[G.R. No. 119286.

October 13, 2004]

PASEO REALTY & DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS, COURT OF TAX
APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
DECISION
TINGA, J.:
The changes in the reportorial requirements and payment schedules of corporate income taxes from annual to
quarterly have created problems, especially on the matter of tax refunds. [1] In this case, the Court is called to resolve
the question of whether alleged excess taxes paid by a corporation during a taxable year should be refunded or
credited against its tax liabilities for the succeeding year.
Paseo Realty and Development Corporation, a domestic corporation engaged in the lease of two (2) parcels of
land at Paseo de Roxas in Makati City, seeks a review of the Decision[2] of the Court of Appeals dismissing its petition
for review of the resolution[3] of the Court of Tax Appeals (CTA) which, in turn, denied its claim for refund.
The factual antecedents[4] are as follows:
On April 16, 1990, petitioner filed its Income Tax Return for the calendar year 1989 declaring a gross income
of P1,855,000.00, deductions of P1,775,991.00, net income ofP79,009.00, an income tax due thereon in the amount
of P27,653.00, prior years excess credit of P146,026.00, and creditable taxes withheld in 1989 of P54,104.00 or a
total tax credit of P200,130.00 and credit balance of P172,477.00.
On November 14, 1991, petitioner filed with respondent a claim for the refund of excess creditable withholding and
income taxes for the years 1989 and 1990 in the aggregate amount of P147,036.15.
On December 27, 1991 alleging that the prescriptive period for refunds for 1989 would expire on December 30, 1991
and that it was necessary to interrupt the prescriptive period, petitioner filed with the respondent Court of Tax Appeals
a petition for review praying for the refund of P54,104.00 representing creditable taxes withheld from income
payments of petitioner for the calendar year ending December 31, 1989.
On February 25, 1992, respondent Commissioner filed an Answer and by way of special and/or affirmative defenses
averred the following: a) the petition states no cause of action for failure to allege the dates when the taxes sought to
be refunded were paid; b) petitioners claim for refund is still under investigation by respondent Commissioner; c) the
taxes claimed are deemed to have been paid and collected in accordance with law and existing pertinent rules and
regulations; d) petitioner failed to allege that it is entitled to the refund or deductions claimed; e) petitioners
contention that it has available tax credit for the current and prior year is gratuitous and does not ipso factowarrant
the refund; f) petitioner failed to show that it has complied with the provision of Section 230 in relation to Section 204
of the Tax Code.
After trial, the respondent Court rendered a decision ordering respondent Commissioner to refund in favor of
petitioner the amount of P54,104.00, representing excess creditable withholding taxes paid for January to July1989.
Respondent Commissioner moved for reconsideration of the decision, alleging that the P54,104.00 ordered to be
refunded has already been included and is part and parcel of the P172,477.00 which petitioner automatically applied
as tax credit for the succeeding taxable year 1990.

In a resolution dated October 21, 1993 Respondent Court reconsidered its decision of July 29, 1993 and dismissed
the petition for review, stating that it has overlooked the fact that the petitioners 1989 Corporate Income Tax Return
(Exh. A) indicated that the amount of P54,104.00 subject of petitioners claim for refund has already been included
as part and parcel of the P172,477.00 which the petitioner automatically applied as tax credit for the succeeding
taxable year 1990.
Petitioner filed a Motion for Reconsideration which was denied by respondent Court on March 10, 1994. [5]
Petitioner filed a Petition for Review[6] dated April 3, 1994 with the Court of Appeals. Resolving the twin issues
of whether petitioner is entitled to a refund of P54,104.00 representing creditable taxes withheld in 1989 and whether
petitioner applied such creditable taxes withheld to its 1990 income tax liability, the appellate court held that petitioner
is not entitled to a refund because it had already elected to apply the total amount of P172,447.00, which includes
the P54,104.00 refund claimed, against its income tax liability for 1990. The appellate court elucidated on the reason
for its dismissal of petitioners claim for refund, thus:
In the instant case, it appears that when petitioner filed its income tax return for the year 1989, it filled up the box
stating that the total amount of P172,477.00 shall be applied against its income tax liabilities for the succeeding
taxable year.
Petitioner did not specify in its return the amount to be refunded and the amount to be applied as tax credit to the
succeeding taxable year, but merely marked an x to the box indicating to be applied as tax credit to the succeeding
taxable year. Unlike what petitioner had done when it filed its income tax return for the year 1988, it specifically
stated that out of the P146,026.00 the entire refundable amount, only P64,623.00 will be made available as tax
credit, while the amount of P81,403.00 will be refunded.
In its 1989 income tax return, petitioner filled up the box to be applied as tax credit to succeeding taxable year,
which signified that instead of refund, petitioner will apply the total amount of P172,447.00, which includes the
amount of P54,104.00 sought to be refunded, as tax credit for its tax liabilities in 1990. Thus, there is really nothing
left to be refunded to petitioner for the year 1989. To grant petitioners claim for refund is tantamount to granting twice
the refund herein sought to be refunded, to the prejudice of the Government.
The Court of Appeals denied petitioners Motion for Reconsideration[7] dated November 8, 1994 in
its Resolution[8] dated February 21, 1995 because the motion merely restated the grounds which have already been
considered and passed upon in its Decision.[9]
Petitioner thus filed the instant Petition for Review[10] dated April 14, 1995 arguing that the evidence presented
before the lower courts conclusively shows that it did not apply the P54,104.00 to its 1990 income tax liability; that
the Decision subject of the instant petition is inconsistent with a final decision [11]of the Sixteenth Division of the
appellate court in C.A.-G.R. Sp. No. 32890 involving the same parties and subject matter; and that the affirmation of
the questioned Decision would lead to absurd results in the manner of claiming refunds or in the application of prior
years excess tax credits.
The Office of the Solicitor General (OSG) filed a Comment[12] dated May 16, 1996 on behalf of respondents
asserting that the claimed refund ofP54,104.00 was, by petitioners election in its Corporate Annual Income Tax
Return for 1989, to be applied against its tax liability for 1990. Not having submitted its tax return for 1990 to show
whether the said amount was indeed applied against its tax liability for 1990, petitioners election in its tax return
stands. The OSG also contends that petitioners election to apply its overpaid income tax as tax credit against its tax
liabilities for the succeeding taxable year is mandatory and irrevocable.
On September 2, 1997, petitioner filed a Reply[13] dated August 31, 1996 insisting that the issue in this case is
not whether the amount of P54,104.00 was included as tax credit to be applied against its 1990 income tax liability
but whether the same amount was actually applied as tax credit for 1990. Petitioner claims that there is no need to
show that the amount of P54,104.00 had not been automatically applied against its 1990 income tax liability because
the appellate courts decision in C.A.-G.R. Sp. No. 32890 clearly held that petitioner charged its 1990 income tax
liability against its tax credit for 1988 and not 1989. Petitioner also disputes the OSGs assertion that the taxpayers

election as to the application of excess taxes is irrevocable averring that there is nothing in the law that prohibits a
taxpayer from changing its mind especially if subsequent events leave the latter no choice but to change its election.
The OSG filed a Rejoinder[14] dated March 5, 1997 stating that petitioners 1988 tax return shows a prior years
excess credit of P81,403.00, creditable tax withheld of P92,750.00 and tax due of P27,127.00. Petitioner indicated
that the prior years excess credit of P81,403.00 was to be refunded, while the remaining amount of P64,623.00
(P92,750.00 - P27,127.00) shall be considered as tax credit for 1989. However, in its 1989 tax return, petitioner
included the P81,403.00 which had already been segregated for refund in the computation of its excess credit, and
specified that the full amount of P172,479.00*(P81,403.00 + P64,623.00 + P54,104.00** - P27,653.00***) be
considered as its tax credit for 1990. Considering that it had obtained a favorable ruling for the refund of its excess
credit for 1988 in CA-G.R. SP. No. 32890, its remaining tax credit for 1989 should be the excess credit to be applied
against its 1990 tax liability. In fine, the OSG argues that by its own election, petitioner can no longer ask for a
refund of its creditable taxes withheld in 1989 as the same had been applied against its 1990 tax due.
In its Resolution[15] dated July 16, 1997, the Court gave due course to the petition and required the parties to
simultaneously file their respective memoranda within 30 days from notice. In compliance with this directive,
petitioner submitted its Memorandum[16] dated September 18, 1997 in due time, while the OSG filed
its Memorandum[17] dated April 27, 1998 only on April 29, 1998 after several extensions.
The petition must be denied.
As a matter of principle, it is not advisable for this Court to set aside the conclusion reached by an agency such
as the CTA which is, by the very nature of its functions, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident
exercise of its authority.[18]
This interdiction finds particular application in this case since the CTA, after careful consideration of the merits of
the Commissioner of Internal Revenues motion for reconsideration, reconsidered its earlier decision which ordered
the latter to refund the amount of P54,104.00 to petitioner. Its resolution cannot be successfully assailed based, as it
is, on the pertinent laws as applied to the facts.
Petitioners 1989 tax return indicates an aggregate creditable tax of P172,477.00, representing its 1988 excess
credit of P146,026.00 and 1989 creditable tax of P54,104.00 less tax due for 1989, which it elected to apply as tax
credit for the succeeding taxable year.[19] According to petitioner, it successively utilized this amount when it obtained
refunds in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300) and CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890), and
applied its 1990 tax liability, leaving a balance of P54,104.00, the amount subject of the instant claim for refund.
[20]
Represented mathematically, petitioner accounts for its claim in this wise:
P172,477.00 Amount indicated in petitioners 1989 tax return to be applied as tax credit for the succeeding taxable
year
- 25,623.00 Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
P146,854.00 Balance as of April 16, 1990
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
P87,344.00 Balance as of January 2, 1991
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15, 1991
P54,104.00 Balance as of April 15, 1991 now subject of the instant claim for refund [21]
Other than its own bare allegations, however, petitioner offers no proof to the effect that its creditable tax
of P172,477.00 was applied as claimed above. Instead, it anchors its assertion of entitlement to refund on an alleged
finding in C.A.-G.R. Sp. No. 32890[22] involving the same parties to the effect that petitioner charged its 1990 income

tax liability to its tax credit for 1988 and not its 1989 tax credit. Hence, its excess creditable taxes withheld
of P54,104.00 for 1989 was left untouched and may be refunded.
Note should be taken, however, that nowhere in the case referred to by petitioner did the Court of Appeals make
a categorical determination that petitioners tax liability for 1990 was applied against its 1988 tax credit. The
statement adverted to by petitioner was actually presented in the appellate courts decision in CA-G.R. Sp No. 32890
as part of petitioners own narration of facts. The pertinent portion of the decision reads:
It would appear from petitioners submission as follows:
xxx since it has already applied to its prior years excess credit of P81,403.00 (which petitioner wanted refunded
when it filed its 1988 Income Tax Return on April 14, 1989) the income tax liability for 1988 of P28,127.00 and the
income tax liability for 1989 of P27,653.00, leaving a balance refundable of P25,623.00 subject of C.T.A. Case No.
4439, the P92,750.00 (P64,623.00 plus P28,127.00, since this second amount was already applied to the amount
refundable of P81,403.00) should be the refundable amount. But since the taxpayer again used part of it to satisfy its
income tax liability of P33,240.00 for 1990, the amount refundable was P59,510.00, which is the amount prayed for
in the claim for refund and also in the petitioner (sic) for review.
That the present claim for refund already consolidates its claims for refund for 1988, 1989, and 1990, when it filed a
claim for refund of P59,510.00 in this case (CTA Case No. 4528). Hence, the present claim should be resolved
together with the previous claims.[23]
The confusion as to petitioners entitlement to a refund could altogether have been avoided had it presented its
tax return for 1990. Such return would have shown whether petitioner actually applied its 1989 tax credit
of P172,477.00, which includes the P54,104.00 creditable taxes withheld for 1989 subject of the instant claim for
refund, against its 1990 tax liability as it had elected in its 1989 return, or at least, whether petitioners tax credit
of P172,477.00 was applied to its approved refunds as it claims.
The return would also have shown whether there remained an excess credit refundable to petitioner after
deducting its tax liability for 1990. As it is, we only have petitioners allegation that its tax due for 1990
was P33,240.00 and that this was applied against its remaining tax credits using its own first in, first out method of
computation.
It would have been different had petitioner not included the P54,104.00 creditable taxes for 1989 in the total
amount it elected to apply against its 1990 tax liabilities. Then, all that would have been required of petitioner are:
proof that it filed a claim for refund within the two (2)-year prescriptive period provided under Section 230 of the
NIRC; evidence that the income upon which the taxes were withheld was included in its return; and to establish the
fact of withholding by a copy of the statement (BIR Form No. 1743.1) issued by the payor [24] to the payee showing the
amount paid and the amount of tax withheld therefrom. However, since petitioner opted to apply its aggregate
excess credits as tax credit for 1990, it was incumbent upon it to present its tax return for 1990 to show that the
claimed refund had not been automatically credited and applied to its 1990 tax liabilities.
The grant of a refund is founded on the assumption that the tax return is valid, i.e., that the facts stated therein
are true and correct.[25] Without the tax return, it is error to grant a refund since it would be virtually impossible to
determine whether the proper taxes have been assessed and paid.
Why petitioner failed to present such a vital piece of evidence confounds the Court. Petitioner could very well
have attached a copy of its final adjustment return for 1990 when it filed its claim for refund on November 13, 1991.
Annex B of its Petition for Review[26] dated December 26, 1991 filed with the CTA, in fact, states that its annual tax
return for 1990 was submitted in support of its claim. Yet, petitioners tax return for 1990 is nowhere to be found in
the records of this case.
Had petitioner presented its 1990 tax return in refutation of respondent Commissioners allegation that it did not
present evidence to prove that its claimed refund had already been automatically credited against its 1990 tax
liability, the CTA would not have reconsidered its earlier Decision. As it is, the absence of petitioners 1990 tax return
was the principal basis of the CTAs Resolution reconsidering its earlier Decision to grant petitioners claim for refund.

