income from the property of the organization taxable, regardless
of how that income is used whether for profit or for lofty non-profit purposes. Verba
legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on
income it derived from renting out its real property, on the solitary but unconvincing
ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law does not
distinguished, neither should we.

4. ID.; ID.; WHEN GRANTED; REQUISITES. 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. 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.

5. ID.; ID.; EDUCATIONAL INSTITUTION, CONSTRUED; WHEN NOT

APPLICABLE; CASE AT BAR. Is the YMCA and 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. Under the Education Act of 1982, such term refers to schools. The school
system is synonymous with formal education, 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." The Court has examined the "Amended
Articles of Incorporation" and "By-Laws" of the YMCA, but found nothing in them that
even hints that it is a school or an educational institution. 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. It is
settled that the term "educational institution," when used in laws granting tax exemptions,
refers to a ". . . school seminary, college or educational establishment . . . ." 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 institution in any or all of the useful
branches of learning is given by methods common to schools and instruction of learning.
That we conceive to be the true intent and scope of the term [educational institutions] as
used in the Constitution."

BELLOSILLO, J., dissenting opinion:

1. TAXATION; COURT OF TAX APPEALS; FINDINGS OF FACTS, WHEN

SUPPORTED BY SUBSTANTIAL EVIDENCE, WILL NOT BE DISTURBED ON
APPEAL; EXCEPTION; NOT APPLICABLE IN CASE AT BAR. The basic rule is
that the factual findings of the Court of Tax Appeals when supported by substantial
evidence will not be disturbed on appeal unless it is shown that the court committed
grave error in the appreciation of facts. In the instant case, there is no dispute as to the
validity of the findings of the Court of Tax Appeals that private respondent Young Men's
Christian Association (YMCA) is an association organized and operated exclusively for
the promotion of social welfare and other non-profitable purposes, particularly the
physical and character development of the youth. cHAaEC

2. ID.; TAX EXEMPTION; WHEN INCOME DERIVED FROM ITS PROPERTY BY

A TAX EXEMPT ORGANIZATION IS NOT ABSOLUTELY TAXABLE; CASE AT
BAR. Respondent YMCA is undoubtedly exempt from corporate income tax under
the provisions of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:
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 . . . (g) civic
league or organization not organized for profit but operated exclusively for the promotion
of social welfare; (h) club organized and operated exclusively for pleasure, recreation and
other non-profitable purposes, no part of the net income of which inures to the benefit of
any private stockholder or member . . . Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax imposed
under this Code. Income derived from its property by a tax exempt organization is not
absolutely taxable. Taken in solitude, a word or phrase such as, in this case, "the income
of whatever kind and character . . . from any of their properties" might easily convey a
meaning quite different from the one actually intended and evident when a word or
phrase is considered with those with which it is associated. It is a rule in statutory
construction that every part of the statute must be interpreted with reference to the
context, that every part of the statute must be considered together with the other parts and
kept subservient to the general intent of the whole enactment. A close reading of the last
paragraph of Sec. 27 of the National Internal Revenue Code, in relation to the whole
section on tax exemption of the organizations enumerated therein, shows that the phrase
"conducted for profit" in the last paragraph of Sec. 27 qualifies, limits and describes "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" in order to make such income
taxable. It is the exception to Sec. 27, pars. (g) and (h) providing for the tax exemptions
of the income of said organizations. Hence, if such income from property or any other
property is not conducted for profit, then it is not taxable. Even taken alone and
understood according to its plain, simple and literal meaning, the word "income" which is
derived from property, real or personal, provided in the last paragraph of Sec. 27 means
the amount of money coming to a person or corporation within a specified time as profit
from investment; the return in money from one's business or capital invested. Income
from property also means gains and profits derived from the sale or other disposition of
capital assets; the money which any person or corporation periodically receives either as
profits from business, or as returns from investments. The word "income" as used in tax
statutes is to be taken in its ordinary sense as gain or profit. Clearly, therefore, income
derived from property whether real or personal connotes profit from business or from
investment of the same. If we are to apply the ordinary meaning of income from property
as profit to the language of the last paragraph of Sec. 27 of the NIRC, then only those
profits arising from business and investment involving property are taxable. In the instant
case, there is no question that in leasing its facilities to small shop owners and in
operating parking spaces, YMCA does not engage in any profit-making business. Both
the Court of Tax Appeals, and the Court of Appeals in its resolution of 25 September
1995, categorically found that these activities conducted on YMCA's property were
aimed not only at fulfilling the needs and requirements of its members as part of
YMCA'S youth program but, more importantly, at raising funds to finance the
multifarious projects of the Association.

3. ID.; ID.; THE MERE REALIZATION OF PROFITS OUT OF ITS OPERATION

DOES NOT AUTOMATICALLY RESULT IN THE LOSS THEREOF, AS LONG AS
NO PART OF THE PROFITS OF AN EDUCATIONAL INSTITUTION INURES TO
THE BENEFIT OF ANY STOCKHOLDER OR INDIVIDUAL; CASE AT BAR. As
the Court has ruled in one case, the fact that an educational institution charges tuition fees
and other fees for the different services it renders to the students does not in itself make
the school a profit-making enterprise that would place it beyond the purview of the law
exempting it from taxation. The mere realization of profits out of its operation does not
automatically result in the loss of an educational institution's exemption from income tax
as long as no part of its profits inures to the benefit of any stockholder or individual. In
order to claim exemption from income tax, a corporation or association must show that it
is organized and operated exclusively for religious, charitable, scientific, athletic, cultural
or educational purposes or for the rehabilitation of veterans, and that no part of its income
inures to the benefit of any private stockholder or individual. The main evidence of the
purpose of a corporation should be its articles of incorporation and by-laws, for such
purpose is required by statute to be stated in the articles of incorporation, and the by-laws
outline the administrative organization of the corporation which, in turn, is supposed to
insure or facilitate the accomplishment of said purpose. The foregoing principle applies
to income derived by tax exempt corporations from their property. The criterion or test in
order to make such income taxable is when it arises from purely profit-making business.
Otherwise, when the income derived from use of property is reasonable and incidental to
the charitable, benevolent, educational or religious purpose for which the corporation or
association is created, such income should be tax-exempt. The majority, if not all, of the
income of the organizations covered by the exemption provided in Sec. 27, pars. (g) and
(h), of the NIRC are derived from their properties, real or personal. If we are to interpret
the last paragraph of Sec. 27 to the effect that all income of whatever kind from the
properties of said organization, real or personal, are taxable, even if not conducted for
profit, then Sec. 27, pars. (g) and (h), would be rendered ineffective and nugatory. As this
Court elucidated in Jesus Sacred Heart College v. Collector of Internal Revenue, (95
Phil. 16 [1954]) every responsible organization must be so run as to at least insure its
existence by operating within the limits of its own resources, especially its regular
income. It should always strive whenever possible to have a surplus. If the benefits of the
exemption would be limited to institutions which do not hope or propose to have such
surplus, then the exemption would apply only to schools which are on the verge of
bankruptcy. Unlike the United States where a substantial number of institutions of
learning are dependent upon voluntary contributions and still enjoy economic stability,
such as Harvard, the trust fund of which has been steadily increasing with the years, there
are and there have always been very few educational enterprises in the Philippines which
are supported by donations, and these organizations usually have a very precarious
existence. ESAHca

DECISION

PANGANIBAN, J : p
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? cdphil

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.cda

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: cdtai

". . . [T]he leasing of [private respondent's] facilities to small shop owners, to

restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the [private respondents]. It appears from the testimonies of the
witnesses for the [private respondent] particularly Mr. James C. Delote, former
accountant of YMCA, that these facilities were leased to members and that they
have to service the needs of its members and their guests. The rentals were
minimal as for example, the barbershop was only charged P300 per month. He
also testified that there was actually no lot devoted for parking space but the
parking was done at the sides of the building. The parking was primarily for
members with stickers on the windshields of their cars and they charged P.50
for non-members. The rentals and parking fees were just enough to cover the
costs of operation and maintenance only. The earning[s] from these rentals and
parking charges including those from lodging and other charges for the use of
the recreational facilities constitute [the] bulk of its income which [is] channeled
to support its many activities and attainment of its objectives. As pointed out
earlier, the membership dues are very insufficient to support its program. We
find it reasonably necessary therefore for [private respondent] to make [the]
most out [of] its existing facilities to earn some income. It would have been
different if under the circumstances, [private respondent] will purchase a lot and
convert it to a parking lot to cater to the needs of the general public for a fee, or
construct a building and lease it out to the highest bidder or at the market rate
for commercial purposes, or should it invest its funds in the buy and sell of
properties, real or personal. Under these circumstances, we could conclude that
the activities are already profit oriented, not incidental and reasonably necessary
to the pursuit of the objectives of the association and therefore, will fall under
the last paragraph of Section 27 of the Tax Code and any income derived
therefrom shall be taxable. LLpr

"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 aforecited 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. cda

"WHEREFORE, the appealed decision is hereby REVERSED in so far as it

dismissed the assessment for:

1980 Deficiency Income Tax P353.15

1980 Deficiency Contractor's Tax P3,129.23, &

1980 Deficiency Income Tax P372,578.20,

but the same is AFFIRMED in all other respect." 7

Aggrieved, the YMCA asked for reconsideration based on the following grounds: cdll

"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. Cdpr

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

Before us, petitioner imputes to the Court of Appeals the following errors:

"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 llcd

II

"In affirming the conclusion of Respondent Court of Tax Appeals that the
income of private respondent from rentals of small shops and parking fees [is]
exempt from taxation." 11

This Court's Ruling

The petition is meritorious.

