TAXREV CASES The project of partition (Exhibit K; see also pp.

1. ONA v. CIR 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels
Republic of the Philippines of land with a total assessed value of
SUPREME COURT P87,860.00, six houses with a total assessed
Manila value of P17,590.00 and an undetermined
amount to be collected from the War Damage
Commission. Later, they received from said
EN BANC Commission the amount of P50,000.00, more
or less. This amount was not divided among
G.R. No. L-19342 May 25, 1972 them but was used in the rehabilitation of
properties owned by them in common (t.s.n., p.
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: 46). Of the ten parcels of land aforementioned,
RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA two were acquired after the death of the
B. OÑA and LORENZO B. OÑA, JR., petitioners, decedent with money borrowed from the
vs. Philippine Trust Company in the amount of
THE COMMISSIONER OF INTERNAL REVENUE, respondent. P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34
BIR rec.).

Orlando Velasco for petitioners.

The project of partition also shows that the
estate shares equally with Lorenzo T. Oña, the
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor administrator thereof, in the obligation of
General Felicisimo R. Rosete, and Special Attorney Purificacion P94,973.00, consisting of loans contracted by
Ureta for respondent. the latter with the approval of the Court (see p.
3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved

BARREDO, J.:p by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed.
Instead, the properties remained under the
Petition for review of the decision of the Court of Tax Appeals in
management of Lorenzo T. Oña who used said
CTA Case No. 617, similarly entitled as above, holding that
properties in business by leasing or selling
petitioners have constituted an unregistered partnership and are,
them and investing the income derived
therefore, subject to the payment of the deficiency corporate
therefrom and the proceeds from the sales
income taxes assessed against them by respondent
thereof in real properties and securities. As a
Commissioner of Internal Revenue for the years 1955 and 1956
result, petitioners' properties and investments
in the total sum of P21,891.00, plus 5% surcharge and 1%
gradually increased from P105,450.00 in 1949
monthly interest from December 15, 1958, subject to the
to P480,005.20 in 1956 as can be gleaned from
provisions of Section 51 (e) (2) of the Internal Revenue Code, as
the following year-end balances:
amended by Section 8 of Republic Act No. 2343 and the costs of
the suit,1 as well as the resolution of said court denying
petitioners' motion for reconsideration of said decision.
Y I L B
e n a u
The facts are stated in the decision of the Tax Court as follows: a v n i
r e d l
Julia Buñales died on March 23, 1944, leaving s d
as heirs her surviving spouse, Lorenzo T. Oña t i
and her five children. In 1948, Civil Case No. m n
4519 was instituted in the Court of First e g
Instance of Manila for the settlement of her n
estate. Later, Lorenzo T. Oña the surviving t
spouse was appointed administrator of the
estate of said deceased (Exhibit 3, pp. 34-41, A A A
BIR rec.). On April 14, 1949, the administrator c c c
submitted the project of partition, which was c c c
approved by the Court on May 16, 1949 (See o o o
Exhibit K). Because three of the heirs, namely u u u
Luz, Virginia and Lorenzo, Jr., all surnamed n n n
Oña, were still minors when the project of t t t
partition was approved, Lorenzo T. Oña, their
father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of
1949 — P87,860.00 P17,590.00
First Instance of Manila for appointment as
guardian of said minors. On November 14,
1949, the Court appointed him guardian of the 1950 P24,657.65 128,566.72 96,076.26
persons and property of the aforenamed
minors (See p. 3, BIR rec.). 1951 51,301.31 120,349.28 110,605.11
 2,010.50
1952 67,927.52 87,065.28 152,674.39 Compromise for non-filing
.......................... 50.00
1953 61,258.27 84,925.68 161,463.83 Total ...............................................................
P10,102.50
1954 63,623.37 99,001.20 167,962.04
1956
1955 100,786.00 120,249.78 169,262.52
Net income as per investigation
1956 175,028.68 135,714.68 169,262.52 ................ P69,245.23

Income tax due thereon ...............................

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 13,849.00
102-104) 25% surcharge ..............................................
3,462.25
From said investments and properties Compromise for non-filing
petitioners derived such incomes as profits .......................... 50.00
from installment sales of subdivided lots, profits Total ...............................................................
from sales of stocks, dividends, rentals and P17,361.25
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.;
t.s.n., pp. 37-38). The said incomes are (See Exhibit 13, page 50, BIR records)
recorded in the books of account kept by
Lorenzo T. Oña where the corresponding Upon further consideration of the case, the
shares of the petitioners in the net income for 25% surcharge was eliminated in line with the
the year are also known. Every year, petitioners ruling of the Supreme Court in Collector v.
returned for income tax purposes their shares Batangas Transportation Co., G.R. No. L-9692,
in the net income derived from said properties Jan. 6, 1958, so that the questioned
and securities and/or from transactions assessment refers solely to the income tax
involving them (Exhibit 3, supra; t.s.n., pp. 25- proper for the years 1955 and 1956 and the
26). However, petitioners did not actually "Compromise for non-filing," the latter item
receive their shares in the yearly income. obviously referring to the compromise in lieu of
(t.s.n., pp. 25-26, 40, 98, 100). The income was the criminal liability for failure of petitioners to
always left in the hands of Lorenzo T. Oña who, file the corporate income tax returns for said
as heretofore pointed out, invested them in real years. (See Exh. 17, page 86, BIR records).
properties and securities. (See Exhibit 3, t.s.n., (Pp. 1-3, Annex C to Petition)
pp. 50, 102-104).
Petitioners have assigned the following as alleged errors of the
On the basis of the foregoing facts, respondent Tax Court:
(Commissioner of Internal Revenue) decided
that petitioners formed an unregistered
partnership and therefore, subject to the I.
corporate income tax, pursuant to Section 24,
in relation to Section 84(b), of the Tax Code. THE COURT OF TAX APPEALS ERRED IN
Accordingly, he assessed against the HOLDING THAT THE PETITIONERS
petitioners the amounts of P8,092.00 and FORMED AN UNREGISTERED
P13,899.00 as corporate income taxes for 1955 PARTNERSHIP;
and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR II.
rec.). Petitioners protested against the
assessment and asked for reconsideration of
the ruling of respondent that they have formed THE COURT OF TAX APPEALS ERRED IN
an unregistered partnership. Finding no merit in NOT HOLDING THAT THE PETITIONERS
petitioners' request, respondent denied it (See WERE CO-OWNERS OF THE PROPERTIES
Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, INHERITED AND (THE) PROFITS DERIVED
Memorandum for Respondent, June 12, 1961). FROM TRANSACTIONS THEREFROM (sic);

The original assessment was as follows: III.

1955 THE COURT OF TAX APPEALS ERRED IN

HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES
Net income as per investigation FOR 1955 AND 1956 AS AN UNREGISTERED
................ P40,209.89 PARTNERSHIP;
Income tax due thereon ...............................
8,042.00 IV.
25% surcharge ..............................................
 ON THE ASSUMPTION THAT THE to tell, petitioners should find comfort in the fact that they were not
PETITIONERS CONSTITUTED AN similarly assessed earlier by the Bureau of Internal Revenue.
UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT The Tax Court found that instead of actually distributing the estate
HOLDING THAT THE PETITIONERS WERE of the deceased among themselves pursuant to the project of
AN UNREGISTERED PARTNERSHIP TO partition approved in 1949, "the properties remained under the
THE EXTENT ONLY THAT THEY INVESTED management of Lorenzo T. Oña who used said properties in
THE PROFITS FROM THE PROPERTIES business by leasing or selling them and investing the income
OWNED IN COMMON AND THE LOANS derived therefrom and the proceed from the sales thereof in real
RECEIVED USING THE INHERITED properties and securities," as a result of which said properties and
PROPERTIES AS COLLATERALS; investments steadily increased yearly from P87,860.00 in "land
account" and P17,590.00 in "building account" in 1949 to
V. P175,028.68 in "investment account," P135.714.68 in "land
account" and P169,262.52 in "building account" in 1956. And all
ON THE ASSUMPTION THAT THERE WAS these became possible because, admittedly, petitioners never
AN UNREGISTERED PARTNERSHIP, THE actually received any share of the income or profits from Lorenzo
COURT OF TAX APPEALS ERRED IN NOT T. Oña and instead, they allowed him to continue using said
DEDUCTING THE VARIOUS AMOUNTS PAID shares as part of the common fund for their ventures, even as
BY THE PETITIONERS AS INDIVIDUAL they paid the corresponding income taxes on the basis of their
INCOME TAX ON THEIR RESPECTIVE respective shares of the profits of their common business as
SHARES OF THE PROFITS ACCRUING reported by the said Lorenzo T. Oña.
FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF It is thus incontrovertible that petitioners did not, contrary to their
THE UNREGISTERED PARTNERSHIP. contention, merely limit themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
In other words, petitioners pose for our resolution the following years herein involved, some of the said properties were sold at
questions: (1) Under the facts found by the Court of Tax Appeals, considerable profit, and that with said profit, petitioners engaged,
should petitioners be considered as co-owners of the properties thru Lorenzo T. Oña, in the purchase and sale of corporate
inherited by them from the deceased Julia Buñales and the profits securities. It is likewise admitted that all the profits from these
derived from transactions involving the same, or, must they be ventures were divided among petitioners proportionately in
deemed to have formed an unregistered partnership subject to tax accordance with their respective shares in the inheritance. In
under Sections 24 and 84(b) of the National Internal Revenue these circumstances, it is Our considered view that from the
Code? (2) Assuming they have formed an unregistered moment petitioners allowed not only the incomes from their
partnership, should this not be only in the sense that they invested respective shares of the inheritance but even the inherited
as a common fund the profits earned by the properties owned by properties themselves to be used by Lorenzo T. Oña as a
them in common and the loans granted to them upon the security common fund in undertaking several transactions or in business,
of the said properties, with the result that as far as their respective with the intention of deriving profit to be shared by them
shares in the inheritance are concerned, the total income thereof proportionally, such act was tantamonut to actually contributing
should be considered as that of co-owners and not of the such incomes to a common fund and, in effect, they thereby
unregistered partnership? And (3) assuming again that they are formed an unregistered partnership within the purview of the
taxable as an unregistered partnership, should not the various above-mentioned provisions of the Tax Code.
amounts already paid by them for the same years 1955 and 1956
as individual income taxes on their respective shares of the profits It is but logical that in cases of inheritance, there should be a
accruing from the properties they owned in common be deducted period when the heirs can be considered as co-owners rather than
from the deficiency corporate taxes, herein involved, assessed unregistered co-partners within the contemplation of our
against such unregistered partnership by the respondent corporate tax laws aforementioned. Before the partition and
Commissioner? distribution of the estate of the deceased, all the income thereof
does belong commonly to all the heirs, obviously, without them
Pondering on these questions, the first thing that has struck the becoming thereby unregistered co-partners, but it does not
Court is that whereas petitioners' predecessor in interest died way necessarily follow that such status as co-owners continues until
back on March 23, 1944 and the project of partition of her estate the inheritance is actually and physically distributed among the
was judicially approved as early as May 16, 1949, and heirs, for it is easily conceivable that after knowing their respective
presumably petitioners have been holding their respective shares shares in the partition, they might decide to continue holding said
in their inheritance since those dates admittedly under the shares under the common management of the administrator or
administration or management of the head of the family, the executor or of anyone chosen by them and engage in business
widower and father Lorenzo T. Oña, the assessment in question on that basis. Withal, if this were to be allowed, it would be the
refers to the later years 1955 and 1956. We believe this point to easiest thing for heirs in any inheritance to circumvent and render
be important because, apparently, at the start, or in the years meaningless Sections 24 and 84(b) of the National Internal
1944 to 1954, the respondent Commissioner of Internal Revenue Revenue Code.
did treat petitioners as co-owners, not liable to corporate tax, and
it was only from 1955 that he considered them as having formed It is true that in Evangelista vs. Collector, 102 Phil. 140, it was
an unregistered partnership. At least, there is nothing in the record stated, among the reasons for holding the appellants therein to be
indicating that an earlier assessment had already been made. unregistered co-partners for tax purposes, that their common fund
Such being the case, and We see no reason how it could be "was not something they found already in existence" and that "it
otherwise, it is easily understandable why petitioners' position that was not a property inherited by them pro indiviso," but it is
they are co-owners and not unregistered co-partners, for the certainly far fetched to argue therefrom, as petitioners are doing
purposes of the impugned assessment, cannot be upheld. Truth here, that ergo, in all instances where an inheritance is not
actually divided, there can be no unregistered co-partnership. As
already indicated, for tax purposes, the co-ownership of inherited which are possessed of the aforementioned
properties is automatically converted into an unregistered personality — have been expressly excluded
partnership the moment the said common properties and/or the by law (sections 24 and 84[b]) from the
incomes derived therefrom are used as a common fund with intent connotation of the term "corporation." ....
to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either xxx xxx xxx
duly executed in an extrajudicial settlement or approved by the
court in the corresponding testate or intestate proceeding. The
reason for this is simple. From the moment of such partition, the Similarly, the American Law
heirs are entitled already to their respective definite shares of the
estate and the incomes thereof, for each of them to manage and ... provides its own
dispose of as exclusively his own without the intervention of the concept of a partnership.
other heirs, and, accordingly he becomes liable individually for all Under the term "partnership"
taxes in connection therewith. If after such partition, he allows his it includes not only a
share to be held in common with his co-heirs under a single partnership as known in
management to be used with the intent of making profit thereby in common law but, as well, a
proportion to his share, there can be no doubt that, even if no syndicate, group, pool, joint
document or instrument were executed for the purpose, for tax venture, or other
purposes, at least, an unregistered partnership is formed. This is unincorporated organization
exactly what happened to petitioners in this case. which carries on any
business, financial
In this connection, petitioners' reliance on Article 1769, paragraph operation, or venture, and
(3), of the Civil Code, providing that: "The sharing of gross returns which is not, within the
does not of itself establish a partnership, whether or not the meaning of the Code, a trust,
persons sharing them have a joint or common right or interest in estate, or a corporation. ... .
any property from which the returns are derived," and, for that (7A Merten's Law of Federal
matter, on any other provision of said code on partnerships is Income Taxation, p. 789;
unavailing. In Evangelista, supra, this Court clearly differentiated emphasis ours.)
the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as "corporations" The term "partnership"
under Sections 24 and 84(b) of the National Internal Revenue includes a syndicate, group,
Code. Mr. Justice Roberto Concepcion, now Chief Justice, pool, joint venture or other
elucidated on this point thus: unincorporated organization,
through or by means of
To begin with, the tax in question is one which any business,
imposed upon "corporations", which, strictly financial operation, or
speaking, are distinct and different from venture is carried on. ... . (8
"partnerships". When our Internal Revenue Merten's Law of Federal
Code includes "partnerships" among the Income Taxation, p. 562
entities subject to the tax on "corporations", Note 63; emphasis ours.)
said Code must allude, therefore, to
organizations which are not For purposes of the tax on corporations, our
necessarily "partnerships", in the technical National Internal Revenue Code includes these
sense of the term. Thus, for instance, section partnerships — with the exception only of duly
24 of said Code exempts from the registered general copartnerships — within the
aforementioned tax "duly registered general purview of the term "corporation." It is,
partnerships," which constitute precisely one of therefore, clear to our mind that petitioners
the most typical forms of partnerships in this herein constitute a partnership, insofar as said
jurisdiction. Likewise, as defined in section Code is concerned, and are subject to the
84(b) of said Code, "the term corporation income tax for corporations.
includes partnerships, no matter how created
or organized." This qualifying expression We reiterated this view, thru Mr. Justice Fernando, in Reyes vs.
clearly indicates that a joint venture need not Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July
be undertaken in any of the standard forms, or 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory
in confirmity with the usual requirements of the of co-ownership pursued by appellants therein.
law on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section As regards the second question raised by petitioners about the
84(b),the term "corporation" includes, among segregation, for the purposes of the corporate taxes in question,
others, "joint accounts,(cuentas en of their inherited properties from those acquired by them
participacion)" and "associations", none of subsequently, We consider as justified the following ratiocination
which has a legal personality of its own, of the Tax Court in denying their motion for reconsideration:
independent of that of its members.
Accordingly, the lawmaker could not have In connection with the second ground, it is
regarded that personality as a condition alleged that, if there was an unregistered
essential to the existence of the partnerships partnership, the holding should be limited to the
therein referred to. In fact, as above stated, business engaged in apart from the properties
"duly registered general co-partnerships" — inherited by petitioners. In other words, the
 taxable income of the partnership should be distributable to the partners (petitioners herein)
limited to the income derived from the should be reduced by the amounts of income
acquisition and sale of real properties and tax assessed against the partnership.
corporate securities and should not include the Consequently, each of the petitioners in his
income derived from the inherited properties. It individual capacity overpaid his income tax for
is admitted that the inherited properties and the the years in question, but the income tax due
income derived therefrom were used in the from the partnership has been correctly
business of buying and selling other real assessed. Since the individual income tax
properties and corporate securities. liabilities of petitioners are not in issue in this
Accordingly, the partnership income must proceeding, it is not proper for the Court to pass
include not only the income derived from the upon the same.
purchase and sale of other properties but also
the income of the inherited properties. Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax
Besides, as already observed earlier, the income derived from cannot be credited as part payment of the taxes herein in
inherited properties may be considered as individual income of question. It is argued that to sanction the view of the Tax Court is
the respective heirs only so long as the inheritance or estate is to oblige petitioners to pay double income tax on the same
not distributed or, at least, partitioned, but the moment their income, and, worse, considering the time that has lapsed since
respective known shares are used as part of the common assets they paid their individual income taxes, they may already be
of the heirs to be used in making profits, it is but proper that the barred by prescription from recovering their overpayments in a
income of such shares should be considered as the part of the separate action. We do not agree. As We see it, the case of
taxable income of an unregistered partnership. This, We hold, is petitioners as regards the point under discussion is simply that of
the clear intent of the law. a taxpayer who has paid the wrong tax, assuming that the failure
to pay the corporate taxes in question was not deliberate. Of
Likewise, the third question of petitioners appears to have been course, such taxpayer has the right to be reimbursed what he has
adequately resolved by the Tax Court in the aforementioned erroneously paid, but the law is very clear that the claim and
resolution denying petitioners' motion for reconsideration of the action for such reimbursement are subject to the bar of
decision of said court. Pertinently, the court ruled this wise: prescription. And since the period for the recovery of the excess
income taxes in the case of herein petitioners has already lapsed,
it would not seem right to virtually disregard prescription merely
In support of the third ground, counsel for upon the ground that the reason for the delay is precisely because
petitioners alleges: the taxpayers failed to make the proper return and payment of the
corporate taxes legally due from them. In principle, it is but proper
Even if we were to yield to not to allow any relaxation of the tax laws in favor of persons who
the decision of this are not exactly above suspicion in their conduct vis-a-vis their tax
Honorable Court that the obligation to the State.
herein petitioners have
formed an unregistered IN VIEW OF ALL THE FOREGOING, the judgment of the Court
partnership and, therefore, of Tax Appeals appealed from is affirm with costs against
have to be taxed as such, it petitioners.
might be recalled that the
petitioners in their individual
income tax returns reported 2. DPWH v. SORIANO
their shares of the profits of
the unregistered partnership. Republic of the Philippines
We think it only fair and SUPREME COURT
equitable that the various Manila
amounts paid by the
individual petitioners as THIRD DIVISION
income tax on their
respective shares of the
unregistered partnership G.R. No. 211666 February 25, 2015
should be deducted from the
deficiency income tax found REPUBLIC OF THE PHILIPPINES, represented by the
by this Honorable Court DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS,
against the unregistered Petitioners,
partnership. (page 7, vs.
Memorandum for the ARLENE R. SORIANO, Respondent.
Petitioner in Support of Their
Motion for Reconsideration, DECISION
Oct. 28, 1961.)

PERALTA, J.:
In other words, it is the position of petitioners
that the taxable income of the partnership must
be reduced by the amounts of income tax paid Before the Court is a petition for review under Rule 45 of the Rules
by each petitioner on his share of partnership of Court assailing the Decision1 dated November 15, 2013 and
profits. This is not correct; rather, it should be Order2 dated March 10, 2014 of the Regional Trial Court (RTC),
the other way around. The partnership profits Valenzuela City, Branch 270, in Civil Case No. 140-V-10.
FACTS: foregoing determination of just compensation, judgment is hereby
rendered:
On October 20, 2010, petitioner Republic of the Philippines,
represented by the Department of Public Works and Highways 1) Declaring plaintiff to have lawful right to acquire possession of
(DPWH), filed a Complaint3 for expropriation against respondent and title to 200 square meters of defendant Arlene R. Soriano’s
Arlene R. Soriano, the registered owner of a parcel of land parcel of land covered by TCT V-13790 necessary for the
consisting of an area of 200 square meters, situated at Gen. T De construction of the NLEX – Harbor Link Project (Segment 9) from
Leon, Valenzuela City, and covered by Transfer Certificate of Title NLEX to MacArthur Highway Valenzuela City;
(TCT) No. V-13790.4 In its Complaint, petitioner averred that
pursuant to Republic Act (RA) No. 8974, otherwise known as "An 2) Condemning portion to the extent of 200 square meters of the
Act to Facilitate the Acquisition of Right-Of-Way, Site or Location above-described parcel of land including improvements thereon,
for National Government Infrastructure Projects and for other if there be any, free from all liens and encumbrances;
Purposes," the property sought to be expropriated shall be used
in implementing the construction of the North Luzon Expressway
(NLEX)- Harbor Link Project (Segment 9) from NLEX to 3) Ordering the plaintiff to pay defendant Arlene R. Soriano
MacArthur Highway, Valenzuela City.5 Php2,100.00 per square meter or the sum of Four Hundred
Twenty Thousand Pesos (Php420,000.00) for the 200 square
meters as fair, equitable, and just compensation with legal
Petitioner duly deposited to the Acting Branch Clerk of Court interest at 12% per annum from the taking of the possession
the amount of ₱420,000.00 representing 100% of the zonal of the property, subject to the payment of all unpaid real property
value of the subject property. Consequently, in an Order6 dated taxes and other relevant taxes, if there be any;
May 27, 2011, the RTC ordered the issuance of a Writ of
Possession and a Writ of Expropriation for failure of respondent,
or any of her representatives, to appear despite notice during the 4) Plaintiff is likewise ordered to pay the defendant consequential
hearing called for the purpose. damages which shall include the value of the transfer tax
necessary for the transfer of the subject property from the name
of the defendant to that of the plaintiff;
In another Order7 dated June 21, 2011, the RTC appointed the
following members of the Board of Commissioners for the
determination of just compensation: (1) Ms. Eunice O. Josue, 5) The Office of the Register of Deeds of Valenzuela City, Metro
Officer-in-Charge, RTC, Branch 270, Valenzuela City; (2) Atty. Manila is directed to annotate this Decision in Transfer Certificate
Cecilynne R. Andrade, Acting Valenzuela City Assessor,City of Title No. V-13790 registered under the name of Arlene R.
Assessor’s Office, Valenzuela City; and (3) Engr. Restituto Soriano.
Bautista, of Brgy. Bisig, Valenzuela City. However, the trial court
subsequently revoked the appointment of the Board for their Let a certified true copy of this decision be recorded in the
failure to submit a report as to the fair market value of the property Registry of Deeds of Valenzuela City.
to assist the court in the determination of just compensation and
directed the parties to submit their respective position Records of this case show that the Land Bank Manager’s Check
papers.8 Thereafter, the case was set for hearing giving the Nos. 0000016913 dated January 21, 2011 in the amount of
parties the opportunity to present and identify all evidence in Php400,000.00 and 0000017263 dated April 28, 2011 in the
support of their arguments therein. amount of Php20,000.00 issued by the Department of Public
Works and Highways (DPWH) are already stale. Thus, the said
According to the RTC, the records of the case reveal that Office is hereby directed to issue another Manager’s Check in the
petitioner adduced evidence to show that the total amount total amount Php420,000.00 under the name of the Office of the
deposited is just, fair, and equitable. Specifically, in its Position Clerk of Court, Regional Trial Court, Valenzuela City earmarked
Paper, petitioner alleged that pursuant to a Certification for the instant case.10
issued by the Bureau of Internal Revenue (BIR), Revenue
Region No. 5, the zonal value of the subject property in the
Petitioner filed a Motion for Reconsideration maintaining that
amount of ₱2,100.00 per square meter is reasonable, fair, and pursuant to Bangko Sentral ng Pilipinas (BSP) Circular No. 799,
just to compensate the defendant for the taking of her Series of 2013, which took effect on July 1, 2013, the interest
property in the total area of 200 square meters. 9 In fact, Tax rate imposed by the RTC on just compensation should be
Declaration No. C-018-07994, dated November 13, 2009 lowered to 6% for the instant case falls under a loan or
submitted by petitioner, shows that the value of the subject forbearance of money.11 In its Order12 dated March 10, 2014,
property is at a lower rate of ₱400.00per square meter. Moreover, the RTC reduced the interest rate to 6% per annum not on the
as testified to by Associate Solicitor III Julie P. Mercurio, and as basis of the aforementioned Circular, but on Article 2209 of the
affirmed by the photographs submitted, the subject property is Civil Code, viz.:
poorly maintained, covered by shrubs and weeds, and not
concretely-paved. It is located far from commercial or industrial
developments in an area without a proper drainage system, can However, the case of National Power Corporation v. Honorable
only be accessed through a narrow dirt road, and is surrounded Zain B. Angas is instructive.
by adjacent dwellings of sub-standard materials.
In the aforementioned case law, which is similar to the instant
Accordingly, the RTC considered respondent to have waived her case, the Supreme Court had the occasion to rule that it is well-
right to adduce evidence and to object to the evidence submitted settled that the aforequoted provision of Bangko Sentral ng
by petitioner for her continued absence despite being given Pilipinas Circular applies only to a loan or forbearance of money,
several notices to do so. goods or credits. However, the term "judgments" as used in
Section 1 of the Usury Law and the previous Central Bank Circular
No. 416, should be interpreted to mean only judgments involving
On November 15, 2013, the RTC rendered its Decision, the loan or forbearance of money, goods or credits, following the
dispositive portion of which reads: WHEREFORE, with the principle of ejusdem generis. And applying said rule on statutory
construction, the general term "judgments" can refer only to The petition is partly meritorious.
judgments in cases involving loans or forbearance of any money,
goods, or credits. Thus, the High Court held that, Art. 2209 of the At the outset, it must be noted that the RTC’s reliance on National
Civil Code, and not the Central Bank Circular, is the law Power Corporation v. Angas is misplaced for the same has
applicable. already been overturned by our more recent ruling in Republic v.
Court of Appeals,16 wherein we held that the payment of just
Art. 2009 of the Civil Code reads: compensation for the expropriated property amounts to an
effective forbearance on the part of the State, to wit:
"If the obligation consists in the payment of a sum of money, and
the debtor incurs in delay, the indemnity for damages, there being Aside from this ruling, Republic notably overturned the Court’s
no stipulation to the contrary, shall be the payment of the interest previous ruling in National Power Corporation v. Angas which
agreed upon, and in the absence of stipulation, the legal interest, held that just compensation due for expropriated properties is not
which is six per cent per annum." a loan or forbearance of money but indemnity for damages for the
delay in payment; since the interest involved is in the nature of
Further in that case, the Supreme Court explained that the damages rather than earnings from loans, then Art. 2209 of the
transaction involved is clearly not a loan or forbearance of money, Civil Code, which fixes legal interest at 6%, shall apply.
goods or credits but expropriation of certain parcels of land for a
public purpose, the payment of which is without stipulation In Republic, the Court recognized that the just compensation due
regarding interest, and the interest adjudged by the trial court is to the landowners for their expropriated property amounted to an
in the nature of indemnity for damages. The legal interest required effective forbearance on the part of the State. Applying the
to be paid on the amount of just compensation for the properties Eastern Shipping Lines ruling, the Court fixed the applicable
expropriated is manifestly in the form of indemnity for damages interest rate at 12% per annum, computed from the time the
for the delay in the payment thereof. It ultimately held that Art. property was taken until the full amount of just compensation was
2209 of the Civil Code shall apply.13 paid, in order to eliminate the issue of the constant fluctuation and
inflation of the value of the currency over time. In the Court’s own
On May 12, 2014, petitioner filed the instant petition invoking the words:
following arguments:
The Bulacan trial court, in its 1979 decision, was correct in
I. imposing interest[s] on the zonal value of the property to be
computed from the time petitioner instituted condemnation
proceedings and "took" the property in September 1969. This
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST allowance of interest on the amount found to be the value of the
OF 6% PER ANNUM ON THE AMOUNT OF JUST property as of the time of the taking computed, being an effective
COMPENSATION OF THE SUBJECT PROPERTY AS THERE forbearance, at 12% per annum should help eliminate the issue
WAS NO DELAY ON THE PART OF PETITIONER. of the constant fluctuation and inflation of the value of the currency
over time.
II.
We subsequently upheld Republic’s 12% per annum interest rate
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF on the unpaid expropriation compensation in the following cases:
1997 AND THE LOCAL GOVERNMENT CODE, IT IS Reyes v. National Housing Authority, Land Bank of the Philippines
RESPONDENT’S OBLIGATION TO PAY THE TRANSFER v. Wycoco, Republic v. Court of Appeals, Land Bank of the
TAXES. Philippines v. Imperial, Philippine Ports Authority v. Rosales-
Bondoc, and Curata v. Philippine Ports Authority.17
Petitioner maintains that if property is taken for public use before
compensation is deposited with the court having jurisdiction over Effectively, therefore, the debt incurred by the government on
the case, the final compensation must include interests on its just account of the taking of the property subject of an
value computed from the time the property is taken up to the time expropriation constitutes a forbearance18 which runs contrary
when compensation is actually paid or deposited with the to the trial court’s opinion that the same is in the nature of
court.14 Thus, legal interest applies only when the property was indemnity for damages calling for the application of Article 2209
taken prior to the deposit of payment with the court and only to of the Civil Code.
the extent that there is delay in payment. In the instant case,
petitioner posits that since it was able to deposit with the court the Nevertheless, in line with the recent circular of the Monetary
amount representing the zonal value of the property before its Board of the Bangko Sentral ng Pilipinas (BSP-MB) No. 799,
taking, it cannot be said to be in delay, and thus, there can be no Series of 2013, effective July 1, 2013, the prevailing rate of
interest due on the payment of just compensation.15 Moreover, interest for loans or forbearance of money is six percent (6%) per
petitioner alleges that since the entire subject property was annum, in the absence of an express contract as to such rate of
expropriated and not merely a portion thereof, it did not suffer an interest.
impairment or decrease in value, rendering the award of
consequential damages nugatory. Furthermore, petitioner claims
that contrary to the RTC’s instruction, transfer taxes, in the nature Notwithstanding the foregoing, We find that the imposition of
of Capital Gains Tax and Documentary Stamp Tax, necessary for interest in this case is unwarranted in view of the fact that as
the transfer of the subject property from the name of the evidenced by the acknowledgment receipt19 signed by the Branch
respondent to that of the petitioner are liabilities of respondent and Clerk of Court, petitioner was able to deposit with the trial court
not petitioner. the amount representing the zonal value of the property before its
taking. As often ruled by this Court, the award of interest is
imposed in the nature of damages for delay in payment
HELD: which, in effect, makes the obligation on the part of the
government one of forbearance to ensure prompt payment the consequential benefits exceed the consequential damages,
of the value of the land and limit the opportunity loss of the these items should be disregarded altogether as the basic value
owner.20 However, when there is no delay in the payment of just of the property should be paid in every case.23
compensation, We have not hesitated in deleting the imposition
of interest thereon for the same is justified only in cases where Considering that the subject property is being expropriated in its
delay has been sufficiently established.21 entirety, there is no remaining portion which may suffer an
impairment or decrease in value as a result of the expropriation.
The records of this case reveal that petitioner did not delay in its Hence, the award of consequential damages is improper.
payment of just compensation as it had deposited the pertinent
amount in full due to respondent on January 24, 2011, or four (4) Anent petitioner’s contention that it cannot be made to pay the
months before the taking thereof, which was when the RTC value of the transfer taxes in the nature of capital gains tax and
ordered the issuance of a Writ of Possession and a Writ of documentary stamp tax, which are necessary for the transfer of
Expropriation on May 27, 2011. The amount deposited was the subject property from the name of the respondent to that of
deemed by the trial court to be just, fair, and equitable, taking into the petitioner, the same is partly meritorious.
account the well-established factors in assessing the value of
land, such as its size, condition, location, tax declaration, and
zonal valuation as determined by the BIR. Considering, therefore, With respect to the capital gains tax, We find merit in petitioner’s
the prompt payment by the petitioner of the full amount of just posture that pursuant to Sections 24(D) and 56(A)(3) of the 1997
compensation as determined by the RTC, We find that the National Internal Revenue Code (NIRC), capital gains tax due
imposition of interest thereon is unjustified and should be on the sale of real property is a liability for the account of the
deleted. seller, to wit:

Similarly, the award of consequential damages should likewise be Section 24. Income Tax Rates–
deleted in view of the fact that the entire area of the subject
property is being expropriated, and not merely a portion thereof, xxxx
wherein such remaining portion suffers an impairment or
decrease in value, as enunciated in Republic of the Philippines v. (D) Capital Gains from Sale of Real Property. –
Bank of the Philippine Islands,22thus:

(1) In General. – The provisions of Section 39(B) notwithstanding,

x x x The general rule is that the just compensation to which the a final tax of six percent (6%) based on the gross selling price or
owner of the condemned property is entitled to is the market current fair market value as determined in accordance with
value. Market value is that sum of money which a person desirous Section 6(E) of this Code, whichever is higher, is hereby imposed
but not compelled to buy, and an owner willing but not compelled upon capital gains presumed to have been realized from the sale,
to sell, would agree on as a price to be paid by the buyer and exchange, or other disposition of real property located in the
received by the seller. The general rule, however, is modified Philippines, classified as capital assets, including pacto de retro
where only a part of a certain property is expropriated. In such a sales and other forms of conditional sales, by individuals,
case, the owner is not restricted to compensation for the portion including estates and trusts: Provided, That the tax liability, if any,
actually taken, he is also entitled to recover the consequential on gains from sales or other disposition of real property to the
damage, if any, to the remaining part of the property. government or any of its political subdivisions or agencies or to
government-owned or controlled corporations shall be
xxxx determined either under Section 24(A)or under this Subsection,
at the option of the taxpayer.
No actual taking of the building is necessary to grant
consequential damages. Consequential damages are awarded if xxxx
as a result of the expropriation, the remaining property of the
owner suffers from an impairment or decrease in value. The rules Section 56. Payment and Assessment of Income Tax for
on expropriation clearly provide a legal basis for the award of Individuals and Corporations. – (A) Payment of Tax –
consequential damages. Section 6 of Rule 67 of the Rules of
Court provides:
xxxx
x x x The commissioners shall assess the consequential damages
to the property not taken and deduct from such consequential (3) Payment of Capital Gains Tax. - The total amount of tax
damages the consequential benefits to be derived by the owner imposed and prescribed under Section 24 (c), 24(D), 27(E)(2),
from the public use or public purpose of the property taken, the 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the return
operation of its franchise by the corporation or the carrying on of prescribed therefor is filed by the person liable thereto: Provided,
the business of the corporation or person taking the property. But That if the seller submits proof of his intention to avail himself of
in no case shall the consequential benefits assessed exceed the the benefit of exemption of capital gains under existing special
consequential damages assessed, or the owner be deprived of laws, no such payments shall be required : Provided, further, That
the actual value of his property so taken. in case of failure to qualify for exemption under such special laws
and implementing rules and regulations, the tax due on the gains
realized from the original transaction shall immediately become
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that: due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the
To determine just compensation, the trial court should first seller, having paid the tax, submits such proof of intent within six
ascertain the market value of the property, to which should be (6) months from the registration of the document transferring the
added the consequential damages after deducting therefrom the real property, he shall be entitled to a refund of such tax upon
consequential benefits which may arise from the expropriation. If
verification of his compliance with the requirements for such amount of the tax due: Provided, however, that as
exemption. between themselves, the said parties may agree on who
shall be liable or how they may share on the cost of the
Thus, it has been held that since capital gains is a tax on passive tax.
income, it is the seller, not the buyer, who generally would
shoulder the tax.24 Accordingly, the BIR, in its BIR Ruling No. 476- (b) Exception. - Whenever one of the parties to the
2013, dated December 18, 2013, constituted the DPWH as a taxable transaction is exempt from the tax imposed
withholding agent to withhold the six percent (6%) final under Title VII of the Code, the other party thereto who
withholding tax in the expropriation of real property for is not exempt shall be the one directly liable for the tax.27
infrastructure projects. As far as the government is concerned,
therefore, the capital gains tax remains a liability of the seller since As a general rule, therefore, any of the parties to a transaction
it is a tax on the seller's gain from the sale of the real estate.25 shall be liable for the full amount of the documentary stamp tax
due, unless they agree among themselves on who shall be liable
As to the documentary stamp tax, however, this Court finds for the same.
inconsistent petitioner’s denial of liability to the same. Petitioner
cites Section 196 of the 1997 NIRC as its basis in saying that the In this case, there is no agreement as to the party liable for the
documentary stamp tax is the liability of the seller, viz.: documentary stamp tax due on the sale of the land to be
expropriated. But while petitioner rejects any liability for the same,
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances this Court must take note of petitioner’s Citizen’s Charter,28 which
of Real Property. - On all conveyances, deeds, instruments, or functions as a guide for the procedure to be taken by the DPWH
writings, other than grants, patents or original certificates of in acquiring real property through expropriation under RA 8974.
adjudication issued by the Government, whereby any land, The Citizen’s Charter, issued by petitioner DPWH itself on
tenement or other realty sold shall be granted, assigned, December 4,2013, explicitly provides that the documentary
transferred or otherwise conveyed to the purchaser, or stamp tax, transfer tax, and registration fee due on the
purchasers, or to any other person or persons designated by such transfer of the title of land in the name of the Republic shall
purchaser or purchasers, there shall be collected a documentary be shouldered by the implementing agency of the DPWH,
stamp tax, at the rates herein below prescribed, based on the while the capital gains tax shall be paid by the affected
consideration contracted to be paid for such realty or on its fair property owner.29 Thus, while there is no specific agreement
market value determined in accordance with Section 6(E) of this between petitioner and respondent, petitioner's issuance of the
Code, whichever is higher: Provided, That when one of the Citizen's Charter serves as its notice to the public as to the
contracting parties is the Government, the tax herein imposed procedure it shall generally take in cases of expropriation under
shall be based on the actual consideration: (a) When the RA 8974. Accordingly, it will be rather unjust for this Court to
consideration, or value received or contracted to be paid for such blindly accede to petitioner's vague rejection of liability in the face
realty, after making proper allowance of any encumbrance, does of its issuance of the Citizen's Charter, which contains a clear and
not exceed One thousand pesos (₱1,000), Fifteen pesos unequivocal assumption of accountability for the documentary
(₱15.00). stamp tax. Had petitioner provided this Court with more
convincing basis, apart from a mere citation of an indefinite
(b) For each additional One thousand pesos (₱1,000), or provision of the 1997 NIRC, showing that it should be respondent-
fractional part thereof in excess of One thousand pesos (₱1,000) seller who shall be liable for the documentary stamp tax due on
of such consideration or value, Fifteen pesos (₱15.00). the sale of the subject property, its rejection of the payment of the
same could have been sustained. WHEREFORE, premises
considered, the instant pet1t10n 1s PARTIALLY GRANTED. The
When it appears that the amount of the documentary stamp tax Decision and Order, dated November 15, 2013 and March 10,
payable hereunder has been reduced by an incorrect statement 2014, respectively, of the Regional Trial Court, Valenzuela City,
of the consideration in any conveyance, deed, instrument or Branch 270, in Civil Case No. 140-V-10 are hereby MODIFIED, in
writing subject to such tax the Commissioner, provincial or city that the imposition of interest on the payment of just
Treasurer, or other revenue officer shall, from the assessment compensation as well as the award of consequential damages are
rolls or other reliable source of information, assess the property deleted. In addition, respondent Arlene R. Soriano is ORDERED
of its true market value and collect the proper tax thereon. to pay for the capital gains tax due on the transfer of the
expropriated property, while the documentary stamp tax, transfer
Yet, a perusal of the provision cited above does not explicitly tax, and registration fee shall be for the account of petitioner.
impute the obligation to pay the documentary stamp tax on the
seller. In fact, according to the BIR, all the parties to a transaction SO ORDERED.
are primarily liable for the documentary stamp tax, as provided by
Section 2 of BIR Revenue Regulations No. 9-2000, which reads:26
3. BDO v. CIR

SEC. 2. Nature of the Documentary Stamp Tax and Persons

Liable for the Tax. – Republic of the Philippines
SUPREME COURT
Manila
(a) In General. - The documentary stamp taxes under
Title VII of the Code is a tax on certain
transactions.1âwphi1 It is imposed against "the person EN BANC
making, signing, issuing, accepting, or transferring" the
document or facility evidencing the aforesaid G.R. No. 198756 January 13, 2015
transactions. Thus, in general, it may be imposed on the
transaction itself or upon the document underlying such BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING
act. Any of the parties thereto shall be liable for the full CORPORATION, METROPOLITAN BANK & TRUST
COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, By letter4 dated March 23, 2001, the Caucus of Development
PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS NGO Networks (CODE-NGO) "with the assistance of its financial
BANK AND PLANTERS DEVELOPMENT BANK, Petitioners, advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC
Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC Corp. ("CAPEX") and SEED Capital Ventures, Inc.
CAPITAL CORPORATION, Petitioners-Intervenors, (SEED),"5 requested an approval from the Department of Finance
for the issuance by the Bureau of Treasury of 10-year zero
coupon Treasury Certificates (T-notes).6 The T-notes would
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner- initially be purchased by a special purpose vehicle on behalf of
Intervenor, CODE-NGO, repackaged and sold at a premium to investors as
vs. the PEACe Bonds.7 The net proceeds from the sale of the
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF Bonds" will be used to endow a permanent fund
INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE, (Hanapbuhay® Fund) to finance meritorious activities and
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE projects of accredited non-government organizations
NATIONAL TREASURER AND BUREAU OF (NGOs) throughout the country."8
TREASURY, Respondent.
Prior to and around the time of the proposal of CODE-NGO, other
DECISION proposals for the issuance of zero-coupon bonds were also
presented by banks and financial institutions, such as First Metro
LEONEN, J.: Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27,
The case involves the proper tax treatment of the discount or 2000),10 Security Bank Corporation and SB Capital Investment
interest income arising from the ₱35 billion worth of 10-year zero- Corporation (proposal dated July 25, 2001), 11 and ATR-Kim Eng
coupon treasury bonds issued by the Bureau of Treasury on Fixed Income, Inc. (proposal dated August 25, 1999). 12 "[B]oth
October 18, 2001 (denominated as the Poverty Eradication and the proposals of First Metro Investment Corp. and ATR-Kim Eng
Alleviation Certificates or the PEA Ce Bonds by the Caucus of Fixed Income indicate that the interest income or discount earned
Development NGO Networks). on the proposed zero coupon bonds would be subject to the
prevailing withholding tax."13

On October 7, 2011, the Commissioner of Internal Revenue

issued BIR Ruling No. 370-20111 (2011 BIR Ruling), declaring A zero-coupon bond is a bond bought at a price substantially
that the PEACe Bonds being deposit substitutes are subject to the lower than its face value (or at a deep discount), with the face
20% final withholding tax. Pursuant to this ruling, the Secretary of value repaid at the time of maturity.14 It does not make periodic
Finance directed the Bureau of Treasury to withhold a 20% final interest payments, or have so called "coupons," hence the term
tax from the face value of the PEACe Bonds upon their payment zero-coupon bond.15 However, the discount to face value
at maturity on October 18, 2011. constitutes the return to the bondholder.16

This is a petition for certiorari, prohibition and/or mandamus 2 filed On May 31, 2001, the Bureau of Internal Revenue, in reply to
by petitioners under Rule 65 of the Rules of Court seeking to: CODENGO’s letters dated May 10, 15, and 25, 2001, issued BIR
Ruling No. 020-200117 on the tax treatment of the proposed
PEACe Bonds. BIR Ruling No. 020-2001, signed by then
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 Commissioner of Internal Revenue René G. Bañez confirmed that
October 2011 [and] other related rulings issued by BIR of similar the PEACe Bonds would not be classified as deposit substitutes
tenor and import, for being unconstitutional and for having been and would not be subject to the corresponding withholding tax:
issued without jurisdiction or with grave abuse of discretion
amounting to lack or excess of jurisdiction ... ;
Thus, to be classified as "deposit substitutes", the borrowing of
funds must be obtained from twenty (20) or more individuals or
b. PROHIBIT Respondents, particularly the BTr, from withholding corporate lenders at any one time. In the light of your
or collecting the 20% FWT from the payment of the face value of representation that the PEACe Bonds will be issued only to one
the Government Bonds upon their maturity; entity, i.e., Code NGO, the same shall not be considered as
"deposit substitutes" falling within the purview of the above
c. COMMAND Respondents, particularly the BTr, to pay the full definition. Hence, the withholding tax on deposit substitutes will
amount of the face value of the Government Bonds upon maturity not apply.18 (Emphasis supplied)
... ; and
The tax treatment of the proposed PEACe Bonds in BIR Ruling
d. SECURE a temporary restraining order (TRO), and No. 020-2001 was subsequently reiterated in BIR Ruling No. 035-
subsequently a writ of preliminary injunction, enjoining 200119 dated August 16, 2001 and BIR Ruling No. DA-175-
Respondents, particularly the BIR and the BTr, from withholding 0120 dated September 29, 2001 (collectively, the 2001 Rulings).
or collecting 20% FWT on the Government Bonds and the In sum, these rulings pronounced that to be able to determine
respondent BIR from enforcing the assailed 2011 BIR Ruling, as whether the financial assets, i.e., debt instruments and securities
well as other related rulings issued by the BIR of similar tenor and are deposit substitutes, the "20 or more individual or corporate
import, pending the resolution by [the court] of the merits of [the] lenders" rule must apply. Moreover, the determination of the
Petition.3 phrase "at any one time" for purposes of determining the "20 or
more lenders" is to be determined at the time of the original
issuance. Such being the case, the PEACe Bonds were not to be
FACTS:
treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former agreement, CODE-NGO represented that "[a]ll income derived
Treasurer Eduardo Sergio G. Edeza (Former Treasurer Edeza) from the Bonds, inclusive of premium on redemption and gains on
questioned the propriety of issuing the bonds directly to a special the trading of the same, are exempt from all forms of taxation as
purpose vehicle considering that the latter was not a Government confirmed by Bureau of Internal Revenue (BIR) letter rulings
Securities Eligible Dealer (GSED).22 Former Treasurer Edeza dated 31 May 2001 and 16 August 2001, respectively."48
recommended that the issuance of the Bonds "be done through
the ADAPS"23 and that CODE-NGO "should get a GSED to bid in RCBC Capital sold the Government Bonds in the secondary
[sic] its behalf."24 market for an issue price of ₱11,995,513,716.51. Petitioners
purchased the PEACe Bonds on different dates.49
Subsequently, in the notice to all GSEDs entitled Public Offering
of Treasury Bonds25 (Public Offering) dated October 9, 2001, the BIR rulings
Bureau of Treasury announced that "₱30.0B worth of 10-year
Zero[-] Coupon Bonds [would] be auctioned on October 16,
2001[.]"26 The notice stated that the Bonds "shall be issued to not On October 7, 2011, "the BIR issued the assailed 2011 BIR
more than 19 buyers/lenders hence, the necessity of a manual Ruling imposing a 20% FWT on the Government Bonds and
auction for this maiden issue."27 It also required the GSEDs to directing the BTr to withhold said final tax at the maturity
submit their bids not later than 12 noon on auction date and to thereof, [allegedly without] consultation with Petitioners as
disclose in their bid submissions the names of the institutions bond holders, and without conducting any hearing."50
bidding through them to ensure strict compliance with the 19
lender limit.28 Lastly, it stated that "the issue being limited to 19 "It appears that the assailed 2011 BIR Ruling was issued in
lenders and while taxable shall not be subject to the 20% final response to a query of the Secretary of Finance on the proper tax
withholding [tax]."29 treatment of the discount or interest income derived from the
Government Bonds."51 The Bureau of Internal Revenue, citing
On October 12, 2001, the Bureau of Treasury released a three (3) of its rulings rendered in 2004 and 2005, namely: BIR
memo30 on the "Formula for the Zero-Coupon Bond." The memo Ruling No. 007-0452 dated July 16, 2004; BIR Ruling No. DA-491-
stated in part that the formula (in determining the purchase price 0453 dated September 13, 2004; and BIR Ruling No. 008-
and settlement amount) "is only applicable to the zeroes that are 0554 dated July 28, 2005, declared the following:
not subject to the 20% final withholding due to the 19 buyer/lender
limit."31 The Php 24.3 billion discount on the issuance of the PEACe
Bonds should be subject to 20% Final Tax on interest income from
A day before the auction date or on October 15, 2001, the Bureau deposit substitutes. It is now settled that all treasury bonds
of Treasury issued the "Auction Guidelines for the 10-year Zero- (including PEACe Bonds), regardless of the number of
Coupon Treasury Bond to be Issued on October 16, 2001" purchasers/lenders at the time of origination/issuance are
(Auction Guidelines).32 The Auction Guidelines reiterated that the considered deposit substitutes. In the case of zero-coupon
Bonds to be auctioned are "[n]ot subject to 20% withholding tax bonds, the discount (i.e. difference between face value and
as the issue will be limited to a maximum of 19 lenders in the purchase price/discounted value of the bond) is treated as
primary market (pursuant to BIR Revenue Regulation No. 020 interest income of the purchaser/holder. Thus, the Php 24.3
2001)."33The Auction Guidelines, for the first time, also stated that interest income should have been properly subject to the 20%
the Bonds are "[e]ligible as liquidity reserves (pursuant to MB Final Tax as provided in Section 27(D)(1) of the Tax Code of
Resolution No. 1545 dated 27 September 2001)[.]"34 1997. . . .