Petitioner could even still have attached a copy of its 1990 tax return to its petition for review before the Court of
Appeals. The appellate court, being a trier of facts, is authorized to receive it in evidence and would likely have taken
it into account in its disposition of the petition.
In BPI-Family Savings Bank v. Court of Appeals,[27] although petitioner failed to present its 1990 tax return, it
presented other evidence to prove its claim that it did not apply and could not have applied the amount in dispute as
tax credit. Importantly, petitioner therein attached a copy of its final adjustment return for 1990 to its motion for
reconsideration before the CTA buttressing its claim that it incurred a net loss and is thus entitled to refund.
Considering this fact, the Court held that there is no reason for the BIR to withhold the tax refund.
In this case, petitioners failure to present sufficient evidence to prove its claim for refund is fatal to its cause.
After all, it is axiomatic that a claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.[28]
Section 69, Chapter IX, Title II of the National Internal Revenue Code of the Philippines (NIRC) provides:
Sec. 69. Final Adjustment Return.Every corporation liable to tax under Section 24 shall file a final adjustment
return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the
corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the
refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year. [Emphasis supplied]
Revenue Regulation No. 10-77 of the Bureau of Internal Revenue clarifies:
SEC. 7. Filing of final or adjustment return and final payment of income tax. A final or an adjustment return on
B.I.R. Form No. 1702 covering the total taxable income of the corporation for the preceding calendar or fiscal year
shall be filed on or before the 15th day of the fourth month following the close of the calendar or fiscal year. The return
shall include all the items of gross income and deductions for the taxable year. The amount of income tax to be paid
shall be the balance of the total income tax shown on the final or adjustment return after deducting therefrom the
total quarterly income taxes paid during the preceding first three quarters of the same calendar or fiscal year.
Any excess of the total quarterly payments over the actual income tax computed and shown in the adjustment or final
corporate income tax return shall either (a) be refunded to the corporation, or (b) may be credited against the
estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must
signify in its annual corporate adjustment return its intention whether to request for refund of the overpaid
income tax or claim for automatic credit to be applied against its income tax liabilities for the quarters of the
succeeding taxable year by filling up the appropriate box on the corporate tax return (B.I.R. Form No. 1702).
[Emphasis supplied]
As clearly shown from the above-quoted provisions, in case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding year. The carrying
forward of any excess or overpaid income tax for a given taxable year is limited to the succeeding taxable year only.
In the recent case of AB Leasing and Finance Corporation v. Commissioner of Internal Revenue,[29] where the
Court declared that [T]he carrying forward of any excess or overpaid income tax for a given taxable year then
is limited to the succeeding taxable year only, we ruled that since the case involved a claim for refund of overpaid
taxes for 1993, petitioner could only have applied the 1993 excess tax credits to its 1994 income tax liabilities. To
further carry-over to 1995 the 1993 excess tax credits is violative of Section 69 of the NIRC.

In this case, petitioner included its 1988 excess credit of P146,026.00 in the computation of its total excess
credit for 1989. It indicated this amount, plus the 1989 creditable taxes withheld of P54,104.00 or a total
of P172,477.00, as its total excess credit to be applied as tax credit for 1990. By its own disclosure, petitioner
effectively combined its 1988 and 1989 tax credits and applied its 1990 tax due of P33,240.00 against the total, and
not against its creditable taxes for 1989 only as allowed by Section 69. This is a clear admission that petitioners
1988 tax credit was incorrectly and illegally applied against its 1990 tax liabilities.
Parenthetically, while a taxpayer is given the choice whether to claim for refund or have its excess taxes applied
as tax credit for the succeeding taxable year, such election is not final. Prior verification and approval by the
Commissioner of Internal Revenue is required. The availment of the remedy of tax credit is not absolute and
mandatory. It does not confer an absolute right on the taxpayer to avail of the tax credit scheme if it so chooses.
Neither does it impose a duty on the part of the government to sit back and allow an important facet of tax collection
to be at the sole control and discretion of the taxpayer.[30]
Contrary to petitioners assertion however, the taxpayers election, signified by the ticking of boxes in Item 10 of
BIR Form No. 1702, is not a mere technical exercise. It aids in the proper management of claims for refund or tax
credit by leading tax authorities to the direction they should take in addressing the claim.
The amendment of Section 69 by what is now Section 76 of Republic Act No. 8424 [31] emphasizes that it is
imperative to indicate in the tax return or the final adjustment return whether a tax credit or refund is sought by
making the taxpayers choice irrevocable. Section 76 provides:
SEC. 76. Final Adjustment Return.Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that
year, the corporation shall either:
(A) Pay the balance of the tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be carried over and 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 against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed therefore. [Emphasis
supplied]
As clearly seen from this provision, the taxpayer is allowed three (3) options if the sum of its quarterly tax
payments made during the taxable year is not equal to the total tax due for that year: (a) pay the balance of the tax
still due; (b) carry-over the excess credit; or (c) be credited or refunded the amount paid. If the taxpayer has paid
excess quarterly income taxes, it may be entitled to a tax credit or refund as shown in its final adjustment return
which may be carried over and applied against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable years. However, once the taxpayer has exercised the option to carry-over and to apply the
excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years, such
option is irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate
shall be allowed.
Had this provision been in effect when the present claim for refund was filed, petitioners excess credits for 1988
could have been properly applied to its 1990 tax liabilities. Unfortunately for petitioner, this is not the case.
Taxation is a destructive power which interferes with the personal and property rights of the people and takes
from them a portion of their property for the support of the government. And since taxes are what we pay for civilized

society, or are the lifeblood of the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. A
claim of refund or exemption from tax payments must be clearly shown and be based on language in the law too
plain to be mistaken. Elsewise stated, taxation is the rule, exemption therefrom is the exception. [32]
WHEREFORE, the instant petition is DENIED. The challenged decision of the Court of Appeals is hereby
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur.
Chico-Nazario, J., on leave.

G.R. No. 183137

April 10, 2013

PELIZLOY REALTY CORPORATION, represented herein by its President, GREGORY K. LOY, Petitioner,
vs.
THE PROVINCE OF BENGUET, Respondent.
DECISION
LEONEN, J.:
The principal issue in this case is the scope of authority of a province to impose an amusement tax.
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying that the December 10, 2007
decision of the Regional Trial Court,- Branch 62, La Trinidad, Benguet in Civil Case No. 06-CV-2232 be reversed and
set aside and a new one issued in which: ( 1) respondent Province of Benguet is declared as having no authority to
levy amusement taxes on admission fees for resorts, swimming pools, bath houses, hot springs, tourist spots, and
other places for recreation; (2) Section 59, Article X of the Benguet Provincial Revenue Code of 2005 is declared null
and void; and (3) the respondent Province of Benguet is permanently enjoined from enforcing Section 59, Article X of
the Benguet Provincial Revenue Code of 2005.
Petitioner Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort, which is designed for recreation and
which has facilities like swimming pools, a spa and function halls. It is located at Asin, Angalisan, Municipality of
Tuba, Province of Benguet.
On December 8, 2005, the Provincial Board of the Province of Benguet approved Provincial Tax Ordinance No. 05107, otherwise known as the Benguet Revenue Code of 2005 ("Tax Ordinance"). Section 59, Article X of the Tax
Ordinance levied a ten percent (10%) amusement tax on gross receipts from admissions to "resorts, swimming
pools, bath houses, hot springs and tourist spots." Specifically, it provides the following:
Article Ten: Amusement Tax on Admission
Section 59. Imposition of Tax. There is hereby levied a tax to be collected from the proprietors, lessees, or operators
of theaters, cinemas, concert halls, circuses, cockpits, dancing halls, dancing schools, night or day clubs, and other
places of amusement at the rate of thirty percent (30%) of the gross receipts from admission fees; and
A tax of ten percent (10%) of gross receipts from admission fees for boxing, resorts, swimming pools, bath houses,
hot springs, and tourist spots is likewise levied. [Emphasis and underscoring supplied]
Section 162 of the Tax Ordinance provided that the Tax Ordinance shall take effect on January 1, 2006.
It was Pelizloy's position that the Tax Ordinance's imposition of a 10% amusement tax on gross receipts from
admission fees for resorts, swimming pools, bath houses, hot springs, and tourist spots is an ultra vires act on the
part of the Province of Benguet. Thus, it filed an appeal/petition before the Secretary of Justice on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the effectivity of a tax ordinance allowed by
Section 187 of Republic Act No. 7160, otherwise known as the Local Government Code (LGC). 1 The appeal/petition
was docketed as MSO-OSJ Case No. 03-2006.

Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days from receipt of the appeal to render a
decision. After the lapse of which, the aggrieved party may file appropriate proceedings with a court of competent
jurisdiction.
Treating the Secretary of Justice's failure to decide on its appeal/petition within the sixty (60) days provided by
Section 187 of the LGC as an implied denial of such appeal/petition, Pelizloy filed a Petition for Declaratory Relief
and Injunction before the Regional Trial Court, Branch 62, La Trinidad, Benguet. The petition was docketed as Civil
Case No. 06-CV-2232.
Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a percentage tax in violation of the limitation
on the taxing powers of local government units (LGUs) under Section 133 (i) of the LGC. Thus, it was null and void
ab initio. Section 133 (i) of the LGC provides:
Section 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided
herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
xxx
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services
except as otherwise provided herein
The Province of Benguet assailed the Petition for Declaratory Relief and Injunction as an improper remedy. It alleged
that once a tax liability has attached, the only remedy of a taxpayer is to pay the tax and to sue for recovery after
exhausting administrative remedies.2
On substantive grounds, the Province of Benguet argued that the phrase other places of amusement in Section 140
(a) of the LGC3 encompasses resorts, swimming pools, bath houses, hot springs, and tourist spots since "Article 220
(b) (sic)" of the LGC defines "amusement" as "pleasurable diversion and entertainment x x x synonymous to
relaxation, avocation, pastime, or fun."4 However, the Province of Benguet erroneously cited Section 220 (b) of the
LGC. Section 220 of the LGC refers to valuation of real property for real estate tax purposes. Section 131 (b) of the
LGC, the provision which actually defines "amusement", states:
Section 131. Definition of Terms. - When used in this Title, the term:
xxx
(b) "Amusement" is a pleasurable diversion and entertainment. It is synonymous to relaxation, avocation, pastime, or
fun On December 10, 2007, the RTC rendered the assailed Decision dismissing the Petition for Declaratory Relief
and Injunction for lack of merit.
Procedurally, the RTC ruled that Declaratory Relief was a proper remedy. On the validity of Section 59, Article X of
the Tax Ordinance, the RTC noted that, while Section 59, Article X imposes a percentage tax, Section 133 (i) of the
LGC itself allowed for exceptions. It noted that what the LGC prohibits is not the imposition by LGUs of percentage
taxes in general but the "imposition and levy of percentage tax on sales, barters, etc., on goods and services only." 5 It
further gave credence to the Province of Benguet's assertion that resorts, swimming pools, bath houses, hot springs,
and tourist spots are encompassed by the phrase other places of amusement in Section 140 of the LGC.