First Issue:

Factual Findings of the CTA

Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's facilities to small shop owners,
to restaurant and canteen operators and the operation of parking lots are reasonably
incidental to and reasonably necessary for the accomplishment of the objectives of the
private respondent and that the income derived therefrom are tax exempt." 12 Petitioner
insists that what the appellate court reversed was the legal conclusion, not the factual
finding of the CTA. 13 The commissioner has a point.

Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported
by substantial evidence, will not be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts. 14 In the present case, this Court
finds that the February 16, 1994 Decision of the CA did not deviate from this rule. The
latter merely applied the law to the facts as found by the CTA and ruled on the issue
raised by the CIR: "Whether or not the collection or earnings of rental income from the
lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 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. cdll

The distinction between a question of law and a question of fact is clear-cut. It has been
held that "[t]here is a question of law in a given case when the doubt or difference arises
as to what the law is on a certain state of facts; there is a question of fact when the doubt
or difference arises as to the truth or falsehood of alleged facts." 16 In the present case,
the CA did not doubt, much less change, the facts narrated by the CTA. It merely applied
the law to the facts. That its interpretation or conclusion is different from that of the CTA
is not irregular or abnormal.

Second Issue:

Is the Rental Income of the YMCA Taxable?

We now come to the crucial issue: Is the rental income of the YMCA from its real estate
subject to tax? At the outset, we set forth the relevant provision of the NIRC: prLL

"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
non-profitable 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)" Cdpr

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 interpretation in construing tax exemptions. 18Furthermore, 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. LLpr

It is axiomatic that where the language of the law is clear and unambiguous, its express
terms must be applied. 21Parenthetically, 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

The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities 'conducted for
profit' before it may be considered taxable." 23 This argument is erroneous. As
previously stated, a reading of said paragraph ineludibly shows that the income from any
property of exempt organizations, as well as that arising from any activity it conducts for
profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify
the word "properties." This makes income from the property of the organization taxable,
regardless of how that income is used whether for profit or for lofty non-profit
purposes. cdrep

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.dctai
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

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax
exemption covers property taxes only." 35 Indeed, the income tax exemption claimed by
private respondent finds no basis in Article VI, Section 28, par. 3 of the Constitution.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter, 36 claiming
that the YMCA "is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is exempt
from taxes on its properties and income." 37 We reiterate that private respondent is
exempt from the payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit educational
institution is insufficient to justify its exemption from the payment of income tax. cdtai

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" 42 and "By-Laws" 43 of the YMCA, but found nothing in them that
even hints that it is a school or an educational institution. 44

Furthermore, under the Education Act of 1982, even non-formal education is understood
to be school-based and "private auspices such as foundations and civic-spirited
organizations" are ruled out. 45 It is settled that the term "educational institution," when
used in laws granting tax exemptions, refers to a ". . . 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.cdphil

". . . 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 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. LLphil

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. prLL

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. cda

SO ORDERED.

Davide, Jr., Vitug and Quisumbing, JJ ., concur.

Separate Opinions
BELLOSILLO, J ., dissenting:

I vote to deny the petition. The basic rule is that the factual findings of the Court of Tax
Appeals when supported by substantial evidence will not be disturbed on appeal unless it
is shown that the court committed grave error in the appreciation of facts. 1 In the instant
case, there is no dispute as to the validity of the findings of the Court of Tax Appeals that
private respondent Young Men's Christian Association (YMCA) is an association
organized and operated exclusively for the promotion of social welfare and other non-
profitable purposes, particularly the physical and character development of the youth. 2
The enduring objectives of respondent YMCA as reflected in its Constitution and By-
laws are:cdll

(a) To develop well-balanced Christian personality, mission in life, usefulness

of individuals, and the promotion of unity among Christians and
understanding among peoples of all faiths, to the end that the
 Brotherhood of Man under the Fatherhood of God may be fostered in an
atmosphere of mutual respect and understanding;

(b) To promote on equal basis the physical, mental, and spiritual welfare of the
youth, with emphasis on reverence for God, social discipline,
responsibility for the common good, respect for human dignity, and the
observance of the Golden Rule; prLL

(c) To encourage members of the Young Men's Christian Associations in the

Philippines to participate loyally in the life of their respective churches;
to bring these churches closer together; and to participate the effort to
realize the church Universal;

(d) To strengthen and coordinate the work of the Young Men's Christian
Associations in the Philippines and to foster the extension of the Youth
Men's Christian Associations to new areas;

(e) To help its Member Associations develop and adopt their programs to the
needs of the youth;

(f) To assist the Member Associations in developing and maintaining a high

standard of management, operation and practice; and

(g) To undertake and sponsor national and international programs and activities
in pursuance of its purposes and objectives. 3

Pursuant to these objectives, YMCA has continuously organized and undertaken

throughout the country various programs for the youth through actual workshops,
seminars, training, sports and summer camps, conferences on the cultivation of Christian
moral values, drug addiction, out-of-school youth, those with handicap and physical
defects and youth alcoholism. To fulfill these multifarious projects and attain the laudable
objectives of YMCA, fund raising has become an indispensable and integral part of the
activities of the Association. YMCA derives its funds from various sources such as
membership dues, charges on the use of facilities like bowling and billiards, lodging,
interest income, parking fees, restaurant and canteen. Since the membership dues are very
minimal, the Association derives funds from rentals of small shops, restaurant, canteen
and parking fees. For the taxable year ending December 1980, YMCA earned gross rental
income of P676,829.00 and P44,259.00 from parking fees which became the subject of
the questioned assessment by petitioner. cdrep

The majority of this Court upheld the findings of the Court of Tax Appeals that the
leasing of petitioner's facilities to small shop owners and to restaurant and canteen
operators in addition to the operation of a parking lot are reasonably necessary for and
incidental to the accomplishment of the objectives of YMCA. 4 In fact, these facilities are
leased to members in order to service their needs and those of their guests. The rentals are
minimal, such as, the rent of P300.00 for the barbershop. With regard to parking space,
there is no lot actually devoted therefor and the parking is done only along the sides of
the building. The parking is primarily for members with car stickers but to non-members,
parking fee is P0.50 only. The rentals and parking fees are just enough to cover the
operation and maintenance costs of these facilities. The earnings which YMCA derives
from these rentals and parking fees, together with the charges for lodging and use of
recreational facilities, constitute the bulk or majority of its income used to support its
programs and activities.

In its decision of 16 February 1994, the Court of Appeals thus committed grave error in
departing from the findings of the Court of Tax Appeals by declaring that the leasing of
YMCA's facilities to shop owners and restaurant operators and the operation of a parking
lot are used for commercial purposes or for profit; which fact takes YMCA outside the
coverage of tax exemption. In later granting the motion for reconsideration filed by
respondent YMCA, the Court of Appeals correctly reversed its earlier decision and
upheld the findings of the Court of Tax Appeals by ruling that YMCA is not designed for
profit and the little income it derives from rentals and parking fees helps maintain its
noble existence for the fulfillment of its goals for the Christian development of the youth.
LexLib

Respondent YMCA is undoubtedly exempt from corporate income tax under the
provisions of Sec. 27, pars. (g) and (h), of the National Internal Revenue Code, to wit:

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
. . . (g) civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare; (h) club organized and operated
exclusively for pleasure, recreation and other non-profitable purposes, no part of
the net income of which inures to the benefit of any private stockholder or
member . . . Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations from any
of their properties, real or personal, or from any of their activities conducted for
profit, regardless of the disposition made of such income, shall be subject to tax
imposed under this Code. cdphil

The majority of the Court accepted petitioner's view that while the income of
organizations enumerated in Sec. 27 are exempt from income tax, such exemption does
not however extend to their income of whatever kind or character from any of their
properties real or personal regardless of the disposition made of such income; that based
on the wording of the law which is plain and simple and does not need any interpretation,
any income of a tax exempt entity from any of its properties is a taxable income; hence,
the rental income derived by a tax exempt organization from the lease of its properties is
not therefore exempt from income taxation even if such income is exclusively used for
the accomplishment of its objectives.

Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind
and character . . . from any of their properties" might easily convey a meaning quite
different from the one actually intended and evident when a word or phrase is considered
with those with which it is associated. 5 It is a rule in statutory construction that every
part of the statute must be interpreted with reference to the context, that every part of the
statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment. 6 A close reading of the last paragraph of Sec. 27
of the National Internal Revenue Code, in relation to the whole section on tax exemption
of the organizations enumerated therein, shows that the phrase "conducted for profit" in
the last paragraph of Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the exception
to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of said
organizations. Hence, if such income from property or any other property is not
conducted for profit, then it is not taxable.
LLphil

Even taken alone and understood according to its plain, simple and literal meaning, the
word "income" which is derived from property, real or personal, provided in the last
paragraph of Sec. 27 means the amount of money coming to a person or corporation
within a specified time as profit from investment; the return in money from one's
business or capital invested. 7 Income from property also means gains and profits derived
from the sale or other disposition of capital assets; the money which any person or
corporation periodically receives either as profits from business, or as returns from
investments. 8 The word "income" as used in tax statutes is to be taken in its ordinary
sense as gain or profit. 9

Clearly, therefore, income derived from property whether real or personal connotes profit
from business or from investment of the same. If we are to apply the ordinary meaning of
income from property as profit to the language of the last paragraph of Sec. 27 of the
NIRC, then only those profits arising from business and investment involving property
are taxable. In the instant case, there is no question that in leasing its facilities to small
shop owners and in operating parking spaces, YMCA does not engage in any profit-
making business. Both the Court of Tax Appeals, and the Court of Appeals in its
resolution of 25 September 1995, categorically found that these activities conducted on
YMCA's property were aimed not only at fulfilling the needs and requirements of its
members as part of YMCA's youth program but, more importantly, at raising funds to
finance the multifarious projects of the Association. cdll
As the Court has ruled in one case, the fact that an educational institution charges tuition
fees and other fees for the different services it renders to the students does not in itself
make the school a profit-making enterprise that would place it beyond the purview of the
law exempting it from taxation. The mere realization of profits out of its operation does
not automatically result in the loss of an educational institution's exemption from income
tax as long as no part of its profits inures to the benefit of any stockholder or individual.
10 In order to claim exemption from income tax, a corporation or association must show
that it is organized and operated exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes or for the rehabilitation of veterans, and that no part of
its income inures to the benefit of any private stockholder or individual. 11 The main
evidence of the purpose of a corporation should be its articles of incorporation and by-
laws, for such purpose is required by statute to be stated in the articles of incorporation,
and the by-laws outline the administrative organization of the corporation which, in turn,
is supposed to insure or facilitate the accomplishment of said purpose. 12

The foregoing principle applies to income derived by tax exempt corporations from their
property. The criterion or test in order to make such income taxable is when it arises from
purely profit-making business. Otherwise, when the income derived from use of property
is reasonable and incidental to the charitable, benevolent, educational or religious
purpose for which the corporation or association is created, such income should be tax-
exempt.