On October 16, 2001, the Bureau of Treasury held an auction for ....
the 10-year zero-coupon bonds.35 Also on the same date, the
Bureau of Treasury issued another memorandum 36 quoting However, at the time of the issuance of the PEACe Bonds in 2001,
excerpts of the ruling issued by the Bureau of Internal Revenue the BTr was not able to collect the final tax on the discount/interest
concerning the Bonds’ exemption from 20% final withholding tax income realized by RCBC as a result of the 2001 Rulings.
and the opinion of the Monetary Board on reserve eligibility. 37 Subsequently, the issuance of BIR Ruling No. 007-04 dated July
16, 2004 effectively modifies and supersedes the 2001 Rulings by
During the auction, there were 45 bids from 15 GSEDs. 38 The stating that the [1997] Tax Code is clear that the "term public
bidding range was very wide, from as low as 12.248% to as high means borrowing from twenty (20) or more individual or corporate
as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the lenders at any one time." The word "any" plainly indicates that
auction results.40 The cut-off was at 12.75%.41 the period contemplated is the entire term of the bond, and not
merely the point of origination or issuance. . . . Thus, by taking the
PEACe bonds out of the ambit of deposits [sic] substitutes and
After the auction, RCBC which participated on behalf of CODE- exempting it from the 20% Final Tax, an exemption in favour of
NGO was declared as the winning bidder having tendered the the PEACe Bonds was created when no such exemption is found
lowest bids.42 Accordingly, on October 18, 2001, the Bureau of in the law.55
Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of
12.75% to RCBC for approximately ₱10.17 billion,43 resulting in a
discount of approximately ₱24.83 billion. On October 11, 2011, a "Memo for Trading Participants No. 58-
2011 was issued by the Philippine Dealing System Holdings
Corporation and Subsidiaries ("PDS Group"). The Memo provides
Also on October 16, 2001, RCBC Capital entered into an that in view of the pronouncement of the DOF and the BIR on the
underwriting Agreement44 with CODE-NGO, whereby RCBC applicability of the 20% FWT on the Government Bonds, no
Capital was appointed as the Issue Manager and Lead transfer of the same shall be allowed to be recorded in the
Underwriter for the offering of the PEACe Bonds.45RCBC Capital Registry of Scripless Securities ("ROSS") from 12 October 2011
agreed to underwrite46 on a firm basis the offering, distribution until the redemption payment date on 18 October 2011. Thus, the
and sale of the 35 billion Bonds at the price of bondholders of record appearing on the ROSS as of 18 October
₱11,995,513,716.51.47 In Section 7(r) of the underwriting
2011, which include the Petitioners, shall be treated by the BTr as On February 22, 2012, respondents filed their consolidated
the beneficial owners of such securities for the relevant [tax] comment74 on the petitions-in-intervention filed by RCBC and
payments to be imposed thereon."56 RCBC Capital and On November 27, 2012, petitioners filed their
"Manifestation with Urgent Reiterative Motion (To Direct
On October 17, 2011, replying to an urgent query from the Bureau Respondents to Comply with the Temporary Restraining
of Treasury, the Bureau of Internal Revenue issued BIR Ruling Order)."75
No. DA 378-201157 clarifying that the final withholding tax due on
the discount or interest earned on the PEACe Bonds should "be On December 4, 2012, this court: (a) noted petitioners’
imposed and withheld not only on RCBC/CODE NGO but also manifestation with urgent reiterative motion (to direct respondents
[on] ‘all subsequent holders of the Bonds.’"58 to comply with the temporary restraining order); and (b) required
respondents to comment thereon.76
On October 17, 2011, petitioners filed a petition for certiorari,
prohibition, and/or mandamus (with urgent application for a Respondents’ comment77 was filed on April 15,2013, and
temporary restraining order and/or writ of preliminary petitioners filed their reply78 on June 5, 2013.
injunction)59 before this court.
ISSUES:
On October 18, 2011, this court issued a temporary restraining
order (TRO)60 "enjoining the implementation of BIR Ruling No. I. Whether the PEACe Bonds are "deposit substitutes" and
370-2011 against the [PEACe Bonds,] . . . subject to the condition thus subject to 20% final withholding tax under the 1997
that the 20% final withholding tax on interest income there from National Internal Revenue Code. Related to this question is
shall be withheld by the petitioner banks and placed in escrow the interpretation of the phrase "borrowing from twenty (20)
pending resolution of [the] petition."61 or more individual or corporate lenders at any one time"
under Section 22(Y) of the 1997 National Internal Revenue
On October 28, 2011, RCBC and RCBC Capital filed a motion for Code, particularly on whether the reckoning of the 20 lenders
leave of court to intervene and to admit petition-in- includes trading of the bonds in the secondary market; and
intervention62 dated October 27, 2011, which was granted by this
court on November 15, 2011.63 II. If the PEACe Bonds are considered "deposit substitutes,"
whether the government or the Bureau of Internal Revenue is
Meanwhile, on November 9, 2011, petitioners filed their estopped from imposing and/or collecting the 20% final
"Manifestation with Urgent Ex Parte Motion to Direct Respondents withholding tax from the face value of these Bonds
to Comply with the TRO."64 They alleged that on the same day
that the temporary restraining order was issued, the Bureau of a. Will the imposition of the 20% final withholding tax violate the
Treasury paid to petitioners and other bondholders the amounts non-impairment clause of the Constitution?
representing the face value of the Bonds, net however of the
amounts corresponding to the 20% final withholding tax on
interest income, and that the Bureau of Treasury refused to b. Will it constitute a deprivation of property without due process
release the amounts corresponding to the 20% final withholding of law?
tax.65On November 15, 2011, this court directed respondents to:
"(1) SHOW CAUSE why they failed to comply with the October c. Will it violate Section 245 of the 1997 National Internal Revenue
18, 2011 resolution; and (2) COMPLY with the Court’s resolution Code on non-retroactivity of rulings?
in order that petitioners may place the corresponding funds in
escrow pending resolution of the petition."66 Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
On the same day, CODE-NGO filed a motion for leave to
intervene (and to admit attached petition-in-intervention with Petitioners argue that "[a]s the issuer of the Government Bonds
comment on the petition in-intervention of RCBC and RCBC acting through the BTr, the Government is obligated . . . to pay
Capital).67 The motion was granted by this court on November 22, the face value amount of Ph₱35 Billion upon maturity without any
2011.68 deduction whatsoever."79 They add that "the Government cannot
impair the efficacy of the [Bonds] by arbitrarily, oppressively and
On December 1, 2011, public respondents filed their unreasonably imposing the withholding of 20% FWT upon the
compliance.69 They explained that: 1) "the implementation of [BIR [Bonds] a mere eleven (11) days before maturity and after
Ruling No. 370-2011], which has already been performed on several, consistent categorical declarations that such bonds are
October 18, 2011 with the withholding of the 20% final withholding exempt from the 20% FWT, without violating due process"80 and
tax on the face value of the PEACe bonds, is already fait accompli the constitutional principle on non-impairment of
. . . when the Resolution and TRO were served to and received contracts.81 Petitioners aver that at the time they purchased the
by respondents BTr and National Treasurer [on October 19, Bonds, they had the right to expect that they would receive the full
2011]";70 and 2) the withheld amount has ipso facto become face value of the Bonds upon maturity, in view of the 2001 BIR
public funds and cannot be disbursed or released to petitioners Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings
without congressional appropriation.71 Respondents further aver are correct, the fact remains that [they] relied [on] good faith
that"[i]nasmuch as the . . . TRO has already become moot . . . the thereon."83
condition attached to it, i.e., ‘that the 20% final withholding tax on
interest income therefrom shall be withheld by the banks and At any rate, petitioners insist that the PEACe Bonds are not
placed in escrow . . .’has also been rendered moot[.]"72 deposit substitutes as defined under Section 22(Y) of the 1997
National Internal Revenue Code because there was only one
On December 6, 2011, this court noted respondents' lender (RCBC) to whom the Bureau of Treasury issued the
compliance.73 Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
"erroneously interpreted that the number of investors that argue that "[b]y her blanket and arbitrary classification of treasury
participate in the ‘secondary market’ is the determining factor in bonds as deposit substitutes, respondent CIR not only amended
reckoning the existence or non-existence of twenty (20) or more and expanded the NIRC, but effectively imposed a new tax on
individual or corporate lenders."85 Furthermore, they contend that privately-placed treasury bonds."108Petitioners-intervenors RCBC
the Bureau of Internal Revenue unduly expanded the definition of and RCBC Capital further argue that the 2011 BIR Ruling will
deposit substitutes under Section 22 of the 1997 National Internal cause substantial impairment of their vested rights 109 under the
Revenue Code in concluding that "the mere issuance of Bonds since the ruling imposes new conditions by "subjecting the
government debt instruments and securities is deemed as falling PEACe Bonds to the twenty percent (20%) final withholding tax
within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011 notwithstanding the fact that the terms and conditions thereof as
BIR Ruling clearly amount[ed] to an unauthorized act of previously represented by the Government, through respondents
administrative legislation[.]"87 BTr and BIR, expressly state that it is not subject to final
withholding tax upon their maturity." 110 They added that "[t]he
Petitioners further argue that their income from the Bonds is a exemption from the twenty percent (20%) final withholding tax
"trading gain," which is exempt from income tax.88They insist that [was] the primary inducement and principal consideration for
"[t]hey are not lenders whose income is considered as ‘interest [their] participat[ion] in the auction and underwriting of the PEACe
income or yield’ subject to the 20% FWT under Section 27 (D)(1) Bonds."111
of the [1997 National Internal Revenue Code]" 89 because they
"acquired the Government Bonds in the secondary or tertiary Like petitioners, petitioners-intervenors RCBC and RCBC Capital
market."90 also contend that respondent Commissioner of Internal Revenue
violated their rights to due process when she arbitrarily issued the
Even assuming without admitting that the Government Bonds are 2011 BIR Ruling without prior notice and hearing, and the
deposit substitutes, petitioners argue that the collection of the final oppressive timing of such ruling deprived them of the opportunity
tax was barred by prescription.91 They point out that under to challenge the same.112
Section 7 of DOF Department Order No. 141-95,92 the final
withholding tax "should have been withheld at the time of their Assuming the 20% final withholding tax was due on the PEACe
issuance[.]"93 Also, under Section 203 of the 1997 National Bonds, petitioners-intervenors RCBC and RCBC Capital claim
Internal Revenue Code, "internal revenue taxes, such as the final that respondents Bureau of Treasury and CODE-NGO should be
tax, [should] be assessed within three (3) years after the last day held liable "as [these] parties explicitly represented . . . that the
prescribed by law for the filing of the return." 94 said bonds are exempt from the final withholding tax." 113

Moreover, petitioners contend that the retroactive application of Finally, petitioners-intervenors RCBC and RCBC Capital argue
the 2011 BIR Ruling without prior notice to them was in violation that "the implementation of the [2011 assailed BIR Ruling and BIR
of their property rights,95 their constitutional right to due Ruling No. DA 378-2011] will have pernicious effects on the
process96 as well as Section 246 of the 1997 National Internal integrity of existing securities, which is contrary to the State
Revenue Code on non-retroactivity of rulings.97 Allegedly, it would policies of stabilizing the financial system and of developing
also have "an adverse effect of colossal magnitude on the capital markets."114
investors, both local and foreign, the Philippine capital market,
and most importantly, the country’s standing in the international For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and
commercial community."98 Petitioners explained that "unless BIR Ruling No. DA 378-2011 are "invalid because they
enjoined, the government’s threatened refusal to pay the full value contravene Section 22(Y) of the 1997 [NIRC] when the said
of the Government Bonds will negatively impact on the image of rulings disregarded the applicability of the ‘20 or more lender’ rule
the country in terms of protection for property rights (including to government debt instruments"[;]115 (b) "when [it] sold the
financial assets), degree of legal protection for lender’s rights, and PEACe Bonds in the secondary market instead of holding them
strength of investor protection."99 They cited the country’s ranking until maturity, [it] derived . . . long-term trading gain[s], not interest
in the World Economic Forum: 75th in the world in its 2011–2012 income, which [are] exempt . . . under Section 32(B)(7)(g) of the
Global Competitiveness Index, 111th out of 142 countries 1997 NIRC"[;]116 (c) "the tax exemption privilege relating to the
worldwide and 2nd to the last among ASEAN countries in terms issuance of the PEACe Bonds . . . partakes of a contractual
of Strength of Investor Protection, and 105th worldwide and last commitment granted by the Government in exchange for a valid
among ASEAN countries in terms of Property Rights Index and and material consideration [i.e., the issue price paid and savings
Legal Rights Index.100 It would also allegedly "send a in borrowing cost derived by the Government,] thus protected by
reverberating message to the whole world that there is no the non-impairment clause of the 1987 Constitution"[;]117 and (d)
certainty, predictability, and stability of financial transactions in the the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the
capital markets[.]"101 "[T]he integrity of Government-issued bonds 2001 BIR Rulings since no notice of revocation was issued to [it],
and notes will be greatly shattered and the credit of the Philippine RCBC and [RCBC Capital] and petitioners[-bondholders], nor was
Government will suffer"102 if the sudden turnaround of the there any BIR administrative guidance issued and
government will be allowed,103 and it will reinforce "investors’ published[.]"118CODE-NGO additionally argues that impleading it
perception that the level of regulatory risk for contracts entered in a Rule 65 petition was improper because: (a) it involves
into by the Philippine Government is high,"104 thus resulting in determination of a factual question;119 and (b) it is premature and
higher interest rate for government-issued debt instruments and states no cause of action as it amounts to an anticipatory third-
lowered credit rating.105 party claim.120

Petitioners-intervenors RCBC and RCBC Capital contend that Arguments of respondents:

respondent Commissioner of Internal Revenue "gravely and
seriously abused her discretion in the exercise of her rule-making
power"106 when she issued the assailed 2011 BIR Ruling which Respondents argue that petitioners’ direct resort to this court to
ruled that "all treasury bonds are ‘deposit substitutes’ regardless challenge the 2011 BIR Ruling violates the doctrines of
of the number of lenders, in clear disregard of the requirement of exhaustion of administrative remedies and hierarchy ofcourts,
twenty (20)or more lenders mandated under the NIRC." 107 They resulting in a lack of cause of action that justifies the dismissal of
the petition.121 According to them, "the jurisdiction to review the to indicate that market participants, including the Petitioners
rulings of the [Commissioner of Internal Revenue], after the herein, were aware of the ruling and its consequences for the
aggrieved party exhausted the administrative remedies, pertains PEACe Bonds."138
to the Court of Tax Appeals."122 They point out that "a case similar
to the present Petition was [in fact] filed with the CTA on October Moreover, they contend that the assailed 2011 BIR Ruling is a
13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal valid exercise of the Commissioner of Internal Revenue’s rule-
Commercial Banking Corporation and RCBC Capital Corporation making power;139 that it and the 2004 and 2005 BIR Rulings did
vs. Commissioner of Internal Revenue, et al.’"123 not unduly expand the definition of deposit substitutes by creating
an unwarranted exception to the requirement of having 20 or more
Respondents further take issue on the timeliness of the filing of lenders/purchasers;140 and the word "any" in Section 22(Y) of the
the petition and petitions-in-intervention.124 They argue that under National Internal Revenue Code plainly indicates that the period
the guise of mainly assailing the 2011 BIR Ruling, petitioners are contemplated is the entire term of the bond and not merely the
indirectly attacking the 2004 and 2005 BIR Rulings, of which the point of origination or issuance.141
attack is legally prohibited, and the petition insofar as it seeks to
nullify the 2004 and 2005 BIR Rulings was filed way out of time Respondents further argue that a retroactive application of the
pursuant to Rule 65, Section 4.125 2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners
Respondents contend that the discount/interest income derived would be liable topay a 20% final withholding tax just the same
from the PEACe Bonds is not a trading gain but interest income because the PEACe Bonds in their possession are legally in the
subject to income tax.126 They explain that "[w]ith the payment of nature of deposit substitutes subject to a 20% final withholding tax
the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, under the NIRC."143 Section 7 of DOF Department Order No. 141-
Petitioners receive an amount of money equivalent to about 95 also provides that income derived from Treasury bonds is
Ph₱24.8 Billion as payment for interest. Such interest is clearly subject to the 20% final withholding tax.144 "[W]hile revenue
an income of the Petitioners considering that the same is a flow regulations as a general rule have no retroactive effect, if the
of wealth and not merely a return of capital – the capital initially revocation is due to the fact that the regulation is erroneous or
invested in the Bonds being approximately Ph₱10.2 Billion[.]"127 contrary to law, such revocation shall have retroactive operation
as to affect past transactions, because a wrong construction of
Maintaining that the imposition of the 20% final withholding tax on the law cannot give rise to a vested right that can be invoked by
the PEACe Bonds does not constitute an impairment of the a taxpayer."145
obligations of contract, respondents aver that: "The BTr has no
power to contractually grant a tax exemption in favour of Finally, respondents submit that "there are a number of variables
Petitioners thus the 2001 BIR Rulings cannot be considered a and factors affecting a capital market." 146 "[C]apital market itself
material term of the Bonds"[;]128 "[t]here has been no change in is inherently unstable."147 Thus, "[p]etitioners’ argument that the
the laws governing the taxability of interest income from deposit 20% final withholding tax . . . will wreak havoc on the financial
substitutes and said laws are read into every contract"[;] 129 "[t]he stability of the country is a mere supposition that is not a
assailed BIR Rulings merely interpret the term "deposit substitute" justiciable issue."148
in accordance with the letter and spirit of the Tax Code"[;]130 "[t]he
withholding of the 20% FWT does not result in a default by the On the prayer for the temporary restraining order, respondents
Government as the latter performed its obligations to the argue that this order "could no longer be implemented [because]
bondholders in full"[;]131 and "[i]f there was a breach of contract or the acts sought to be enjoined are already fait accompli." 149 They
a misrepresentation it was between RCBC/CODE-NGO/RCBC add that "to disburse the funds withheld to the Petitioners at this
Cap and the succeeding purchasers of the PEACe Bonds." 132 time would violate Section 29[,] Article VI of the Constitution
prohibiting ‘money being paid out of the Treasury except in
Similarly, respondents counter that the withholding of "[t]he 20% pursuance of an appropriation made by law[.]’"150 "The remedy of
final withholding tax on the PEACe Bonds does not amount to a petitioners is to claim a tax refund under Section 204(c) of the Tax
deprivation of property without due process of law."133 Their Code should their position be upheld by the Honorable Court." 151
imposition of the 20% final withholding tax is not arbitrary because
they were only performing a duty imposed by law; 134 "[t]he 2011 Respondents also argue that "the implementation of the TRO
BIR Ruling is an interpretative rule which merely interprets the would violate Section 218 of the Tax Code in relation to Section
meaning of deposit substitutes [and upheld] the earlier 11 of Republic Act No. 1125 (as amended by Section 9 of
construction given to the term by the 2004 and 2005 BIR Republic Act No. 9282) which prohibits courts, except the Court
Rulings."135 Hence, respondents argue that "there was no need to of Tax Appeals, from issuing injunctions to restrain the collection
observe the requirements of notice, hearing, and publication[.]" 136 of any national internal revenue tax imposed by the Tax Code." 152

Nonetheless, respondents add that "there is every reason to Summary of arguments

believe that Petitioners — all major financial institutions equipped
with both internal and external accounting and compliance
departments as well as access to both internal and external legal In sum, petitioners and petitioners-intervenors, namely, RCBC,
counsel; actively involved in industry organizations such as the RCBC Capital, and CODE-NGO argue that:
Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and 1. The 2011 BIR Ruling is ultra vires because it is contrary to the
special debt issuances of the BTr and indeed regularly proposing 1997 National Internal Revenue Code when it declared that all
products for issue by BTr — had actual notice of the 2004 and government debt instruments are deposit substitutes regardless
2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop — of the 20-lender rule; and
including virtually zero trading for extended periods of six months
to almost a year — in the trading volume of the PEACe Bonds 2. The 2011 BIR Ruling cannot be applied retroactively because:
after the release of BIR Ruling No. 007-04 on July 16, 2004 tend
a) It will violate the contract clause; SEC. 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases. -The power to interpret the provisions of this
● It constitutes a unilateral amendment of a material term (tax Code and other tax laws shall be under the exclusive and original
exempt status) in the Bonds, represented by the government as jurisdiction of the Commissioner, subject to review by the
an inducement and important consideration for the purchase of Secretary of Finance. (Emphasis supplied)
the Bonds;
Thus, it was held that "[i]f superior administrative officers [can]
b) It constitutes deprivation of property without due process grant the relief prayed for, [then] special civil actions are generally
because there was no prior notice to bondholders and hearing not entertained."153 The remedy within the administrative
and publication; machinery must be resorted to first and pursued to its appropriate
conclusion before the court’s judicial power can be sought.154
c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code; Nonetheless, jurisprudence allows certain exceptions to the rule
on exhaustion of administrative remedies:
d) It violates the constitutional provision on supporting activities of
non-government organizations and development of the capital [The doctrine of exhaustion of administrative remedies] is a
market; and relative one and its flexibility is called upon by the peculiarity and
uniqueness of the factual and circumstantial settings of a case.
Hence, it is disregarded (1) when there is a violation of due
e) The assessment had already prescribed. process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal
Respondents counter that: amounting to lack or excess of jurisdiction,(4) when there is
estoppel on the part of the administrative agency concerned,(5)
1) Respondent Commissioner of Internal Revenue did not act with when there is irreparable injury, (6) when the respondent is a
grave abuse of discretion in issuing the challenged 2011 BIR department secretary whose acts as an alter ego of the President
Ruling: bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a
a. The 2011 BIR Ruling, being an interpretative rule, was issued claim, (9) when the subject matter is a private land in land case
by virtue of the Commissioner of Internal Revenue’s power to proceedings, (10) when the rule does not provide a plain, speedy
interpret the provisions of the 1997 National Internal Revenue and adequate remedy, (11) when there are circumstances
Code and other tax laws; indicating the urgency of judicial intervention. 156 (Emphasis
supplied, citations omitted)
b. Commissioner of Internal Revenue merely restates and
confirms the interpretations contained in previously issued BIR The exceptions under (2) and (11) are present in this case. The
Ruling Nos. 007-2004, DA-491-04,and 008-05, which have question involved is purely legal, namely: (a) the interpretation of
already effectively abandoned or revoked the 2001 BIR Rulings; the 20-lender rule in the definition of the terms public and deposit
substitutes under the 1997 National Internal Revenue Code; and
c. Commissioner of Internal Revenue is not bound by his or her (b) whether the imposition of the 20% final withholding tax on the
predecessor’s rulings especially when the latter’s rulings are not PEACe Bonds upon maturity violates the constitutional provisions
in harmony with the law; and on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the
PEACe Bonds on October 18, 2011.
d. The wrong construction of the law that the 2001 BIR Rulings
have perpetrated cannot give rise to a vested right. Therefore, the
2011 BIR Ruling can be given retroactive effect. The rule on exhaustion of administrative remedies also finds no
application when the exhaustion will result in an exercise in
futility.157
2) Rule 65 can be resorted to only if there is no appeal or any
plain, speedy, and adequate remedy in the ordinary course of law:
In this case, an appeal to the Secretary of Finance from the
questioned 2011 BIR Ruling would be a futile exercise because it
a. Petitioners had the basic remedy of filing a claim for refund of
was upon the request of the Secretary of Finance that the 2011
the 20% final withholding tax they allege to have been wrongfully
BIR Ruling was issued by the Bureau of Internal Revenue. It
collected; and
appears that the Secretary of Finance adopted the Commissioner
of Internal Revenue’s opinions as his own.158 This position was in
b. Non-observance of the doctrine of exhaustion of administrative fact confirmed in the letter159 dated October 10, 2011 where he
remedies and of hierarchy of courts. ordered the Bureau of Treasury to withhold the amount
corresponding to the 20% final withholding tax on the interest or
HELD: discounts allegedly due from the bondholders on the strength of
the 2011 BIR Ruling.
Procedural Issues
Non-exhaustion of Doctrine on hierarchy of courts
administrative remedies proper
We agree with respondents that the jurisdiction to review the
Under Section 4 of the 1997 National Internal Revenue Code, rulings of the Commissioner of Internal Revenue pertains to the
interpretative rulings are reviewable by the Secretary of Finance. Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011
and DA 378-2011 were issued in connection with the
implementation of the 1997 National Internal Revenue Code on needful rules and regulations for the effective enforcement of the
the taxability of the interest income from zero-coupon bonds provisions of this Code.
issued by the government.
The authority of the Secretary of Finance to determine articles
Under Republic Act No. 1125 (An Act Creating the Court of Tax similar or analogous to those subject to a rate of sales tax under
Appeals), as amended by Republic Act No. 9282, 160such rulings certain category enumerated in Section 163 and 165 of this Code
of the Commissioner of Internal Revenue are appealable to that shall be without prejudice to the power of the Commissioner of
court, thus: Internal Revenue to make rulings or opinions in connection with
the implementation of the provisions of internal revenue laws,
SEC. 7.Jurisdiction.- The CTA shall exercise: including ruling on the classification of articles of sales and similar
purposes." (Emphasis in the original)
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided: ....

1. Decisions of the Commissioner of Internal Revenue in cases The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or other "Plaintiff maintains that this is not an appeal from a ruling of the
matters arising under the National Internal Revenue or other laws Collector of Internal Revenue, but merely an attempt to nullify
administered by the Bureau of Internal Revenue; General Circular No. V-148, which does not adjudicate or settle
any controversy, and that, accordingly, this case is not within the
.... jurisdiction of the Court of Tax Appeals.

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - We find no merit in this pretense. General Circular No. V-148
Any party adversely affected by a decision, ruling or inaction of directs the officers charged with the collection of taxes and license
the Commissioner of Internal Revenue, the Commissioner of fees to adhere strictly to the interpretation given by the defendant
Customs, the Secretary of Finance, the Secretary of Trade and to the statutory provisions abovementioned, as set forth in the
Industry or the Secretary of Agriculture or the Central Board of Circular. The same incorporates, therefore, a decision of the
Assessment Appeals or the Regional Trial Courts may file an Collector of Internal Revenue (now Commissioner of Internal
appeal with the CTA within thirty (30) days after the receipt of such Revenue) on the manner of enforcement of the said statute, the
decision or ruling or after the expiration of the period fixed by law administration of which is entrusted by law to the Bureau of
for action as referred to in Section 7(a)(2) herein. Internal Revenue. As such, it comes within the purview of
Republic Act No. 1125, Section 7 of which provides that the Court
of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to
.... review by appeal . . . decisions of the Collector of Internal
Revenue in . . . matters arising under the National Internal
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil Revenue Code or other law or part of the law administered by the
proceeding involving matters arising under the National Internal Bureau of Internal Revenue.’"163
Revenue Code, the Tariff and Customs Code or the Local
Government Code shall be maintained, except as herein In exceptional cases, however, this court entertained direct
provided, until and unless an appeal has been previously filed with recourse to it when "dictated by public welfare and the
the CTA and disposed of in accordance with the provisions of this advancement of public policy, or demanded by the broader
Act. interest of justice, or the orders complained of were found to be
patent nullities, or the appeal was considered as clearly an
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez inappropriate remedy."164
v. Blaquera,162 this court emphasized the jurisdiction of the Court
of Tax Appeals over rulings of the Bureau of Internal Revenue, In Philippine Rural Electric Cooperatives Association, Inc.
thus: (PHILRECA) v. The Secretary, Department of Interior and Local
Government,165 this court noted that the petition for prohibition
While the Court of Appeals correctly took cognizance of the was filed directly before it "in disregard of the rule on hierarchy of
petition for certiorari, however, let it be stressed that the courts. However, [this court] opt[ed] to take primary jurisdiction
jurisdiction to review the rulings of the Commissioner of Internal over the . . . petition and decide the same on its merits in view of
Revenue pertains to the Court of Tax Appeals, not to the RTC. the significant constitutional issues raised by the parties dealing
with the tax treatment of cooperatives under existing laws and in
The questioned RMO No. 15-91 and RMC No. 43-91 are actually the interest of speedy justice and prompt disposition of the
rulings or opinions of the Commissioner implementing the Tax matter."166
Code on the taxability of pawnshops.. . .
Here, the nature and importance of the issues raised 167 to the
.... investment and banking industry with regard to a definitive
declaration of whether government debt instruments are deposit
substitutes under existing laws, and the novelty thereof, constitute
Such revenue orders were issued pursuant to petitioner's powers exceptional and compelling circumstances to justify resort to this
under Section 245 of the Tax Code, which states: court in the first instance.

"SEC. 245. Authority of the Secretary of Finance to promulgate The tax provision on deposit substitutes affects not only the
rules and regulations. — The Secretary of Finance, upon PEACe Bonds but also any other financial instrument or product
recommendation of the Commissioner, shall promulgate all that may be issued and traded in the market. Due to the changing
positions of the Bureau of Internal Revenue on this issue, there is interest on currency bank deposit and yield or any other monetary
a need for a final ruling from this court to stabilize the expectations benefit from deposit substitutes and from trust funds and similar
in the financial market. arrangements received by domestic corporations, and royalties,
derived from sources within the Philippines: Provided, however,
Finally, non-compliance with the rules on exhaustion of That interest income derived by a domestic corporation from a
administrative remedies and hierarchy of courts had been depository bank under the expanded foreign currency deposit
rendered moot by this court’s issuance of the temporary system shall be subject to a final income tax at the rate of seven
restraining order enjoining the implementation of the 2011 BIR and one-half percent (7 1/2%) of such interest income. (Emphasis
Ruling. The temporary restraining order effectively recognized the supplied)
urgency and necessity of direct resort to this court.
SEC. 28. Rates of Income Tax on Foreign Corporations. -
Substantive issues
(A) Tax on Resident Foreign Corporations. -
Tax treatment of deposit
substitutes ....