On May 21, 2008, the RTC denied Pelizloys Motion for Reconsideration.
Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure questions of law. It assailed the legality of
Section 59, Article X of the Tax Ordinance as being a (supposedly) prohibited percentage tax per Section 133 (i) of
the LGC.
In its Comment, the Province of Benguet, erroneously citing Section 40 of the LGC, argued that Section 59, Article X
of the Tax Ordinance does not levy a percentage tax "because the imposition is not based on the total gross receipts
of services of the petitioner but solely and actually limited on the gross receipts of the admission fees collected." 6 In
addition, it argued that provinces can validly impose amusement taxes on resorts, swimming pools, bath houses, hot
springs, and tourist spots, these being amusement places.
For resolution in this petition are the following issues:
1. Whether or not Section 59, Article X of Provincial Tax Ordinance No. 05-107, otherwise known as the
Benguet Revenue Code of 2005, levies a percentage tax.
2. Whether or not provinces are authorized to impose amusement taxes on admission fees to resorts,
swimming pools, bath houses, hot springs, and tourist spots for being "amusement places" under the Local
Government Code.
The power to tax "is an attribute of sovereignty," 7 and as such, inheres in the State. Such, however, is not true for
provinces, cities, municipalities and barangays as they are not the sovereign; 8 rather, they are mere "territorial and
political subdivisions of the Republic of the Philippines". 9
The rule governing the taxing power of provinces, cities, muncipalities and barangays is summarized in Icard v. City
Council of Baguio:10
It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The
charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it. And the
power when granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out of the term used in
granting that power must be resolved against the municipality. Inferences, implications, deductions all these have
no place in the interpretation of the taxing power of a municipal corporation. 11 [Underscoring supplied]
Therefore, the power of a province to tax is limited to the extent that such power is delegated to it either by the
Constitution or by statute. Section 5, Article X of the 1987 Constitution is clear on this point:
Section 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes,
fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.
[Underscoring supplied]
Per Section 5, Article X of the 1987 Constitution, "the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other charges." 12 Nevertheless, such authority
is "subject to such guidelines and limitations as the Congress may provide". 13
In conformity with Section 3, Article X of the 1987 Constitution, 14 Congress enacted Republic Act No. 7160, otherwise
known as the Local Government Code of 1991. Book II of the LGC governs local taxation and fiscal matters.

Relevant provisions of Book II of the LGC establish the parameters of the taxing powers of LGUS found below.
First, Section 130 provides for the following fundamental principles governing the taxing powers of LGUs:
1. Taxation shall be uniform in each LGU.
2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic policy, or in the restraint of trade.
3. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private
person.
4. The revenue collected pursuant to the provisions of the LGC shall inure solely to the benefit of, and be
subject to the disposition by, the LGU levying the tax, fee, charge or other imposition unless otherwise
specifically provided by the LGC.
5. Each LGU shall, as far as practicable, evolve a progressive system of taxation.
Second, Section 133 provides for the common limitations on the taxing powers of LGUs. Specifically, Section 133 (i)
prohibits the levy by LGUs of percentage or value-added tax (VAT) on sales, barters or exchanges or similar
transactions on goods or services except as otherwise provided by the LGC.
As it is Pelizloys contention that Section 59, Article X of the Tax Ordinance levies a prohibited percentage tax, it is
crucial to understand first the concept of a percentage tax.
In Commissioner of Internal Revenue v. Citytrust Investment Phils. Inc., 15 the Supreme Court defined percentage tax
as a "tax measured by a certain percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services."
Also, Republic Act No. 8424, otherwise known as the National Internal Revenue Code (NIRC), in Section 125, Title
V,16 lists amusement taxes as among the (other) percentage taxes which are levied regardless of whether or not a
taxpayer is already liable to pay value-added tax (VAT).
Amusement taxes are fixed at a certain percentage of the gross receipts incurred by certain specified
establishments.
Thus, applying the definition in CIR v. Citytrust and drawing from the treatment of amusement taxes by the NIRC,
amusement taxes are percentage taxes as correctly argued by Pelizloy.
However, provinces are not barred from levying amusement taxes even if amusement taxes are a form of percentage
taxes. Section 133 (i) of the LGC prohibits the levy of percentage taxes "except as otherwise provided" by the LGC.

Section 140 of the LGC provides:

SECTION 140. Amusement Tax - (a) The province may levy an amusement tax to be collected from the proprietors,
lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement at
a rate of not more than thirty percent (30%) of the gross receipts from admission fees.
(b) In the case of theaters of cinemas, the tax shall first be deducted and withheld by their proprietors,
lessees, or operators and paid to the provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the cinematographic films.
(c) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows, musical
programs, literary and oratorical presentations, except pop, rock, or similar concerts shall be exempt from
the payment of the tax herein imposed.
(d) The Sangguniang Panlalawigan may prescribe the time, manner, terms and conditions for the payment of
tax. In case of fraud or failure to pay the tax, the Sangguniang Panlalawigan may impose such surcharges,
interests and penalties.
(e) The proceeds from the amusement tax shall be shared equally by the province and the municipality
where such amusement places are located. [Underscoring supplied]
Evidently, Section 140 of the LGC carves a clear exception to the general rule in Section 133 (i). Section 140
expressly allows for the imposition by provinces of amusement taxes on "the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement."
However, resorts, swimming pools, bath houses, hot springs, and tourist spots are not among those places expressly
mentioned by Section 140 of the LGC as being subject to amusement taxes. Thus, the determination of whether
amusement taxes may be levied on admissions to resorts, swimming pools, bath houses, hot springs, and tourist
spots hinges on whether the phrase other places of amusement encompasses resorts, swimming pools, bath
houses, hot springs, and tourist spots.
Under the principle of ejusdem generis, "where a general word or phrase follows an enumeration of particular and
specific words of the same class or where the latter follow the former, the general word or phrase is to be construed
to include, or to be restricted to persons, things or cases akin to, resembling, or of the same kind or class as those
specifically mentioned."17
The purpose and rationale of the principle was explained by the Court in National Power Corporation v. Angas 18as
follows:
The purpose of the rule on ejusdem generis is to give effect to both the particular and general words, by treating the
particular words as indicating the class and the general words as including all that is embraced in said class,
although not specifically named by the particular words. This is justified on the ground that if the lawmaking body
intended the general terms to be used in their unrestricted sense, it would have not made an enumeration of
particular subjects but would have used only general terms. [2 Sutherland, Statutory Construction, 3rd ed., pp. 395400].19
In Philippine Basketball Association v. Court of Appeals,20 the Supreme Court had an opportunity to interpret a starkly
similar provision or the counterpart provision of Section 140 of the LGC in the Local Tax Code then in effect.

Petitioner Philippine Basketball Association (PBA) contended that it was subject to the imposition by LGUs of
amusement taxes (as opposed to amusement taxes imposed by the national government).1wphi1 In support of its
contentions, it cited Section 13 of Presidential Decree No. 231, otherwise known as the Local Tax Code of 1973,
(which is analogous to Section 140 of the LGC) providing the following:
Section 13. Amusement tax on admission. - The province shall impose a tax on admission to be collected from the
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and other places of
amusement xxx.
Applying the principle of ejusdem generis, the Supreme Court rejected PBA's assertions and noted that:
In determining the meaning of the phrase 'other places of amusement', one must refer to the prior enumeration of
theaters, cinematographs, concert halls and circuses with artistic expression as their common characteristic.
Professional basketball games do not fall under the same category as theaters, cinematographs, concert halls and
circuses as the latter basically belong to artistic forms of entertainment while the former caters to sports and
gaming.21 [Underscoring supplied]
However, even as the phrase other places of amusement was already clarified in Philippine Basketball Association,
Section 140 of the LGC adds to the enumeration of 'places of amusement' which may properly be subject to
amusement tax. Section 140 specifically mentions 'boxing stadia' in addition to "theaters, cinematographs, concert
halls and circuses" which were already mentioned in PD No. 231. Also, 'artistic expression' as a characteristic does
not pertain to 'boxing stadia'.
In the present case, the Court need not embark on a laborious effort at statutory construction. Section 131 (c) of the
LGC already provides a clear definition of amusement places:
Section 131. Definition of Terms. - When used in this Title, the term:
xxx
(c) "Amusement Places" include theaters, cinemas, concert halls, circuses and other places of amusement where
one seeks admission to entertain oneself by seeing or viewing the show or performances [Underscoring supplied]
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are bound by a common typifying characteristic
in that they are all venues primarily for the staging of spectacles or the holding of public shows, exhibitions,
performances, and other events meant to be viewed by an audience. Accordingly, other places of amusement must
be interpreted in light of the typifying characteristic of being venues "where one seeks admission to entertain oneself
by seeing or viewing the show or performances" or being venues primarily used to stage spectacles or hold public
shows, exhibitions, performances, and other events meant to be viewed by an audience.
As defined in The New Oxford American Dictionary,22 show means "a spectacle or display of something, typically an
impressive one";23 while performance means "an act of staging or presenting a play, a concert, or other form of
entertainment."24 As such, the ordinary definitions of the words show and performance denote not only visual
engagement (i.e., the seeing or viewing of things) but also active doing (e.g., displaying, staging or presenting) such
that actions are manifested to, and (correspondingly) perceived by an audience.
Considering these, it is clear that resorts, swimming pools, bath houses, hot springs and tourist spots cannot be
considered venues primarily "where one seeks admission to entertain oneself by seeing or viewing the show or

performances". While it is true that they may be venues where people are visually engaged, they are not primarily
venues for their proprietors or operators to actively display, stage or present shows and/or performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots do not belong to the same category or
class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they cannot be considered as
among the other places of amusement contemplated by Section 140 of the LGC and which may properly be subject
to amusement taxes.
At this juncture, it is helpful to recall this Courts pronouncements in Icard:
The power to tax when granted to a province is to be construed in strictissimi juris. Any doubt or ambiguity arising out
of the term used in granting that power must be resolved against the province. Inferences, implications, deductions
all these have no place in the interpretation of the taxing power of a province. 25
In this case, the definition of' amusement places' in Section 131 (c) of the LGC is a clear basis for determining what
constitutes the 'other places of amusement' which may properly be subject to amusement tax impositions by
provinces. There is no reason for going beyond such basis. To do otherwise would be to countenance an arbitrary
interpretation/application of a tax law and to inflict an injustice on unassuming taxpayers.
The previous pronouncements notwithstanding, it will be noted that it is only the second paragraph of Section 59,
Article X of the Tax Ordinance which imposes amusement taxes on "resorts, swimming pools, bath houses, hot
springs, and tourist spots". The first paragraph of Section 59, Article X of the Tax Ordinance refers to "theaters,
cinemas, concert halls, circuses, cockpits, dancing halls, dancing schools, night or day clubs, and other places of
amusement".1wphi1 In any case, the issues raised by Pelizloy are pertinent only with respect to the second
paragraph of Section 59, Article X of the Tax Ordinance. Thus, there is no reason to invalidate the first paragraph of
Section 59, Article X of the Tax Ordinance. Any declaration as to the Province of Benguet's lack of authority to levy
amusement taxes must be limited to admission fees to resorts, swimming pools, bath houses, hot springs and tourist
spots.
Moreover, the second paragraph of Section 59, Article X of the Tax Ordinance is not limited to resorts, swimming
pools, bath houses, hot springs, and tourist spots but also covers admission fees for boxing. As Section 140 of the
LGC allows for the imposition of amusement taxes on gross receipts from admission fees to boxing stadia, Section
59, Article X of the Tax Ordinance must be sustained with respect to admission fees from boxing stadia.
WHEREFORE, the petition for review on certiorari is GRANTED. The second paragraph of Section 59, Article X of
the Benguet Provincial Revenue Code of 2005, in so far as it imposes amusement taxes on admission fees to
resorts, swimming pools, bath houses, hot springs and tourist spots, is declared null and void. Respondent Province
of Benguet is permanently enjoined from enforcing the second paragraph of Section 59, Article X of the Benguet
Provincial Revenue Code of 2005 with respect to resorts, swimming pools, bath houses, hot springs and tourist
spots.
SO ORDERED.
MARVIC MARIO VICTOR F. LEONEN
Associate Justice