In Hospital de San Juan de Dios, Inc. v. Pasay City 13 we held

In this connection, it should be noted that respondent therein is a corporation

organized for 'charitable, educational and religious purposes'; that no part of its
net income inures to the benefit of any private individual; that it is exempt from
paying income tax; that it operates a hospital in which MEDICAL assistance is
given to destitute persons free of charge; that it maintains a pharmacy
department within the premises of said hospital, to supply drugs and medicines
only to charity and paying patients confined therein; and that only the paying
patients are required to pay the medicines supplied to them, for which they are
charged the cost of the medicines, plus an additional 10% thereof, to partly
offset the cost of medicines supplied free of charge to charity patients. Under
these facts we are of the opinion and so hold that the Hospital may not be
regarded as engaged in "business" by reason of said sale of medicines to its
paying patients . . . (W)e held that the UST Hospital was not established for
profit-making purposes, despite the fact that it had 140 paying beds, because the
same were maintained only to partly finance the expenses of the free wards
containing 203 beds for charity patients.llcd

In YMCA of Manila v. Collector of Internal Revenue, 14 this Court explained

 It is claimed however that the institution is run as a business in that it keeps a
lodging and boarding house. It may be admitted that there are 64 persons
occupying rooms in the main building as lodgers or roomers and that they take
their meals at the restaurant below. These facts however are far from
constituting a business in the ordinary acceptation of the word. In the first place,
no profit is realized by the association in any sense. In the second place it is
undoubted, as it is undisputed, that the purpose of the association is not
primarily to obtain the money which comes from the lodgers and boarders. The
real purpose is to keep the membership continually within the sphere of
influence of the institution; and thereby to prevent, as far as possible, the
opportunities which vice presents to young men in foreign countries who lack
home or other similar influences.

The majority, if not all, of the income of the organizations covered by the exemption
provided in Sec. 27, pars. (g) and (h), of the NIRC are derived from their properties, real
or personal. If we are to interpret the last paragraph of Sec. 27 to the effect that all
income of whatever kind from the properties of said organization, real or personal, are
taxable, even if not conducted for profit, then Sec. 27, pars. (g) and (h), would be
rendered ineffective and nugatory. As this Court elucidated in Jesus Sacred Heart
College v. Collector of Internal Revenue, 15 every responsible organization must be so
run as to at least insure its existence by operating within the limits of its own resources,
especially its regular income. It should always strive whenever possible to have a surplus.
If the benefits of the exemption would be limited to institutions which do not hope or
propose to have such surplus, then the exemption would apply only to schools which are
on the verge of bankruptcy. Unlike the United States where a substantial number of
institutions of learning are dependent upon voluntary contributions and still enjoy
economic stability, such as Harvard, the trust fund of which has been steadily increasing
with the years, there are and there have always been very few educational enterprises in
the Philippines which are supported by donations, and these organizations usually have a
very precarious existence. 16

Finally, the non-taxability of all income and properties of educational institutions finds
enduring support in Art. XIV, Sec. 4, par. 3, of the 1987 Constitution

(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions. their assets shall be disposed of in the manner provided by
law. llcd

In YMCA of Manila v. Collector of Internal Revenue 17 this Court categorically held and
found YMCA to be an educational institution exclusively devoted to educational and
charitable purposes and not operated for profit. The purposes of the Association as set
forth in its charter and constitution are "to develop the Christian character and usefulness
of its members, to improve the spiritual, intellectual, social and physical condition of
young men and to acquire, hold, mortgage and dispose of the necessary lands, buildings
and personal property for the use of said corporation exclusively for religious, charitable
and educational purposes, and not for investment or profit." YMCA has an educational
department, the aim of which is to furnish, at much less than cost, instructions on subjects
that will greatly increase the mental efficiency and wage-earning capacity of young men,
prepare them in special lines of business and offer them special lines of study. We ruled
therein that YMCA cannot be said to be an institution used exclusively for religious
purposes or an institution devoted exclusively for charitable purposes or an institution
devoted exclusively to educational purposes, but it can be truthfully said that it is an
institution used exclusively for all three purposes and that, as such, it is entitled to be
exempted from taxation. Cdpr

(Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 124043, [October 14,
|||

1998], 358 PHIL 562-592)

 EN BANC

[G.R. No. L-10405. December 29, 1960.]

WENCESLAO PASCUAL, in his official capacity as Provincial

Governor of Rizal, petitioner and appellant, vs. THE SECRETARY
OF PUBLIC WORKS AND COMMUNICATIONS, ET AL.,
respondents and appellees.

Asst. Fiscal Noli M. Cortes and Jose P. Santos for appellant.

Asst. Solicitor General Jose G. Bautista and Solicitor A.A. Torres for appellee.

SYLLABUS

1. CONSTITUTIONAL LAW; LEGISLATIVE POWERS;

APPROPRIATION OF PUBLIC REVENUES ONLY FOR PUBLIC PURPOSES;
WHAT DETERMINES VALIDITY OF A PUBLIC EXPENDITURE. "It is a
general rule that the legislature is without power to appropriate public revenues for
anything but a public purpose. . . . It is the essential character of the direct object of
the expenditure which must determine its validity as justifying a tax and not the
magnitude of the interests to be affected nor the degree to which the general
advantage of the community, and thus the public welfare, may be ultimately benefited
by their promotion. Incidental advantage to the public or to the state, which results
from the promotion of private interests, and the prosperity of private enterprises or
business, does not justify their aid by the use of public money." (23 R. L. C. pp. 398-
450).
2. ID.; ID.; ID.; UNDERLYING REASON FOR THE RULE. Generally,
under the express or implied provisions of the constitution, public funds may be used
only for a public purpose. The right of the legislature to appropriate public funds is
correlative with its right to tax, and, under constitutional provisions against taxation
except for public purposes and prohibiting the collection of a tax for one purpose and
the devotion thereof to another purpose, no appropriate of state funds can be made for
other than a public purpose. (81 C.J.S. p. 1147).
3. ID.; ID.; ID.; TEST OF CONSTITUTIONALITY. The test of the
constitutionality of a statute requiring the use of public funds is whether the statute is
designed to promote the public interests, as opposed to the furtherance of the
advantage of individuals, although such advantage to individuals might incidentally
serve the public. (81 C.J.S. p. 1147).
 4. ID.; ID.; ID.; ID.; POWERS OF CONGRESS AT THE TIME OF
PASSAGE OF A STATUTE SHOULD BE CONSIDERED. The validity of a
statute depends upon the powers of Congress at the time of its passage or approval,
not upon events occurring, or acts performed, subsequently thereto, unless the latter
consist of an amendment of the organic law, removing, with retrospective operation,
the constitutional limitation infringed by said statute.
5. ID.; ID.; ID.; APPROPRIATION FOR A PRIVATE PURPOSE NULL
AND VOID; SUBSEQUENT DONATION TO GOVERNMENT NOT CURATIVE
OF DEFECT. Where the land on which projected feeder roads are to be
constructed belongs to a private person, an appropriation made by Congress for that
purpose is null and void, and a donation to the Government, made over five (5)
months after the approval and effectivity of the Act for the purpose of giving a
"semblance of legality" to the appropriation, does not cure the basic defect.
Consequently, a judicial nullification of said donation need not precede the
declaration of unconstitutionality of said appropriation.
6. ID.; ID.; ID.; ID.; RIGHT OF TAXPAYERS TO CONTEST
CONSTITUTIONALITY OF A LEGISLATION. The relation between the people
of the Philippines and its taxpayers, on the one hand, and the Republic of the
Philippines, on the other, is not identical to that obtaining between the people and
taxpayers of the U.S. and its Federal Government. It is closer, from a domestic
viewpoint, to that existing between the people and taxpayers of each state and the
government thereof, except that the authority of the Republic of the Philippines over
the people of the Philippines is more fully direct than that of the states of the Union,
insofar as the simple and unitary type of our national government is not subject to
limitations analogous to those imposed by the Federal Constitution upon the states of
the Union, and those imposed upon the Federal Government in the interest of the
states of the Union. For this reason, the rule recognizing the right of taxpayers to
assailed the constitutionality of a legislation appropriating local or state public funds -
which has been upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101
U.S. 601) - has greater application in the Philippines than that adopted with respect to
acts of Congress of the United States appropriating federal funds.
7. CONTRACTS; DEFENSE OF ILLEGALITY; EXCEPTIONS TO
ARTICLE 1421 OF THE CIVIL CODE. Article 1421 of the Civil Code is subject
to exceptions. For instance, the creditors of a party to an illegal contract may, under
the conditions set forth in Article 1177 of said Code, exercise the rights and actions of
the latter, except only those which are inherent in his person, including his right to the
annulment of said contract, even though such creditors are not affected by the same,
except indirectly, in the manner indicated in said legal provision.