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 (7) Tax on Certain Incomes Received by a Resident Foreign
National Internal Revenue Code, a final withholding tax at the rate Corporation. -
of 20% is imposed on interest on any currency bank deposit and
yield or any other monetary benefit from deposit substitutes and (a) Interest from Deposits and Yield or any other Monetary Benefit
from trust funds and similar arrangements. from Deposit Substitutes, Trust Funds and Similar Arrangements
and Royalties. - Interest from any currency bank deposit and yield
These provisions read: or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements and royalties derived from
SEC. 24. Income Tax Rates. sources within the Philippines shall be subject to a final income
tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign
.... corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at
(B) Rate of Tax on Certain Passive Income. the rate of seven and one-half percent (7 1/2%) of such interest
income. (Emphasis supplied)
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax
at the rate of twenty percent (20%) is hereby imposed upon the This tax treatment of interest from bank deposits and yield from
amount of interest from any currency bank deposit and yield or deposit substitutes was first introduced in the 1977 National
any other monetary benefit from deposit substitutes and from trust Internal Revenue Code through Presidential Decree No.
funds and similar arrangements; . . . Provided, further, That 1739168 issued in 1980. Later, Presidential Decree No. 1959,
interest income from long-term deposit or investment in the form effective on October 15, 1984, formally added the definition of
of savings, common or individual trust funds, deposit substitutes, deposit substitutes, viz:
investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko (y) ‘Deposit substitutes’ shall mean an alternative form of
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed obtaining funds from the public, other than deposits, through the
under this Subsection: Provided, finally, That should the holder of issuance, endorsement, or acceptance of debt instruments for the
the certificate pre-terminate the deposit or investment before the borrower's own account, for the purpose of relending or
fifth (5th) year, a final tax shall be imposed on the entire income purchasing of receivables and other obligations, or financing their
and shall be deducted and withheld by the depository bank from own needs or the needs of their agent or dealer. These
the proceeds of the long-term deposit or investment certificate promissory notes, repurchase agreements, certificates of
based on the remaining maturity thereof: assignment or participation and similar instrument with recourse
as may be authorized by the Central Bank of the Philippines, for
Four (4) years to less than five (5) years - 5%; banks and non-bank financial intermediaries or by the Securities
and Exchange Commission of the Philippines for commercial,
Three (3) years to less than four (4) years - 12%; and industrial, finance companies and either non-financial companies:
Provided, however, that only debt instruments issued for inter-
bank call loans to cover deficiency in reserves against deposit
Less than three (3) years - 20%. (Emphasis supplied) liabilities including those between or among banks and quasi-
banks shall not be considered as deposit substitute debt
SEC. 27. Rates of Income Tax on Domestic Corporations. - instruments. (Emphasis supplied)

.... Revenue Regulations No. 17-84, issued to implement

Presidential Decree No. 1959, adopted verbatim the same
definition and specifically identified the following borrowings as
(D) Rates of Tax on Certain Passive Incomes. -
"deposit substitutes":

(1) Interest from Deposits and Yield or any other Monetary

SECTION 2. Definitions of Terms. . . .
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. - A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of (h) "Deposit substitutes" shall mean –
.... NIRC."171 Indeed, in the context of the financial market, the words
"at any one time" create an ambiguity.
(a) All interbank borrowings by or among banks and non-bank
financial institutions authorized to engage in quasi-banking Financial markets
functions evidenced by deposit substitutes instruments, except
interbank call loans to cover deficiency in reserves against Financial markets provide the channel through which funds from
deposit liabilities as evidenced by interbank loan advice or the surplus units (households and business firms that have
repayment transfer tickets. savings or excess funds) flow to the deficit units (mainly business
firms and government that need funds to finance their operations
(b) All borrowings of the national and local government and its or growth). They bring suppliers and users of funds together and
instrumentalities including the Central Bank of the Philippines, provide the means by which the lenders transform their funds into
evidenced by debt instruments denoted as treasury bonds, bills, financial assets, and the borrowers receive these funds now
notes, certificates of indebtedness and similar instruments. considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund
(c) All borrowings of banks, non-bank financial intermediaries, suppliers earn a return on their investment; the return is
finance companies, investment companies, trust companies, necessary to ensure that funds are supplied to the financial
including the trust department of banks and investment houses, markets.172
evidenced by deposit substitutes instruments. (Emphasis
supplied) "The financial markets that facilitate the transfer of debt securities
are commonly classified by the maturity of the
The definition of deposit substitutes was amended under the 1997 securities[,]"173 namely: (1) the money market, which facilitates
National Internal Revenue Code with the addition of the qualifying the flow of short-term funds (with maturities of one year or less);
phrase for public – borrowing from 20 or more individual or and (2) the capital market, which facilitates the flow of long-term
corporate lenders at any one time. Under Section 22(Y), deposit funds (with maturities of more than one year).174
substitute is defined thus:
Whether referring to money market securities or capital market
SEC. 22. Definitions- When used in this Title: . . . . securities, transactions occur either in the primary market or in the
secondary market.175 "Primary markets facilitate the issuance of
new securities. Secondary markets facilitate the trading of
(Y) The term ‘deposit substitutes’ shall mean an alternative form existing securities, which allows for a change in the ownership of
of obtaining funds from the public (the term 'public' means the securities."176 The transactions in primary markets exist
borrowing from twenty (20) or more individual or corporate between issuers and investors, while secondary market
lenders at any one time) other than deposits, through the transactions exist among investors.177
issuance, endorsement, or acceptance of debt instruments for the
borrower’s own account, for the purpose of relending or
purchasing of receivables and other obligations, or financing their "Over time, the system of financial markets has evolved from
own needs or the needs of their agent or dealer. These simple to more complex ways of carrying out financial
instruments may include, but need not be limited to, bankers’ transactions."178 Still, all systems perform one basic function: the
acceptances, promissory notes, repurchase agreements, quick mobilization of money from the lenders/investors to the
including reverse repurchase agreements entered into by and borrowers.179
between the Bangko Sentral ng Pilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation Fund transfers are accomplished in three ways: (1) direct finance;
and similar instruments with recourse: Provided, however, That (2) semidirect finance; and (3) indirect finance.180
debt instruments issued for interbank call loans with maturity of
not more than five (5) days to cover deficiency in reserves against With direct financing, the "borrower and lender meet each other
deposit liabilities, including those between or among banks and and exchange funds in return for financial assets"181(e.g.,
quasi-banks, shall not be considered as deposit substitute debt purchasing bonds directly from the company issuing them). This
instruments. (Emphasis supplied) method provides certain limitations such as: (a) "both borrower
and lender must desire to exchange the same amount of funds at
Under the 1997 National Internal Revenue Code, Congress the same time"[;]182 and (b) "both lender and borrower must
specifically defined "public" to mean "twenty (20) or more frequently incur substantial information costs simply to find each
individual or corporate lenders at any one time." Hence, the other."183
number of lenders is determinative of whether a debt instrument
should be considered a deposit substitute and consequently In semidirect financing, a securities broker or dealer brings
subject to the 20% final withholding tax. surplus and deficit units together, thereby reducing information
costs.184 A Broker185 is "an individual or financial institution who
20-lender rule provides information concerning possible purchases and sales of
securities. Either a buyer or a seller of securities may contact a
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) broker, whose job is simply to bring buyers and sellers
to whom the BTr issued the Government Bonds."169 On the other together."186 A dealer187 "also serves as a middleman between
hand, respondents theorize that the word "any" "indicates that the buyers and sellers, but the dealer actually acquires the seller’s
period contemplated is the entire term of the bond and not merely securities in the hope of selling them at a later time at a more
the point of origination or issuance[,]"170 such that if the debt favorable price."188 Frequently, "a dealer will split up a large issue
instruments "were subsequently sold in secondary markets and of primary securities into smaller units affordable by . . . buyers . .
so on, in such a way that twenty (20) or more buyers eventually . and thereby expand the flow of savings into investment."189 In
own the instruments, then it becomes indubitable that funds would semi direct financing, "[t]he ultimate lender still winds up holding
be obtained from the "public" as defined in Section 22(Y) of the the borrower’s securities, and therefore the lender must be willing
to accept the risk, liquidity, and maturity characteristics of the It must be emphasized, however, that debt instruments that do
borrower’s [debt security]. There still must be a fundamental not qualify as deposit substitutes under the 1997 National Internal
coincidence of wants and needs between [lenders and borrowers] Revenue Code are subject to the regular income tax.
for semidirect financial transactions to take place." 190
The phrase "all income derived from whatever source" in Chapter
"The limitations of both direct and semidirect finance stimulated VI, Computation of Gross Income, Section 32(A) of the 1997
the development of indirect financial transactions, carried out with National Internal Revenue Code discloses a legislative policy to
the help of financial intermediaries"191 or financial institutions, like include all income not expressly exempted as within the class of
banks, investment banks, finance companies, insurance taxable income under our laws.
companies, and mutual funds.192 Financial intermediaries accept
funds from surplus units and channel the funds to deficit "The definition of gross income is broad enough to include all
units.193 "Depository institutions [such as banks] accept deposits passive incomes subject to specific tax rates or final
from surplus units and provide credit to deficit units through loans taxes."197 Hence, interest income from deposit substitutes are
and purchase of [debt] securities."194 Nondepository institutions, necessarily part of taxable income. "However, since these
like mutual funds, issue securities of their own (usually in smaller passive incomes are already subject to different rates and taxed
and affordable denominations) to surplus units and at the same finally at source, they are no longer included in the computation
time purchase debt securities of deficit units.195 "By pooling the of gross income, which determines taxable income." 198 "Stated
resources of [small savers, a financial intermediary] can service otherwise . . . if there were no withholding tax system in place in
the credit needs of large firms simultaneously."196 this country, this 20 percent portion of the ‘passive’ income of
[creditors/lenders] would actually be paid to the [creditors/lenders]
The financial market, therefore, is an agglomeration of financial and then remitted by them to the government in payment of their
transactions in securities performed by market participants that income tax."199
works to transfer the funds from the surplus units (or
investors/lenders) to those who need them (deficit units or This court, in Chamber of Real Estate and Builders’ Associations,
borrowers). Inc. v. Romulo,200 explained the rationale behind the withholding
tax system:
Meaning of "at any one time"
The withholding [of tax at source] was devised for three primary
Thus, from the point of view of the financial market, the phrase "at reasons: first, to provide the taxpayer a convenient manner to
any one time" for purposes of determining the "20 or more meet his probable income tax liability; second, to ensure the
lenders" would mean every transaction executed in the primary or collection of income tax which can otherwise be lost or
secondary market in connection with the purchase or sale of substantially reduced through failure to file the corresponding
securities. returns [;] and third, to improve the government’s cash flow. This
results in administrative savings, prompt and efficient collection of
For example, where the financial assets involved are government taxes, prevention of delinquencies and reduction of governmental
securities like bonds, the reckoning of "20 or more effort to collect taxes through more complicated means and
lenders/investors" is made at any transaction in connection with remedies.201 (Citations omitted)
the purchase or sale of the Government Bonds, such as:
"The application of the withholdings system to interest on bank
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in deposits or yield from deposit substitutes is essentially to
the primary market; maximize and expedite the collection of income taxes by requiring
its payment at the source."202
2. Sale and distribution by GSEDs to various lenders/investors in
the secondary market; Hence, when there are 20 or more lenders/investors in a
transaction for a specific bond issue, the seller is required to
withhold the 20% final income tax on the imputed interest income
3. Subsequent sale or trading by a bondholder to another from the bonds.
lender/investor in the secondary market usually through a broker
or dealer; or
Interest income v. gains from sale or redemption

4. Sale by a financial intermediary-bondholder of its participation

interests in the bonds to individual or corporate lenders in the The interest income earned from bonds is not synonymous with
secondary market. the "gains" contemplated under Section 32(B)(7)(g)203 of the 1997
National Internal Revenue Code, which exempts gains derived
from trading, redemption, or retirement of long-term securities
When, through any of the foregoing transactions, funds are from ordinary income tax.
simultaneously obtained from 20 or more lenders/investors, there
is deemed to be a public borrowing and the bonds at that point in
time are deemed deposit substitutes. Consequently, the seller is The term "gain" as used in Section 32(B)(7)(g) does not include
required to withhold the 20% final withholding tax on the imputed interest, which represents forbearance for the use of money.
interest income from the bonds. Gains from sale or exchange or retirement of bonds or other
certificate of indebtedness fall within the general category of
"gains derived from dealings in property" under Section 32(A)(3),
For debt instruments that are while interest from bonds or other certificate of indebtedness falls
not deposit substitutes, regular within the category of "interests" under Section 32(A)(4).204 The
income tax applies use of the term "gains from sale" in Section 32(B)(7)(g) shows the
intent of Congress not to include interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: It bears repeating that Revenue memorandum-circulars are
(1) gain realized from the trading of the bonds before their maturity considered administrative rulings (in the sense of more specific
date, which is the difference between the selling price of the and less general interpretations of tax laws) which are issued from
bonds in the secondary market and the price at which the bonds time to time by the Commissioner of Internal Revenue. It is widely
were purchased by the seller; and (2) gain realized by the last accepted that the interpretation placed upon a statute by the
holder of the bonds when the bonds are redeemed at maturity, executive officers, whose duty is to enforce it, is entitled to great
which is the difference between the proceeds from the retirement respect by the courts. Nevertheless, such interpretation is not
of the bonds and the price at which such last holder acquired the conclusive and will be ignored if judicially found to be erroneous.
bonds. For discounted instruments, like the zero-coupon bonds, Thus, courts will not countenance administrative issuances that
the trading gain shall be the excess of the selling price over the override, instead of remaining consistent and in harmony with, the
book value or accreted value (original issue price plus law they seek to apply and implement.213(Citations omitted)
accumulated discount from the time of purchase up to the time of
sale) of the instruments.206 This court further held that "[a] memorandum-circular of a bureau
head could not operate to vest a taxpayer with a shield against
The Bureau of Internal judicial action [because] there are no vested rights to speak of
Revenue rulings respecting a wrong construction of the law by the administrative
officials and such wrong interpretation could not place the
The Bureau of Internal Revenue’s interpretation as expressed in Government in estoppel to correct or overrule the same."214 In
the three 2001 BIR Rulings is not consistent with law. 207 Its Commissioner of Internal Revenue v. Michel J. Lhuillier
interpretation of "at any one time" to mean at the point of Pawnshop, Inc.,215 this court nullified Revenue Memorandum
origination alone is unduly restrictive. Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a
5% lending investor's tax on pawnshops.216 It was held that "the
[Commissioner] cannot, in the exercise of [its interpretative]
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated power, issue administrative rulings or circulars not consistent with
(relying on the 2004 and 2005 BIR Rulings) that "all treasury the law sought to be applied. Indeed, administrative issuances
bonds . . . regardless of the number of purchasers/lenders at the must not override, supplant or modify the law, but must remain
time of origination/issuance are considered deposit consistent with the law they intend to carry out. Only Congress
substitutes."208 can repeal or amend the law."217

Being the subject of this petition, it is, thus, declared void because In Misamis Oriental Association of Coco Traders, Inc. v.
it completely disregarded the 20 or more lender rule added by Department of Finance Secretary,218 this court stated that the
Congress in the 1997 National Internal Revenue Code. It also Commissioner of Internal Revenue is not bound by the ruling of
created a distinction for government debt instruments as against his predecessors,219 but, to the contrary, the overruling of
those issued by private corporations when there was none in the decisions is inherent in the interpretation of laws:
law.
[I]n considering a legislative rule a court is free to make three
Tax statutes must be reasonably construed as to give effect to the inquiries: (i) whether the rule is within the delegated authority of
whole act. Their constituent provisions must be read together, the administrative agency; (ii) whether it is reasonable; and (iii)
endeavoring to make every part effective, harmonious, and whether it was issued pursuant to proper procedure. But the court
sensible.209 That construction which will leave every word is not free to substitute its judgment as to the desirability or
operative will be favored over one that leaves some word, clause, wisdom of the rule for the legislative body, by its delegation of
or sentence meaningless and insignificant.210 administrative judgment, has committed those questions to
administrative judgments and not to judicial judgments. In the
It may be granted that the interpretation of the Commissioner of case of an interpretative rule, the inquiry is not into the validity but
Internal Revenue in charge of executing the 1997 National into the correctness or propriety of the rule. As a matter of power
Internal Revenue Code is an authoritative construction of great a court, when confronted with an interpretative rule, is free to (i)
weight, but the principle is not absolute and may be overcome by give the force of law to the rule; (ii) go to the opposite extreme
strong reasons to the contrary. If through a misapprehension of and substitute its judgment; or (iii) give some intermediate degree
law an officer has issued an erroneous interpretation, the error of authoritative weight to the interpretative rule.
must be corrected when the true construction is ascertained.
In the case at bar, we find no reason for holding that respondent
In Philippine Bank of Communications v. Commissioner of Commissioner erred in not considering copra as an "agricultural
Internal Revenue,211 this court upheld the nullification of Revenue food product" within the meaning of § 103(b) of the NIRC. As the
Memorandum Circular (RMC) No. 7-85 issued by the Acting Solicitor General contends, "copra per se is not food, that is, it is
Commissioner of Internal Revenue because it was contrary to the not intended for human consumption. Simply stated, nobody eats
express provision of Section 230 of the 1977 National Internal copra for food." That previous Commissioners considered it so, is
Revenue Codeand, hence, "[cannot] be given weight for to do so not reason for holding that the present interpretation is wrong. The
would, in effect, amend the statute."212 Thus: Commissioner of Internal Revenue is not bound by the ruling of
his predecessors. To the contrary, the overruling of decisions is
When the Acting Commissioner of Internal Revenue issued RMC inherent in the interpretation of laws.220 (Emphasis supplied,
7-85, changing the prescriptive period of two years to ten years citations omitted)
on claims of excess quarterly income tax payments, such circular
created a clear inconsistency with the provision of Sec. 230 of Tax treatment of income
1977 NIRC. In so doing, the BIR did not simply interpret the law; derived from the PEACe Bonds
rather it legislated guidelines contrary to the statute passed by
Congress. The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury year period shall be counted from the day the return was filed. For
to RCBC/CODE-NGO at 10.2 billion; and purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed
2. The sale and distribution by RCBC Capital (underwriter) on on such last day. (Emphasis supplied)
behalf of CODE-NGO of the PEACe Bonds to undisclosed
investors at ₱11.996 billion. ....

It may seem that there was only one lender — RCBC on behalf of SEC. 222. Exceptions as to Period of Limitation of Assessment
CODE-NGO — to whom the PEACe Bonds were issued at the and Collection of Taxes.
time of origination. However, a reading of the underwriting
agreement221 and RCBC term sheet222reveals that the settlement (a) In the case of a false or fraudulent return with intent to evade
dates for the sale and distribution by RCBC Capital (as tax or of failure to file a return, the tax may be assessed, or a
underwriter for CODE-NGO) of the PEACe Bonds to various proceeding in court for the collection of such tax may be filed
undisclosed investors at a purchase price of approximately without assessment, at any time within ten (10) years after the
₱11.996 would fall on the same day, October 18, 2001, when the discovery of the falsity, fraud or omission: Provided, That in a
PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In fraud assessment which has become final and executory, the fact
reality, therefore, the entire ₱10.2 billion borrowing received by of fraud shall be judicially taken cognizance of in the civil or
the Bureau of Treasury in exchange for the ₱35 billion worth of criminal action for the collection thereof.
PEACe Bonds was sourced directly from the undisclosed number
of investors to whom RCBC Capital/CODE-NGO distributed the
PEACe Bonds — all at the time of origination or issuance. At this Thus, should it be found that RCBC Capital/CODE-NGO sold the
point, however, we do not know as to how many investors the PEACe Bonds to 20 or more lenders/investors, the Bureau of
PEACe Bonds were sold to by RCBC Capital. Internal Revenue may still collect the unpaid tax from RCBC
Capital/CODE-NGO within 10 years after the discovery of the
omission.
Should there have been a simultaneous sale to 20 or more
lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 In view of the foregoing, there is no need to pass upon the other
National Internal Revenue Code and RCBC Capital/CODE-NGO issues raised by petitioners and petitioners-intervenors.
would have been obliged to pay the 20% final withholding tax on
the interest or discount from the PEACe Bonds. Further, the Reiterative motion on the temporary restraining order
obligation to withhold the 20% final tax on the corresponding
interest from the PEACe Bonds would likewise be required of any Respondents’ withholding of the
lender/investor had the latter turned around and sold said PEACe 20% final withholding tax on
Bonds, whether in whole or part, simultaneously to 20 or more October 18, 2011 was justified
lenders or investors.

Under the Rules of Court, court orders are required to be "served

We note, however, that under Section 24 223 of the 1997 National upon the parties affected."224 Moreover, service may be made
Internal Revenue Code, interest income received by individuals personally or by mail.225 And, "[p]ersonal service is complete upon
from long term deposits or investments with a holding period of actual delivery [of the order.]"226This court’s temporary restraining
not less than five (5) years is exempt from the final tax. order was received only on October 19, 2011, or a day after the
PEACe Bonds had matured and the 20% final withholding tax on
Thus, should the PEACe Bonds be found to be within the the interest income from the same was withheld.
coverage of deposit substitutes, the proper procedure was for the
Bureau of Treasury to pay the face value of the PEACe Bonds to Publication of news reports in the print and broadcast media, as
the bondholders and for the Bureau of Internal Revenue to collect well as on the internet, is not a recognized mode of service of
the unpaid final withholding tax directly from RCBC pleadings, court orders, or processes. Moreover, the news
Capital/CODE-NGO, or any lender or investor if such be the case, reports227 cited by petitioners were posted minutes before the
as the withholding agents. close of office hours or late in the evening of October 18, 2011,
and they did not givethe exact contents of the temporary
The collection of tax is not restraining order.
barred by prescription
"[O]ne cannot be punished for violating an injunction or an order
The three (3)-year prescriptive period under Section 203 of the for an injunction unless it is shown that suchinjunction or order
1997 National Internal Revenue Code to assess and collect was served on him personally or that he had notice of the
internal revenue taxes is extended to 10 years in cases of (1) issuance or making of such injunction or order." 228
fraudulent returns; (2) false returns with intent to evade tax; and
(3) failure to file a return, to be computed from the time of At any rate, "[i]n case of doubt, a withholding agent may always
discovery of the falsity, fraud, or omission. Section 203 states: protect himself or herself by withholding the tax due" 229 and return
the amount of the tax withheld should it be finally determined that
SEC. 203. Period of Limitation Upon Assessment and Collection. the income paid is not subject to withholding. 230 Hence,
- Except as provided in Section 222, internal revenue taxes shall respondent Bureau of Treasury was justified in withholding the
be assessed within three (3) years after the last day prescribed amount corresponding to the 20% final withholding tax from the
by law for the filing of the return, and no proceeding in court proceeds of the PEACe Bonds, as it received this court’s
without assessment for the collection of such taxes shall be begun temporary restraining order only on October 19, 2011, or the day
after the expiration of such period: Provided, That in a case where after this tax had been withheld.
a return is filed beyond the period prescribed by law, the three (3)-
Respondents’ retention of the
amounts withheld is a defiance Sinking Fund- 198-001 30,033,792,203.59
of the temporary restraining Cash (BSF)
order
Due to BIR 412-002 4,966,207,796.41
Nonetheless, respondents’ continued failure to release to To record
petitioners the amount corresponding to the 20% final withholding redemption of
tax in order that it may be placed in escrow as directed by this 10yr Zero
court constitutes a defiance of this court’s temporary restraining coupon (Peace
order.231
Bond) net of the
20% final
The temporary restraining order is not moot. The acts sought to withholding tax
be enjoined are not fait accompli. For an act to be considered fait pursuant to BIR
accompli, the act must have already been fully accomplished and Ruling No.
consummated.232 It must be irreversible, e.g., demolition of 378-2011, value
properties,233 service of the penalty of imprisonment,234 and date, October
hearings on cases.235When the act sought to be enjoined has not 18, 2011 per
yet been fully satisfied, and/or is still continuing in nature,236 the BTr letter
defense of fait accomplicannot prosper. authority and
BSP Bank
The temporary restraining order enjoins the entire implementation Statements.
of the 2011 BIR Ruling that constitutes both the withholding and
remittance of the 20% final withholding tax to the Bureau of
Internal Revenue. Even though the Bureau of Treasury had The foregoing journal entry, however, does not prove that the
already withheld the 20% final withholding tax237 when it received amount of ₱4,966,207,796.41, representing the 20% final
the temporary restraining order, it had yet to remit the monies it withholding tax on the PEACe Bonds, was disbursed by it and
withheld to the Bureau of Internal Revenue, a remittance which remitted to the Bureau of Internal Revenue on October 18, 2011.
was due only on November 10, 2011.238 The act enjoined by the The entries merely show that the monies corresponding to 20%
temporary restraining order had not yet been fully satisfied and final withholding tax was set aside for remittance to the Bureau of
was still continuing. Internal Revenue.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, We recall the November 15, 2011 resolution issued by this court
2001 which prescribes to national government agencies such as directing respondents to "show cause why they failed to comply
the Bureau of Treasury the procedure for the remittance of all with the [TRO]; and [to] comply with the [TRO] in order that
taxes it withheld to the Bureau of Internal Revenue, a national petitioners may place the corresponding funds in escrow pending
agency shall file before the Bureau of Internal Revenue a Tax resolution of the petition."245 The 20% final withholding tax was
Remittance Advice (TRA) supported by withholding tax returns on effectively placed in custodia legiswhen this court ordered the
or before the 10th day of the following month after the said taxes deposit of the amount in escrow. The Bureau of Treasury could
had been withheld.240 The Bureau of Internal Revenue shall still release the money withheld to petitioners for the latter to place
transmit an original copy of the TRA to the Bureau of in escrow pursuant to this court’s directive. There was no legal
Treasury,241which shall be the basis for recording the remittance obstacle to the release of the 20% final withholding tax to
of the tax collection.242 The Bureau of Internal Revenue will then petitioners. Congressional appropriation is not required for the
record the amount of taxes reflected in the TRA as tax collection servicing of public debts in view of the automatic appropriations
in the Journal ofTax Remittance by government agencies based clause embodied in Presidential Decree Nos. 1177 and 1967.
on its copies of the TRA.243 Respondents did not submit any
withholding tax return or TRA to provethat the 20% final Section 31 of Presidential Decree No. 1177 provides:
withholding tax was indeed remitted by the Bureau of Treasury to
the Bureau of Internal Revenue on October 18, 2011. Section 31. Automatic Appropriations. All expenditures for (a)
personnel retirement premiums, government service insurance,
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11- and other similar fixed expenditures, (b) principal and interest on
10-10395244 dated October 18, 2011 submitted to this court public debt, (c) national government guarantees of obligations
shows: which are drawn upon, are automatically appropriated: provided,
that no obligations shall be incurred or payments made from funds
thus automatically appropriated except as issued in the form of
Account Debit Amount Credit regular budgetary allotments.
Code Amount
Section 1 of Presidential Decree No. 1967 states:
Bonds Payable- 442-360 35,000,000,000.00
L/T, Dom-Zero
Coupon Section 1. There is hereby appropriated, out of any funds in the
T/Bonds National Treasury not otherwise appropriated, such amounts as
may be necessary to effect payments on foreign or domestic
loans, or foreign or domestic loans whereon creditors make a call
(Peace Bonds)
on the direct and indirect guarantee of the Republic of the
– 10 yr
Philippines, obtained by:
 a. the Republic of the Philippines the proceeds of which wisdom formulates an appropriation act precisely following the
were relent to government-owned or controlled process established by the Constitution, which specifies that no
corporations and/or government financial institutions; money may be paid from the Treasury except in accordance with
an appropriation made by law.
b. government-owned or controlled corporations and/or
government financial institutions the proceeds of which Debt service is not included inthe General Appropriation Act,
were relent to public or private institutions; since authorization therefor already exists under RA Nos. 4860
and 245, as amended, and PD 1967. Precisely in the light of this
c. government-owned or controlled corporations and/or subsisting authorization as embodied in said Republic Acts and
financial institutions and guaranteed by the Republic of PD for debt service, Congress does not concern itself with details
the Philippines; for implementation by the Executive, butlargely with annual levels
and approval thereof upon due deliberations as part of the whole
obligation program for the year. Upon such approval, Congress
d. other public or private institutions and guaranteed by has spoken and cannot be said to havedelegated its wisdom to
government owned or controlled corporations and/or the Executive, on whose part lies the implementation or execution
government financial institutions. of the legislative wisdom.246 (Citation omitted)

The amount of ₱35 billion that includes the monies corresponding Respondent Bureau of Treasury had the duty to obey the
to 20% final withholding tax is a lawfuland valid obligation of the temporary restraining order issued by this court, which remained
Republic under the Government Bonds. Since said obligation in full force and effect, until set aside, vacated, or modified. Its
represents a public debt, the release of the monies requires no conduct finds no justification and is reprehensible.247
legislative appropriation.
WHEREFORE, the petition for review and petitions-in-
Section 2 of Republic Act No. 245 likewise provides that the intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA
money to be used for the payment of Government Bonds may be 378-2011 are NULLIFIED.
lawfully taken from the continuing appropriation out of any monies
in the National Treasury and is not required to be the subject of
another appropriation legislation: SEC. 2. The Secretary of Furthermore, respondent Bureau of Treasury is REPRIMANDED
Finance shall cause to be paid out of any moneys in the National for its continued retention of the amount corresponding to the 20%
Treasury not otherwise appropriated, or from any sinking funds final withholding tax despite this court's directive in the temporary
provided for the purpose by law, any interest falling due, or restraining order and in the resolution dated November 15, 2011
accruing, on any portion of the public debt authorized by law. He to deliver the amounts to the banks to be placed in escrow
shall also cause to be paid out of any such money, or from any pending resolution of this case.
such sinking funds the principal amount of any obligations which
have matured, or which have been called for redemption or for Respondent Bureau of Treasury is hereby ORDERED to
which redemption has been demanded in accordance with terms immediately ·release and pay to the bondholders the amount
prescribed by him prior to date of issue. . . In the case of interest- corresponding-to the 20% final withholding tax that it withheld on
bearing obligations, he shall pay not less than their face value; in October 18, 2011.
the case of obligations issued at a discount he shall pay the face
value at maturity; or if redeemed prior to maturity, such portion of
the face value as is prescribed by the terms and conditions under
which such obligations were originally issued. There are hereby
appropriated as a continuing appropriation out of any moneys in 4. WINEBRENNER v. CIR
the National Treasury not otherwise appropriated, such sums as
may be necessary from time to time to carry out the provisions of Republic of the Philippines
this section. The Secretary of Finance shall transmit to Congress SUPREME COURT
during the first month of each regular session a detailed statement Manila
of all expenditures made under this section during the calendar
year immediately preceding. SECOND DIVISION

Thus, DOF Department Order No. 141-95, as amended, states G.R. No. 206526 January 28, 2015
that payment for Treasury bills and bonds shall be made through
the National Treasury’s account with the Bangko Sentral ng
Pilipinas, to wit: WINEBRENNER & IÑIGO INSURANCE BROKERS,
INC., Petitioner,
vs.
Section 38. Demand Deposit Account.– The Treasurer of the COMMISSIONER OF INTERNAL REVENUE, Respondent.
Philippines maintains a Demand Deposit Account with the
Bangko Sentral ng Pilipinas to which all proceeds from the sale of
Treasury Bills and Bonds under R.A. No. 245, as amended, shall DECISION
be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged.1âwphi1 MENDOZA, J.:

Regarding these legislative enactments ordaining an automatic In this petition for review under Rule 45 of the Rules of Court and
appropriations provision for debt servicing, this court has held: Rule 16 of the Revised Rules of the Court of Tax Appeals,
Winebrenner & Ifiigo Insurance Brokers, Inc. (petitioner) seeks
Congress . . . deliberates or acts on the budget proposals of the the review of the March 22, 2013 Decision1of the Court of Tax
President, and Congress in the exercise of its own judgment and Appeals En Banc (CTA-En Banc). In the said decision, the CTA-
En Banc affirmed the denial of petitioner's judicial claim for refund taxable year is not equal to the total tax due on the entire taxable
or issuance of tax credit certificate for excess and unutilized income of that year, the corporation shall either:
creditable withholding tax (CWT) for the 1st to 4th quarter of
calendar year (CJ} 2003 amounting to ₱4,073,954.00. In denying (A) Pay the balance of tax still due; or
the refund, the CTA-En Banc held that petitioner failed to prove
that the excess CWT for CY 2003 was not carried over to the
succeeding quarters of the subject taxable year. Under the 1997 (B) Carry-over the excess credits; or
National Internal Revenue Code (NJRC), a taxpayer must not
have exercised the option to carryover the excess CWT for a (C) Be credited or refunded with the excess amount paid, as the
particular taxable year in order to qualify for refund. case may be.