G.R. No. 175356

December 3, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners,

vs.
SECRETARY OF THE DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT and THE SECRETARY OF
THE DEPARTMENT OF FINANCE, Respondents.
DISSENTING OPINION
CARPIO, J.:
The main issue in this case is the constitutionality of Section 4 of Republic Act No. 7432 1 (R.A. 7432), as amended
by Republic Act No. 92572 (R.A. 9257_, which states that establishments may claim the 20% mandatory discount to
senior citizens as tax credit. Manila Memorial Park, Inc. and La Funeraria Paz-Sucat, Inc. (petitioners) allege that the
tax deduction scheme under R.A. 9257 violates Section 9, Article III of the Constitution which provides that "[p]rivate
property shall not be taken for public use without just compensation."
Section 4 of R.A. 7432, as amended by R.A. 9257, provides:
Sec. 4. Privileges for the Senior Citizens. - The senior Citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishment, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction
form gross income for the same taxable year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net of value added tax if applicable, shall be included in their gross sales
receipts for tax purposes and shall be subject to proper documentation and to the provisions of National Internal
Revenue Code, as amended. (Emphasis supplied)
The constitutionality of Section 4(a) of R.A. 7432, as amended by R.A. 9257, had been passed upon by the Court
in Carlos Superdrug Corporation v. Department of Social Welfare and Development. 3
In Carlos Superdrug Corporation, the Court made a distinction between the tax credit scheme under Section 4 of
R.A. 7432 (the old Senior Citizens Act). and the tax deduction scheme under R.A. 9257 (the Expanded Senior
Citizens Act). Under the tax credit scheme, the establishments are paid back 100% of the discount they give to
senior citizens. Under the tax deduction scheme, they are only paid back about 32% of the 20% discount granted to
senior citizens.
The Court cited in Carlos Superdrug Corporation the clarification by the Department of Finance, through Director IV
Ma. Lourdes B. Recente, which explained the difference between tax credit and tax deduction, as follows:

1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the
Expanded Senior Citizens Act.)
1.1 The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%) discount
from all establishment relative to the utilization of transportation services, hotels and similar lodging establishment,
restaurants and recreation centers and purchase of medicines anywhere in the country, the costs of which may be
claimed by the private establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayer's tax liability due to the government of the
amount of discounts such establishment has granted to a senior citizen. The establishment recovers the full amount
of discount given to a senior citizen and hence, the government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system, necessitates that
prior payments of taxes have been made and the taxpayer is attempting to recover this tax payment from his/her
income tax due. The tax credit scheme under R.A. No. 7432 is therefore, inapplicable since no tax payments have
previously occurred.
1.2. The provision under R.A. No. 9257, on the other hand, provides that the establishment concerned may claim the
discount under Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on the net cost of goods
sold or service rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing for its tax
liability, the amount of discount granted to senior citizens. Effectively, the government has loses in terms of foregone
revenues an amount equivalent to the marginal tax rate the said establishment is liable to pay the government. This
will be an amount equivalent to 32% of the twenty percent (20%) discounts so granted. The establishment shoulders
the remaining portion of the granted discounts.4 (Emphasis in the original)
Thus, under the tax deduction scheme, there is no full compensation for the 20% discount that private
establishments are forced to give to senior citizens.
The justification for the validity of the tax deduction, which the majority opinion adopts, was explained by the Court
in Carlos Superdrug Corporation as a lawful exercise of police power. The Court ruled:
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare
for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as
"the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs." It is
"[t]he power vested in the legislature by the constitution to make, ordain , and establish all manner of wholesome and
reasonable laws, statutes, and ordinances, either with penalities or without, not repugnant to the constitution, as they
shall judge to be for the good and welfare of commonwealth, and of the subject of the same."
For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the
primacy of police power because property right, though sheltered by due process, must shield to general welfare.
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the

absence demonstrating the allege confiscatory effect of the provision in question, there is no basis for its nullification
in view of presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the petitioner to insist that the grant of the senior citizen
discount is unduly oppressive to their business, because petitioners have not taken time to calculate correctly and
come up with a financial report, so that they have not been able to show properly whether or not the tax deduction
scheme really works greatly to their disadvantages. 5
In the case before us, the majority opinion declares that it finds no reason to overturn or modify the ruling inCarlos
Superdrug Corporation. The majority opinion also declares the Court's earlier decision in Commissioner of Internal
Revenue v. Central Luzon Drug Corporation6 (Central Luzon Drug Corporation) holding that "the tax credit benefit
granted to these establishments can be deemed as their just compensation for private property taken by the State of
public use"7 and that the permanent reduction in the total revenues of private establishments is "a forced subsidy
corresponding to the taking of private property for public use or benefit"8 is an obiter dictum and is not a binding
precedent. The majority opinion reasons that the Court in Central Luzon Drug Corporation was not confronted with
the use of whether the 20% discount was not confronted with the issue of whether the 20% discount was an exercise
of police power or eminent domain.
The sole issue, according to the Court's decision in Central Luzon Drug Corporation, was whether a private a private
establishment operates at a loss. However, a reading of the decision shows that petitioner raised the issue of
"[w]hether Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax
credit instead of as tax deduction from gross income or gross sales." In that case, the BIR erroneously treated
the 20% discount as a tax deduction under Sections 2.i and 4 of Revenue Regulations No. RR 2-94 necessitated the
discussion explaining why the tax credit benefit given to private establishments should be deemed just
compensation. The Court explained in Central Luzon Drug Corporation:
Fourt, Section 2.1 and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed
that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed
as their just compensation for private property taken by the State for public use.
The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous
with public interest, public interest, public benefit, public welfare, and public convenience. The discount privilege to
which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens
belong. The discountsgiven would have entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certified indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State,
such issuance when not done within a reasonable time from the grant of the discounts cannot be considered
as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues.
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax
measures are but "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for a public

purpose." In recent years, the power to tax has indeed become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.
While it is a declared commitment under Section 1of RA 7432, social justice "cannot be invoked to trample
on the rights of property owners who under our Constitution and laws are also entitled to protection. The
social justice consecrated in our [C]onstitution [is] not intended to take away rights from a person and give
them to another who is not entitled thereto. "For this reason, a just compensation for income that is taken
away from respondent becomes necessary. It is the tax credit that our legislators find support to realize
social justice, and no administrative body can alter fact.
To put it differently, a private establishment that merely breaks even- without the discount the discounts yet will
surely start to incur loses because of such discount. The same effect is expected if its mark-up is less than 20
percent, and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already
raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions
from either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that
the tax credit limitation under RR 2-94 is inutile, if not improper. Worse profit-generating businesses will be put in a
better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the
latter.10 (Emphasis supplied)
The foregoing discussion formed part of the explanation of this Court in Central Luzon Drug Corporation why
Sections 2.i and 4 of RR 2-94 were erroneously issued. The foregoing discussion was certainly not unnecessary or
immaterial in the resolution of the case;11 hence, the discussion is definitely not obiter dictum.
As regards Carlos Superdrug Corporation, a second look at the case shows that it barely distinguished between
police power and eminent domain. While it is true that police power is similar to the power of eminent domain. While
it is true that police power is similar to the power of eminent domain because both have the general welfare of the
people for their object, we need to clarify the concept of taking in police power to prevent any claim of police power
when the power actually exercised is eminent domain. When police power is exercised, there is no just
compensation to the citizen who loses his private property. When eminent domain is exercised, there must be just
compensation. Thus, the Court must clarify taking in police power and taking in eminent domain. Government
officials cannot just invoke police power when the act constitutes eminent domain.
In the early case of People v. Pomar.12 the Court acknowledge that "[b]y reason of the constant growth of public
opinion ina developing civilization, the term police power has ever been, and we do not believe can be, clearly and
definitely defined and circumscribed."13 The Court stated that the definition of the police power of the state must
depend upon the particular law and the particular facts to which it is to be applied." 14 However it was considered
even then that police power, when applied to taking of property without compensation, refers to property
without compensation, refers to property that are destroyed or placed outside the commerce of man. The
Court declared in Pomar:
It is believed and confidently asserted that no case can be found, in civilized society and well-organized
governments, where individuals have been deprived of their property, under the police power of the state,
without compensation, except in cases where the property in question was used for the purpose of violatiing
some law legally adopted, or constitutes a nuisance. Among such cases may be mentioned: Apparatus used in
counterfeiting the money of the state; firearms illegally possessed; opium possessed in violation of law; apparatus
used for gambling in violation of law; buildings and property used for the purpose of violating laws prohibiting the
manufacture and sale of intoxicating liquor; and all cases in which their property itself has become a nuisance and
dangerous and detrimental to the public health, morals and general welfare of the state. In all of such cases, and in

many more which might be cited , the destruction of the property is permitted in the exercise of the public health,
morals and general welfare of the state. In all of such cases, and in many more which might be cited, the destruction
of the property is permitted in the exercise of the police power of the state. But it must first be established that such
property was used as the instrument for the violation of a valid existing law. (Mugler vs. Kansan, 123 U.S. 623;
Slaughter-House Cases, 16 Wall. [U.S.] 36; Butchers Union etc., Co. vs. Crescent City, etc., Co., 111 U.S. 746; John
Stuart Mill "On Liberty, " 28, 29)
Without further attempting to define what are the peculiar subjects or limits of th police power, it may safely de
affirmed, that every law for the restraint and punishment of crimes, for the preservation of the public peace, health,
and morals, must come within this category. But the state, when providing by legislation for the protection of the
public health, the public morals, or the public safety, is subject to and is controlled by the paramount authority of the
constituion of the stae, and will not be permitted to violate rights secured or guaranteedd by that instrument to the
people under their law the constitution. (Mugler vs. Kansan, 123 U.S. 623) 15 (Emphasis supplied)
In City Government of Quezon City v. Hon. Judge Erica, 16 the Court quoted with approval the trial courts decision
declaring null and void Section 9 of Ordinance No. 6118, S-64, of the Quezon City Council, thus:
We start the decision with a restatement of certain basic principles. Occupying the forefront in the bill of rights is the
property without due process of law. (Art. III, Section 1 subparagraph 1, Constitution)
On the other hand, there are three inherent powers of government by which the state interferes with the property
rights, namely (1) police power, (2) eminent domain, [and] (3) taxation. These are said to exist independently of the
Constitution as necessary attributes of sovereignity.
Police power is defined by Freud as the power of promoting the public welfare by restraining and regulating
the use of liberty and property (Quoted in Politiocal Law by Taada and Carreon, V-11, p. 50) It is usually
exerted oin order to merely regulate the use and enjoyment of property of the owner. If he is deprived of his
property outright, it is not taken for public use but rather to destroy in order to promote the general
welfare. In policepower, the owner does not recover from the government for injury sustained in
consequence thereof (12 C.J. 623). It has been said that police power is the most essential of government powers,
at time the most insistent, and always one of the least limitable of the powers of government (Ruby vs. Provincial
Board, 39 Phil. 660; Ichong vs. Hernandez, L-7995, May 31, 1957). This power embraces the whole system of public
regulation (U.S. vs. Linsuya Fan, 10 Phil. 104). The Supreme Court has said that police power is so far-reaching in
scope that it has almost become impossible to limit its sweep. As it derives its existence from the very existence of
state itself, it is the most positive and active of all governmental processes, the most essential insistent and
illimitable. Especially it is so under the modern democratic framework where the demands of society and nation s
have multiplied to almost unimaginable proportions. The field and scope of police power have become almost
boundless, just as the fields of public interest and public welfare have become almost all embracing and have
transcended human foresight. Since the Court cannot foresee the needs and demands of public interest and welfare,
they cannot delimit beforehand the extent or scope of the police power by which and through which the state seeks
to attain or achieve public interest and welfare . (Ichong vs. Hernandez, L-7995, May 31, 1957).
The police power being the most active power of the government and the due process clause being the broadest
limitation on governmental power, the conflict between this power of government and the due process clause of the
Constitution is oftentimes inevitable.
It will be seen from the foregoing authorities that the police power is usually exercised in the form of mere
regulation or restrictions in the use of liberty or property for the promotion of the general welfare. It does not