DECISION
CONCEPCION, J : p

Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First

Instance of Rizal, dismissing the above entitled case and dissolving the writ of
preliminary injunction therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of
Rizal, instituted this action for declaratory relief, with injunction upon the ground that
Republic Act No. 920, entitled An Act Appropriating Funds for Public Works",
approved on June 20, 1953, contained, in section 1-C (a) thereof, an item (43[h]) of
P85,000.00, "for the construction, reconstruction, repair, extension and improvement"
of "Pasig feeder road terminals (Gen. Roxas Gen. Araneta Gen. Lucban Gen.
Capinpin Gen. Segundo Gen. Delgado Gen. Malvar Gen. Lim)"; that, at
the time of the passage and approval of said Act, the aforementioned feeder roads
were "nothing but projected and planned subdivision roads, not yet constructed, . . .
within the Antonio Subdivision . . . situated at . . . Pasig, Rizal" (according to the
tracings attached to the petition as Annexes A and B, near Shaw Boulevard, nor far
away from the intersection between the latter and Highway 54), which projected
feeder roads "do not connect any government property or any important premises to
the main highway"; that the aforementioned Antonio Subdivision (as well as the lands
on which said feeder roads were to be constructed) were private respondent Jose C.
Zulueta, who, at the time of the passage and approval of said Act, was a member of
the Senate of the Philippines; that on May 29, 1953, respondent Zulueta, addressed a
letter to the Municipal Council of Pasig, Rizal, offering to donate said projected
feeder roads to the municipality of Pasig, Rizal; that, on June 13, 1953, the offer was
accepted by the council, subject to the condition "that the donor would submit a plan
of the said roads and agree to change the names of two of them"; that no deed of
donation in favor of the municipality of Pasig was, however, executed; that on July
10, 1953, respondent Zulueta wrote another letter to said council, calling attention to
the approval of Republic Act No. 920, and the sum of P85,000.00 appropriated
therein for the construction of the projected feeder reads in question; that the
municipal council of Pasig endorsed said letter of respondent Zulueta to the District
Engineer of Rizal, who, up to the present "has not made any endorsement thereon";
that inasmuch as the projected feeder roads in question were private property at the
time of the passage and approval of Republic Act No. 920, the appropriation of
P85,000.00 therein made, for the construction, reconstruction, repair, extension and
improvement of said projected feeder roads, was "illegal and, therefore, void ab
initio"; that said appropriation of P85,000.00 was made by Congress because its
members were made to believe that the projected feeder roads in question were
"public roads and not private streets of a private subdivision"; that, "in order to give a
semblance of legality, when there is absolutely none, to the aforementioned
appropriation", respondent Zulueta executed, on December 12, 1953, while he was a
member of the Senate of the Philippines, an alleged deed of donation copy of
which is annexed to the petition of the four (4) parcels of land constituting said
project feeder roads, in favor of the Government of the Republic of the Philippines;
that said alleged deed of donation was on the same date, accepted by the ten
Executive Secretary; that being subject to an onerous condition, said donation partook
of the nature of a contract; that, such, said donation violated the provision of our
fundamental law prohibition members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is
unconstitutional, as well as null and void ab initio, for the construction of the
projected feeder roads in question with public funds would greatly enhance or
increase the value of the aforementioned subdivision of respondent Zulueta, "aside
from relieving him from the burden of constructing his subdivision streets or roads at
his own expense"; that the construction of said projected feeder roads was then being
undertaken by the Bureau of Public Highways; and that, unless restrained by the
court, the respondents would continue to execute, comply with, follow and implement
the aforementioned illegal provision of law, "to the irreparable damage, detriment and
prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be
declared null and void; that the alleged deed of donation of the feeder roads in
question be "declared unconstitutional and, therefore, illegal"; that a writ of injunction
be issued enjoining the Secretary of Public Works and Communications, the Director
of the Bureau of Public Works, the Commissioner of the Bureau of Public Highways
and Jose C. Zulueta from ordering or allowing the continuance of the above-
mentioned feeder roads project, and from making and securing any new and further
releases on the aforementioned item of Republic Act No. 926 and the disbursing
officers of the Department of Public Works and Communications, the Bureau of
Public Works and the Bureau of Public Highways from making any further payments
out of said funds provided for in Republic Act No. 920; and that pending final hearing
on the merits, a writ of preliminary injunction be issued enjoining the aforementioned
parties respondent from making and securing any new and further releases on the
aforesaid item of Republic Act No. 920 and from making any further payments out of
said illegally appropriated funds.