FACTS: In case the corporation is entitled to a tax credit or refund of the

excess estimated quarterly income taxes paid, the excess amount
On April 15, 2004, petitioner filed its Annual Income Tax Return shown on its final adjustment return may be carried over and
for CY 2003. credited against the estimated quarterly income tax liabilities for
the taxable quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess quarterly income tax
About two years thereafter or on April 7, 2006, petitioner applied against income tax due for the taxable quarters of the succeeding
for the administrative tax credit/refund claiming entitlement to the taxable years has been made, such option shall be considered
refund of its excess or unutilized CWT for CY 2003, by filing BIR irrevocable for that taxable period and no application for cash
Form No. 1914 with the Revenue District Office No. 50 of the refund or issuance of a tax credit certificate shall be allowed
Bureau of Internal Revenue (BIR). therefor.

There being no action taken on the said claim, a petition for review On July 27, 2011, the CTA-Division reversed itself. In an
was filed by petitioner before the CTA on April 11, 2006. The case Amended Decision,4 it denied the entire claim of petitioner. It
was docketed as CTA Case No. 7440 and was raffled to the reasoned out that petitioner should have presented as evidence
Special First Division (CTA Division). its first, second and third quarterly ITRs for the year 2004 to prove
that the unutilized CWT being claimed had not been carried over
On April 13, 2010, CTA Division partially granted petitioner’s claim to the succeeding quarters. Thus:
for refund of excess and unutilized CWT for CY 2003 in the
reduced amount of ₱2,737,903.34 in its April 13, 2010 WHEREFORE, in view of the foregoing, petitioner’s Motion for
Decision2 (original decision). The dispositive portion of the Partial Reconsideration is hereby DENIED while respondent’s
decision reads: Motion for Reconsideration is hereby GRANTED. Accordingly, the
Decision dated April 13, 2010 granting petitioner’s claim in the
In view of the foregoing, the Petition for Review is hereby reduced amount of ₱2,737,903.34 is hereby REVERSED AND
PARTIALLY GRANTED. Accordingly, respondent is hereby SET ASIDE. Consequently, the instant Petition for Review is
ORDERED to REFUND or ISSUE A TAX CREDIT CERTIFICATE hereby DENIED due to insufficiency of evidence.
in favor of the petitioner in the reduced amount of ₱2,737,903.34
representing its excess/unutilized creditable withholding taxes for SO ORDERED.5
the year 2003.
Aggrieved, petitioner elevated the case to the CTA En Banc
SO ORDERED.3 praying for the reversal of the Amended Decision of the CTA
Division.
Petitioner filed a Motion for Partial Reconsideration with Leave to
Submit Supplemental Evidence. It prayed that an amended In its March 22, 2013 Decision,6 the CTA-En Banc affirmed the
decision be issued granting the entirety of its claim for refund, or Amended Decision of the CTA-Division. It stated that before a
in the alternative, that it be allowed to submit and offer relevant cash refund or an issuance of tax credit certificate for unutilized
documents as supplemental evidence. excess tax credits could be granted, it was essential for petitioner
to establish and prove, by presenting the quarterly ITRs of the
Respondent Commissioner of Internal Revenue (CIR) also succeeding years, that the excess CWT was not carried over to
moved for reconsideration, praying for the denial of the the succeeding taxable quarters considering that the option to
entire amount of refund because petitioner failed to present carry over in the succeeding taxable quarters could not be
the quarterly Income Tax Returns (ITRs) for CY 2004. To the modified in the final adjustment returns (FAR). Because petitioner
CIR, the presentation of the 2004 quarterly ITRs was did not present the first, second and third quarterly ITRs for CY
indispensable in proving petitioner’s entitlement to the claimed 2004, despite having offered and submitted the Annual ITR/FAR
amount because it would prove that no carry-over of unutilized for the same year, the CTA-En Banc stated that the petitioner
and excess CWT for the four (4) quarters of CY 2003 to the failed to discharge its burden, hence, no refund could be granted.
succeeding four (4) quarters of CY 2004 was made. In the In justifying its conclusions, the CTA-En Banc cited its own case
absence of said ITRs, no refund could be granted. In the CIR’s of Millennium Business Services, Inc. v. Commissioner of Internal
view, this was in accordance with the irrevocability rule under Revenue (Millennium)7 wherein it held as follows:
Section 76 of the NIRC which reads:
Since the burden of proof is upon the claimant to show that the
SEC. 76. Final Adjustment Return. – Every corporation liable to amount claimed was not utilized or carried over to the succeeding
tax under Section 27 shall file an adjustment return covering the taxable quarters, the presentation of the succeeding quarterly
total taxable income for the preceding calendar or fiscal year. If income tax return and final adjustment return is indispensable to
the sum of the quarterly tax payments made during the said prove that it did not carry over or utilized the claimed excess
creditable withholding taxes. Absent thereof, there will be no basis
for a taxpayer’s claim for refund since there will be no evidence Noteworthy is the fact that the CTA-En Banc ruling was met with
that the taxpayer did not carry over or utilize the claimed excess two dissents from Associate Justices Juanito C. Castañeda
creditable withholding taxes to the succeeding taxable quarters. (Justice Castañeda) and Esperanza R. Fabon-Victorino (Justice
Fabon-Victorino).
Significantly, a taxpayer may amend its quarterly income tax
return or annual income tax return or Final Adjustment Return, In his Dissenting Opinion9 which was concurred in by Justice
which in any case may modify the previous intention to carry-over, Fabon Victorino, Justice Castañeda expressed the view that the
apply as tax credit certificate or refund, as the case may be. But CTA-En Banc should have reinstated the CTA-Division’s original
the option to carry over in the succeeding taxable quarters under decision because in the cases of Philam Asset Management Inc.
the irrevocability rule cannot be modified in its final adjustment v. Commissioner of Internal Revenue (Philam);10 State Land
return. Investment Corporation v. Commissioner of Internal Revenue
(State Land);11 Commissioner of Internal Revenue v. PERF
The presentation of the final adjustment return does not shift the Realty Corporation (PERF Realty);12 and Commissioner of
burden of proof that the excess creditable withholding tax was not Internal Revenue v. Mirant (Philippines) Operations, Corporation
utilized or carried over to the first three (3) taxable quarters. It (Mirant),13this Court already ruled that requiring the ITR or the
remains with the taxpayer claimant. It goes without saying that FAR for the succeeding year in a claim for refund had no basis in
final adjustment returns of the preceding and the succeeding law and jurisprudence. According to him, the submission of the
taxable years are not sufficient to prove that the amount claimed FAR of the succeeding taxable year was not required under the
was utilized or carried over to the first three (3) taxable quarters. law to prove the claimant’s entitlement to excess or unutilized
CWT, and by following logic, the submission of quarterly income
tax returns for the subsequent taxable period was likewise
The importance of the presentation of the succeeding quarterly unnecessary. He found no justifiable reason not to follow the
income tax return and the annual income tax return of the existing rulings of this Court. Petitioner’s reasoning in this petition
subsequent taxable year need not be overly emphasized. All echoes the dissenting opinion of Justice Castaneda. It further
corporations subject to income tax, are required to file quarterly submits that despite the non-presentation of the quarterly ITRs, it
income tax returns, on a cumulative basis for the preceding has sufficiently shown that the excess CWT for CY 2003 was not
quarters, upon which payment of their income tax has been made. carried over or applied to its income tax liabilities for CY 2004, as
In addition to the quarterly income tax returns, corporations are shown in the Annual ITR for 2004 it submitted. Thus, petitioner
required to file a final or adjustment return on or before the insists that its refund should have been granted. Petitioner further
fifteenth day of April. The quarterly income tax return, like the final avers, in its Reply,14 that even if Millennium Business case was
adjustment return, is the most reliable firsthand evidence of applicable, such must be given prospective effect considering that
corporate acts pertaining to income taxes, as it includes the this case was litigated on the basis of the doctrines laid down in
itemization and summary of additions to and deductions from the Philam, State Land and PERF Realty cases wherein the
income tax due. These entries are not without rhyme or reason. submission of quarterly ITRs in a case for tax refund was held by
They are required, because they facilitate the tax administration this Court as not mandatory.
process, and guide this Court to the veracity of a petitioner’s claim
for refund without which petitioner could not prove with certainty
that the claimed amount was not utilized or carried over to the In its Comment,15 the CIR counters that even if the taxpayer
succeeding quarters or the option to carry over and apply the signifies the option for either tax refund or carry-over as tax credit,
excess was effectively chosen despite the intent to claim a refund. this does not ipso facto confer the right to avail of the option
immediately. There is a need, according to the CIR, for an
investigation to ascertain the correctness of the corporate returns
In the same vein, if the government wants to disprove that the and the amount sought to be credited; and part of which is to look
excess creditable withholding tax was not utilized or carried over into the quarterly returns so that it may be determined whether or
to the succeeding taxable quarters, the presentation of the not excess and unutilized CWT was carried over into the
succeeding quarterly income tax return and the annual income tax succeeding quarters of the next taxable year. Because the
return of the subsequent taxable year indicating utilization or pertinent quarterly ITRs were not presented, the CIR submits that
carrying over are [sic] indispensible. However, the claimant must the petitioner failed to prove its right to a tax refund.
first establish its claim for refund, such that it did not utilize or carry
over or that it opted to utilize and carry over to the 1st, 2nd, 3rd
quarters and final adjustment return of the succeeding taxable ISSUE:
year.
The sole issue here is whether the submission and presentation
Concomitantly, the presentation of the quarterly income tax return of the quarterly ITRs of the succeeding quarters of a taxable year
and the annual income tax return to prove the fact that excess is indispensable in a claim for refund.
creditable withholding tax was not utilized or carried over or opted
to be utilized and carried over to the 1st, 2nd, 3rd quarters and HELD:
final adjustment return of the succeeding taxable quarter is not
only for convenience to facilitate the tax administration process The Court recognizes, as it always has, that the burden of proof
but it is part of the requisites to establish the claim for refund. to establish entitlement to refund is on the claimant
Section 76 of the NIRC of 1997 provides that if the taxpayer taxpayer.16 Being in the nature of a claim for exemption, 17 refund
claimant carries over and applies the excess quarterly income tax is construed in strictissimi juris against the entity claiming the
against the income tax due for the taxable quarters of the refund and in favor of the taxing power. 18 This is the reason why
succeeding taxable years, the same is irrevocable and no a claimant must positively show compliance with the statutory
application for cash refund or issuance of a tax credit certificate requirements provided for under the NIRC in order to successfully
shall be allowed.8 pursue one’s claim. As implemented by the applicable rules and
regulations and as interpreted in a vast array of decisions, a
Hence, this petition. taxpayer who seeks a refund of excess and unutilized CWT must:
1) File the claim with the CIR within the two year period from the Requiring that the ITR or the FAR of the succeeding year be
date of payment of the tax; presented to the BIR in requesting a tax refund has no basis in
law and jurisprudence.
2) Show on the return that the income received was declared as
part of the gross income; and First, Section 76 of the Tax Code does not mandate it. The law
merely requires the filing of the FAR for the preceding – not the
3) Establish the fact of withholding by a copy of a statement duly succeeding – taxable year. Indeed, any refundable amount
issued by the payor to the payee showing the amount paid and indicated in the FAR of the preceding taxable year may be
the amount of tax withheld.19 credited against the estimated income tax liabilities for the taxable
quarters of the succeeding taxable year. However, nowhere is
there even a tinge of a hint in any provisions of the [NIRC] that the
The original decision of the CTA-Division made plain that the FAR of the taxable year following the period to which the tax
petitioner complied with the above requisites in so far as the credits are originally being applied should also be presented to
reduced amount of ₱2,737,903.34 was concerned. In the the BIR.
amended decision, however, it was pointed out that because
petitioner failed to present the quarterly ITRs of the subsequent
year, there was an impossibility of determining compliance with Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-
the irrevocability rule under Section 76 of the NIRC as in those 85, merely provides that claims for refund of income taxes
documents could be found evidence of whether the excess CWT deducted and withheld from income payments shall be given due
was applied to its income tax liabilities in the quarters of 2004. course only (1) when it is shown on the ITR that the income
The irrevocability rule under Section 76 of the NIRC means that payment received is being declared part of the taxpayer’s gross
once an option, either for refund or issuance of tax credit income; and (2) when the fact of withholding is established by a
certificate or carry-over of CWT has been exercised, the same copy of the withholding tax statement, duly issued by the payor to
can no longer be modified for the succeeding taxable years.20 For the payee, showing the amount paid and the income tax withheld
said reason, the CTA-En Banc affirmed the conclusion in the from that amount.
amended decision that because of the said impossibility, the claim
for refund was not substantiated. It has been submitted that Philam cannot be cited as a precedent
to hold that the presentation of the quarterly income tax return is
The CIR agrees with the disposition of the CTA-En Banc, not indispensable as it appears that the quarterly returns for the
stressing that the petitioner failed to carry out the burden of succeeding year were presented when the petitioner therein filed
showing that no carryover was made when it did not present the an administrative claim for the refund of its excess taxes withheld
quarterly ITRs for CY 2004. in 1997.

Petitioner disagrees, as the dissents did, that the non-submission It appears however that there is misunderstanding in the ruling of
of quarterly ITRs is fatal to its claim. the Court in Philam. That factual distinction does not negate the
proposition that subsequent quarterly ITRs are not indispensable.
The logic in not requiring quarterly ITRs of the succeeding taxable
Hence, the issue on the indispensability of quarterly ITRs of the years to be presented remains true to this day. What Section 76
succeeding taxable year in a claim for refund. requires, just like in all civil cases, is to prove the prima facie
entitlement to a claim, including the fact of not having carried over
The Court finds for the petitioner. the excess credits to the subsequent quarters or taxable year. It
does not say that to prove such a fact, succeeding quarterly ITRs
There is no question that those who claim must not only prove its are absolutely needed.
entitlement to the excess credits, but likewise must prove that no
carry-over has been made in cases where refund is sought. This simply underscores the rule that any document, other than
quarterly ITRs may be used to establish that indeed the non-
In this case, the fact of having carried over petitioner’s 2003 carry over clause has been complied with, provided that
such is competent, relevant and part of the records. The Court
excess credits to succeeding taxable year is in issue. According
to the CTA-En Banc and the CIR, the only evidence that can is thus not prepared to make a pronouncement as to the
sufficiently show that carrying over has been made is to present indispensability of the quarterly ITRs in a claim for refund for no
the quarterly ITRs. Some members of this Court adhere to the court can limit a party to the means of proving a fact for as long
same view. as they are consistent with the rules of evidence and fair play. The
means of ascertainment of a fact is best left to the party that
alleges the same. The Court’s power is limited only to the
The Court however cannot. appreciation of that means pursuant to the prevailing rules of
evidence. To stress, what the NIRC merely requires is to
Proving that no carry-over has been made does not absolutely sufficiently prove the existence of the non-carry over of excess
require the presentation of the quarterly ITRs. CWT in a claim for refund.

In Philam, the petitioner therein sought for recognition of its right The implementing rules similarly support this conclusion,
to the claimed refund of unutilized CWT. The CIR opposed the particularly Section 2.58.3 of Revenue Regulation No. 2-98
claim, on the grounds similar to the case at hand, that no proof thereof. There, it provides as follows:
was provided showing the non-carry over of excess CWT to the
subsequent quarters of the subject year. In a categorical manner, SECTION 2.58.3. Claim for Tax Credit or Refund.
the Court ruled that the presentation of the quarterly ITRs was not
necessary. Therein, it was written:
(A) The amount of creditable tax withheld shall be allowed as a
tax credit against the income tax liability of the payee in the
quarter of the taxable year in which income was earned or covering the total taxable income for the preceding calendar or
received. fiscal year. The total taxable income contains the combined
income for the four quarters of the taxable year, as well as the
(B) Claims for tax credit or refund of any creditable income tax deductions and excess tax credits carried over in the quarterly
which was deducted and withheld on income payments shall be income tax returns for the same period.
given due course only when it is shown that the income payment
has been declared as part of the gross income and the fact of If the excess tax credits of the preceding year were deducted,
withholding is established by a copy of the withholding tax whether in whole or in part, from the estimated income tax
statement duly issued by the payer to the payee showing the liabilities of any of the taxable quarters of the succeeding taxable
amount paid and the amount of tax withheld therefrom. year, the total amount of the tax credits deducted for the entire
taxable year should appear in the Annual ITR under the item
xxx xxx xxx "Prior Year’s Excess Credits." Otherwise, or if the tax credits were
carried over to the succeeding quarters and the corporation did
not report it in the annual ITR, there would be a discrepancy in the
Evident from the above is the absence of any categorical amounts of combined income and tax credits carried over for all
pronouncement of requiring the presentation of the succeeding quarters and the corporation would end up shouldering a bigger
quarterly ITRs in order to prove the fact of non-carrying over. To tax payable. It must be remembered that taxes computed in the
say the least, the Court rules that as to the means of proving it, It quarterly returns are mere estimates. It is the annual ITR which
has no power to unduly restrict it. shows the aggregate amounts of income, deductions, and credits
for all quarters of the taxable year. It is the final adjustment return
In this case, it confounds the Court why the CTA did not recognize which shows whether a corporation incurred a loss or gained a
and discuss in detail the sufficiency of the annual ITR for profit during the taxable quarter.24 Thus, the presentation of the
2004,21 which was submitted by the petitioner. The CTA in fact annual ITR would suffice in proving that prior year’s excess credits
said: were not utilized for the taxable year in order to make a final
determination of the total tax due.
In the present case, while petitioner did offer its Annual ITR/Final
Adjustment Return for taxable year 2004, it appears that petitioner In this case, petitioner reported an overpayment in the amount of
miserably failed to submit and offer as part of its evidence the first, ₱7,194,213.00 in its annual ITR for the year ended December
second, and third Quarterly ITRs for the year 2004. Consequently, 2003:
petitioner was not able to prove that it did not exercise its option
to carry-over its excess CWT.22 Annual ITR 2003

Petitioner claims that the requirement of proof showing the non-

carry over has been established in said document. Income Tax Due 1,259,259.00

Less: Prior Year’s Excess Credits (2002 (4,379,518.00)

Indeed, an annual ITR contains the total taxable income earned Annual ITR)
for the four (4) quarters of a taxable year, as well as deductions
and tax credits previously reported or carried over in the quarterly Creditable Tax Withheld for the 4th Quarter (4,073,954.00)
income tax returns for the subject period. A quick look at the
Annual ITR reveals this fact: Tax Payable / (Overpayment) (7,194,213.00)

Aggregate Income Tax Due

For the overpayment, petitioner chose the option "To be issued a
Tax Credit Certificate." In its Annual ITR for the year ended
Less Tax Credits/Payments
December 2004, petitioner did not report the Creditable Tax
Withheld for the 4th quarter of 2003 in the amount of
Prior Year’s excess Credits – Taxes withheld ₱4,073,954.00 as prior year’s excess credits. As shown in the
2004 ITR:
Tax Payment (s) for the Previous Quarter (s) of the same taxable
year other than MCIT Annual ITR 2004

xxx xxx xxx

Income Tax Due 1,321,409.00

Creditable Tax Withheld for the Previous Quarter (s) Less: Prior Year’s Excess Credits -

Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter Creditable Tax Withheld for the 4th (3,689,419.00)

xxx xxx x x x23 Quarter

Tax Payable / (Overpayment) (2,368,010.00)