involve the taking or confiscation of property with the exception of a few cases where there is a necessity t o
confiscate private property in order to destroy it for the purpose of protecting the peace and order and of
promoting the general welfare as for instance, the confiscation of an illegally possessed article, such as
opium and firearms.17 (Boldfacing and italicization supplied)
Clearly, taking under the exercise of police power does not require any compensation because the property
taken is either destroyed or placed outside the commerce of man.
On the other hand, the power of eminent domain has been described as
xxx the highest and most exact idea of property remaining in the government that may be acquired for some public
purpose through a method in the nature of a forced purchase by the State. It is a right to take or reassert dominion
over property within the state for public use or to meet public exigency. It is said to be an essential part of
governance even in its most primitive form and thus inseparable from sovereignty. The only direct constitutional
qualification is that "prvate property should not be taken for public use without just compensation. " This proscription
is intended to provide a safeguard against whose property the power is sought to be enforced. 18
In order to be valid, the taking of private property by the government under eminent domain has to be for public use
and there must be just compensation.19
Fr. Joaquin G. Bernas, S.J., expounded:
Both police power and the power of eminent have the general welfare for their object. The former achieves
its object by regulation while the latter by "taking". When property right is impaired by regulation,
compensation is not required; whereas, when property is taken, the Constitution prescribes just
compensation. Hence, a sharp distinction must be made between regulation and taking.
When title to property is transferred to the expropriating authority, there is a clear case of compensable taking.
However, as will be seen, it is a settled rule that neither acquisition of title nor total destruction of value is essential to
taking. It is in cases where title remains with the private owner that inquiry must be made whether the impairment of
property right is merely regulation or already amounts to compensable taking.
An analysis of existing jurisprudence yields the rule that when a property interest is appropriated and
applied to some public purpose, there is compensable taking. Where, however, a property interest is merely
restricted because continued unrestricted use would be injurious to public welfare or where property is
destroyed because continued existence of the property would be injurious to public interest, there is no
compensable taking.20 (Emphasis supplied)
In Section 4 of R.A. 7432, it is undeniable that there is taking of property for public use. Private property is anything
that is subject to private ownership. The property taken for public is anything that is subject to private ownership. The
property taken for public use applies not only to land but also to other proprietary property, including the mandatory
discounts given to senior citizens which form part of the gross sales of the private establishments that are forced to
give them. The amount of mandatory discount is money that belongs to the private establishment. For sure,
money or cash is private propertybecause it is something of value that is subject to private ownership. The
taking of property under Section 4 of R.A. 7432 is an exercise of the power of eminent domain and not an exercise of
the polie power of the State. A clear and sharp distinction should be made because private property owners
will be left at the mercy of government officials if these officials are allowed to invoke police power when
what is actually exercised is the power of eminent domain.

Section 9, Article III of the 1987 Constitution speaks or private property without any distinction It does not state that
there should be profit before the taking of property is subject to just compensation. The private property referred to
purposes of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales of
private establishments. They are all private property and any taking should be attended by a corresponding payment
of just compensation. The 20% whether these establishments make a profit or suffer a loss. In fact, the 20% discount
applies to non-profit establishments like country, social, or golf clubs which are open to the public and not only for
exclusive membership21 The issue of profit or loss to the establishments is immaterial.
Just compensation is "the full equivalent of the property taken from its owner by the expropriator," 22 The Court
explained:
x x x. The measure is not the takers gain, but the owners loss. The word just is used to qualify the meaning of the
word compensation and to convey thereby the idea that the amount to be tendered for the property to be taken
shall be real, substantial, full and ample. x x x.23 (Emphasis supplied)
The 32% of the discount that the private establishments could recover under the tax deduction scheme cannot be
considered real, substantial, full and ample compensation. In Carlos Superdrug Corporation, the Court conceded
that "[t]he permanent reduction in [private establishments] total revenue is forced subsidy corresponding to
the taking of private property for public use or benefit"[24 The Court ruled that "[t]his constitutes compansable
taking for which petitioners would ordinarily become entitled to s just compensation."25 Despite these
pronouncements admitting there was compensable taking, the Court still proceeded to rule that "the State, in
promoting the health and welfare of a special group of citizens, can be impose upon private establishments
the burden of partly subsidizing government program."
There may be valid instances when the State can impose burdens on private establishments that effectively
subsidize a government program. However, the moment a constitutional threshold is crossed when the burden
constitutes a taking of private property for public use then the burden becomes an exercise of eminent domain for
which just compensation is required.
An example of burden that can be validly imposed on private establishments is the requirement under Article 157 of
the Labor Code that employers with certain number of employees should maintain a clinic and employ a registered
nurse, a physician, and a dentist, depending on number of employee. Article 157 of the Labor Code provides:
Art. 157. Emergency medical and dental services. It shall be duty of every employer to furnish his employees in
any locality with free
a. The service of a full-time registered nurse when the number of employees exceeds fifty (50) but not more that two
hundred (200) except when the employer does not maintain hazardous workplaces, in which case, the services of a
graduate first-aider shall be provided for the protection of workers, where no registered nurse is available. The
Secretary of Labor and Employment shall provide by appropriate regulations, the services that shall be required
when the number of employees does not exceed fifty (50) and shall determined by appropriate order, hazardous
workplace for purposed of this Article;
b. The services of a full-time registered nurse, a part-time physician and dentist, and an emergency clinic, when the
number of employee exceeds two hundred (200) but more that three hundred (300); and

c. The services of full-time physician, dentist and full-time registered nurse as well as a dental clinic and an infirmary
or emergency hospital with one bed capacity for every one hundred (100) employees when the number of employees
exceeds three hundred (300).
xxxx
Article 157 is a burden imposed by the State on private employers to complement a government program of
promoting a healthy workplace. The employer itself, however, benefits fully from this burden because the health of its
workers while in the workplace is a legitimate concern of the private employer. Moreover, the cost of maintaining the
clinic and staff is part of the legislated wages for which the private employer is fully compensated by the services
of the employees. In the case of the senior citizens discount, the private establishment is compensated only in the
equivalent amount of 32% of the mandatory discount. There are no services rendered by the senior citizens, or any
other form of payment, that could make up for the 68% balance of the mandatory discount. Clearly, the private
establishments cannot recover the full amount of the discount they give and thus there is taking to the extent of the
amount that cannot be recovered.
Another example of a burden that can be validly imposed on a private establishment is the requirement under
Section 19 in relation to Section 18 of the Social Security Law 26 and Section 7 of the Pag-IBIG Fund27 for the
employer to contrinute a certain amount to fund the benefits of its employees. The amounts contributed by private
employers form part of the legislated wages of employees. The private employers are deemed fully
compensated for these amounts by the services rendered by the employees.
In the present case, the private establishments are only compensated about 32% of the 20% discount granted to
senior citizens. They shoulder 68% of the discount they are forced to give to senior citizens. The Court should correct
this situation as it clearly violates Section 9, Article III of the Constitution which provides that "[p]rivate property shall
not be taken for public use without just compensation." Carlos Superdrug Corporation should be abandoned by this
Court and Central Luzon Drug Corporation re-affirmed.
Carlos Superdrug Corporation admitted that the permanent reduction in the total revenues of private establishments
is a "Compensable taking for which petitioners would ordinarily become entitled to a just
compensation."28 However, Carlos Superdrug Corporation considered that there was sufficient basis for taking
without compensation but invoking the exercise of police power of the State. In doing so, the Court failed to consider
that a permanent taking of property for public use is an exercise of eminent domain for which the government must
pay compensation. Eminent domain is a sub-class of police power and its exercise is subject to certain conditions,
that is, the taking of property for public use and payment of just compensation.
It is incorrect to say that private establishments only suffer a minimal loss when they give 20% discount to senior
citizens. Under R.A. 9257, the 20% discount applies to "all establishments relative to the utilization of services in
hotels and similar lodging establishment, restaurants and recreation centers, and purchase of medicines in all
establishments for exclusive use or enjoyment to senior citizens;" 29 "admission fees charged by theaters, cinema
houses and concert halls, circuses, carnivals, and other similar places of culture, leisure and amusement for the
exclusive use or enjoyment for senior citizens;" 30 "medical and dental services, and diagnostic and laboratory fees
provided under Section 4(e) including professional fees of attending doctors in all private hospitals and medical
facilities, in accordance with the rule and regulations to be issued by the Department of Health in coordination with
the Philippine Health Insurance Corporation;"31 "fare for domestic air and sea travel for the exclusive use or
enjoyment of senior citizens;"32 and "public railways, skyways and bus fare for the exclusive use and enjoyment of
the senior citizens:33 The 20% discount cannot be considered minimal because not all private establishments
make a 20% margin of profit. Besides, on its face alone, a 20% mandatory discount based on the gross

selling price huge. The 20% mandatory discount is more that the 12% Value Added Tax, itself not an
insignificant amount.
The majority opinion states that the grant of 20% discount to senior citizens is a regulation of business similar to the
regulation of public utilities and businesses imbued with public interest. The majority opinion states:
The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate or return on investment
of these corporations considering that they have monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishment
from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of
a given establishment but only to a class of senior citizens. x x x 34
However, the majority opinion admits that the 20% mandatory discount is only "similar to, but with substantial
distinctions from price control or rate or return on investment control laws" which "regulate public utilities or
industries/enterprises imbued with public interest." Since there are admittedly "substantial distinctions," regulatory
laws on public utilities or industries imbued with public interest cannot be used as justification for the 20% mandatory
discount with our payment of just compensation. The profits of public utilities are regulated
Because they operate under franchises granted by the State. Only those who are granted franchises by the State
can operate public utilities and these franchises have agreed to limit their profits as condition for the grant of the
franchises. The profits of industries imbued with public interest, but which do not enjoy franchises from the State, can
only be regulated temporarily during emergencies like calamities. There has to be an emergency to trigger price
control on businesses and only for the duration of the emergency. The profits of private establishments which are
non-franchisees cannot be regulated permanently, and there is no such law regulating their profits permanently. The
majotity opinion cites a case35 that allegedly allows the State to limit the net profits of private establishments.
However, the case cited by the majority opinion refers to franchise holders of electric plants.
The State cannot compel private establishments without franchise to grant discounts, or to operate at a loss,
because that constitutes taking of private property for public use without just compensation. The State can take over
private property without compensation in times of war or other national emergency under Section 23(2) Article VI of
the 1987 Constitution but only for a limited period and subject to such restrictions as Congress may provide.
Under its police power, the State may also temporarily limit or suspend business activities. One example is the twoday liquor ban during elections under Article 261 of the Omnibus Election Code but this, again, is onlyfor a limited
period. This is a valid exercise of police power of the State.
However, any form of permanent taking of private property is exercise of eminent domain that requires the State to
pay just compensation. The police power to regulate business cannot negate another provision of the
Constitution like the eminent domain clause, which requires just compensation to be paid for taking or
private property for public use. The State has the power to regulate the conduct of the business of private
establishments as long as the regulation is reasonable, but when the regulation amounts to permanent
taking of private property for public use , there must be just compensation because the regulation now
reaches the level of eminent domain.
The explanation by the majority that private establishments can always increase their prices to recover the
mandatory discount will only encourage private establishments to adjust their prices upwards to prejudice of

customers who do not enjoy the 20% discount. It was likewise suggested that if a company increases its prices,
despite the application of the 20% discount, the establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers will suffer from the
price increase than will benefit from the 20% discount. Even then, such ability to increase prices cannot legally
validate a violation of the eminent domain clause.
Finally, the 20% discount granted to senior citizens is not per se unreasonable. It is the provision that the 20%
discount may be claimed by private establishments as tax deduction, and no longer as tax credit, that is oppressive
and confiscatory.
Prior to its amendment, Section 4 of R.A. 6432 reads:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the the following:
(a) the grant of twenty percent (20%) discount from all establishments, relative to utilization of transportation
services, hotels and similar lodging establishment, restaurant and recreation centers and purchase of medicine
anywhere in the country: Provided, That private establishments may claim the cost as tax credit;
x x x x (Emphasis supplied)
Under R.A. 9257, the amendment reads:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishment, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including fineral and burial services for the
death of senior citizens;
xxxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered:Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is granted. Provided, further, That the total
amount of the claimed tax deduction net value added tax is applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue
Code, as amended. (Emphasis supplied)
Due to the patent unconstitutionality of Section 4 of R.A. 7432, as amended by R.A. 9257, providing that the private
establishments may claim the 20% discount to senior citizens as tax deduction, the old law, or Section 4 of R.A.
7432, which allows the 20% discount as tax credit, is automatically reinstated. Where amendments to statute are
declared unconstituional, the original statute as it existed before the amendment remains in force 36 An amendatory
law, if declared null and void, in legal contemplation does not exist. 37 The private establishments should therefore be
allowed to claim the 20% discount granted to senior citizens as tax credit.
ACCORDINGLY, I vote to GRANT the petition.

ANTONIO T. CARPIO
Associate Justice

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

G.R. No. 185371

Present:

METRO STAR SUPERAMA, INC.,

Respondent.