Respondents moved to dismiss the petition upon the ground that petitioner had
"no legal capacity to sue", and that the petition did "not state a cause of action". In
support to this motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal,
not its provincial governor, should represent the Province Administrative Code; that
said respondent "not aware of any law which makes illegal the appropriation of public
funds for the improvement of . . . private proper"; and that, the constitutional
provision invoked by petitioner inapplicable to the donation in question, the same
being a pure act of liberality, not a contract. The other respondents, in turn,
maintained that petitioner could not assail the appropriation in question because "there
is no actual bona fide case . . . in which the validity of Republic Act No. 920 is
necessarily involved and petitioner "has not shown that he has a personal and
substantial interest" in said Act "and that its enforcement has caused or will cause him
a direct injury".
Acting upon said motion to dismiss, the lower court rendered the
aforementioned decision, dated October 29, 1953, holding that, since public interest is
involved in this case, the Provincial Governor of Rizal and the provincial fiscal
thereof who represents him therein, "have the requisite personalities" to question the
constitutionality of the disputed item of Republic Act No. 920; that "the legislature is
without power to appropriate public revenues for anything but a public purpose", that
the construction and improvement of the feeder roads in question, if such roads were
private property, would not be a public purpose; that, being subject to the following
condition:
"The within donation is hereby made upon the condition that the Government of
the Republic of the Philippines will use the parcels of land hereby donated for
street purposes only and for no other purposes whatsoever; it being expressly
understood that should the Government of the Republic of the Philippines
violate the condition hereby imposed upon it, the title to the land hereby
donated shall, upon such violation, ipso facto revert to the DONOR, JOSE C.
ZULUETA." (Italics supplied.)
which is onerous, the donation in question is a contract; that said donation or contract
is "absolutely forbidden by the Constitution" and consequently illegal", for Article
1409 of the Civil Code of the Philippines, declares in existent and void from the very
beginning contracts "whose cause, object or purpose is contrary to law, morals . . . or
public policy"; that the legality of said donation may not be contested, however, by
petitioner herein, because his "interests are not directly affected" thereby; and that,
accordingly, the appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting
the aforementioned motions to dismiss, which as such, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein.
According to said petition, respondent Zulueta is the owner of several parcels of
residential land, situated in Pasig Rizal, and known as the Antonio Subdivision,
certain portions of which had been reserved for the projected feeder roads
aforementioned, which, admittedly, were private property of said respondent when
Republic Act No. 920, appropriating P85,000.00 for the "construction, reconstruction,
repair, extension and improvement" of said roads, was passed by Congress, as well as
when it was approved by the President on June 20, 1953. The petition further alleges
that the construction of said feeder roads, to be undertaken with the aforementioned
appropriation of P85,000.00, would have the effect of relieving respondent Zulueta of
the burden of constructing its subdivision streets or roads at his own expenses, 1 and
would greatly enhance or increase the value of the subdivision" of said respondent.
The lower court held that under these circumstances, the appropriation in question
was "clearly for a private, not a public purpose."
 Respondents do not deny the accuracy of this conclusion, which is self-evident.
2 However, respondent Zulueta contended, in his motion to dismiss that:
"A law passed by Congress and approved by the President can never be illegal
because Congress is the source of all laws . . .. Aside from the fact that the
movant is not aware of any law which makes illegal the appropriation of public
funds for the improvement of what we, in the meantime, may assume as private
property . . .." (Record on Appeal, pp. 33.)
The first proposition must be rejected most emphatically, it being inconsistent
with the nature of the Government established under the Constitution of the
Philippines and the system of checks and balances underlying our political structure.
Moreover, it is refuted by the decisions of this Court invalidating legislative
enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a private
purpose the principle according to Ruling Case Law, is this:
"It is a general rule that the legislature is without power to appropriate public
revenue for anything but a public purpose. . . . It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a
tax, and not the magnitude of the interests to be affected nor the degree to which
the general advantage of the community, and thus the public welfare, may be
ultimately benefited by their promotion. Incidental advantage to the public or to
the state, which results from the promotion of private interests and the
prosperity of private enterprises or business, does not justify their aid by the use
of public money." (25 R.L.C. pp. 398-400; Italics supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
"In accordance with the rule that the taxing power must be exercised for public
purposes only, discussed supra sec. 14, money raised by taxation can be
expanded only for public purposes and not for the advantage of private
individuals." (85 C.J.S. pp. 645-646; italics supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
"Generally, under the express or implied provisions of the constitution, public
funds may be used for a public purpose. The right of the legislature to
appropriate funds is correlative with its right to tax, under constitutional
provisions against taxation except for public purposes and prohibiting the
collection of a tax for one purpose and the devotion thereof to another purpose,
no appropriation of state funds can be made for other than a public purpose. . .
xxx xxx xxx
"The test of the constitutionality of a statute requiring the use of public funds is
whether the statute is designed to promote the public interests, as opposed to the
furtherance of the advantage of individuals, although each advantage to
individuals might incidentally serve the public. . . ." (81 C.J.S. p. 1147; italics
supplied.)
 Needless to say, this Court is fully in accord with the foregoing views which,
apart from being patently sound, are a necessary corollary to our democratic system of
government, which, as such, exists primarily for the promotion of the general welfare.
Besides, reflecting as they do, the established jurisprudence in the United States, after
whose constitutional system ours has been patterned, said views and jurisprudence
are, likewise, part and parcel of our own constitutional law.
This notwithstanding, the lower court felt constrained to uphold the
appropriation in question, upon the ground that petitioner may not contest the legality
of the donation above referred to because the same does not affect him directly. This
conclusion is, presumably, based upon the following premises namely: (1) that, if
valid, said donation cured the constitutional infirmity of the aforementioned
appropriation; (2) that the latter may not be annulled without a previous declaration of
unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421
of the Civil Code is absolute, and admits of no exception. We do not agree with these
premises.
The validity of a statute depends upon the powers of Congress at the time of its
passage or approval, not upon events occupying, or acts performed, subsequently
thereto, unless the latter consist of an amendment of the organic law, removing, with
retrospective operation, the constitutional limitation infringed by said statute.
Referring to the P85,000.00 appropriation for the projected feeder roads in question,
the legality thereof depended upon whether said roads were public or private property
when the bill, which, later on, became Republic Act No. 920, was passed by
Congress, or when said bill was approved by the President and the disbursement of
said sum became effective, or on June 20, 1953 (see section 13 of said Act). Inasmuch
as the land on which the projected feeder roads were to be constructed belonged then
to respondent Zulueta, the result is that said appropriation sought a private purpose,
and, hence, was null and void. 4 The donation to the Government, over five (5)
months after the approval and effectivity of said Act, made according to the petition,
for the purpose of giving a "semblance of legality", or legalizing, the appropriation in
question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality
of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is
subject to exceptions. For instance, the creditors of a party to an illegal contract may,
under the conditions set forth in Article 1177 of said Code, exercise the rights and
actions of the latter, except only those which are inherent in his person, including,
therefore, his right to the annulment of said contract, even though such creditors are
not affected by the same, except indirectly, in the manner indicated in said legal
provision.
 Again, it is well settled that the validity of a statute may be contested only by
one who will sustain a direct injury in consequence of its enforcement. Yet, there are
many decisions nullifying, at the instance of taxpayers, laws providing for the
disbursement of public funds, 5 upon the theory that "the expenditure of public funds
by an officer of the State for the purpose of administering an unconstitutional act
constitutes an misapplication of such funds," which may be enjoined at the request of
a taxpayer. 6 Although there are some decisions to the contrary, 7 the prevailing view
in the United States is stated in the American Jurisprudence as follows:
"In the determination of the degree of interest essential to give the requisite
standing to attack the constitutionality of a statute the general rule is that only
persons individually affected, but also taxpayers, have sufficient interest in
preventing the illegal expenditure of moneys raised by taxation and may
therefore question the constitutionality of statutes requiring expenditure of
public moneys." (11 Am. Jur. 761; italics supplied.)
However, this view was not favored by the Supreme Court of the U.S. in
Frothingham vs. Mellon (262 U.S. 447), insofar as federal laws are concerned, upon
the ground that the relationship of a taxpayer of the U.S. to its Federal Government is
different from that of a taxpayer of a municipal corporation to its government. Indeed,
under the composite system of government existing in the U.S., states of the Union
are integral part of the Federation from an international viewpoint, but, each state
enjoys internally a substantial measure of sovereignty, subject to the limitations
imposed by the Federal Constitution. In fact, the same was made by representatives of
each state of the Union, not of the people of the U.S., except insofar as the former
represented the people of the respective States, and the people of each State has,
independently of that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding upon the people of
the U.S. in consequence of an act of, and, in this sense, through the respective states
of the Union of which they are citizens. The peculiar nature of the relation between
said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen
by each State, in such manner as the legislature thereof may direct (Article II, section
2, of the Federal Constitution).
The relation between the people of the Philippines and its taxpayers, on the
other hand, and the Republic of the Philippines, on the other, is not identical to that
obtaining between the people and taxpayers of the U.S. and its Federal Government. It
is closer, from a domestic viewpoint, to that existing between the people and
taxpayers of each state and the government thereof, except that the authority of the
Republic of the Philippines over the people of the Philippines is more fully direct than
that of the states of the Union, insofar as the simple and unitary type of our national
government is not subject to limitations analogous to those imposed by the Federal
Constitution upon the states of the Union, and those imposed upon the Federal
Government in the interest of the states of the Union. For this reason, the rule
 recognizing the right of taxpayers to assail the constitutionality of a legislation
appropriating local or state public funds which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) has greater application in
the Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the
expropriation of a land by the Province of Tayabas, two (2) taxpayers thereof were
allowed to intervene for the purpose of contesting the price being paid to the owner
thereof, as unduly exorbitant. It is true that in Custodio vs. President of the Senate (42
Off. Gaz., 1243), a taxpayer and employee of the Government was not permitted to
question the constitutionality of an appropriation for backpay of members of
Congress. However, in Rodriguez vs. Treasurer of the Philippines and Barredo vs.
Commission on Election (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action
of taxpayers impugning the validity of certain appropriations of public funds, and
invalidated the same. Moreover, the reason that impelled this Court to take such
position in said two (2) cases the importance of the issues therein raised is
present in the case at bar. Again, like the petitioners in the Rodriguez and Barredo
cases, petitioner herein is not merely a taxpayer. The province of Rizal, which he
represents officially as it Provincial Governor, is our most populated political
subdivision, 7 and, the taxpayers therein bear a substantial portion of the burden of
taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this
case sufficiently justify petitioner's action in contesting the appropriation and
donation in question; that this action should not have been dismissed by the lower
court; and that the writ of preliminary injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are
remanded to the lower court for further proceedings not inconsistent with this
decision, with the costs of this instance against respondent Jose C. Zulueta. It is so
ordered.
Paras, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Reyes, J.B.L.,
Barrera, Gutierrez David, Paredes and Dizon, JJ., concur.
(Pascual v. Secretary of Public Works and Communications, G.R. No. L-10405,
|||

[December 29, 1960], 110 PHIL 331-346)

 THIRD DIVISION

[G.R. No. 120082. September 11, 1996.]

MACTAN CEBU INTERNATIONAL AIRPORT AUTHORITY,

petitioner, vs. HON. FERDINAND J. MARCOS, in his capacity as the
Presiding Judge of the Regional Trial Court, Branch 20, Cebu City,
THE CITY OF CEBU, represented by its Mayor, HON. TOMAS R.
OSMEA, and EUSTAQUIO B. CESA, respondents.

The Solicitor General for petitioner.

The Office of the City Attorney for City of Cebu.

SYLLABUS

1. POLITICAL LAW; GOVERNMENT; POWER OF TAXATION; CONSTRUED.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations thereon may be
imposed by the people through their Constitution. Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation. So potent indeed is the power that it was once
opined that "the power to tax involves the power to destroy." Verily, taxation is a
destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government.
Accordingly, tax statutes must be construed strictly against the government and liberally
in favor of the taxpayer. But since taxes are what we pay for civilized society, or are the
lifeblood of the nation, the law frowns against exemptions from taxation and statutes
granting the exemptions are thus construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority. A claim of exemption from tax payments must
be clearly shown and based on language in the law too plain to be mistaken. Elsewise
stated, taxation is the rule, exemption therefrom is the exception. However, if the grantee
of the exemption is a political subdivision or instrumentality, the rigid rule of
construction does not apply because the practical effect of the exemption is merely to
reduce the amount of money that has to be handled by the government in the course of its
operation.
2. ID., ID.; ID.; MAYBE EXERCISED BY THE LOCAL LEGISLATIVE BODIES.
The power to tax is primarily vested in the Congress; however, in our jurisdictions, it
may be exercised by local legislative bodies, no longer merely by virtue of a valid
delegation as before, but pursuant to direct authority conferred by Section 5, Article X of
the Constitution. Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy. The LGC, enacted pursuant to Section
3, Article X of the Constitution, provides for the exercise by local government units of
their power to tax, the scope thereof or its limitations, and the exemptions from taxation.
Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units.

3. ID.; ID .; ID.; EXEMPTION FROM PAYMENT OF TAX MAYBE WITHDRAWN

AT THE PLEASURE OF THE TAXING AUTHORITY; EXCEPTION. There can be
no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the
payment of realty taxes imposed by the National Government or any of its political
subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the rule and
exemption therefrom the exception, the exemption may thus be withdrawn at the pleasure
of the taxing authority. The only exception to this rule is where the exemption was
granted to private parties based on material consideration of a mutual nature, which then
becomes contractual and is thus covered by the non-impairment claim of the
Constitution.

4. ID.; LOCAL GOVERNMENT CODE; SEC. 234 PROVIDES FOR THE

EXEMPTION FROM THE PAYMENT OF REAL PROPERTY TAX; BASIS
THEREOF. Section 234 of the LGC provides for the exemptions from payment of real
property taxes and withdraws previous exemptions therefrom granted to natural and
juridical persons, including government-owned and controlled corporations, except as
provided therein. These exemptions are based on the ownership, character, and use of the
property. Thus: (a) Ownership Exemptions. Exemptions from real property taxes on the
basis of ownership are real properties owned by: (i) the Republic, (ii) a province, (iii) a
city, (iv) a municipality, (v) a barangay, (vi) registered cooperatives. (b) character
exemptions. Exempted from real property taxes on the basis of their character are: (i)
charitable institutions, (ii) houses and temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (iii) non-profit or religious cemeteries. (c)
Usage exemptions. Exempted from real property taxes on the basis of the actual, direct
and exclusive use to which they are devoted are: (i) all lands, buildings and
improvements which are actually, directly and exclusively used for religious, charitable
or educational purposes; (ii) all machineries and equipment actually, directly and
exclusively used by local water districts or by government-owned or controlled
corporations engaged in the supply and distribution of water and/or generation and
transmission of electric power; and (iii) all machinery and equipment used for pollution
control and environmental protection. To help provide a healthy environment in the midst
of the modernization of the country, all machinery and equipment for pollution control
and environmental protection may not be taxed by local governments. 2. Other
Exemptions Withdrawn. All other exemptions previously granted to natural or juridical
persons including government-owned or controlled corporations are withdrawn upon
effectivity of the Code.