It goes without saying that the annual ITR (including any other
proof that may be sufficient to the Court) can sufficiently reveal
whether carry over has been made in subsequent quarters even Verily, the absence of any amount written in the Prior Year excess
if the petitioner has chosen the option of tax credit or refund in the Credit – Tax Withheld portion of petitioner’s 2004 annual ITR
immediately 2003 annual ITR. Section 76 of the NIRC requires a clearly shows that no prior excess credits were carried over in the
corporation to file a Final Adjustment Return (or Annual ITR) first four quarters of 2004. And since petitioner was able to
sufficiently prove that excess tax credits in 2003 were not just hoped that the burden would fall on the petitioner’s head once
carried over to taxable year 2004 by leaving the item "Prior the issue reaches the courts.
Year’s Excess Credits" as blank in its 2004 annual ITR, then
petitioner is entitled to a refund. Unfortunately, the CTA, in This mindset ignores the rule that the CIR has the equally
denying entirely the claim, merely relied on the absence of the important responsibility of contradicting petitioner’s claim by
quarterly ITRs despite being able to verify the truthfulness of the presenting proof readily on hand once the burden of evidence
declaration that no carry over was indeed effected by simply shifts to its side. Claims for refund are civil in nature and as such,
looking at the 2004 annual ITR. petitioner, as claimant, though having a heavy burden of showing
entitlement, need only prove preponderance of evidence in order
At this point, worth mentioning is the fact that subsequent cases to recover excess credit in cold cash. To review,
affirm the proposition as correctly pointed out by petitioner. State "[P]reponderance of evidence is [defined as] the weight, credit,
Land, PERF and Mirant reiterated the rule that the presentation and value of the aggregate evidence on either side and is usually
of the quarterly ITRs of the subsequent year is not mandatory on considered to be synonymous with the term ‘greater weight of the
the part of the claimant to prove its claims. evidence’ or ‘greater weight of the credible evidence.’ It is
evidence which is more convincing to the court as worthy of belief
There are some who challenges the applicability of PERF in the than that which is offered in opposition thereto.26
case at bar. It is said that PERF is not in point because the Annual
ITR for the succeeding year had actually been attached to PERF’s The CIR must then be reminded that in Philam, the CIR’s "failure
motion for reconsideration with the CTA and had formed part of to present [the quarterly ITRs and AFR] to support its contention
the records of the case. Clearly, if the Annual ITR has been against the grant of a tax refund to [a claimant] is certainly fatal."
recognized by this Court in PERF, why then would the submitted PERF reinforces this with a sweeping statement holding that the
2004 Annual ITR in this case be insufficient despite the absence verification process is not incumbent on PERF [or any claimant
of the quarterly ITRs? Why then would this Court require more for that matter]; [but] is the duty of the CIR to verify whether xxx
than what is enough and deny a claim even if the minimum burden excess income taxes [have been carried over].
has been overcome? At best, the existence of quarterly ITRs
would have the effect of strengthening a proven fact. And as such, And should there be a possibility that a claimant may have
may only be considered corroborative evidence, obviously not violated the irrevocability rule and thereafter claim twice from its
indispensable in character. PERF simply affirms that quarterly credits, no one is to be blamed but the CIR for not discharging its
ITRs are not indispensable, provided that there is sufficient proof burden of evidence to destroy a claimant’s right to a refund. At
that carrying over excess CWT was not effected. any rate, a claimant who defrauds the government cannot escape
liability be it criminal or civil in nature.
Stateland and Mirantare equally challenged. In all these cases
however, the factual distinctions only serve to bolster the Verily, with the petitioner having complied with the requirements
proposition that succeeding quarterly ITRs are not indispensable. for refund, and without the CIR showing contrary evidence other
Implicit from all these cases is the Court’s recognition that proving than its bare assertion of the absence of the quarterly ITRs,
carry-over is an evidentiary matter and that the submission of copies of which are easily verifiable by its very own records, the
quarterly ITRs is but a means to prove the fact of one’s entitlement burden of proof of establishing the propriety of the claim for refund
to a refund and not a condition sine qua non for the success of has been sufficiently discharged. Hence, the grant of refund is
refund. True, it would have been better, easier and more efficient proper.
for the CTA and the CIR to have as basis the quarterly ITRs, but
it is not the only way considering further that in this case, the
Annual ITR for 2004 is sufficient. Courts are here to painstakingly The Court does not, and cannot, however, grant the entire
weigh evidence so that justice and equity in the end will prevail. claimed amount as it finds no error in the original decision of the
CTA Division granting refund to the reduced amount of
₱2,737,903.34. This finding of fact is given respect, if not finality,
It must be emphasized that once the requirements laid down as the CTA,27 which by the very nature of its functions of
by the NIRC have been met, a claimant should be considered dedicating itself exclusively to the consideration of the tax
successful in discharging its burden of proving its right to problems has necessarily developed an expertise on the
refund. Thereafter, the burden of going forward with the subject.28 It being the case, the Court partly grants this petition to
evidence, as distinct from the general burden of proof, shifts the extent of reinstating the April 23, 2010 original decision of the
to the opposing party,25 that is, the CIR. It is then the turn of CTA Division.
the CIR to disprove the claim by presenting contrary evidence
which could include the pertinent ITRs easily obtainable from its
own files. The Court reminds the CIR that substantial justice, equity and fair
play take precedence over technicalities and legalisms. The
government must keep in mind that it has no right to keep the
All along, the CIR espouses the view that it must be given ample Money not belonging to it, thereby enriching itself at the expense
opportunity to investigate the veracity of the claims. Thus, the of the law-abiding citizen29 or entities who have complied with the
Court asks: In the process of investigation at the administrative requirements of the law in order to forward the claim for refund.
level to determine the right of the petitioner to the claimed amount, Under the principle of solutio in debiti provided in Article 2154 of
did the CIR, with all its resources even attempt to verify the the Civil Code, the CIR must return anythihg it has received.30
quarterly ITRs it had in its files? Certainly, it did not as the
application was met by the inaction of the CIR. And if desirous in
its effort to clearly verify petitioner’s claim, it should have had the Finally, even assuming that the Court reverses itself and
time, resources and the liberty to do so. Yet, nothing was pronounces the indispensability of presenting the quarterly ITRs
produced during trial to destroy the prima facie right of the to prove entitlement to the claimed refund, petitioner should not
petitioner by counterchecking the claims with the quarterly ITRs be prejudiced for relying on Philam. The CTA En Banc merely
the CIR has on its file. To the Court, it seems that the CIR based its pronouncement on a case that does not enjoy the
languished on its duties to ascertain the veracity of the claims and benefit of stare decis et non quieta movere which means "to
adhere to precedents, and not to unsettle things which are
established."31 As between a CTA En Banc Decision (Millennium) Net Income Subject to Tax 499, 194,964.00
and this Court's Decision (Philam), it is elementary that the latter XTaxRate 10%
should prevail. Tax Due 49,919,496.40
Less: Tax Credits -
WHEREFORE, the Court partly grants the petition. The March 22, Deficiency Income Tax 49,919,496.40
2013 Decision of the Court of Tax Appeals En Banc is Add: Increments
REVERSED. The April 13, 2010 Decision of the Court of Tax 25% Surcharge 12,479,874.10
Appeals Special First Division is REINSTATED. Respondent 20% Interest Per Annum (4115/06-
Commissioner of Internal Revenue is ordered to REFUND to 19,995,151.71
4/15/08)
petitioner the amount of ₱2,737,903.34 as excess creditable
Compromise Penalty for Late Payment 25,000.00
withholding tax paid for taxable year 2003.
Total increments 32,500,025.81
Total Amount Due ?82,419,522.21
SO ORDERED.
For Taxable Year 2006:
ASSESSMENT NO. QA-07-000097
5. CIR v. FSM CINEMA PARTICULARS [AMOUNT]
Sales/Revenues/Receipts/Fees ?3,8 l
(see separate pdf) 5,922,240.00
Less: Cost of Sales/Services 2,760,518,437.00
6. CIR vs. St. Lukes G.R. No. 203514 | 2017-02-13 Gross Income From Operation 1,055,403,803.00
*DEL CASTILLO CASE Add: Non-Operating & Other Income -
Total Gross Income 1,055,403,803.00
SUPREME COURT Less: Deductions 640,147,719.00
FIRST DIVISION Net Income Subject to Tax 415,256,084.00
February 13, 2017 XTaxRate 10%
G.R. No. 203514 Tax.Due 41,525,608.40
COMMISSIONER OF INTERNAL REVENUE, Petitioner
Less: Tax Credits -
vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent Deficiency Income Tax 41,525,608.40
DECISION Add: Increments -
DEL CASTILLO, J.: 25% Surcharge 10,381,402.10
The doctrine of stare decisis dictates that "absent any powerful 20% Interest Per Annum (4/15/07-
8,327,875.44
countervailing considerations, like cases ought to be decided 4/15/08)
alike."1 Compromise Penalty for Late Payment 25,000.00
This Petition for Review on Certiorari2 under Rule 45 of the Rules Total increments 18,734,277.54
of Court assails the May 9, 2012 Decision3 and the September Total Amount Due ?60,259,885.9411
17, 2012 Resolution4 of the Court of Tax Appeals (CTA) in CTA Aggrieved, SLMC elevated the matter to the CTA via a Petition
EB Case No. 716. for Review,12 docketed as CTA Case No. 7789.
Factual Antecedents Ruling of the Court of Tax Appeals Division
On December 14, 2007, respondent St. Luke’s Medical Center, On August 26, 2010, the CTA Division rendered a Decision13
Inc. (SLMC) received from the Large Taxpayers Service- finding SLMC not liable for deficiency income tax under Section
Documents Processing and Quality Assurance Division of the 27(B) of the 1997 NIRC, as amended, since it is exempt from
Bureau of Internal Revenue (BIR) Audit Results/Assessment paying income tax under Section 30(E) and (G) of the same Code.
Notice Nos. QA-07-0000965 and QA-07-000097,6 assessing Thus:
respondent SLMC deficiency income tax under Section 27(B)7 of WHEREFORE, premises considered, the Petition for Review is
the 1997 National Internal Revenue Code (NIRC), as amended, hereby GRANTED. Accordingly, Audit Results/Assessment
for taxable year 2005 in the amount of ₱78,617,434.54 and for Notice Nos. QA-07-000096 and QA-07-000097, assessing
taxable year 2006 in the amount of ₱57,119,867.33. petitioner for alleged deficiency income taxes for the taxable
On January 14, 2008, SLMC filed with petitioner Commissioner of years 2005 and 2006, respectively, are hereby CANCELLED and
Internal Revenue (CIR) an administrative protest8 assailing the SET ASIDE.
assessments. SLMC claimed that as a non-stock, non-profit SO ORDERED.14
charitable and social welfare organization under Section 30(E) CIR moved for reconsideration but the CTA Division denied the
and (G)9 of the 1997 NIRC, as amended, it is exempt from paying same in its December 28, 2010 Resolution.15
income tax. This prompted CIR to file a Petition for Review16 before the CTA
On April 25, 2008, SLMC received petitioner CIR's Final Decision En Banc.
on the Disputed Assessment10 dated April 9, 2008 increasing the Ruling of the Court of Tax Appeals En Banc
deficiency income for the taxable year 2005 tax to On May 9, 2012, the CTA En Banc affirmed the cancellation and
₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, setting aside of the Audit Results/Assessment Notices issued
computed as follows: against SLMC. It sustained the findings of the CTA Division that
For Taxable Year 2005: SLMC complies with all the requisites under Section 30(E) and
ASSESSMENT NO. QA-07-000096 (G) of the 1997 NIRC and thus, entitled to the tax exemption
PARTICULARS AMOUNT provided therein.17
Sales/Revenues/Receipts/Fees ?3,623,511,616.00 On September 17, 2012, the CTA En Banc denied CIR's Motion
Less: Cost of Sales/Services 2,643,049, 769.00 for Reconsideration.
Gross Income From Operation 980,461,847.00 Issue
Add: Non-Operating & Other Income - Hence, CIR filed the instant Petition under Rule 45 of the Rules
Total Gross Income 980,461,847.00 of Court contending that the CTA erred in exempting SLMC from
the payment of income tax.
Less: Deductions 481,266,883 .00
Meanwhile, on September 26, 2012, the Court rendered a Internal Revenue v. St. Luke's Medical Center, Inc.), 36 it is not
Decision in G.R. Nos. 195909 and 195960, entitled Commissioner liable for compromise penalties.37
of Internal Revenue v. St. Luke's Medical Center, Inc., 18 finding In any case, SLMC insists that the instant case should be
SLMC not entitled to the tax exemption under Section 30(E) and dismissed in view of its payment of the basic taxes due for taxable
(G) of the NIRC of 1997 as it does not operate exclusively for years 1998, 2000-2002, and 2004-2007 to the BIR on April 30,
charitable or social welfare purposes insofar as its revenues from 2013.38
paying patients are concerned. Thus, the Court disposed of the Our Ruling
case in this manner: SLMC is liable for income tax under
WHEREFORE, the petition of the Commissioner of Internal Section 27(B) of the 1997 NIRC insofar
Revenue in G.R. No. 195909is PARTLY GRANTED. The as its revenues from paying patients are
Decision of the Court of Tax Appeals En Banc dated 19 November concerned
2010 and its Resolution dated 1 March 2011 in CTA Case No. The issue of whether SLMC is liable for income tax under Section
6746 are MODIFIED. St. Luke's Medical Center, Inc. is 27(B) of the 1997 NIRC insofar as its revenues from paying
ORDERED TO PAY the deficiency income tax in 1998 based on patients are concerned has been settled in G.R. Nos. 195909 and
the 10% preferential income tax rate under Section 27(B) of the 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
National Internal Revenue Code. However, it is not liable for Center, Inc.),39 where the Court ruled that:
surcharges and interest on such deficiency income tax under x x x We hold that Section 27(B) of the NIRC does not remove the
Sections 248 and 249 of the National Internal Revenue Code. All income tax exemption of proprietary non-profit hospitals under
other parts of the Decision and Resolution of the Court of Tax Section 30(E) and (G). Section 27(B) on one hand, and Section
Appeals are AFFIRMED. 30(E) and (G) on the other hand, can be construed together
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 without the removal of such tax exemption. The effect of the
is DENIED for violating Section I, Rule 45 of the Rules of Court. introduction of Section 27(B) is to subject the taxable income of
SO ORDERED.19 two specific institutions, namely, proprietary non-profit
Considering the foregoing, SLMC then filed a Manifestation and educational institutions and proprietary non-profit hospitals,
Motion20 informing the Court that on April 30, 2013, it paid the BIR among the institutions covered by Section 30, to the 10%
the amount of basic taxes due for taxable years 1998, 2000-2002, preferential rate under Section 27(B) instead of the ordinary 30%
and 2004-2007, as evidenced by the payment confirmation21 from corporate rate under the last paragraph of Section 30 in relation
the BIR, and that it did not pay any surcharge, interest, and to Section 27(A)(l).
compromise penalty in accordance with the above-mentioned Section 27(B) of the NIRC imposes a 10% preferential tax rate on
Decision of the Court. In view of the payment it made, SLMC the income of (1) proprietary non-profit educational institutions
moved for the dismissal of the instant case on the ground of and (2) proprietary non-profit hospitals. The only qualifications for
mootness. hospitals are that they must be proprietary and non-profit.
CIR opposed the motion claiming that the payment confirmation 'Proprietary' means private, following the definition of a
submitted by SLMC is not a competent proof of payment as it is a 'proprietary educational institution' as 'any private school
mere photocopy and does not even indicate the quarter/sand/or maintained and administered by private individuals or groups' with
year/s said payment covers.22 a government permit. 'Non-profit' means no net income or asset
In reply,23 SLMC submitted a copy of the Certification24 issued by accrues to or benefits any member or specific person, with all the
the Large Taxpayers Service of the BIR dated May 27, 2013, net income or asset devoted to the institution's purposes and all
certifying that, "[a]s far as the basic deficiency income tax for its activities conducted not for profit.
taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are 'Non-profit' does not necessarily mean 'charitable.' In Collector of
concen1ed, this Office considers the cases closed due to the Internal Revenue v. Club Filipino, Inc. de Cebu, this Court
payment made on April 30, 2013." SLMC likewise submitted a considered as non-profit a sports club organized for recreation
letter25 from the BIR dated November 26, 2013 with attached and entertainment of its stockholders and members. The club was
Certification of Payment26 and application for abatement,27 which primarily funded by membership fees and dues. If it had profits,
it earlier submitted to the Court in a related case, G.R. No. they were used for overhead expenses and improving its golf
200688, entitled Commissioner of Internal Revenue v. St. Luke's course. The club was non-profit because of its purpose and there
Medical Center, Inc.28 was no evidence that it was engaged in a profit-making enterprise.
Thereafter, the parties submitted their respective memorandum. The sports club in Club Filipino, Inc. de Cebu may be non-profit,
CIR 's Arguments but it was not charitable. Tue Court defined 'charity' in Lung
CIR argues that under the doctrine of stare decisis SLMC is Center of the Philippines v. Quezon City as 'a gift, to be applied
subject to 10% income tax under Section 27(B) of the 1997 consistently with existing laws, for the benefit of an indefinite
NIRC.29 It likewise asserts that SLMC is liable to pay compromise number of persons, either by bringing their minds and hearts
penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing under the influence of education or religion, by assisting them to
to file its quarterly income tax returns.31 establish themselves in life or [by] otherwise lessening the burden
As to the alleged payment of the basic tax, CIR contends that this of government.' A nonprofit club for the benefit of its members fails
does not render the instant case moot as the payment this test. An organization may be considered as non-profit if it
confirmation submitted by SLMC is not a competent proof of does not distribute any part of its income to stockholders or
payment of its tax liabilities.32 members. However, despite its being a tax exempt institution, any
SLMC's Arguments income such institution earns from activities conducted for profit
SLMC, on the other hand, begs the indulgence of the Court to is taxable, as expressly provided in the last paragraph of Section
revisit its ruling in G.R. Nos. 195909 and 195960 (Commissioner 30.
of Internal Revenue v. St. Luke's Medical Center, Inc.)33 positing To be a charitable institution, however, an organization must meet
that earning a profit by a charitable, benevolent hospital or the substantive test of charity in Lung Center. The issue in Lung
educational institution does not result in the withdrawal of its tax Center concerns exemption from real property tax and not income
exempt privilege.34 SLMC further claims that the income it derives tax. However, it provides for the test of charity in our jurisdiction.
from operating a hospital is not income from "activities conducted Charity is essentially a gift to an indefinite number of persons
for profit."35 Also, it maintains that in accordance with the ruling of which lessens the burden of government. In other words,
the Court in G.R. Nos. 195909 and 195960 (Commissioner of charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes requires that the corporation or association be non-stock, which
which should have been spent to address public needs, because is defined by the Corporation Code as 'one where no part of its
certain private entities already assume a part of the burden. This income is distributable as dividends to its members, trustees, or
is the rationale for the tax exemption of charitable institutions. The officers' and that any profit 'obtain[ed] as an incident to its
loss of taxes by the government is compensated by its relief from operations shall, whenever necessary or proper, be used for the
doing public works which would have been funded by furtherance of the purpose or purposes for which the corporation
appropriations from the Treasury. was organized.' However, under Lung Center, any profit by a
Charitable institutions, however, are not ipso facto entitled to a tax charitable institution must not only be plowed back 'whenever
exemption. The requirements for a tax exemption are specified by necessary or proper,' but must be 'devoted or used altogether to
the law granting it. The power of Congress to tax implies the the charitable object which it is intended to achieve.'
power to exempt from tax. Congress can create tax exemptions, The operations of the charitable institution generally refer to its
subject to the constitutional provision that '[n]o law granting any regular activities. Section 30(E) of the NIRC requires that these
tax exemption shall be passed without the concurrence of a operations be exclusive to charity. There is also a specific
majority of all the Members of Congress.' The requirements for a requirement that 'no part of [the] net income or asset shall belong
tax exemption are strictly construed against the taxpayer because to or inure to the benefit of any member, organizer, officer or any
an exemption restricts the collection of taxes necessary for the specific person.' The use of lands, buildings and improvements of
existence of the government. the institution is but a part of its operations.
The Court in Lung Center declared that the Lung Center of the There is no dispute that St. Luke's is organized as a non-stock
Philippines is a charitable institution for the purpose of exemption and non-profit charitable institution. However, this does not
from real property taxes. This ruling uses the same premise as automatically exempt St. Luke's from paying taxes. This only
Hospital de San Juan and Jesus Sacred Heart College which says refers to the organization of St. Luke's. Even if St. Luke's meets
that receiving income from paying patients does not destroy the the test of charity, a charitable institution is not ipso facto tax
charitable nature of a hospital. exempt. To be exempt from real property taxes, Section 28(3),
As a general principle, a charitable institution does not lose its Article VI of the Constitution requires that a charitable institution
character as such and its exemption from taxes simply because it use the property 'actually, directly and exclusively' for charitable
derives income from paying patients, whether outpatient, or purposes. To be exempt from income taxes, Section 30(E) of the
confined in the hospital, or receives subsidies from the NIRC requires that a charitable institution must be 'organized and
government, so long as the money received is devoted or used operated exclusively' for charitable purposes. Likewise, to be
altogether to the charitable object which it is intended to achieve; exempt from income taxes, Section 30(G) of the NIRC requires
and no money inures to the private benefit of the persons that the institution be 'operated exclusively' for social welfare.
managing or operating the institution. However, the last paragraph of Section 30 of the NIRC qualifies
For real property taxes, the incidental generation of income is the words 'organized and operated exclusively' by providing that:
permissible because the test of exemption is the use of the Notwithstanding the provisions in the preceding paragraphs, the
property. The Constitution provides that '[c]haritable institutions, income of whatever kind and character of the foregoing
churches and personages or convents appurtenant thereto, organizations from any of their properties, real or personal, or
mosques, non-profit cemeteries, and all lands, buildings, and from any of their activities conducted for profit regardless of the
improvements, actually, directly, and exclusively used for disposition made of such income, shall be subject to tax imposed
religious, charitable, or educational purposes shall be exempt under this Code.
from taxation.' The test of exemption is not strictly a requirement In short, the last paragraph of Section 30 provides that if a tax
on the intrinsic nature or character of the institution. The test exempt charitable institution conducts 'any' activity for profit, such
requires that the institution use property in a certain way, i.e., for activity is not tax exempt even as its not-for-profit activities remain
a charitable purpose. Thus, the Court held that the Lung Center tax exempt. This paragraph qualifies the requirements in Section
of the Philippines did not lose its charitable character when it used 30(E) that the '[n]on-stock corporation or association [must be]
a portion of its lot for commercial purposes. The effect of failing to organized and operated exclusively for . . . charitable . . . purposes
meet the use requirement is simply to remove from the tax . . . . ' It likewise qualifies the requirement in Section 30(G) that
exemption that portion of the property not devoted to charity. the civic organization must be 'operated exclusively' for the
The Constitution exempts charitable institutions only from real promotion of social welfare.
property taxes. In the NIRC, Congress decided to extend the Thus, even if the charitable institution must be 'organized and
exemption to income taxes. However, the way Congress crafted operated exclusively' for charitable purposes, it is nevertheless
Section 30(E) of the NIRC is materially different from Section allowed to engage in 'activities conducted for profit' without losing
28(3), Article VI of the Constitution. Section 30(E) of the NIRC its tax exempt status for its not-for-profit activities. The only
defines the corporation or association that is exempt from income consequence is that the 'income of whatever kind and character'
tax. On the other hand, Section 28(3), Article VI of the Constitution of a charitable institution 'from any of its activities conducted for
does not define a charitable institution, but requires that the profit, regardless of the disposition made of such income, shall be
institution 'actually, directly and exclusively' use the property for a subject to tax.' Prior to the introduction of Section 27(B), the tax
charitable purpose. rate on such income from for-profit activities was the ordinary
Section 30(E) of the NIRC provides that a charitable institution corporate rate under Section 27(A). With the introduction of
must be: Section 27(B), the tax rate is now 10%.
(1) A non-stock corporation or association; In 1998, St. Luke's had total revenues of ₱l,730,367,965 from
(2) Organized exclusively for charitable purposes; services to paying patients. It cannot be disputed that a hospital
(3) Operated exclusively for charitable purposes; and which receives approximately ₱l.73 billion from paying patients is
(4) No part of its net income or asset shall belong to or inure to not an institution 'operated exclusively' for charitable purposes.
the benefit of any member, organizer, officer or any specific Clearly, revenues from paying patients are income received from
person. 'activities conducted for profit.' Indeed, St. Luke's admits that it
Thus, both the organization and operations of the charitable derived profits from its paying patients. St. Luke's declared
institution must be devoted 'exclusively' for charitable purposes. ₱l,730,367,965 as 'Revenues from Services to Patients' in
The organization of the institution refers to its corporate form, as contrast to its 'Free Services' expenditure of ₱218,187,498. In its
shown by its articles of incorporation, by-laws and other Comment in G.R. No. 195909, St. Luke's showed the following
constitutive documents. Section 30(E) of the NIRC specifically
'calculation' to support its claim that 65.20% of its 'income after that an institution be 'operated exclusively' for charitable or social
expenses was allocated to free or charitable services' in 1998. welfare purposes to be completely exempt from income tax. An
x x xx institution under Section 30(E) or (G) does not lose its tax
In Lung Center, this Court declared: exemption if it earns income from its for-profit activities. Such
'[e]xclusive' is defined as possessed and enjoyed to the exclusion income from for-profit activities, under the last paragraph of
of others; debarred from participation or enjoyment; and Section 30, is merely subject to income tax, previously at the
'exclusively' is defined, 'in a manner to exclude; as enjoying a ordinary corporate rate but now at the preferential 10% rate
privilege exclusively.' . . . The words 'dominant use' or 'principal pursuant to Section 27(B).
use' cannot be substituted for the words 'used exclusively' without A tax exemption is effectively a social subsidy granted by the
doing violence to the Constitution and thelaw. Solely is State because an exempt institution is spared from sharing in the
synonymous with exclusively. expenses of government and yet benefits from them. Tax
The Court cannot expand the meaning of the words 'operated exemptions for charitable institutions should therefore be lin1ited
exclusively' without violating the NIRC. Services to paying to institutions beneficial to the public and those which improve
patients are activities conducted for profit. They cannot be social welfare. A profit-making entity should not be allowed to
considered any other way. There is a 'purpose to make profit over exploit this subsidy to the detriment of the government and other
and above the cost' of services. The ₱l.73 billion total revenues taxpayers.
from paying patients is not even incidental to St. Luke's charity St. Luke's fails to meet the requirements under Section 30(E) and
expenditure of ₱2l8,187,498 for non-paying patients. (G) of the NIRC to be completely tax exempt from all its income.
St. Luke's claims that its charity expenditure of ₱218,187,498 is However, it remains a proprietary non-profit hospital under
65.20% of its operating income in 1998. However, if a part of the Section 27(B) of the NIRC as long as it does not distribute any of
remaining 34.80% of the operating income is reinvested in its profits to its members and such profits are reinvested pursuant
property, equipment or facilities used for services to paying and to its corporate purposes. St. Luke's, as a proprietary non-profit
non-paying patients, then it cannot be said that the income is hospital, is entitled to the preferential tax rate of 10% on its net
'devoted or used altogether to the charitable object which it is income from its for-profit activities.
intended to achieve.' The income is plowed back to the St. Luke's is therefore liable for deficiency income tax in 1998
corporation not entirely for charitable purposes, but for profit as under Section 27(B) of the NIRC. However, St. Luke's has good
well. In any case, the last paragraph of Section 30 of the NIRC reasons to rely on the letter dated 6 June 1990 by the BIR, which
expressly qualifies that income from activities for profit is taxable opined that St. Luke's is 'a corporation for purely charitable and
'regardless of the disposition made of such income.' social welfare purposes' and thus exempt from income tax. In
Jesus Sacred Heart College declared that there is no official Michael J Lhuillier, Inc. v. Commissioner of Internal Revenue, the
legislative record explaining the phrase 'any activity conducted for Court said that 'good faith and honest belief that one is not subject
profit.' However, it quoted a deposition of Senator Mariano Jesus to tax on the basis of previous interpretation of government
Cuenco, who was a member of the Committee of Conference for agencies tasked to implement the tax law, are sufficient
the Senate, which introduced the phrase 'or from any activity justification to delete the imposition of surcharges and interest.'40
conducted for profit.' A careful review of the pleadings reveals that there is no
P. Cuando ha hablado de la Universidad de Santo Tomas que countervailing consideration for the Court to revisit its aforequoted
tiene un hospital, no cree V d que es una actividad esencial dicho ruling in G.R. Nos. 195909 and 195960 (Commissioner of Internal
hospital para el funcionamiento def colegio de medicina Revenue v. St. Luke's Medical Center, Inc.). Thus, under the
de dicha universidad? doctrine of stare decisis, which states that "[o]nce a case has
x x x x x x xxx been decided in one way, any other case involving exactly the
R. Si el hospital se limita a recibir enformos pobres, mi same point at issue x x x should be decided in the same
contestacion seria afirmativa; pero considerando que el hospital manner,"41 the Court finds that SLMC is subject to 10% income
tiene cuartos de pago, y a los mismos generalmente van tax insofar as its revenues from paying patients are concerned.
enfermos de buena posicion social economica, lo que se paga To be clear, for an institution to be completely exempt from
por estos enfermos debe estar sujeto a 'income tax', y es una de income tax, Section 30(E) and (G) of the 1997 NIRC requires said