CARPIO, J., Chairperson,

NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.
DECISION

MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of
Internal Revenue (CIR)seeks to reverse and set aside the 1] September 16, 2008 Decision [1] of the Court of Tax
Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution [2] denying
petitioners motion for reconsideration.
The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case
No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama,
Inc. (Metro Star) of deficiency value-added tax and withholding tax for the taxable year 1999.
Based on a Joint Stipulation of Facts and Issues [3] of the parties, the CTA Second Division summarized the
factual and procedural antecedents of the case, the pertinent portions of which read:
Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the
Republic of the Philippines,
x x x.
On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued
Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioners
books of accounts and other accounting records for income tax and other internal revenue taxes for
the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional
Director Leonardo Sacamos.
For petitioners failure to comply with several requests for the presentation of records and
Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September
26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed with
the investigation based on the best evidence obtainable preparatory to the issuance of assessment
notice.
On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a
Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated that
a post audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from petitioner in the amount of P 292,874.16.
On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from
Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two
Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency
value-added and withholding taxes for the taxable year 1999, computed as follows:

ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX
Gross Sales
Output Tax
Less: Input Tax
VAT Payable
Add: 25% Surcharge
20% Interest
Compromise Penalty
Late Payment
Failure to File VAT returns
TOTAL

P1,697,718.90
P 154,338.08
P 154,338.08
P 38,584.54
79,746.49
P16,000.00
2,400.00 18,400.00

WITHHOLDING TAX
Compensation
Expanded
Total Tax Due
Less: Tax Withheld
Deficiency Withholding Tax
Add: 20% Interest p.a.
Compromise Penalty
TOTAL

136,731.01
P 291,069.09

2,772.91
110,103.92
P 112,876.83
111,848.27
P
1,028.56
576.51
200.00
P
1,805.07

*Expanded Withholding Tax P1,949,334.25

x 5%
97,466.71
Film Rental
10,000.25
x 10%
1,000.00
Audit Fee
193,261.20
x 5%
9,663.00
Rental Expense
41,272.73
x 1%
412.73
Security Service
156,142.01
x 1%
1,561.42
Service Contractor
P 110,103.92
Total
SUMMARIES OF DEFICIENCIES
VALUE ADDED TAX
WITHHOLDING TAX
TOTAL

P 291,069.09
1,805.07
P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure
dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to
settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent
BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy and
Garnishment to enforce collection.
On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of
Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency valueadded tax and withholding tax payment in the amount of P292,874.16.
On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for
Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99.
On February 8, 2005, respondent Commissioner, through its authorized representative,
Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying
petitioners Motion for Reconsideration. Petitioner, through counsel received said Decision
onFebruary 18, 2005.

x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due
process, Metro Star filed a petition for review [4] with the CTA. The parties then stipulated on the following issues to be
decided by the tax court:
1. Whether the respondent complied with the due process requirement as provided under the
National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the
issuance of a deficiency tax assessment;
1.1 Whether petitioner is liable for the respective amounts of P291,069.09
and P1,805.07 as deficiency VAT and withholding tax for the year 1999;
1.2. Whether the assessment has become final and executory and demandable for
failure of petitioner to protest the same within 30 days from its receipt thereof
on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code;
2.

Whether the deficiency assessments issued by the respondent are void for failure to state the
law and/or facts upon which they are based.
2.2 Whether petitioner was informed of the law and facts on which the assessment is
made in compliance with Section 228 of the National Internal Revenue Code;

3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales

of services under Section 108(A) of the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section
6(b) of the National Internal Revenue Code.
The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a
decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE
and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner.
The CTA-Second Division opined that [w]hile there [is] a disputable presumption that a mailed letter [is]
deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the
burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the
addressee.[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN,
dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the
Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.[6]
The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the
latters July 24, 2007Resolution.[8]
Aggrieved, the CIR filed a petition for review [9] with the CTA-En Banc, but the petition was dismissed after a
determination that no new matters were raised. The CTA-En Banc disposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007
Resolution of the CTA Second Division in CTA Case No. 7169 entitled, Metro Star Superama, Inc.,
petitioner vs. Commissioner of Internal Revenue, respondent are hereby AFFIRMED in toto.

SO ORDERED.
The motion for reconsideration [10] filed by the CIR was likewise denied by the CTA-En Banc in its November 18,
2008 Resolution.[11]
The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was
served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court
with the sole issue of whether or not Metro Star was denied due process.
The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the
very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has
been an abuse or improvident exercise of authority.[12] InBarcelon, Roxas Securities, Inc. (now known as UBP
Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote:
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA
with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April
2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the
very nature of its function is dedicated exclusively to the consideration of tax problems, has
necessarily developed an expertise on the subject, and its conclusions will not be overturned unless
there has been an abuse or improvident exercise of authority. Such findings can only be disturbed
on appeal if they are not supported by substantial evidence or there is a showing of gross error or
abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the contrary,
this Court must presume that the CTA rendered a decision which is valid in every respect.
On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz:
Jurisprudence is replete with cases holding that if the taxpayer denies ever having
received an assessment from the BIR, it is incumbent upon the latter to prove by competent
evidence that such notice was indeed received by the addressee. The onus probandi was
shifted to respondent to prove by contrary evidence that the Petitioner received the
assessment in the due course of mail. The Supreme Court has consistently held that while a
mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable
presumption subject to controversion and a direct denial thereof shifts the burden to the party
favored by the presumption to prove that the mailed letter was indeed received by the addressee
(Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P.
Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
"The facts to be proved to raise this presumption are (a) that the letter
was properly addressed with postage prepaid, and (b) that it was mailed. Once
these facts are proved, the presumption is that the letter was received by the
addressee as soon as it could have been transmitted to him in the ordinary course
of the mail. But if one of the said facts fails to appear, the presumption does not lie.
(VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs.
Sunlife Assurance of Canada, 41 Phil 269)."
x x x. What is essential to prove the fact of mailing is the registry receipt issued by the
Bureau of Posts or the Registry return card which would have been signed by the Petitioner
or its authorized representative. And if said documents cannot be located, Respondent at the
very least, should have submitted to the Court a certification issued by the Bureau of Posts
and any other pertinent document which is executed with the intervention of the Bureau of
Posts. This Court does not put much credence to the self serving documentations made by the BIR
personnel especially if they are unsupported by substantial evidence establishing the fact of mailing.
Thus:

"While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. of Int.
Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the
more imperative that the release, mailing or sending of the notice be clearly and
satisfactorily proved. Mere notations made without the taxpayers intervention,
notice or control, without adequate supporting evidence cannot suffice; otherwise,
the taxpayer would be at the mercy of the revenue offices, without adequate
protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965).
x x x.
The failure of the respondent to prove receipt of the assessment by the Petitioner leads to
the conclusion that no assessment was issued. Consequently, the governments right to issue an
assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the
Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show
that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt
or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it
failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman
dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was
willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of
lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under
Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount
to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the
computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which reads:
SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of
his findings: provided, however, that a preassessment notice shall not be required in the following
cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically applied
the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall
be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as
may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall have been submitted; otherwise, the assessment
shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable
for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the
assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.
[14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's
records shall, among others, state in his report whether or not the taxpayer agrees with his findings
that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the
said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the
Revenue District Office or by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National
Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes,
for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to
present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of
receipt of the notice for informal conference, he shall be considered in default, in which case, the
Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional
Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case
with the least possible delay to the Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case may be, for appropriate review and
issuance of a deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as the case may
be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or
taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary
Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration
in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of
the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment
notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's
deficiency tax liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference
and the preliminary assessment notice shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax
liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax appearing on the face of the tax return filed by the
taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or

(v) When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt persons.
3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative. The
letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the
law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal
letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof).
The same shall be sent to the taxpayer only by registered mail or by personal delivery.
If sent by personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a)
His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if
acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof.
x x x.
From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the
assessment made is but part of the due process requirement in the issuance of a deficiency tax assessment, the
absence of which renders nugatory any assessment made by the tax authorities. The use of the word shall in
subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due
process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the
requirements laid down by law and its own rules is a denial of Metro Stars right to due process. [15] Thus, for its failure
to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A.
No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the
FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the noncompliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No.
8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of
merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law,
but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid.

[17]

The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form
prescribed, and that no consequence would ensue for failure to comply with that form.
The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is well-settled
that a void assessment bears no fruit.[18]
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property
without due process of law.[19] In balancing the scales between the power of the State to tax and its inherent right to
prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of
law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right
is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the
government, the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue
v. Algue, Inc.,[20] it was said
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.
xxx

xxx

xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income to taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction
by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in accordance with
the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will
then come to his succor. For all the awesome power of the tax collector, he may still be stopped in
his tracks if the taxpayer can demonstrate x x x that the law has not been
observed.[21] (Emphasis
supplied).
WHEREFORE, the petition is DENIED.
SO ORDERED.

G.R. Nos. L-49839-46 April 26, 1991

JOSE B. L. REYES and EDMUNDO A. REYES, petitioners,
vs.
PEDRO ALMANZOR, VICENTE ABAD SANTOS, JOSE ROO, in their capacities as appointed and Acting
Members of the CENTRAL BOARD OF ASSESSMENT APPEALS; TERESITA H. NOBLEJAS, ROMULO M. DEL
ROSARIO, RAUL C. FLORES, in their capacities as appointed and Acting Members of the BOARD OF
ASSESSMENT APPEALS of Manila; and NICOLAS CATIIL in his capacity as City Assessor of
Manila,respondents.
Barcelona, Perlas, Joven & Academia Law Offices for petitioners.

PARAS, J.:p
This is a petition for review on certiorari to reverse the June 10, 1977 decision of the Central Board of Assessment
Appeals 1 in CBAA Cases Nos. 72-79 entitled "J.B.L. Reyes, Edmundo Reyes, et al. v. Board of Assessment Appeals
of Manila and City Assessor of Manila" which affirmed the March 29, 1976 decision of the Board of Tax Assessment
Appeals 2 in BTAA Cases Nos. 614, 614-A-J, 615, 615-A, B, E, "Jose Reyes, et al. v. City Assessor of Manila" and
"Edmundo Reyes and Milagros Reyes v. City Assessor of Manila" upholding the classification and assessments
made by the City Assessor of Manila.
The facts of the case are as follows:
Petitioners J.B.L. Reyes, Edmundo and Milagros Reyes are owners of parcels of land situated in Tondo and Sta.
Cruz Districts, City of Manila, which are leased and entirely occupied as dwelling sites by tenants. Said tenants were
paying monthly rentals not exceeding three hundred pesos (P300.00) in July, 1971. On July 14, 1971, the National
Legislature enacted Republic Act No. 6359 prohibiting for one year from its effectivity, an increase in monthly rentals
of dwelling units or of lands on which another's dwelling is located, where such rentals do not exceed three hundred
pesos (P300.00) a month but allowing an increase in rent by not more than 10% thereafter. The said Act also
suspended paragraph (1) of Article 1673 of the Civil Code for two years from its effectivity thereby disallowing the
ejectment of lessees upon the expiration of the usual legal period of lease. On October 12, 1972, Presidential Decree
No. 20 amended R.A. No. 6359 by making absolute the prohibition to increase monthly rentals below P300.00 and
by indefinitely suspending the aforementioned provision of the Civil Code, excepting leases with a definite period.
Consequently, the Reyeses, petitioners herein, were precluded from raising the rentals and from ejecting the tenants.
In 1973, respondent City Assessor of Manila re-classified and reassessed the value of the subject properties based
on the schedule of market values duly reviewed by the Secretary of Finance. The revision, as expected, entailed an
increase in the corresponding tax rates prompting petitioners to file a Memorandum of Disagreement with the Board
of Tax Assessment Appeals. They averred that the reassessments made were "excessive, unwarranted, inequitable,
confiscatory and unconstitutional" considering that the taxes imposed upon them greatly exceeded the annual
income derived from their properties. They argued that the income approach should have been used in determining
the land values instead of the comparable sales approach which the City Assessor adopted (Rollo, pp. 9-10-A). The
Board of Tax Assessment Appeals, however, considered the assessments valid, holding thus:
WHEREFORE, and considering that the appellants have failed to submit concrete evidence which
could overcome the presumptive regularity of the classification and assessments appear to be in