5. ID.; REPUBLIC OF THE PHILIPPINES AS DISTINGUISHED FROM NATIONAL

GOVERNMENT. The terms "Republic of the Philippines" and "National
Government" are not interchangeable. The former is broader and synonymous with
"Government of the Republic of the Philippines" which the Administrative Code of 1987
defines as the "corporate governmental entity through which the functions of government
are exercised throughout the Philippines, including, save as the contrary appears from the
context, the various arms through which political authority is made effective in the
Philippines, whether pertaining to the autonomous regions, the provincial, city, municipal
or barangay subdivisions or other forms of local government." (Section 2[1], Introductory
Provisions, Administrative Code of 1987.) These "autonomous regions, provincial, city,
municipal or barangay subdivisions" are the political subdivisions. (Section l, Article X,
1987 Constitution.) On the other hand, "National Government" refers "to the entire
machinery of the central government, as distinguished from the different forms of local
government." (Section 2[2], Introductory Provisions, Administrative Code of 1987. The
National Government then is composed of the three great departments: the executive, the
legislative and the judicial.

6. ID.; GOVERNMENT; AGENCY AS DISTINGUISHED FROM

INSTRUMENTALITY. An "agency" of the Government refers to "any of the various
units of the Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a distinct unit
therein," while an "instrumentality" refers to "any agency of the National Government,
not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special
funds, and enjoying operational autonomy, usually, through a charter. This term includes
regulatory agencies, chartered institutions and government-owned and controlled
corporations."

DECISION

DAVIDE, JR., J :

For review under Rule 45 of the Rules of Court on a pure question of law are the decision
of 22 March 1995 1 of the Regional Trial Court (RTC) of Cebu City, Branch 20,
dismissing the petition for declaratory relief in Civil Case No. CEB-16900, entitled
"Mactan Cebu International Airport Authority vs. City of Cebu," and its order of 4 May
1995 2 denying the motion to reconsider the decision.
We resolved to give due course to this petition for it raises issues dwelling on the scope
of the taxing power of local government units and the limits of tax exemption privileges
of government-owned and controlled corporations.

The uncontradicted factual antecedents are summarized in the instant petition as follows:

Petitioner Mactan Cebu International Airport Authority (MCIAA) was created by virtue
of Republic Act No. 6958, mandated to "principally undertake the economical, efficient
and effective control, management and supervision of the Mactan International Airport in
the Province of Cebu and the Lahug Airport in Cebu City, . . . and such other airports as
may be established in the Province of Cebu . . ." (Sec. 3, RA 6958). It is also mandated
to:

a) encourage, promote and develop international and domestic air traffic in the
Central Visayas and Mindanao regions as a means of making the regions
centers of international trade and tourism, and accelerating the
development of the means of transportation and communication in the
country; and,

b) upgrade the services and facilities of the airports and to formulate

internationally acceptable standards of airport accommodation and
service.

Since the time of its creation, petitioner MCIAA enjoyed the privilege of exemption from
payment of realty taxes in accordance with Section 14 of its Charter:

Sec. 14. Tax Exemptions. The Authority shall be exempt from realty taxes
imposed by the National Government or any of its political subdivisions,
agencies and instrumentalities . . ..

On October 11, 1994, however, Mr. Eustaquio B. Cesa, Officer-in-Charge, Office of the
Treasurer of the City of Cebu, demanded payment for realty taxes on several parcels of
land belonging to the petitioner (Lot Nos. 913-G, 743, 88 SWO, 948-A, 989-A, 474,
109(931), I-M, 918, 919, 913-F, 941, 942, 947, 77 Psd., 746 and 991-A), located at
Barrio Apas and Barrio Kasambagan, Lahug, Cebu City, in the total amount of
P2,229,078.79.

Petitioner objected to such demand for payment as baseless and unjustified, claiming in
its favor the aforecited Section 14 of RA 6958 which exempts it from payment of realty
taxes. It was also asserted that it is an instrumentality of the government performing
governmental functions, citing Section 133 of the Local Government Code of 1991 which
puts limitations on the taxing powers of local government units:
 Section 133. Common Limitations on the Taxing Powers of Local Government
Units. Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:

a) . . .

xxx xxx xxx

o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities, and local government units. (italics supplied)

Respondent City refused to cancel and set aside petitioner's realty tax account, insisting
that the MCIAA is a government-controlled corporation whose tax exemption privilege
has been withdrawn by virtue of Sections 193 and 234 of the Local Government Code
that took effect on January 1, 1992:

Section 193. Withdrawal of Tax Exemption Privilege. Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons whether natural or juridical, including government-
owned or controlled corporations, except local water districts, cooperatives
duly registered under RA No. 6938, non-stock and non-profit hospitals and
educational institutions, are hereby withdrawn upon the effectivity of this Code.
(italics supplied)

xxx xxx xxx

Section 234. Exemptions from Real Property Taxes. . . .

(a) . . .

xxx xxx xxx

(e) . . .

Except as provided herein, any exemption from payment of real

property tax previously granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled
corporations are hereby withdrawn upon the effectivity of this Code.

As the City of Cebu was about to issue a warrant of levy against the properties
of petitioner, the latter was compelled to pay its tax account "under protest" and
thereafter filed a Petition for Declaratory Relief with the Regional Trial Court of
Cebu, Branch 20, on December 29, 1994. MCIAA basically contended that the
taxing powers of local government units do not extend to the levy of taxes or
fees of any kind on an instrumentality of the national government. Petitioner
 insisted that while it is indeed a government-owned corporation, it nonetheless
stands on the same footing as an agency or instrumentality of the national
government by the very nature of its powers and functions.

Respondent City, however, asserted that MCIAA is not an instrumentality of the

government but merely a government-owned corporation performing
proprietary functions. As such, all exemptions previously granted to it were
deemed withdrawn by operation of law, as provided under Sections 193 and 234
of the Local Government Code when it took effect on January 1, 1992. 3

The petition for declaratory relief was docketed as Civil Case No. CEB-16900.

In its decision of 22 March 1995, 4 the trial court dismissed the petition in light of its
findings, to wit:

A close reading of the New Local Government Code of 1991 or RA 7160

provides the express cancellation and withdrawal of exemption of taxes by
government-owned and controlled corporation per Sections after the effectivity
of said Code on January 1, 1992, to wit: [proceeds to quote Sections 193 and
234]

Petitioners claimed that its real properties assessed by respondent City

Government of Cebu are exempted from paying realty taxes in view of the
exemption granted under RA 6958 to pay the same (citing Section 14 of RA
6958).

However, RA 7160 expressly provides that "All general and special laws, acts,
city charters, decrees [sic], executive orders, proclamations and administrative
regulations, or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified accordingly." (/f/,
Section 534, RA 7160).

With that repealing clause in RA 7160, it is safe to infer and state that the tax
exemption provided for in RA 6958 creating petitioner had been expressly
repealed by the provisions of the New Local Government Code of 1991.

So that petitioner in this case has to pay the assessed realty tax of its properties
effective after January 1, 1992 until the present.

This Court's ruling finds expression to give impetus and meaning to the overall
objectives of the New Local Government Code of 1991, RA 7160. "It is hereby
declared the policy of the State that the territorial and political subdivisions of
the State shall enjoy genuine and meaningful local autonomy to enable them to
attain their fullest development as self-reliant communities and make them more
effective partners in the attainment of national goals. Toward this end, the State
shall provide for a more responsive and accountable local government structure
 instituted through a system of decentralization whereby local government units
shall be given more powers, authority, responsibilities, and resources. The
process of decentralization shall proceed from the national government to the
local government units. . . ." 5

Its motion for reconsideration having been denied by the trial court in its 4 May 1995
order, the petitioner filed the instant petition based on the following assignment of errors:

I. RESPONDENT JUDGE ERRED IN FAILING TO RULE THAT THE

PETITIONER IS VESTED WITH GOVERNMENT POWERS
AND FUNCTIONS WHICH PLACE IT IN THE SAME
CATEGORY AS AN INSTRUMENTALITY OR AGENCY OF
THE GOVERNMENT.

II. RESPONDENT JUDGE ERRED IN RULING THAT PETITIONER

IS LIABLE TO PAY REAL PROPERTY TAXES TO THE CITY
OF CEBU.

Anent the first assigned error, the petitioner asserts that although it is a government-
owned or controlled corporation, it is mandated to perform functions in the same category
as an instrumentality of Government. An instrumentality of Government is one created to
perform governmental functions primarily to promote certain aspects of the economic life
of the people. 6 Considering its task "not merely to efficiently operate and manage the
Mactan-Cebu International Airport, but more importantly, to carry out the Government
policies of promoting and developing the Central Visayas and Mindanao regions as
centers of international trade and tourism, and accelerating the development of the means
of transportation and communication in the country," 7 and that it is an attached agency
of the Department of Transportation and Communication (DOTC), 8 the petitioner "may
stand in [sic] the same footing as an agency or instrumentality of the national
government." Hence, its tax exemption privilege under Section 14 of its Charter "cannot
be considered withdrawn with the passage of the Local Government Code of 1991
(hereinafter LGC) because Section 133 thereof specifically states that the 'taxing powers
of local government units shall not extend to the levy of taxes or fees or charges of any
kind on the national government, its agencies and instrumentalities.'"