las razones que hemos tenido para insertar las palabras o frase institution to operate exclusively for charitable or social welfare
'or from any activity conducted for profit.' purpose. But in case an exempt institution under Section 30(E) or
The question was whether having a hospital is essential to an (G) of the said Code earns income from its for-profit activities, it
educational institution like the College of Medicine of the will not lose its tax exemption. However, its income from for-profit
University of Santo Tomas.1awp++i1 Senator Cuenco answered activities will be subject to income tax at the preferential 10% rate
that if the hospital has paid rooms generally occupied by people pursuant to Section 27(B) thereof.
of good economic standing, then it should be subject to income SLMC is not liable for Compromise
tax. He said that this was one of the reasons Congress inserted Penalty.
the phrase 'or any activity conducted for profit.' As to whether SLMC is liable for compromise penalty under
The question in Jesus Sacred Heart College involves an Section 248(A) of the 1997 NIRC for its alleged failure to file its
educational institution. However, it is applicable to charitable quarterly income tax returns, this has also been resolved in G.R
institutions because Senator Cuenco's response shows an intent Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
to focus on the activities of charitable institutions. Activities for St. Luke's Medical Center, Inc.),42 where the imposition of
profit should not escape the reach of taxation. Being a non-stock surcharges and interest under Sections 248 43 and 24944 of the
and non-profit corporation does not, by this reason alone, 1997 NIRC were deleted on the basis of good faith and honest
completely exempt an institution from tax. An institution cannot belief on the part of SLMC that it is not subject to tax. Thus,
use its corporate form to prevent its profitable activities from being following the ruling of the Court in the said case, SLMC is not
taxed. liable to pay compromise penalty under Section 248(A) of the
The Court finds that St. Luke's is a corporation that is not 1997 NIRC.
'operated exclusively' for charitable or social welfare purposes The Petition is rendered moot by the
insofar as its revenues from paying patients are concerned. This payment made by SLMC on April 30,
ruling is based not only on a strict interpretation of a provision 2013.
granting tax exemption, but also on the clear and plain text of
Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
However, in view of the payment of the basic taxes made by On May 19, 2004, BIR issued a Preliminary Assessment Notice
SLMC on April 30, 2013, the instant Petition has become to DLSU.6
moot.1avvphi1 Subsequently on August 18, 2004, the BIR through a Formal
While the Court agrees with the CIR that the payment Letter of Demand assessed DLSU the following deficiency taxes:
confirmation from the BIR presented by SLMC is not a competent (1) income tax on rental earnings from restaurants/canteens and
proof of payment as it does not indicate the specific taxable period bookstores operating within the campus; (2) value-added tax
the said payment covers, the Court finds that the Certification (VAI) on business income; and (3) documentary stamp tax (DSI)
issued by the Large Taxpayers Service of the BIR dated May 27, on loans and lease contracts. The BIR demanded the payment of
2013, and the letter from the BIR dated November 26, 2013 with ₱17,303,001.12, inclusive of surcharge, interest and penalty for
attached Certification of Payment and application for abatement taxable years 2001, 2002 and 2003.7
are sufficient to prove payment especially since CIR never DLSU protested the assessment. The Commissioner failed to act
questioned the authenticity of these documents. In fact, in a on the protest; thus, DLSU filed on August 3, 2005 a petition for
related case, G.R. No. 200688, entitled Commissioner of Internal review with the CTA Division.8
Revenue v. St. Luke's Medical Center, lnc.,45 the Court dismissed DLSU, a non-stock, non-profit educational institution, principally
the petition based on a letter issued by CIR confirming SLMC's anchored its petition on Article XIV, Section 4 (3) of the
payment of taxes, which is the same letter submitted by SLMC in Constitution, which reads:
the instant case. (3) All revenues and assets of non-stock, non-profit educational
In fine, the Court resolves to dismiss the instant Petition as the institutions used actually, directly, and exclusively for educational
same has been rendered moot by the payment made by SLMC of purposes shall be exempt from taxes and duties. xxx.
the basic taxes for the taxable years 2005 and 2006, in the On January 5, 2010, the CTA Division partially granted DLSU's
amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively. 46 petition for review. The dispositive portion of the decision reads:
WHEREFORE, the Petition is hereby DISMISSED. WHEREFORE, the Petition for Review is PARTIALLY
SO ORDERED. GRANTED. The DST assessment on the loan transactions of
[DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED.
7. La Salle/Ateneo canteen case - G.R. No. 196596 However, [DLSU] is ORDERED TO PAY deficiency income tax,
VAT and DST on its lease contracts, plus 25% surcharge for the
fiscal years 2001, 2002 and 2003 in the total amount of
SECOND DIVISION ₱18,421,363.53 ... xxx.
November 9, 2016 In addition, [DLSU] is hereby held liable to pay 20% delinquency
G.R. No. 196596 interest on the total amount due computed from September 30,
COMMISSIONER OF INTERNAL REVENUE, Petitioner 2004 until full payment thereof pursuant to Section 249(C)(3) of
vs. the [National Internal Revenue Code]. Further, the compromise
DE LA SALLE UNIVERSITY, INC., Respondent penalties imposed by [the Commissioner] were excluded, there
x-----------------------x being no compromise agreement between the parties.
G.R. No. 198841 SO ORDERED.9
DE LA SALLE UNIVERSITY INC., Petitioner, Both the Commissioner and DLSU moved for the reconsideration
vs. of the January 5, 2010 decision.10 On April 6, 2010, the CTA
COMMISSIONER OF INTERNAL REVENUE, Respondent. Division denied the Commissioner's motion for reconsideration
x-----------------------x while it held in abeyance the resolution on DLSU's motion for
G.R. No. 198941 reconsideration.11
COMMISSIONER OF INTERNAL REVENUE, Petitioner, On May 13, 2010, the Commissioner appealed to the CTA En
vs. Banc (CTA En Banc Case No. 622) arguing that DLSU's use of
DE LA SALLE UNIVERSITY, INC., Respondent. its revenues and assets for non-educational or commercial
DECISION purposes removed these items from the exemption coverage
BRION, J.: under the Constitution.12
Before the Court are consolidated petitions for review on On May 18, 2010, DLSU formally offered to the CTA Division
certiorari:1 supplemental pieces of documentary evidence to prove that its
1. G.R. No. 196596 filed by the Commissioner of Internal rental income was used actually, directly and exclusively for
Revenue (Commissioner) to assail the December 10, 2010 educational purposes.13 The Commissioner did not promptly
decision and March 29, 2011 resolution of the Court of Tax object to the formal offer of supplemental evidence despite
Appeals (CTA) in En Banc Case No. 622;2 notice.14
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) On July 29, 2010, the CTA Division, in view of the supplemental
to assail the June 8, 2011 decision and October 4, 2011 resolution evidence submitted, reduced the amount of DLSU's tax
in CTA En Banc Case No. 671;3 and deficiencies. The dispositive portion of the amended decision
3. G.R. No. 198941 filed by the Commissioner to assail the June reads:
8, 2011 decision and October 4, 2011 resolution in CTA En Banc WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is
Case No. 671.4 hereby PARTIALLY GRANTED. [DLSU] is hereby ORDERED
G.R. Nos. 196596, 198841 and 198941 all originated from CTA TO PAY for deficiency income tax, VAT and DST plus 25%
Special First Division (CTA Division) Case No. 7303. G.R. No. surcharge for the fiscal years 2001, 2002 and 2003 in the total
196596 stemmed from CTA En Banc Case No. 622 filed by the adjusted amount of ₱5,506,456.71 ... xxx.
Commissioner to challenge CTA Case No. 7303. G.R. No. In addition, [DLSU] is hereby held liable to pay 20% per annum
198841 and 198941 both stemmed from CTA En Banc Case No. deficiency interest on the ... basic deficiency taxes ... until full
671 filed by DLSU to also challenge CTA Case No. 7303. payment thereof pursuant to Section 249(B) of the [National
The Factual Antecedents Internal Revenue Code] ... xxx.
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued Further, [DLSU] is hereby held liable to pay 20% per annum
to DLSU Letter of Authority (LOA) No. 2794 authorizing its delinquency interest on the deficiency taxes, surcharge and
revenue officers to examine the latter's books of accounts and deficiency interest which have accrued ... from September 30,
other accounting records for all internal revenue taxes for the 2004 until fully paid.15
period Fiscal Year Ending 2003 and Unverified Prior Years.5
Consequently, the Commissioner supplemented its petition with In the present case, the LOA issued to DLSU is for Fiscal Year
the CTA En Banc and argued that the CTA Division erred in Ending 2003 and Unverified Prior Years. Hence, the assessments
admitting DLSU's additional evidence.16 for deficiency income tax, VAT and DST for taxable years 2001
Dissatisfied with the partial reduction of its tax liabilities, DLSU and 2002 are void, but the assessment for taxable year 2003 is
filed a separate petition for review with the CTA En Banc (CTA En valid.32
Banc Case No. 671) on the following grounds: (1) the entire On the applicability of the Ateneo case
assessment should have been cancelled because it was based The CTA En Banc held that the Ateneo case is not a valid
on an invalid LOA; (2) assuming the LOA was valid, the CTA precedent because it involved different parties, factual settings,
Division should still have cancelled the entire assessment bases of assessments, sets of evidence, and defenses. 33
because DLSU submitted evidence similar to those submitted by On the CTA Division's appreciation of the evidence
Ateneo De Manila University (Ateneo) in a separate case where The CTA En Banc affirmed the CTA Division's appreciation of
the CTA cancelled Ateneo's tax assessment; 17 and (3) the CTA DLSU' s evidence. It held that while DLSU successfully proved
Division erred in finding that a portion of DLSU's rental income that a portion of its rental income was transmitted and used to pay
was not proved to have been used actually, directly and the loan obtained to fund the construction of the Sports Complex,
exclusively for educational purposes.18 the rental income from other sources were not shown to have
The CTA En Banc Rulings been actually, directly and exclusively used for educational
CTA En Banc Case No. 622 purposes.34
The CTA En Banc dismissed the Commissioner's petition for Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No.
review and sustained the findings of the CTA Division.19 198841) and the Commissioner (G.R. No. 198941) came to this
Tax on rental income Court for relief.
Relying on the findings of the court-commissioned Independent The Consolidated Petitions
Certified Public Accountant (Independent CPA), the CTA En Banc G.R. No. 196596
found that DLSU was able to prove that a portion of the assessed The Commissioner submits the following arguments:
rental income was used actually, directly and exclusively for First, DLSU's rental income is taxable regardless of how such
educational purposes; hence, exempt from tax. 20 The CTA En income is derived, used or disposed of. 35 DLSU's operations of
Banc was satisfied with DLSU's supporting evidence confirming canteens and bookstores within its campus even though
that part of its rental income had indeed been used to pay the loan exclusively serving the university community do not negate
it obtained to build the university's Physical Education – Sports income tax liability.36
Complex.21 The Commissioner contends that Article XIV, Section 4 (3) of the
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., Constitution must be harmonized with Section 30 (H) of the Tax
the part of its income that was not shown by supporting Code, which states among others, that the income of whatever
documents to have been actually, directly and exclusively used kind and character of [a non-stock and non-profit educational
for educational purposes, must be subjected to income tax and institution] from any of [its] properties, real or personal, or from
VAT.22 any of [its] activities conducted for profit regardless of the
DST on loan and mortgage transactions disposition made of such income, shall be subject to tax imposed
Contrary to the Commissioner's contention, DLSU froved its by this Code.37
remittance of the DST due on its loan and mortgage documents. 23 The Commissioner argues that the CTA En Banc misread and
The CTA En Banc found that DLSU's DST payments had been misapplied the case of Commissioner of Internal Revenue v.
remitted to the BIR, evidenced by the stamp on the documents YMCA38 to support its conclusion that revenues however
made by a DST imprinting machine, which is allowed under generated are covered by the constitutional exemption, provided
Section 200 (D) of the National Internal Revenue Code (Tax that, the revenues will be used for educational purposes or will be
Code)24 and Section 2 of Revenue Regulations (RR) No. 15- held in reserve for such purposes.39
2001.25 On the contrary, the Commissioner posits that a tax-exempt
Admissibility of DLSU's supplemental evidence organization like DLSU is exempt only from property tax but not
The CTA En Banc held that the supplemental pieces of from income tax on the rentals earned from property. 40 Thus,
documentary evidence were admissible even if DLSU formally DLSU's income from the leases of its real properties is not exempt
offered them only when it moved for reconsideration of the CTA from taxation even if the income would be used for educational
Division's original decision. Notably, the law creating the CTA purposes.41
provides that proceedings before it shall not be governed strictly Second, the Commissioner insists that DLSU did not prove the
by the technical rules of evidence.26 fact of DST payment42 and that it is not qualified to use the On-
The Commissioner moved but failed to obtain a reconsideration Line Electronic DST Imprinting Machine, which is available only
of the CTA En Banc's December 10, 2010 decision.27 Thus, she to certain classes of taxpayers under RR No. 9-2000.43
came to this court for relief through a petition for review on Finally, the Commissioner objects to the admission of DLSU's
certiorari (G.R. No. 196596). supplemental offer of evidence. The belated submission of
CTA En Banc Case No. 671 supplemental evidence reopened the case for trial, and worse,
The CTA En Banc partially granted DLSU's petition for review and DLSU offered the supplemental evidence only after it received the
further reduced its tax liabilities to ₱2,554,825.47 inclusive of unfavorable CTA Division's original decision.44 In any case,
surcharge.28 DLSU's submission of supplemental documentary evidence was
On the validity of the Letter of Authority unnecessary since its rental income was taxable regardless of its
The issue of the LOA' s validity was raised during trial; 29 hence, disposition.45
the issue was deemed properly submitted for decision and G.R. No. 198841
reviewable on appeal. DLSU argues as that:
Citing jurisprudence, the CTA En Banc held that a LOA should First, RMO No. 43-90 prohibits the practice of issuing a LOA with
cover only one taxable period and that the practice of issuing a any indication of unverified prior years. A LOA issued contrary to
LOA covering audit of unverified prior years is prohibited.30 The RMO No. 43-90 is void, thus, an assessment issued based on
prohibition is consistent with Revenue Memorandum Order such defective LOA must also be void.46
(RMO) No. 43-90, which provides that if the audit includes more DLSU points out that the LOA issued to it covered the Fiscal Year
than one taxable period, the other periods or years shall be Ending 2003 and Unverified Prior Years. On the basis of this
specifically indicated in the LOA.31 defective LOA, the Commissioner assessed DLSU for deficiency
income tax, VAT and DST for taxable years 2001, 2002 and prove that it actually, directly and exclusively used its income for
2003.47 DLSU objects to the CTA En Banc's conclusion that the educational purposes.59
LOA is valid for taxable year 2003. According to DLSU, when DLSU also cites the deliberations of the 1986 Constitutional
RMO No. 43-90 provides that: Commission where they recognized that the tax exemption was
The practice of issuing [LOAs] covering audit of 'unverified prior granted "to incentivize private educational institutions to share
years' is hereby prohibited. with the State the responsibility of educating the youth."60
it refers to the LOA which has the format "Base Year + Unverified Third, DLSU highlights that both the CTA En Banc and Division
Prior Years." Since the LOA issued to DLSU follows this format, found that the bank that handled DLSU' s loan and mortgage
then any assessment arising from it must be entirely voided.48 transactions had remitted to the BIR the DST through an
Second, DLSU invokes the principle of uniformity in taxation, imprinting machine, a method allowed under RR No. 15-2001.61
which mandates that for similarly situated parties, the same set of In any case, DLSU argues that it cannot be held liable for DST
evidence should be appreciated and weighed in the same owing to the exemption granted under the Constitution. 62
manner.49 The CTA En Banc erred when it did not similarly Finally, DLSU underscores that the Commissioner, despite
appreciate DLSU' s evidence as it did to the pieces of evidence notice, did not oppose the formal offer of supplemental evidence.
submitted by Ateneo, also a non-stock, non-profit educational Because of the Commissioner's failure to timely object, she
institution.50 became bound by the results of the submission of such
G.R. No. 198941 supplemental evidence.63
The issues and arguments raised by the Commissioner in G.R. The CIR's Comment on G.R. No. 198841
No. 198941 petition are exactly the same as those she raised in The Commissioner submits that DLSU is estopped from
her: (1) petition docketed as G.R. No. 196596 and (2) comment questioning the LOA's validity because it failed to raise this issue
on DLSU's petition docketed as G.R. No. 198841.51 in both the administrative and judicial proceedings. 64 That it was
Counter-arguments asked on cross-examination during the trial does not make it an
DLSU's Comment on G.R. No. 196596 issue that the CTA could resolve.65 The Commissioner also
First, DLSU questions the defective verification attached to the maintains that DLSU's rental income is not tax-exempt because
petition.52 an educational institution is only exempt from property tax but not
Second, DLSU stresses that Article XIV, Section 4 (3) of the from tax on the income earned from the property.66
Constitution is clear that all assets and revenues of non-stock, DLSU's Comment on G.R. No. 198941
non-profit educational institutions used actually, directly and DLSU puts forward the same counter-arguments discussed
exclusively for educational purposes are exempt from taxes and above.67 In addition, DLSU prays that the Court award attorney's
duties.53 fees in its favor because it was constrained to unnecessarily retain
On this point, DLSU explains that: (1) the tax exemption of non- the services of counsel in this separate petition.68
stock, non-profit educational institutions is novel to the 1987 Issues
Constitution and that Section 30 (H) of the 1997 Tax Code Although the parties raised a number of issues, the Court shall
cannot amend the 1987 Constitution;54 (2) Section 30 of the decide only the pivotal issues, which we summarize as follows:
1997 Tax Code is almost an exact replica of Section 26 of the I. Whether DLSU' s income and revenues proved to have been
1977 Tax Code -with the addition of non-stock, non-profit used actually, directly and exclusively for educational purposes
educational institutions to the list of tax-exempt entities; and (3) are exempt from duties and taxes;
that the 1977 Tax Code was promulgated when the 1973 II. Whether the entire assessment should be voided because of
Constitution was still in place. the defective LOA;
DLSU elaborates that the tax exemption granted to a private III. Whether the CTA correctly admitted DLSU's supplemental
educational institution under the 1973 Constitution was only for pieces of evidence; and
real property tax. Back then, the special tax treatment on income IV. Whether the CTA's appreciation of the sufficiency of DLSU's
of private educational institutions only emanates from statute, i.e., evidence may be disturbed by the Court.
the 1977 Tax Code. Only under the 1987 Constitution that Our Ruling
exemption from tax of all the assets and revenues of non-stock, As we explain in full below, we rule that:
non-profit educational institutions used actually, directly and I. The income, revenues and assets of non-stock, non-profit
exclusively for educational purposes, was expressly and educational institutions proved to have been used actually,
categorically enshrined.55 directly and exclusively for educational purposes are exempt from
DLSU thus invokes the doctrine of constitutional supremacy, duties and taxes.
which renders any subsequent law that is contrary to the II. The LOA issued to DLSU is not entirely void. The assessment
Constitution void and without any force and effect. 56 Section 30 for taxable year 2003 is valid.
(H) of the 1997 Tax Code insofar as it subjects to tax the income III. The CTA correctly admitted DLSU's formal offer of
of whatever kind and character of a non-stock and non-profit supplemental evidence; and
educational institution from any of its properties, real or personal, IV. The CTA's appreciation of evidence is conclusive unless the
or from any of its activities conducted for profit regardless of the CTA is shown to have manifestly overlooked certain relevant facts
disposition made of such income, should be declared without not disputed by the parties and which, if properly considered,
force and effect in view of the constitutionally granted tax would justify a different conclusion.
exemption on "all revenues and assets of non-stock, non-profit The parties failed to convince the Court that the CTA overlooked
educational institutions used actually, directly, and exclusively for or failed to consider relevant facts. We thus sustain the CTA En
educational purposes."57 Banc's findings that:
DLSU further submits that it complies with the requirements a. DLSU proved that a portion of its rental income was used
enunciated in the YMCA case, that for an exemption to be granted actually, directly and exclusively for educational purposes; and
under Article XIV, Section 4 (3) of the Constitution, the taxpayer b. DLSU proved the payment of the DST through its bank's on-
must prove that: (1) it falls under the classification non-stock, non- line imprinting machine.
profit educational institution; and (2) the income it seeks to be I. The revenues and assets of non-stock,
 non-profit
exempted from taxation is used actually, directly and exclusively
for educational purposes.58 Unlike YMCA, which is not an educational institutions
 proved to have been used
educational institution, DLSU is undisputedly a non-stock, non-
profit educational institution. It had also submitted evidence to
actually,
 directly, and exclusively for of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
educational
 purposes are exempt from duties and
 taxes. The issue in YMCA was whether the income derived from rentals
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 of real property owned by the YMCA, established as a "welfare,
Constitution, which reads: educational and charitable non-profit corporation," was subject to
(3) All revenues and assets of non-stock, non-profit income tax under the Tax Code and the Constitution.72
educational institutions used actually, directly, and The Court denied YMCA's claim for exemption on the ground that
exclusively for educational purposes shall be exempt from as a charitable institution falling under Article VI, Section 28 (3)
taxes and duties. Upon the dissolution or cessation of the of the Constitution,73 the YMCA is not tax-exempt per se; " what
corporate existence of such institutions, their assets shall be is exempted is not the institution itself... those exempted from real
disposed of in the manner provided by law. estate taxes are lands, buildings and improvements actually,
Proprietary educational institutions, including those directly and exclusively used for religious, charitable or
cooperatively owned, may likewise be entitled to such educational purposes."74
exemptions subject to the limitations provided by law The Court held that the exemption claimed by the YMCA is
including restrictions on dividends and provisions for expressly disallowed by the last paragraph of then Section 27
reinvestment. [underscoring and emphasis supplied] (now Section 30) of the Tax Code, which mandates that the
Before fully discussing the merits of the case, we observe that: income of exempt organizations from any of their properties, real
First, the constitutional provision refers to two kinds of educational or personal, are subject to the same tax imposed by the Tax
institutions: (1) non-stock, non-profit educational institutions and Code, regardless of how that income is used. The Court ruled that
(2) proprietary educational institutions.69 the last paragraph of Section 27 unequivocally subjects to tax the
Second, DLSU falls under the first category. Even the rent income of the YMCA from its property.75
Commissioner admits the status of DLSU as a non-stock, non- In short, the YMCA is exempt only from property tax but not from
profit educational institution.70 income tax.
Third, while DLSU's claim for tax exemption arises from and is As a last ditch effort to avoid paying the taxes on its rental income,
based on the Constitution, the Constitution, in the same provision, the YMCA invoked the tax privilege granted under Article XIV,
also imposes certain conditions to avail of the exemption. We Section 4 (3) of the Constitution.
discuss below the import of the constitutional text vis-a-vis the The Court denied YMCA's claim that it falls under Article XIV,
Commissioner's counter-arguments. Section 4 (3) of the Constitution holding that the term educational
Fourth, there is a marked distinction between the treatment of institution, when used in laws granting tax exemptions, refers to
non-stock, non-profit educational institutions and proprietary the school system (synonymous with formal education); it
educational institutions. The tax exemption granted to non-stock, includes a college or an educational establishment; it refers to the
non-profit educational institutions is conditioned only on the hierarchically structured and chronologically graded learnings
actual, direct and exclusive use of their revenues and assets for organized and provided by the formal school system. 76
educational purposes. While tax exemptions may also be granted The Court then significantly laid down the requisites for availing
to proprietary educational institutions, these exemptions may be the tax exemption under Article XIV, Section 4 (3), namely: (1) the
subject to limitations imposed by Congress. taxpayer falls under the classification non-stock, non-profit
As we explain below, the marked distinction between a non-stock, educational institution; and (2) the income it seeks to be
non-profit and a proprietary educational institution is crucial in exempted from taxation is used actually, directly and
determining the nature and extent of the tax exemption granted to exclusively for educational purposes.77
non-stock, non-profit educational institutions. We now adopt YMCA as precedent and hold that:
The Commissioner opposes DLSU's claim for tax exemption on 1. The last paragraph of Section 30 of the Tax Code is without
the basis of Section 30 (H) of the Tax Code. The relevant text force and effect with respect to non-stock, non-profit educational
reads: institutions, provided, that the non-stock, non-profit educational
The following organizations shall not be taxed under this Title institutions prove that its assets and revenues are used actually,
[Tax on directly and exclusively for educational purposes.
Income] in respect to income received by them as such: 2. The tax-exemption constitutionally-granted to non-stock, non-
xxxx profit educational institutions, is not subject to limitations imposed
(H) A non-stock and non-profit educational institution by law.
xxxx The tax exemption granted by the
 Constitution to non-
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing stock, non-profit
 educational institutions is conditioned
organizations from any of their properties, real or personal, or only
 on the actual, direct and exclusive use of
 their
from any of their activities conducted for profit regardless of
the disposition made of such income shall be subject to tax assets, revenues and income78 for
 educational purposes.
imposed under this Code. [underscoring and emphasis We find that unlike Article VI, Section 28 (3) of the Constitution
supplied] (pertaining to charitable institutions, churches, parsonages or
The Commissioner posits that the 1997 Tax Code qualified the convents, mosques, and non-profit cemeteries), which exempts
tax exemption granted to non-stock, non-profit educational from tax only the assets, i.e., "all lands, buildings, and
institutions such that the revenues and income they derived from improvements, actually, directly, and exclusively used for
their assets, or from any of their activities conducted for profit, are religious, charitable, or educational purposes ... ," Article XIV,
taxable even if these revenues and income are used for Section 4 (3) categorically states that "[a]ll revenues and assets
educational purposes. ... used actually, directly, and exclusively for educational
Did the 1997 Tax Code qualify the tax exemption constitutionally- purposes shall be exempt from taxes and duties."
granted to non-stock, non-profit educational institutions? The addition and express use of the word revenues in Article XIV,
We answer in the negative. Section 4 (3) of the Constitution is not without significance.
While the present petition appears to be a case of first We find that the text demonstrates the policy of the 1987
impression,71 the Court in the YMCA case had in fact already Constitution, discernible from the records of the 1986
analyzed and explained the meaning of Article XIV, Section 4 (3) Constitutional Commission79 to provide broader tax privilege to
non-stock, non-profit educational institutions as recognition of
their role in assisting the State provide a public good. The tax for educational purposes are not exempt from duties and taxes.
exemption was seen as beneficial to students who may otherwise To avail of the exemption, the taxpayer must factually prove that
be charged unreasonable tuition fees if not for the tax exemption it used actually, directly and exclusively for educational purposes
extended to all revenues and assets of non-stock, non-profit the revenues or income sought to be exempted.
educational institutions.80 The crucial point of inquiry then is on the use of the assets or on
Further, a plain reading of the Constitution would show that Article the use of the revenues. These are two things that must be
XIV, Section 4 (3) does not require that the revenues and income viewed and treated separately. But so long as the assets or
must have also been sourced from educational activities or revenues are used actually, directly and exclusively for
activities related to the purposes of an educational institution. The educational purposes, they are exempt from duties and taxes.
phrase all revenues is unqualified by any reference to the source The tax exemption granted by the
 Constitution to non-
of revenues. Thus, so long as the revenues and income are used
actually, directly and exclusively for educational purposes, then stock, non-profit
 educational institutions, unlike the
said revenues and income shall be exempt from taxes and exemption
 that may be availed of by
duties.81
We find it helpful to discuss at this point the taxation of revenues proprietary
 educational institutions, is not subject
versus the taxation of assets. to
 limitations imposed by law.
Revenues consist of the amounts earned by a person or entity
That the Constitution treats non-stock, non-profit educational
from the conduct of business operations.82 It may refer to the sale
institutions differently from proprietary educational institutions
of goods, rendition of services, or the return of an investment.
cannot be doubted. As discussed, the privilege granted to the
Revenue is a component of the tax base in income tax, 83 VAT,84
former is conditioned only on the actual, direct and exclusive use
and local business tax (LBT).85
of their revenues and assets for educational purposes. In clear
Assets, on the other hand, are the tangible and intangible
contrast, the tax privilege granted to the latter may be subject to
properties owned by a person or entity. 86 It may refer to real
limitations imposed by law.
estate, cash deposit in a bank, investment in the stocks of a
We spell out below the difference in treatment if only to highlight
corporation, inventory of goods, or any property from which the
the privileged status of non-stock, non-profit educational
person or entity may derive income or use to generate the same.
institutions compared with their proprietary counterparts.
In Philippine taxation, the fair market value of real property is a
While a non-stock, non-profit educational institution is classified
component of the tax base in real property tax (RPT).87 Also, the
as a tax-exempt entity under Section 30 (Exemptions from Tax on
landed cost of imported goods is a component of the tax base in
Corporations) of the Tax Code, a proprietary educational
VAT on importation88 and tariff duties.89
institution is covered by Section 27 (Rates of Income Tax on