As to the second assigned error, the petitioner contends that being an instrumentality of
the National Government, respondent City of Cebu has no power nor authority to impose
realty taxes upon it in accordance with the aforesaid Section 133 of the LGC, as
explained in Basco vs. Philippine Amusement and Gaming Corporation: 9

Local governments have no power to tax instrumentalities of the National

Government. PAGCOR is a government owned or controlled corporation with
an original charter, PD 1869. All of its shares of stock are owned by the
National Government. . . .
 PAGCOR has a dual role, to operate and regulate gambling casinos. The latter
role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the Government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by a mere Local
government.

The states have no power by taxation or otherwise, to retard, impede, burden or

in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government (McCulloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579)

This doctrine emanates from the "supremacy" of the National Government over
local governments.

"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 USA
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140)

Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as "a tool for regulation" (U.S. v. Sanchez,
340 US 42). The power to tax which was called by Justice Marshall as the
"power to destroy" (Mc Culloch v. Maryland, supra) cannot be allowed to
defeat an instrumentality or creation of the very entity which has the inherent
power to wield it. (italics supplied)

It then concludes that the respondent Judge "cannot therefore correctly say that the
questioned provisions of the Code do not contain any distinction between a government
corporation performing governmental functions as against one performing merely
proprietary ones such that the exemption privilege withdrawn under the said Code would
apply to all government corporations." For it is clear from Section 133, in relation to
Section 234, of the LGC that the legislature meant to exclude instrumentalities of the
national government from the taxing powers of the local government units.

In its comment, respondent City of Cebu alleges that as a local government unit and a
political subdivision, it has the power to impose, levy, assess, and collect taxes within its
jurisdiction. Such power is guaranteed by the Constitution 10 and enhanced further by
the LGC. While it may be true that under its Charter the petitioner was exempt from the
payment of realty taxes, 11 this exemption was withdrawn by Section 234 of the LGC. In
response to the petitioner's claim that such exemption was not repealed because being an
instrumentality of the National Government, Section 133 of the LGC prohibits local
government units from imposing taxes, fees, or charges of any kind on it, respondent City
of Cebu points out that the petitioner is likewise a government-owned corporation, and
Section 234 thereof does not distinguish between government-owned or controlled
corporations performing governmental and purely proprietary functions. Respondent City
of Cebu urges this Court to apply by analogy its ruling that the Manila International
Airport Authority is a government-owned corporation, 12 and to reject the application of
Basco because it was "promulgated . . . before the enactment and the signing into law of
R.A. No. 7160," and was not, therefore, decided "in the light of the spirit and intention of
the framers of" the said law.

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who are to pay it. Nevertheless, effective limitations thereon may be
imposed by the people through their Constitutions. 13 Our Constitution, for instance,
provides that the rule of taxation shall be uniform and equitable and Congress shall
evolve a progressive system of taxation. 14 So potent indeed is the power that it was
once opined that "the power to tax involves the power to destroy." 15 Verily, taxation is
a destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government.
Accordingly, tax statutes must be construed strictly against the government and liberally
in favor of the taxpayer. 16 But since taxes are what we pay for civilized society, 17 or
are the lifeblood of the nation, the law frowns against exemptions from taxation and
statutes granting tax exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority. 18 A claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be
mistaken. 19 Elsewise stated, taxation is the rule, exemption therefrom is the exception.
20 However, if the grantee of the exemption is a political subdivision or instrumentality,
the rigid rule of construction does not apply because the practical effect of the exemption
is merely to reduce the amount of money that has to be handled by the government in the
course of its operations. 21

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may
be exercised by local legislative bodies, no longer merely by virtue of a valid delegation
as before, but pursuant to direct authority conferred by Section 5, Article X of the
Constitution. 22 Under the latter, the exercise of the power may be subject to such
guidelines and limitations as the Congress may provide which, however, must be
consistent with the basic policy of local autonomy.

There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt
from the payment of realty taxes imposed by the National Government or any of its
political subdivisions, agencies, and instrumentalities. Nevertheless, since taxation is the
rule and exemption therefrom the exception, the exemption may thus be withdrawn at the
pleasure of the taxing authority. The only exception to this rule is where the exemption
was granted to private parties based on material consideration of a mutual nature, which
then becomes contractual and is thus covered by the non-impairment clause of the
Constitution. 23

The LGC, enacted pursuant to Section 3, Article X of the Constitution, provides for the
exercise by local government units of their power to tax, the scope thereof or its
limitations, and the exemptions from taxation.

Section 133 of the LGC prescribes the common limitations on the taxing powers of local
government units as follows:

SEC. 133. Common Limitations on the Taxing Power of Local Government

Units. Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of
the following:

(a) Income tax, except when levied on banks and other financial
institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions

mortis causa, except as otherwise provided herein;

(d) Customs duties, registration fees of vessel and wharfage on wharves,

tonnage dues, and all other kinds of customs fees, charges and
dues except wharfage on wharves constructed and maintained by
the local government unit concerned;

(e) Taxes, fees and charges and other impositions upon goods carried
into or out of, or passing through, the territorial jurisdictions of
local government units in the guise of charges for wharfage, tolls
for bridges or otherwise, or other taxes, fees or charges in any
form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold
by marginal farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of

Investments as pioneer or non-pioneer for a period of six (6) and
four (4) years, respectively from the date of registration;
 (h) Excise taxes on articles enumerated under the National Internal
Revenue Code, as amended, and taxes, fees or charges on
petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges

or similar transactions on goods or services except as otherwise
provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons

engaged in the transportation of passengers or freight by hire and
common carriers by air, land or water, except as provided in this
Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for
the issuance of all kinds of licenses or permits for the driving
thereof, except, tricycles;

(m) Taxes, fees, or other charges on Philippine products actually

exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprises and cooperatives duly registered under R.A. No.
6810 and Republic Act Numbered Sixty-nine hundred thirty-
eight (R.A. No. 6938) otherwise known as the "Cooperatives
Code of the 'Philippines' respectively; and

(o) TAXES, FEES OR CHARGES OF ANY KIND ON THE NATIONAL

GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES,
AND LOCAL GOVERNMENT UNITS. (italics supplied)

Needless to say, the last item (item o) is pertinent to this case. The "taxes, fees or charges"
referred to are "of any kind"; hence, they include all of these, unless otherwise provided by
the LGC. The term "taxes" is well understood so as to need no further elaboration, especially
in light of the above enumeration. The term "fees" means charges fixed by law or ordinance
for the regulation or inspection of business or activity, 24 while "charges" are pecuniary
liabilities such as rents or fees against persons or property. 25

Among the "taxes" enumerated in the LGC is real property tax, which is governed by
Section 232. It reads as follows:

SEC. 232. Power to Levy Real Property Tax. A province or city or a

municipality within the Metropolitan Manila Area may levy an annual ad
valorem tax on real property such as land, building, machinery, and other
improvements not hereafter specifically exempted.
Section 234 of the LGC provides for the exemptions from payment of real property taxes
and withdraws previous exemptions therefrom granted to natural and juridical persons,
including government-owned and controlled corporations, except as provided therein. It
provides:

SEC. 234. Exemptions from Real Property Tax. The following are exempted
from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof had
been granted, for consideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant

thereto, mosques, non-profit or religious cemeteries and all lands,
buildings and improvements actually, directly, and exclusively
used for religious, charitable or educational purposes;

(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government-owned
or controlled corporations engaged in the supply and distribution
of water and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided

for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and

environmental protection.

Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.

These exemptions are based on the ownership, character, and use of the property. Thus:

(a) Ownership Exemptions. Exemptions from real property taxes on the basis of
ownership are real properties owned by: (i) the Republic, (ii) a province,
(iii) a city, (iv) a municipality, (v) a barangay, and (vi) registered
cooperatives.

(b) Character Exemptions. Exempted from real property taxes on the basis of
their character are: (i) charitable institutions, (ii) houses and temples of
prayer like churches, parsonages or convents appurtenant thereto,
mosques, and (iii) non-profit or religious cemeteries.
 (c) Usage exemptions. Exempted from real property taxes on the basis of the
actual, direct and exclusive use to which they are devoted are: (i) all
lands, buildings and improvements which are actually directly and
exclusively used for religious, charitable or educational purposes; (ii) all
machineries and equipment actually, directly and exclusively used by
local water districts or by government-owned or controlled corporations
engaged in the supply and distribution of water and/or generation and
transmission of electric power; and (iii) all machinery and equipment
used for pollution control and environmental protection.

To help provide a healthy environment in the midst of the modernization of the

country, all machinery and equipment for pollution control and environmental
protection may not be taxed by local governments.

2. Other Exemptions Withdrawn. All other exemptions previously granted to

natural or juridical persons including government-owned or controlled
corporations are withdrawn upon the effectivity of the Code. 26

Section 193 of the LGC is the general provision on withdrawal of tax exemption
privileges. It provides:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise

provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-
owned or controlled corporations, except local water districts, cooperatives duly
registered under R.A. 6938, non-stock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of this Code.

On the other hand, the LGC authorizes local government units to grant tax exemption
privileges. Thus, Section 192 thereof provides:

SEC. 192. Authority to Grant Tax Exemption Privileges. Local government

units may, through ordinances duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions as they may deem necessary.

The foregoing sections of the LGC speak of: (a) the limitations on the taxing powers of
local government units and the exceptions to such limitations; and (b) the rule on tax
exemptions and the exceptions thereto. The use of exceptions or provisos in these
sections, as shown by the following clauses:

(1) "unless otherwise provided herein" in the opening paragraph of Section 133;

(2) "Unless otherwise provided in this Code" in Section 193;

(3) "not hereafter specifically exempted" in Section 232; and

 (4) "Except as provided herein" in the last paragraph of Section 234

initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead of the
clause "unless otherwise provided herein," with the "herein" to mean, of course, the
section, it should have used the clause "unless otherwise provided in this Code." The
former results in absurdity since the section itself enumerates what are beyond the taxing
powers of local government units and, where exceptions were intended, the exceptions
are explicitly indicated in the next. For instance, in item (a) which excepts income taxes
"when levied on banks and other financial institutions"; item (d) which excepts
"wharfage on wharves constructed and maintained by the local government unit
concerned"; and item (1) which excepts taxes, fees and charges for the registration and
issuance of licenses or permits for the driving of "tricycles." It may also be observed that
within the body itself of the section, there are exceptions which can be found only in
other parts of the LGC, but the section interchangeably uses therein the clause, "except as
otherwise provided herein" as in items (c) and (i), or the clause "except as provided in
this Code" in item (j). These clauses would be obviously unnecessary or mere
surplusages if the opening clause of the section were "Unless otherwise provided in this
Code" instead of "Unless otherwise provided herein." In any event, even if the latter is
used, since under Section 232 local government units have the power to levy real
property tax, except those exempted therefrom under Section 234, then Section 232 must
be deemed to qualify Section 133.

Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in Section 133, the taxing powers of local government units
cannot extend to the levy of, inter alia, "taxes, fees and charges of any kind on the
National Government, its agencies and instrumentalities, and local government units";
however, pursuant to Section 232, provinces, cities, and municipalities in the
Metropolitan Manila Area may impose the real property tax except on, inter alia, "real
property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise,
to a taxable person," as provided in item (a) of the first paragraph of Section 234.

As to tax exemptions or incentives granted to or presently enjoyed by natural or judicial

persons, including government-owned and controlled corporations, Section 193 of the
LGC prescribes the general rule, viz., they are withdrawn upon the effectivity of the LGC,
except those granted to local water districts, cooperatives duly registered under R.A. No.
6938, non-stock and non-profit hospitals and educational institutions, and unless
otherwise provided in the LGC. The latter proviso could refer to Section 234 which
enumerates the properties exempt from real property tax. But the last paragraph of
Section 234 further qualifies the retention of the exemption insofar as real property taxes
are concerned by limiting the retention only to those enumerated therein; all others not
included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover,
even as to real property owned by the Republic of the Philippines or any of its political
subdivisions covered by item (a) of the first paragraph of Section 234, the exemption is
withdrawn if the beneficial use of such property has been granted to a taxable person for
consideration or otherwise.

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of
the LGC, exemptions from payment of real property taxes granted to natural or juridical
persons, including government-owned or controlled corporations, except as provided in
the said section, and the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section 14 of its
Charter, R.A. No. 6958, has been withdrawn. Any claim to the contrary can only be
justified if the petitioner can seek refuge under any of the exceptions provided in Section
234, but not under Section 133, as it now asserts, since, as shown above, the said section
is qualified by Sections 232 and 234.

In short, the petitioner can no longer invoke the general rule in Section 133 that the
taxing powers of the local government units cannot extend to the levy of:

(o) taxes, fees or charges of any kind on the National Government, its agencies
or instrumentalities, and local government units.

It must show that the parcels of land in question, which are real property, are any one of
those enumerated in Section 234, either by virtue of ownership, character, or use of the
property. Most likely, it could only be the first, but not under any explicit provision of the
said section, for none exists. In light of the petitioner's theory that it is an "instrumentality
of the Government," it could only be within the first item of the first paragraph of the
section by expanding the scope of the term "Republic of the Philippines" to embrace its
"instrumentalities" and "agencies." For expediency, we quote:

(a) real property owned by the Republic of the Philippines, or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.

This view does not persuade us. In the first place, the petitioner's claim that it is an
instrumentality of the Government is based on Section 133(o), which expressly mentions
the word "instrumentalities"; and, in the second place, it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" in
Section 133(o), but only the phrase "Republic of the Philippines or any of its political
subdivisions" in Section 234(a).

The terms "Republic of the Philippines" and "National Government" are not
interchangeable. The former is broader and synonymous with "Government of the
Republic of the Philippines" which the Administrative Code of 1987 defines as the
"corporate governmental entity through which the functions of government are exercised
throughout the Philippines, including, save as the contrary appears from the context, the
various arms through which political authority is made affective in the Philippines,
whether pertaining to the autonomous regions, the provincial, city, municipal or barangay
subdivisions or other forms of local government." 27 These "autonomous regions,
provincial, city, municipal or barangay subdivisions" are the political subdivisions. 28

On the other hand, "National Government" refers "to the entire machinery of the central
government, as distinguished from the different forms of local governments." 29 The
National Government then is composed of the three great departments: the executive, the
legislative and the judicial. 30

An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office, instrumentality, or government-owned or
controlled corporation, or a local government or a distinct unit therein;" 31 while an
"instrumentality" refers to "any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned and controlled corporations." 32

If Section 234(a) intended to extend the exception therein to the withdrawal of the
exemption from payment of real property taxes under the last sentence of the said section
to the agencies and instrumentalities of the National Government mentioned in Section
133(o), then it should have restated the wording of the latter. Yet, it did not. Moreover,
that Congress did not wish to expand the scope of the exemption in Section 234(a) to
include real property owned by other instrumentalities or agencies of the government
including government-owned and controlled corporations is further borne out by the fact
that the source of this exemption is Section 40(a) of P.D. No. 464, otherwise known as
The Real Property Tax Code, which reads:

SEC. 40. Exemptions from Real Property Tax. The exemption shall be as
follows:

(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions and any government-owned or controlled corporation so
exempt by its charter: Provided, however, That this exemption shall not
apply to real property of the above-mentioned entities the beneficial use
of which has been granted, for consideration or otherwise, to a taxable
person.

Note that as reproduced in Section 234(a), the phrase "and any government-owned or
controlled corporation so exempt by its charter" was excluded. The justification for
 this restricted exemption in Section 234(a) seems obvious: to limit further tax
exemption privileges, especially in light of the general provision on withdrawal of tax
exemption privileges in Section 193 and the special provision on withdrawal of
exemption from payment of real property taxes in the last paragraph of Section 234.
These policy considerations are consistent with the State policy to ensure autonomy to
local governments 33 and the objective of the LGC that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as self-
reliant communities and make them effective partners in the attainment of national
goals. 34 The power to tax is the most effective instrument to raise needed revenues
to finance and support myriad activities of local government units for the delivery of
basic services essential to the promotion of the general welfare and the enhancement
of peace, progress, and prosperity of the people. It may also be relevant to recall that
the original reasons for the withdrawal of tax exemption privileges granted to
government-owned and controlled corporations and all other units of government
were that such privilege resulted in serious tax base erosion and distortions in the tax
treatment of similarly situated enterprises, and there was a need for these entities to
share in the requirements of development, fiscal or otherwise, by paying the taxes and
other charges due from them. 35

The crucial issues then to be addressed are: (a) whether the parcels of land in question
belong to the Republic of the Philippines whose beneficial use has been granted to the
petitioner, and (b) whether the petitioner is a "taxable person."

Section 15 of the petitioner's Charter provides:

Sec. 15. Transfer of Existing Facilities and Intangible Assets. All existing
public airport facilities, runways, lands, buildings and other properties, movable
or immovable, belonging to or presently administered by the airports, and all
assets, powers, rights, interests and privileges relating on airport works or air
operations, including all equipment which are necessary for the operations of air
navigation, aerodrome control towers, crash, fire, and rescue facilities are
hereby transferred to the Authority: Provided, however, that the operations
control of all equipment necessary for the operation of radio aids to air
navigation, airways communication, the approach control office, and the area
control center shall be retained by the Air Transportation Office. No equipment,
however, shall be removed by the Air Transportation Office from Mactan
without the concurrence of the Authority. The Authority may assist in the
maintenance of the Air Transportation Office equipment.

The "airports" referred to are the "Lahug Air Port" in Cebu City and the "Mactan
International Airport in the Province of Cebu," 36 which belonged to the Republic of the
Philippines, then under the Air Transportation Office (ATO). 37
It may be reasonable to assume that the term "lands" refer to "lands" in Cebu City then
administered by the Lahug Air Port and included the parcels of land the respondent City
of Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the
"lands," among other things, to the petitioner and not just the transfer of the beneficial
use thereof, with the ownership being retained by the Republic of the Philippines.

This "transfer" is actually an absolute conveyance of the ownership thereof because the
petitioner's authorized capital stock consists of, inter alia, "the value of such real estate
owned and/or administered by the airports." 38 Hence, the petitioner is now the owner of
the land in question and the exception in Section 234(c) of the LGC is inapplicable.

Moreover, the petitioner cannot claim that it was never a "taxable person" under its
Charter. It was only exempted from the payment of real property taxes. The grant of the
privilege only in respect of this tax is conclusive proof of the legislative intent to make it
a taxable person subject to all taxes, except real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real
property tax, in light of the foregoing disquisitions, it had already become, even if it be
conceded to be an "agency" or "instrumentality" of the Government, a taxable person for
such purpose in view of the withdrawal in the last paragraph of Section 234 of
exemptions from the payment of real property taxes, which, as earlier adverted to, applies
to the petitioner.

Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs.
Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided
before the effectivity of the LGC. Besides, nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the Government performing governmental
functions may be subject to tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its wisdom.

WHEREFORE, the instant petition is DENIED. The challenged decision and order of the
Regional Trial Court of Cebu, Branch 20, in Civil Case No. CEB-16900 are AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Narvasa, C .J . , Melo, Francisco and Panganiban, JJ ., concur.

(Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September
11, 1996)