Thus, when a non-stock, non-profit educational institution proves
Domestic Corporations).
that it uses its revenues actually, directly, and exclusively for
To be specific, Section 30 provides that exempt organizations like
educational purposes, it shall be exempted from income tax, VAT,
non-stock, non-profit educational institutions shall not be taxed on
and LBT. On the other hand, when it also shows that it uses its
income received by them as such.
assets in the form of real property for educational purposes, it
Section 27 (B), on the other hand, states that "[p]roprietary
shall be exempted from RPT.
educational institutions ... which are nonprofit shall pay a tax of
To be clear, proving the actual use of the taxable item will result
ten percent (10%) on their taxable income .. . Provided, that if the
in an exemption, but the specific tax from which the entity shall be
gross income from unrelated trade, business or other activity
exempted from shall depend on whether the item is an item of
exceeds fifty percent (50%) of the total gross income derived by
revenue or asset.
such educational institutions ... [the regular corporate income tax
To illustrate, if a university leases a portion of its school building
of 30%] shall be imposed on the entire taxable income ... " 92
to a bookstore or cafeteria, the leased portion is not actually,
By the Tax Code's clear terms, a proprietary educational
directly and exclusively used for educational purposes, even if the
institution is entitled only to the reduced rate of 10% corporate
bookstore or canteen caters only to university students, faculty
income tax. The reduced rate is applicable only if: (1) the
and staff.
proprietary educational institution is nonprofit and (2) its gross
The leased portion of the building may be subject to real property
income from unrelated trade, business or activity does not exceed
tax, as held in Abra Valley College, Inc. v. Aquino.90 We ruled in
50% of its total gross income.
that case that the test of exemption from taxation is the use of the
Consistent with Article XIV, Section 4 (3) of the Constitution, these
property for purposes mentioned in the Constitution. We also held
limitations do not apply to non-stock, non-profit educational
that the exemption extends to facilities which are incidental to and
institutions.
reasonably necessary for the accomplishment of the main
Thus, we declare the last paragraph of Section 30 of the Tax Code
purposes.
without force and effect for being contrary to the Constitution
In concrete terms, the lease of a portion of a school building for
insofar as it subjects to tax the income and revenues of non-stock,
commercial purposes, removes such asset from the property tax
non-profit educational institutions used actually, directly and
exemption granted under the Constitution.91 There is no
exclusively for educational purpose. We make this declaration in
exemption because the asset is not used actually, directly and
the exercise of and consistent with our duty93 to uphold the
exclusively for educational purposes. The commercial use of the
primacy of the Constitution.94
property is also not incidental to and reasonably necessary for the
Finally, we stress that our holding here pertains only to non-stock,
accomplishment of the main purpose of a university, which is to
non-profit educational institutions and does not cover the other
educate its students.
exempt organizations under Section 30 of the Tax Code.
However, if the university actually, directly and exclusively uses
For all these reasons, we hold that the income and revenues of
for educational purposes the revenues earned from the lease of
DLSU proven to have been used actually, directly and exclusively
its school building, such revenues shall be exempt from taxes and
for educational purposes are exempt from duties and taxes.
duties. The tax exemption no longer hinges on the use of the
asset from which the revenues were earned, but on the actual, II. The LOA issued to DLSU is
 not entirely void.
direct and exclusive use of the revenues for educational The
 assessment for taxable year
 2003 is valid.
purposes.
DLSU objects to the CTA En Banc 's conclusion that the LOA is
Parenthetically, income and revenues of non-stock, non-profit
valid for taxable year 2003 and insists that the entire LOA should
educational institution not used actually, directly and exclusively
be voided for being contrary to RMO No. 43-90, which provides
that if tax audit includes more than one taxable period, the other that a portion of DLSU's rental income was used actually, directly
periods or years shall be specifically indicated in the LOA. and exclusively for educational purposes. Consequently, the CTA
A LOA is the authority given to the appropriate revenue officer to Division reduced DLSU's tax liabilities.
examine the books of account and other accounting records of We uphold the CTA Division's admission of the supplemental
the taxpayer in order to determine the taxpayer's correct internal evidence on distinct but mutually reinforcing grounds, to wit: (1)
revenue liabilities95 and for the purpose of collecting the correct the Commissioner failed to timely object to the formal offer of
amount of tax,96 in accordance with Section 5 of the Tax Code, supplemental evidence; and (2) the CTA is not governed strictly
which gives the CIR the power to obtain information, to by the technical rules of evidence.
summon/examine, and take testimony of persons. The LOA First, the failure to object to the offered evidence renders it
commences the audit process97 and informs the taxpayer that it admissible, and the court cannot, on its own, disregard such
is under audit for possible deficiency tax assessment. evidence.104
Given the purposes of a LOA, is there basis to completely nullify The Court has held that if a party desires the court to reject the
the LOA issued to DLSU, and consequently, disregard the BIR evidence offered, it must so state in the form of a timely objection
and the CTA's findings of tax deficiency for taxable year 2003? and it cannot raise the objection to the evidence for the first time
We answer in the negative. on appeal.105 Because of a party's failure to timely object, the
The relevant provision is Section C of RMO No. 43-90, the evidence offered becomes part of the evidence in the case. As a
pertinent portion of which reads: consequence, all the parties are considered bound by any
3. A Letter of Authority [LOA] should cover a taxable period not outcome arising from the offer of evidence properly presented. 106
exceeding one taxable year. The practice of issuing [LO As] As disclosed by DLSU, the Commissioner did not oppose the
covering audit of unverified prior years is hereby prohibited. If the supplemental formal offer of evidence despite notice.107 The
audit of a taxpayer shall include more than one taxable period, the Commissioner objected to the admission of the supplemental
other periods or years shall be specifically indicated in the evidence only when the case was on appeal to the CTA En Banc.
[LOA].98 By the time the Commissioner raised her objection, it was too late;
What this provision clearly prohibits is the practice of issuing the formal offer, admission and evaluation of the supplemental
LOAs covering audit of unverified prior years. RMO 43-90 does evidence were all fait accompli.
not say that a LOA which contains unverified prior years is void. We clarify that while the Commissioner's failure to promptly object
It merely prescribes that if the audit includes more than one had no bearing on the materiality or sufficiency of the
taxable period, the other periods or years must be specified. The supplemental evidence admitted, she was bound by the outcome
provision read as a whole requires that if a taxpayer is audited for of the CTA Division's assessment of the evidence.108
more than one taxable year, the BIR must specify each taxable Second, the CTA is not governed strictly by the technical rules of
year or taxable period on separate LOAs. evidence. The CTA Division's admission of the formal offer of
Read in this light, the requirement to specify the taxable period supplemental evidence, without prompt objection from the
covered by the LOA is simply to inform the taxpayer of the extent Commissioner, was thus justified.
of the audit and the scope of the revenue officer's authority. Notably, this Court had in the past admitted and considered
Without this rule, a revenue officer can unduly burden the evidence attached to the taxpayers' motion for
taxpayer by demanding random accounting records from random reconsideration.1âwphi1
unverified years, which may include documents from as far back In the case of BPI-Family Savings Bank v. Court of Appeals,109
as ten years in cases of fraud audit.99 the tax refund claimant attached to its motion for reconsideration
In the present case, the LOA issued to DLSU is for Fiscal Year with the CT A its Final Adjustment Return. The Commissioner, as
Ending 2003 and Unverified Prior Years. The LOA does not in the present case, did not oppose the taxpayer's motion for
strictly comply with RMO 43-90 because it includes unverified reconsideration and the admission of the Final Adjustment
prior years. This does not mean, however, that the entire LOA is Return.110 We thus admitted and gave weight to the Final
void. Adjustment Return although it was only submitted upon motion
As the CTA correctly held, the assessment for taxable year 2003 for reconsideration.
is valid because this taxable period is specified in the LOA. DLSU We held that while it is true that strict procedural rules generally
was fully apprised that it was being audited for taxable year 2003. frown upon the submission of documents after the trial, the law
Corollarily, the assessments for taxable years 2001 and 2002 are creating the CTA specifically provides that proceedings before it
void for having been unspecified on separate LOAs as required shall not be governed strictly by the technical rules of evidence 111
under RMO No. 43-90. and that the paramount consideration remains the ascertainment
Lastly, the Commissioner's claim that DLSU failed to raise the of truth. We ruled that procedural rules should not bar courts from
issue of the LOA' s validity at the CTA Division, and thus, should considering undisputed facts to arrive at a just determination of a
not have been entertained on appeal, is not accurate. controversy.112
On the contrary, the CTA En Banc found that the issue of the We applied the same reasoning in the subsequent cases of
LOA's validity came up during the trial.100 DLSU then raised the Filinvest Development Corporation v. Commissioner of Internal
issue in its memorandum and motion for partial reconsideration Revenue113 and Commissioner of Internal Revenue v. PERF
with the CTA Division. DLSU raised it again on appeal to the CTA Realty Corporation,114 where the taxpayers also submitted the
En Banc. Thus, the CTA En Banc could, as it did, pass upon the supplemental supporting document only upon filing their motions
validity of the LOA.101 Besides, the Commissioner had the for reconsideration.
opportunity to argue for the validity of the LOA at the CTA En Banc Although the cited cases involved claims for tax refunds, we also
but she chose not to file her comment and memorandum despite dispense with the strict application of the technical rules of
notice.102 evidence in the present tax assessment case. If anything, the
III.The CTA correctly admitted
 the supplemental liberal application of the rules assumes greater force and
significance in the case of a taxpayer who claims a constitutionally
evidence
 formally offered by DLSU. granted tax exemption. While the taxpayers in the cited cases
The Commissioner objects to the CTA Division's admission of claimed refund of excess tax payments based on the Tax Code,115
DLSU's supplemental pieces of documentary evidence. DLSU is claiming tax exemption based on the Constitution. If
To recall, DLSU formally offered its supplemental evidence upon liberality is afforded to taxpayers who paid more than they should
filing its motion for reconsideration with the CTA Division.103 The have under a statute, then with more reason that we should allow
CTA Division admitted the supplemental evidence, which proved
a taxpayer to prove its exemption from tax based on the substantiation requirements under pertinent tax laws,
Constitution. regulations and jurisprudence; (e) submission of a formal
Hence, we sustain the CTA's admission of DLSU's supplemental report with certification of authenticity and veracity of findings and
offer of evidence not only because the Commissioner failed to conclusions in the performance of the audit; (f) testifying on such
promptly object, but more so because the strict application of the formal report; and (g) performing such other functions as the CTA
technical rules of evidence may defeat the intent of the may direct.122
Constitution. Based on the Independent CPA's report and on its own
IV. The CTA's appreciation of
 evidence is generally binding appreciation of the evidence, the CTA held that only the portion
of the rental income pertaining to the substantiated
on
 the Court unless compelling
 reasons justify otherwise. disbursements (i.e., proved by receipts, vouchers, etc.) from the
It is doctrinal that the Court will not lightly set aside the CF-CPA Account was considered as used actually, directly and
conclusions reached by the CTA which, by the very nature of its exclusively for educational purposes. Consequently, the
function of being dedicated exclusively to the resolution of tax unaccounted and unsubstantiated disbursements must be
problems, has developed an expertise on the subject, unless subjected to income tax and VAT.123
there has been an abuse or improvident exercise of authority. 116 The CTA then further reduced DLSU's tax liabilities by cancelling
We thus accord the findings of fact by the CTA with the highest the assessments for taxable years 2001 and 2002 due to the
respect. These findings of facts can only be disturbed on appeal defective LOA.124
if they are not supported by substantial evidence or there is a The Court finds that the above fact-finding process undertaken by
showing of gross error or abuse on the part of the CTA. In the the CTA shows that it based its ruling on the evidence on record,
absence of any clear and convincing proof to the contrary, this which we reiterate, were examined and verified by the
Court must presume that the CTA rendered a decision which is Independent CPA. Thus, we see no persuasive reason to deviate
valid in every respect.117 from these factual findings.
We sustain the factual findings of the CTA. However, while we generally respect the factual findings of the
The parties failed to raise credible basis for us to disturb the CTA's CTA, it does not mean that we are bound by its conclusions. In
findings that DLSU had used actually, directly and exclusively for the present case, we do not agree with the method used by the
educational purposes a portion of its assessed income and that it CTA to arrive at DLSU' s unsubstantiated rental income (i.e.,
had remitted the DST payments though an online imprinting income not proved to have been actually, directly and exclusively
machine. used for educational purposes).
a. DLSU used actually, directly, and exclusively for educational To recall, the CTA found that DLSU earned a rental income of
purposes a portion of its assessed income. ₱l0,610,379.00 in taxable year 2003.125 DLSU earned this income
To see how the CTA arrived at its factual findings, we review the from leasing a portion of its premises to: 1) MTG-Sports Complex,
process undertaken, from which it deduced that DLSU 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5) Capri
successfully proved that it used actually, directly and exclusively International, and 6) MTO Bookstore.126
for educational purposes a portion of its rental income. To prove that its rental income was used for educational
The CTA reduced DLSU' s deficiency income tax and VAT purposes, DLSU identified the transactions where the rental
liabilities in view of the submission of the supplemental evidence, income was expended, viz.: 1) ₱4,007,724.00127 used to pay the
which consisted of statement of receipts, statement of loan obtained by DLSU to build the Sports Complex; and 2)
disbursement and fund balance and statement of fund ₱6,602,655.00 transferred to the CF-CPA Account.128
changes.118 DLSU also submitted documents to the Independent CPA to
These documents showed that DLSU borrowed ₱93.86 Million, 119 prove that the ₱6,602,655.00 transferred to the CF-CPA Account
which was used to build the university's Sports Complex. Based was used actually, directly and exclusively for educational
on these pieces of evidence, the CTA found that DLSU' s rental purposes. According to the Independent CPA' findings, DLSU
income from its concessionaires were indeed transmitted and was able to substantiate disbursements from the CF-CPA
used for the payment of this loan. The CTA held that the degree Account amounting to ₱6,259,078.30.
of preponderance of evidence was sufficiently met to prove Contradicting the findings of the Independent CPA, the CTA
actual, direct and exclusive use for educational purposes. concluded that out of the ₱l0,610,379.00 rental income,
The CTA also found that DLSU's rental income from other ₱4,841,066.65 was unsubstantiated, and thus, subject to income
concessionaires, which were allegedly deposited to a fund (CF- tax and VAT.129
CPA Account),120 intended for the university's capital projects, The CTA then concluded that the ratio of substantiated
was not proved to have been used actually, directly and disbursements to the total disbursements from the CF-CPA
exclusively for educational purposes. The CTA observed that Account for taxable year 2003 is only 26.68%.130 The CTA held
"[DLSU] ... failed to fully account for and substantiate all the as follows:
disbursements from the [fund]." Thus, the CTA "cannot ascertain However, as regards petitioner's rental income from Alarey, Inc.,
whether rental income from the [other] concessionaires was Zaide Food Corp., Capri International and MTO Bookstore, which
indeed used for educational purposes."121 were transmitted to the CF-CPA Account, petitioner again failed
To stress, the CTA's factual findings were based on and to fully account for and substantiate all the disbursements from
supported by the report of the Independent CPA who reviewed, the CF-CPA Account; thus failing to prove that the rental income
audited and examined the voluminous documents submitted by derived therein were actually, directly and exclusively used for
DLSU. educational purposes. Likewise, the findings of the Court-
Under the CTA Revised Rules, an Independent CPA's functions Commissioned Independent CPA show that the disbursements
include: (a) examination and verification of receipts, invoices, from the CF-CPA Account for fiscal year 2003 amounts to
vouchers and other long accounts; (b) reproduction of, and ₱6,259,078.30 only. Hence, this portion of the rental income,
comparison of such reproduction with, and certification that the being the substantiated disbursements of the CF-CPA Account,
same are faithful copies of original documents, and pre-marking was considered by the Special First Division as used actually,
of documentary exhibits consisting of voluminous documents; (c) directly and exclusively for educational purposes. Since for fiscal
preparation of schedules or summaries containing a chronological year 2003, the total disbursements per voucher is ₱6,259,078.3
listing of the numbers, dates and amounts covered by receipts or (Exhibit "LL-25-C"), and the total disbursements per subsidiary
invoices or other relevant documents and the amount(s) of taxes ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio
paid; (d) making findings as to compliance with of substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion had been used for educational purposes. This was what DLSU
of CF-CPA Disbursements for fiscal year 2003, arrived at by needed to prove to have actually and directly used for educational
multiplying the ratio of 26.68% with the total rent income added to purposes.
and used in the CF-CPA Account in the amount of ₱6,602,655.00 That this fund had been first deposited into a separate fund (the
is ₱1,761,588.35.131 (emphasis supplied) CF -CPA established to fund capital projects) lends peculiarity to
For better understanding, we summarize the CTA's computation the facts of this case, but does not detract from the fact that the
as follows: deposited funds were DLSU revenue funds that had been
1. The CTA subtracted the rent income used in the construction confirmed and proven to have been actually and directly used for
of the Sports Complex (₱4,007,724.00) from the rental income educational purposes via the CF-CPA. That the CF-CPA might
(₱10,610,379.00) earned from the abovementioned have had other sources of funding is irrelevant because the
concessionaries. The difference (₱6,602,655.00) was the portion assessment in the present case pertains only to the rental income
claimed to have been deposited to the CF-CPA Account. which DLSU indisputably earned as revenue in 2003. That the
2. The CTA then subtracted the supposed substantiated portion proven CF-CPA funds used for educational purposes should not
of CF-CPA disbursements (₱1,761,308.37) from the be prorated as part of its total CF-CPA disbursements for
₱6,602,655.00 to arrive at the supposed unsubstantiated portion purposes of crediting to DLSU is also logical because no claim
of the rental income (₱4,841,066.65).132 whatsoever had been made that the totality of the CF-CPA
3. The substantiated portion of CF-CPA disbursements disbursements had been for educational purposes. No prorating
(₱l,761,308.37)133 was derived by multiplying the rental income is necessary; to state the obvious, exemption is based on actual
claimed to have been added to the CF-CPA Account and direct use and this DLSU has indisputably proven.
(₱6,602,655.00) by 26.68% or the ratio of substantiated Based on these considerations, DLSU should therefore be liable
disbursements to total disbursements (₱23,463,543.02). only for the difference between what it claimed and what it has
4. The 26.68% ratio134 was the result of dividing the substantiated proven. In more concrete terms, DLSU only had to prove that its
disbursements from the CF-CPA Account as found by the rental income for taxable year 2003 (₱10,610,379.00) was used
Independent CPA (₱6,259,078.30) by the total disbursements for educational purposes. Hence, while the total disbursements
(₱23,463,543.02) from the same account. from the CF-CPA Account amounted to ₱23,463,543.02, DLSU
We find that this system of calculation is incorrect and does not only had to substantiate its Pl0.6 million rental income, part of
truly give effect to the constitutional grant of tax exemption to non- which was the ₱6,602,655.00 transferred to the CF-CPA account.
stock, non-profit educational institutions. The CTA's reasoning is Of this latter amount, ₱6.259 million was substantiated to have
flawed because it required DLSU to substantiate an amount that been used for educational purposes.
is greater than the rental income deposited in the CF-CPA To summarize, we thus revise the tax base for deficiency income
Account in 2003. tax and VAT for taxable year 2003 as follows:
To reiterate, to be exempt from tax, DLSU has the burden of
proving that the proceeds of its rental income (which amounted to
a total of ₱10.61 million)135 were used for educational purposes. Rental income
This amount was divided into two parts: (a) the ₱4.0l million,
Less: Rent income used in construction of the Sports Complex
which was used to pay the loan obtained for the construction of
the Sports Complex; and (b) the ₱6.60 million, 136 which was
transferred to the CF-CPA account. Rental income deposited to the CF-CPA Account
For year 2003, the total disbursement from the CF-CPA account
amounted to ₱23 .46 million.137 These figures, read in light of the
Less: Substantiated portion of CF-CPA disbursements
constitutional exemption, raises the question: does DLSU claim
that the whole total CF-CPA disbursement of ₱23.46 million
is tax-exempt so that it is required to prove that all these Tax base for deficiency income tax and VAT
disbursements had been made for educational purposes? On DLSU' s argument that the CTA should have appreciated its
We answer in the negative. evidence in the same way as it did with the evidence submitted
The records show that DLSU never claimed that the total CF-CPA by Ateneo in another separate case, the CTA explained that the
disbursements of ₱23.46 million had been for educational issue in the Ateneo case was not the same as the issue in the
purposes and should thus be tax-exempt; DLSU only claimed present case.
₱10.61 million for tax-exemption and should thus be required to The issue in the Ateneo case was whether or not Ateneo could be
prove that this amount had been used as claimed. held liable to pay income taxes and VAT under certain BIR and
Of this amount, ₱4.01 had been proven to have been used for Department of Finance issuances139 that required the educational
educational purposes, as confirmed by the Independent CPA. institution to own and operate the canteens, or other commercial
The amount in issue is therefore the balance of ₱6.60 million enterprises within its campus, as condition for tax exemption. The
which was transferred to the CF-CPA which in turn made CTA held that the Constitution does not require the educational
disbursements of ₱23.46 million for various general purposes, institution to own or operate these commercial establishments to
among them the ₱6.60 million transferred by DLSU. avail of the exemption.140
Significantly, the Independent CPA confirmed that the CF-CPA Given the lack of complete identity of the issues involved, the CTA
made disbursements for educational purposes in year 2003 in the held that it had to evaluate the separate sets of evidence
amount ₱6.26 million. Based on these given figures, the CT A differently. The CTA likewise stressed that DLSU and Ateneo
concluded that the expenses for educational purposes that had gave distinct defenses and that its wisdom "cannot be equated on
been coursed through the CF-CPA should be prorated so that its decision on two different cases with two different issues."141
only the portion that ₱6.26 million bears to the total CF-CPA DLSU disagrees with the CTA and argues that the entire
disbursements should be credited to DLSU for tax exemption. assessment must be cancelled because it submitted similar, if not
This approach, in our view, is flawed given the constitutional stronger sets of evidence, as Ateneo. We reject DLSU's argument
requirement that revenues actually and directly used for for being non sequitur. Its reliance on the concept of uniformity of
educational purposes should be tax-exempt. As already taxation is also incorrect.
mentioned above, DLSU is not claiming that the whole ₱23.46 First, even granting that Ateneo and DLSU submitted similar
million CF-CPA disbursement had been used for educational evidence, the sufficiency and materiality of the evidence
purposes; it only claims that ₱6.60 million transferred to CF-CPA
supporting their respective claims for tax exemption would universities. Success in tax litigation, like in any other litigation,
necessarily differ because their attendant issues and facts differ. depends to a large extent on the sufficiency of evidence. DLSU's
To state the obvious, the amount of income received by DLSU evidence was wanting, thus, the CTA was correct in not fully
and by Ateneo during the taxable years they were assessed cancelling its tax liabilities.
varied. The amount of tax assessment also varied. The amount b. DLSU proved its payment of the DST
of income proven to have been used for educational purposes The CTA affirmed DLSU's claim that the DST due on its mortgage
also varied because the amount substantiated varied.142 Thus, and loan transactions were paid and remitted through its bank's
the amount of tax assessment cancelled by the CTA varied. On-Line Electronic DST Imprinting Machine. The Commissioner
On the one hand, the BIR assessed DLSU a total tax deficiency argues that DLSU is not allowed to use this method of payment
of ₱17,303,001.12 for taxable years 2001, 2002 and 2003. On the because an educational institution is excluded from the class of
other hand, the BIR assessed Ateneo a total deficiency tax of taxpayers who can use the On-Line Electronic DST Imprinting
₱8,864,042.35 for the same period. Notably, DLSU was assessed Machine.
deficiency DST, while Ateneo was not.143 We sustain the findings of the CTA. The Commissioner's
Thus, although both Ateneo and DLSU claimed that they used argument lacks basis in both the Tax Code and the relevant
their rental income actually, directly and exclusively for revenue regulations.
educational purposes by submitting similar evidence, e.g., the DST on documents, loan agreements, and papers shall be levied,
testimony of their employees on the use of university revenues, collected and paid for by the person making, signing, issuing,
the report of the Independent CPA, their income summaries, accepting, or transferring the same.150 The Tax Code provides
financial statements, vouchers, etc., the fact remains that DLSU that whenever one party to the document enjoys exemption from
failed to prove that a portion of its income and revenues had DST, the other party not exempt from DST shall be directly liable
indeed been used for educational purposes. for the tax. Thus, it is clear that DST shall be payable by any party
The CTA significantly found that some documents that could have to the document, such that the payment and compliance by one
fully supported DLSU's claim were not produced in court. Indeed, shall mean the full settlement of the DST due on the document.
the Independent CPA testified that some disbursements had not In the present case, DLSU entered into mortgage and loan
been proven to have been used actually, directly and exclusively agreements with banks. These agreements are subject to DST.151
for educational purposes.144 For the purpose of showing that the DST on the loan agreement
The final nail on the question of evidence is DLSU's own has been paid, DLSU presented its agreements bearing the
admission that the original of these documents had not in fact imprint showing that DST on the document has been paid by the
been produced before the CTA although it claimed that there was bank, its counterparty. The imprint should be sufficient proof that
no bad faith on its part.145 To our mind, this admission is a good DST has been paid. Thus, DLSU cannot be further assessed for
indicator of how the Ateneo and the DLSU cases varied, resulting deficiency DST on the said documents.
in DLSU's failure to substantiate a portion of its claimed Finally, it is true that educational institutions are not included in
exemption. the class of taxpayers who can pay and remit DST through the
Further, DLSU's invocation of Section 5, Rule 130 of the Revised On-Line Electronic DST Imprinting Machine under RR No. 9-
Rules on Evidence, that the contents of the missing supporting 2000. As correctly held by the CTA, this is irrelevant because it
documents were proven by its recital in some other authentic was not DLSU who used the On-Line Electronic DST Imprinting
documents on record,146 can no longer be entertained at this late Machine but the bank that handled its mortgage and loan
stage of the proceeding. The CTA did not rule on this particular transactions. RR No. 9-2000 expressly includes banks in the
claim. The CTA also made no finding on DLSU' s assertion of lack class of taxpayers that can use the On-Line Electronic DST
of bad faith. Besides, it is not our duty to go over these documents Imprinting Machine.
to test the truthfulness of their contents, this Court not being a trier Thus, the Court sustains the finding of the CTA that DLSU proved
of facts. the
Second, DLSU misunderstands the concept of uniformity of payment of the assessed DST deficiency, except for the unpaid
taxation. balance of
Equality and uniformity of taxation means that all taxable articles ₱13,265.48.152
or kinds of property of the same class shall be taxed at the same WHEREFORE, premises considered, we DENY the petition of the
rate.147 A tax is uniform when it operates with the same force and Commissioner of Internal Revenue in G.R. No. 196596 and
effect in every place where the subject of it is found. 148 The AFFIRM the December 10, 2010 decision and March 29, 2011
concept requires that all subjects of taxation similarly situated resolution of the Court of Tax Appeals En Banc in CTA En Banc
should be treated alike and placed in equal footing.149 Case No. 622, except for the total amount of deficiency tax
In our view, the CTA placed Ateneo and DLSU in equal footing. liabilities of De La Salle University, Inc., which had been reduced.
The CTA treated them alike because their income proved to have We also DENY both the petition of De La Salle University, Inc. in
been used actually, directly and exclusively for educational G.R. No. 198841 and the petition of the Commissioner of Internal
purposes were exempted from taxes. The CTA equally applied Revenue in G.R. No. 198941 and thus AFFIRM the June 8, 2011
the requirements in the YMCA case to test if they indeed used decision and October 4, 2011 resolution of the Court of Tax
their revenues for educational purposes. Appeals En Banc in CTA En Banc Case No. 671, with the
DLSU can only assert that the CTA violated the rule on uniformity MODIFICATION that the base for the deficiency income tax and
if it can show that, despite proving that it used actually, directly VAT for taxable year 2003 is ₱343,576.70.
and exclusively for educational purposes its income and SO ORDERED.
revenues, the CTA still affirmed the imposition of taxes. That the
DLSU secured a different result happened because it failed to fully
prove that it used actually, directly and exclusively for educational
purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of
taxation does not mean that subjects of taxation similarly situated
are treated in literally the same way in all and every occasion. The
fact that the Ateneo and DLSU are both non-stock, non-profit
educational institutions, does not mean that the CTA or this Court
would similarly decide every case for (or against) both