accordance with the base schedule of market values and of the base schedule of building unit
values, as approved by the Secretary of Finance, the cases should be, as they are hereby, upheld.
SO ORDERED. (Decision of the Board of Tax Assessment Appeals, Rollo, p. 22).
The Reyeses appealed to the Central Board of Assessment Appeals. They submitted, among others, the summary of
the yearly rentals to show the income derived from the properties. Respondent City Assessor, on the other hand,
submitted three (3) deeds of sale showing the different market values of the real property situated in the same
vicinity where the subject properties of petitioners are located. To better appreciate the locational and physical
features of the land, the Board of Hearing Commissioners conducted an ocular inspection with the presence of two
representatives of the City Assessor prior to the healing of the case. Neither the owners nor their authorized
representatives were present during the said ocular inspection despite proper notices served them. It was found that
certain parcels of land were below street level and were affected by the tides (Rollo, pp. 24-25).
On June 10, 1977, the Central Board of Assessment Appeals rendered its decision, the dispositive portion of which
reads:
WHEREFORE, the appealed decision insofar as the valuation and assessment of the lots covered
by Tax Declaration Nos. (5835) PD-5847, (5839), (5831) PD-5844 and PD-3824 is affirmed.
For the lots covered by Tax Declaration Nos. (1430) PD-1432, PD-1509, 146 and (1) PD-266, the
appealed Decision is modified by allowing a 20% reduction in their respective market values and
applying therein the assessment level of 30% to arrive at the corresponding assessed value.
SO ORDERED. (Decision of the Central Board of Assessment Appeals, Rollo, p. 27)
Petitioner's subsequent motion for reconsideration was denied, hence, this petition.
The Reyeses assigned the following error:
THE HONORABLE BOARD ERRED IN ADOPTING THE "COMPARABLE SALES APPROACH"
METHOD IN FIXING THE ASSESSED VALUE OF APPELLANTS' PROPERTIES.
The petition is impressed with merit.
The crux of the controversy is in the method used in tax assessment of the properties in question. Petitioners
maintain that the "Income Approach" method would have been more realistic for in disregarding the effect of the
restrictions imposed by P.D. 20 on the market value of the properties affected, respondent Assessor of the City of
Manila unlawfully and unjustifiably set increased new assessed values at levels so high and successive that the
resulting annual real estate taxes would admittedly exceed the sum total of the yearly rentals paid or payable by the
dweller tenants under P.D. 20. Hence, petitioners protested against the levels of the values assigned to their
properties as revised and increased on the ground that they were arbitrarily excessive, unwarranted, inequitable,
confiscatory and unconstitutional (Rollo, p. 10-A).
On the other hand, while respondent Board of Tax Assessment Appeals admits in its decision that the income
approach is used in determining land values in some vicinities, it maintains that when income is affected by some
sort of price control, the same is rejected in the consideration and study of land values as in the case of properties
affected by the Rent Control Law for they do not project the true market value in the open market (Rollo, p. 21). Thus,

respondents opted instead for the "Comparable Sales Approach" on the ground that the value estimate of the
properties predicated upon prices paid in actual, market transactions would be a uniform and a more credible
standards to use especially in case of mass appraisal of properties (Ibid.). Otherwise stated, public respondents
would have this Court completely ignore the effects of the restrictions of P.D. No. 20 on the market value of
properties within its coverage. In any event, it is unquestionable that both the "Comparable Sales Approach" and the
"Income Approach" are generally acceptable methods of appraisal for taxation purposes (The Law on Transfer and
Business Taxation by Hector S. De Leon, 1988 Edition). However, it is conceded that the propriety of one as against
the other would of course depend on several factors. Hence, as early as 1923 in the case of Army & Navy Club,
Manila v. Wenceslao Trinidad, G.R. No. 19297 (44 Phil. 383), it has been stressed that the assessors, in finding the
value of the property, have to consider all the circumstances and elements of value and must exercise a prudent
discretion in reaching conclusions.
Under Art. VIII, Sec. 17 (1) of the 1973 Constitution, then enforced, the rule of taxation must not only be uniform, but
must also be equitable and progressive.
Uniformity has been defined as that principle by which all taxable articles or kinds of property of the same class shall
be taxed at the same rate (Churchill v. Concepcion, 34 Phil. 969 [1916]).
Notably in the 1935 Constitution, there was no mention of the equitable or progressive aspects of taxation required in
the 1973 Charter (Fernando "The Constitution of the Philippines", p. 221, Second Edition). Thus, the need to
examine closely and determine the specific mandate of the Constitution.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is progressive when its rate
goes up depending on the resources of the person affected (Ibid.).
The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of government. But for all
its plenitude the power to tax is not unconfined as there are restrictions. Adversely effecting as it does property rights,
both the due process and equal protection clauses of the Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of Chief Justice
Marshall that "the power to tax involves the power to destroy." The web or unreality spun from Marshall's famous
dictum was brushed away by one stroke of Mr. Justice Holmes pen, thus: "The power to tax is not the power to
destroy while this Court sits. So it is in the Philippines " (Sison, Jr. v. Ancheta, 130 SCRA 655 [1984]; Obillos, Jr. v.
Commissioner of Internal Revenue, 139 SCRA 439 [1985]).
In the same vein, the due process clause may be invoked where a taxing statute is so arbitrary that it finds no
support in the Constitution. An obvious example is where it can be shown to amount to confiscation of property. That
would be a clear abuse of power (Sison v. Ancheta, supra).
The taxing power has the authority to make a reasonable and natural classification for purposes of taxation but the
government's act must not be prompted by a spirit of hostility, or at the very least discrimination that finds no support
in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or
that all persons must be treated in the same manner, the conditions not being different both in the privileges
conferred and the liabilities imposed (Ibid., p. 662).
Finally under the Real Property Tax Code (P.D. 464 as amended), it is declared that the first Fundamental Principle to
guide the appraisal and assessment of real property for taxation purposes is that the property must be "appraised at
its current and fair market value."

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

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the
power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended,
June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of
Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan,
Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein
are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce
compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects
"from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink
corked." 2 For the purpose of computing the taxes due, the person, firm, company or corporation producing soft
drinks shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked
during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on
soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due,
the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the Municipal
Treasurer a monthly report of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding
the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:

1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific
taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the people. 6 It is a power that is purely legislative
and which the central legislative body cannot delegate either to the executive or judicial department of the
government without infringing upon the theory of separation of powers. The exception, however, lies in the case of
municipal corporations, to which, said theory does not apply. Legislative powers may be delegated to local
governments in respect of matters of local concern. 7 This is sanctioned by immemorial practice. 8 By necessary
implication, the legislative power to create political corporations for purposes of local self-government carries with it
the power to confer on such local governmental agencies the power to tax. 9 Under the New Constitution, local
governments are granted the autonomous authority to create their own sources of revenue and to levy taxes. Section
5, Article XI provides: "Each local government unit shall have the power to create its sources of revenue and to levy
taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act
No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in local governments the
power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the
legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public
policy the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without due process of law may be passed over under the
guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as
when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity for hearing are provided. 11 Due process is usually violated where the
tax imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State,
i.e., extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a
tax does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will
result in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to
the tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the
amount of the tax and the manner in which it shall be apportioned are generally not necessary to due process of
law. 12
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. 13 The reason is that the State has exclusively reserved the same for
its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have
not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and
some states of the Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the

benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose,
where one tax is imposed by the State and the other by the city or municipality. 17

16

but not in a case

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two
ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its
assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No.
23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used.
When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still
pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus
clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962
is being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in
his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the
latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied
under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on articles subject
to specific tax except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this
particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the
volume of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the
municipality to enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature
of a percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether
sold or not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely
for purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and
the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as
distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,
saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or
manufactured, or an equivalent of 1- centavos per case, 23 cannot be considered unjust and unfair. 24 an increase
in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal

corporations are allowed much discretion in determining the reates of imposable taxes. 25 This is in line with the
constutional policy of according the widest possible autonomy to local governments in matters of local taxation, an
aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so
excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should
not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local
autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers
of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41,
series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27.
Municipalities are empowered to impose, not only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27)
comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy
Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of
1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.
G.R. No. L-75697 June 18, 1987
VALENTIN TIO doing business under the name and style of OMI ENTERPRISES, petitioner,
vs.
VIDEOGRAM REGULATORY BOARD, MINISTER OF FINANCE, METRO MANILA COMMISSION, CITY MAYOR
and CITY TREASURER OF MANILA, respondents.
Nelson Y. Ng for petitioner.
The City Legal Officer for respondents City Mayor and City Treasurer.

MELENCIO-HERRERA, J.:
This petition was filed on September 1, 1986 by petitioner on his own behalf and purportedly on behalf of other
videogram operators adversely affected. It assails the constitutionality of Presidential Decree No. 1987 entitled "An
Act Creating the Videogram Regulatory Board" with broad powers to regulate and supervise the videogram industry
(hereinafter briefly referred to as the BOARD). The Decree was promulgated on October 5, 1985 and took effect on
April 10, 1986, fifteen (15) days after completion of its publication in the Official Gazette.
On November 5, 1985, a month after the promulgation of the abovementioned decree, Presidential Decree No. 1994
amended the National Internal Revenue Code providing, inter alia:
SEC. 134. Video Tapes. There shall be collected on each processed video-tape cassette, ready
for playback, regardless of length, an annual tax of five pesos; Provided, That locally manufactured
or imported blank video tapes shall be subject to sales tax.

On October 23, 1986, the Greater Manila Theaters Association, Integrated Movie Producers, Importers and
Distributors Association of the Philippines, and Philippine Motion Pictures Producers Association, hereinafter
collectively referred to as the Intervenors, were permitted by the Court to intervene in the case, over petitioner's
opposition, upon the allegations that intervention was necessary for the complete protection of their rights and that
their "survival and very existence is threatened by the unregulated proliferation of film piracy." The Intervenors were
thereafter allowed to file their Comment in Intervention.
The rationale behind the enactment of the DECREE, is set out in its preambular clauses as follows:
1. WHEREAS, the proliferation and unregulated circulation of videograms including, among others,
videotapes, discs, cassettes or any technical improvement or variation thereof, have greatly
prejudiced the operations of moviehouses and theaters, and have caused a sharp decline in
theatrical attendance by at least forty percent (40%) and a tremendous drop in the collection of
sales, contractor's specific, amusement and other taxes, thereby resulting in substantial losses
estimated at P450 Million annually in government revenues;
2. WHEREAS, videogram(s) establishments collectively earn around P600 Million per annum from
rentals, sales and disposition of videograms, and such earnings have not been subjected to tax,
thereby depriving the Government of approximately P180 Million in taxes each year;
3. WHEREAS, the unregulated activities of videogram establishments have also affected the viability
of the movie industry, particularly the more than 1,200 movie houses and theaters throughout the
country, and occasioned industry-wide displacement and unemployment due to the shutdown of
numerous moviehouses and theaters;
4. "WHEREAS, in order to ensure national economic recovery, it is imperative for the Government to
create an environment conducive to growth and development of all business industries, including the
movie industry which has an accumulated investment of about P3 Billion;
5. WHEREAS, proper taxation of the activities of videogram establishments will not only alleviate the
dire financial condition of the movie industry upon which more than 75,000 families and 500,000
workers depend for their livelihood, but also provide an additional source of revenue for the
Government, and at the same time rationalize the heretofore uncontrolled distribution of videograms;
6. WHEREAS, the rampant and unregulated showing of obscene videogram features constitutes a
clear and present danger to the moral and spiritual well-being of the youth, and impairs the mandate
of the Constitution for the State to support the rearing of the youth for civic efficiency and the
development of moral character and promote their physical, intellectual, and social well-being;
7. WHEREAS, civic-minded citizens and groups have called for remedial measures to curb these
blatant malpractices which have flaunted our censorship and copyright laws;
8. WHEREAS, in the face of these grave emergencies corroding the moral values of the people and
betraying the national economic recovery program, bold emergency measures must be adopted with
dispatch; ... (Numbering of paragraphs supplied).
Petitioner's attack on the constitutionality of the DECREE rests on the following grounds:

1. Section 10 thereof, which imposes a tax of 30% on the gross receipts payable to the local
government is a RIDER and the same is not germane to the subject matter thereof;
2. The tax imposed is harsh, confiscatory, oppressive and/or in unlawful restraint of trade in violation
of the due process clause of the Constitution;
3. There is no factual nor legal basis for the exercise by the President of the vast powers conferred
upon him by Amendment No. 6;
4. There is undue delegation of power and authority;
5. The Decree is an ex-post facto law; and
6. There is over regulation of the video industry as if it were a nuisance, which it is not.
We shall consider the foregoing objections in seriatim.
1. The Constitutional requirement that "every bill shall embrace only one subject which shall be expressed in the title
thereof" 1 is sufficiently complied with if the title be comprehensive enough to include the general purpose which a
statute seeks to achieve. It is not necessary that the title express each and every end that the statute wishes to
accomplish. The requirement is satisfied if all the parts of the statute are related, and are germane to the subject
matter expressed in the title, or as long as they are not inconsistent with or foreign to the general subject and
title.2 An act having a single general subject, indicated in the title, may contain any number of provisions, no matter
how diverse they may be, so long as they are not inconsistent with or foreign to the general subject, and may be
considered in furtherance of such subject by providing for the method and means of carrying out the general
object." 3 The rule also is that the constitutional requirement as to the title of a bill should not be so narrowly
construed as to cripple or impede the power of legislation. 4 It should be given practical rather than technical
construction. 5
Tested by the foregoing criteria, petitioner's contention that the tax provision of the DECREE is a rider is without
merit. That section reads, inter alia:
Section 10. Tax on Sale, Lease or Disposition of Videograms. Notwithstanding any provision of
law to the contrary, the province shall collect a tax of thirty percent (30%) of the purchase price or
rental rate, as the case may be, for every sale, lease or disposition of a videogram containing a
reproduction of any motion picture or audiovisual program. Fifty percent (50%) of the proceeds of the
tax collected shall accrue to the province, and the other fifty percent (50%) shall acrrue to the
municipality where the tax is collected; PROVIDED, That in Metropolitan Manila, the tax shall be
shared equally by the City/Municipality and the Metropolitan Manila Commission.
xxx xxx xxx
The foregoing provision is allied and germane to, and is reasonably necessary for the accomplishment of, the
general object of the DECREE, which is the regulation of the video industry through the Videogram Regulatory Board
as expressed in its title. The tax provision is not inconsistent with, nor foreign to that general subject and title. As a
tool for regulation 6 it is simply one of the regulatory and control mechanisms scattered throughout the DECREE. The
express purpose of the DECREE to include taxation of the video industry in order to regulate and rationalize the
heretofore uncontrolled distribution of videograms is evident from Preambles 2 and 5, supra. Those preambles

explain the motives of the lawmaker in presenting the measure. The title of the DECREE, which is the creation of the
Videogram Regulatory Board, is comprehensive enough to include the purposes expressed in its Preamble and
reasonably covers all its provisions. It is unnecessary to express all those objectives in the title or that the latter be an
index to the body of the DECREE. 7
2. Petitioner also submits that the thirty percent (30%) tax imposed is harsh and oppressive, confiscatory, and in
restraint of trade. However, it is beyond serious question that a tax does not cease to be valid merely because it
regulates, discourages, or even definitely deters the activities taxed. 8 The power to impose taxes is one so unlimited
in force and so searching in extent, that the courts scarcely venture to declare that it is subject to any restrictions
whatever, except such as rest in the discretion of the authority which exercises it. 9 In imposing a tax, the legislature
acts upon its constituents. This is, in general, a sufficient security against erroneous and oppressive taxation. 10
The tax imposed by the DECREE is not only a regulatory but also a revenue measure prompted by the realization
that earnings of videogram establishments of around P600 million per annum have not been subjected to tax,
thereby depriving the Government of an additional source of revenue. It is an end-user tax, imposed on retailers for
every videogram they make available for public viewing. It is similar to the 30% amusement tax imposed or borne by
the movie industry which the theater-owners pay to the government, but which is passed on to the entire cost of the
admission ticket, thus shifting the tax burden on the buying or the viewing public. It is a tax that is imposed uniformly
on all videogram operators.
The levy of the 30% tax is for a public purpose. It was imposed primarily to answer the need for regulating the video
industry, particularly because of the rampant film piracy, the flagrant violation of intellectual property rights, and the
proliferation of pornographic video tapes. And while it was also an objective of the DECREE to protect the movie
industry, the tax remains a valid imposition.
The public purpose of a tax may legally exist even if the motive which impelled the legislature to
impose the tax was to favor one industry over another. 11
It is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that "inequities which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation". 12 Taxation has been made the implement of the
state's police power. 13
At bottom, the rate of tax is a matter better addressed to the taxing legislature.
3. Petitioner argues that there was no legal nor factual basis for the promulgation of the DECREE by the former
President under Amendment No. 6 of the 1973 Constitution providing that "whenever in the judgment of the
President ... , there exists a grave emergency or a threat or imminence thereof, or whenever the interim Batasang
Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for any reason that in
his judgment requires immediate action, he may, in order to meet the exigency, issue the necessary decrees, orders,
or letters of instructions, which shall form part of the law of the land."
In refutation, the Intervenors and the Solicitor General's Office aver that the 8th "whereas" clause sufficiently
summarizes the justification in that grave emergencies corroding the moral values of the people and betraying the
national economic recovery program necessitated bold emergency measures to be adopted with dispatch. Whatever
the reasons "in the judgment" of the then President, considering that the issue of the validity of the exercise of
legislative power under the said Amendment still pends resolution in several other cases, we reserve resolution of
the question raised at the proper time.

4. Neither can it be successfully argued that the DECREE contains an undue delegation of legislative power. The
grant in Section 11 of the DECREE of authority to the BOARD to "solicit the direct assistance of other agencies and
units of the government and deputize, for a fixed and limited period, the heads or personnel of such agencies and
units to perform enforcement functions for the Board" is not a delegation of the power to legislate but merely a
conferment of authority or discretion as to its execution, enforcement, and implementation. "The true distinction is
between the delegation of power to make the law, which necessarily involves a discretion as to what it shall be, and
conferring authority or discretion as to its execution to be exercised under and in pursuance of the law. The first
cannot be done; to the latter, no valid objection can be made." 14 Besides, in the very language of the decree, the
authority of the BOARD to solicit such assistance is for a "fixed and limited period" with the deputized agencies
concerned being "subject to the direction and control of the BOARD." That the grant of such authority might be the
source of graft and corruption would not stigmatize the DECREE as unconstitutional. Should the eventuality occur,
the aggrieved parties will not be without adequate remedy in law.
5. The DECREE is not violative of the ex post facto principle. An ex post facto law is, among other categories, one
which "alters the legal rules of evidence, and authorizes conviction upon less or different testimony than the law
required at the time of the commission of the offense." It is petitioner's position that Section 15 of the DECREE in
providing that:
All videogram establishments in the Philippines are hereby given a period of forty-five (45) days after
the effectivity of this Decree within which to register with and secure a permit from the BOARD to
engage in the videogram business and to register with the BOARD all their inventories of
videograms, including videotapes, discs, cassettes or other technical improvements or variations
thereof, before they could be sold, leased, or otherwise disposed of. Thereafter any videogram found
in the possession of any person engaged in the videogram business without the required proof of
registration by the BOARD, shall be prima facie evidence of violation of the Decree, whether the
possession of such videogram be for private showing and/or public exhibition.
raises immediately a prima facie evidence of violation of the DECREE when the required proof of registration of any
videogram cannot be presented and thus partakes of the nature of an ex post facto law.
The argument is untenable. As this Court held in the recent case of Vallarta vs. Court of Appeals, et al. 15
... it is now well settled that "there is no constitutional objection to the passage of a law providing that
the presumption of innocence may be overcome by a contrary presumption founded upon the
experience of human conduct, and enacting what evidence shall be sufficient to overcome such
presumption of innocence" (People vs. Mingoa 92 Phil. 856 [1953] at 858-59, citing 1 COOLEY, A
TREATISE ON THE CONSTITUTIONAL LIMITATIONS, 639-641). And the "legislature may enact
that when certain facts have been proved that they shall be prima facie evidence of the existence of
the guilt of the accused and shift the burden of proof provided there be a rational connection
between the facts proved and the ultimate facts presumed so that the inference of the one from
proof of the others is not unreasonable and arbitrary because of lack of connection between the two
in common experience". 16
Applied to the challenged provision, there is no question that there is a rational connection between the fact proved,
which is non-registration, and the ultimate fact presumed which is violation of the DECREE, besides the fact that
the prima facie presumption of violation of the DECREE attaches only after a forty-five-day period counted from its
effectivity and is, therefore, neither retrospective in character.

6. We do not share petitioner's fears that the video industry is being over-regulated and being eased out of existence
as if it were a nuisance. Being a relatively new industry, the need for its regulation was apparent. While the
underlying objective of the DECREE is to protect the moribund movie industry, there is no question that public
welfare is at bottom of its enactment, considering "the unfair competition posed by rampant film piracy; the erosion of
the moral fiber of the viewing public brought about by the availability of unclassified and unreviewed video tapes
containing pornographic films and films with brutally violent sequences; and losses in government revenues due to
the drop in theatrical attendance, not to mention the fact that the activities of video establishments are virtually
untaxed since mere payment of Mayor's permit and municipal license fees are required to engage in business. 17
The enactment of the Decree since April 10, 1986 has not brought about the "demise" of the video industry. On the
contrary, video establishments are seen to have proliferated in many places notwithstanding the 30% tax imposed.
In the last analysis, what petitioner basically questions is the necessity, wisdom and expediency of the DECREE.
These considerations, however, are primarily and exclusively a matter of legislative concern.
Only congressional power or competence, not the wisdom of the action taken, may be the basis for
declaring a statute invalid. This is as it ought to be. The principle of separation of powers has in the
main wisely allocated the respective authority of each department and confined its jurisdiction to
such a sphere. There would then be intrusion not allowable under the Constitution if on a matter left
to the discretion of a coordinate branch, the judiciary would substitute its own. If there be adherence
to the rule of law, as there ought to be, the last offender should be courts of justice, to which rightly
litigants submit their controversy precisely to maintain unimpaired the supremacy of legal norms and
prescriptions. The attack on the validity of the challenged provision likewise insofar as there may be
objections, even if valid and cogent on its wisdom cannot be sustained. 18
In fine, petitioner has not overcome the presumption of validity which attaches to a challenged statute. We find no
clear violation of the Constitution which would justify us in pronouncing Presidential Decree No. 1987 as
unconstitutional and void.
WHEREFORE, the instant Petition is hereby dismissed.
No costs.
SO ORDERED.

Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION
PLANTERS PRODUCTS, INC.,
Petitioner,

G.R. No. 166006

Present:

FERTIPHIL CORPORATION,
Respondent.
REYES, R.T., J.:
THE Regional Trial Courts (RTC) have the authority and jurisdiction to consider the constitutionality of statutes,
executive orders, presidential decrees and other issuances. The Constitution vests that power not only in the
Supreme Court but in all Regional Trial Courts.
The principle is relevant in this petition for review on certiorari of the Decision[1] of the Court of Appeals (CA)
affirming with modification that of the RTC in Makati City,[2] finding petitioner Planters Products, Inc. (PPI) liable to
private respondent Fertiphil Corporation (Fertiphil) for the levies it paid under Letter of Instruction (LOI) No. 1465.
The Facts
[3]

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.
They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465
which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all
grades of fertilizers in the Philippines.[4] The LOI provides:
3.

The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.[5] (Underscoring supplied)

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer
and Pesticide Authority (FPA). FPA then remitted the amount collected to the Far East Bank and Trust Company, the
depositary bank of PPI. Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.[6]
After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy. With the return of
democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to
accede to the demand.[7]
Fertiphil filed a complaint for collection and damages [8] against FPA and PPI with the RTC in Makati. It
questioned the constitutionality of LOI No. 1465 for being unjust, unreasonable, oppressive, invalid and an unlawful
imposition that amounted to a denial of due process of law.[9] Fertiphil alleged that the LOI solely favored PPI, a
privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.
In its Answer,[10] FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid
exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country. It also

averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the
ultimate consumer, not the seller.
RTC Disposition
On November 20, 1991, the RTC rendered judgment in favor of Fertiphil, disposing as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of the
plaintiff and against the defendant Planters Product, Inc., ordering the latter to pay the former:
1)
2)
3)

the sum of P6,698,144.00 with interest at 12% from the time of judicial demand;
the sum of P100,000 as attorneys fees;
the cost of suit.

SO ORDERED.[11]

Ruling that the imposition of the P10 CRC was an exercise of the States inherent power of taxation,
the RTC invalidated the levy for violating the basic principle that taxes can only be levied for public purpose, viz.:
It is apparent that the imposition of P10 per fertilizer bag sold in the country by LOI 1465 is
purportedly in the exercise of the power of taxation. It is a settled principle that the power of taxation
by the state is plenary. Comprehensive and supreme, the principal check upon its abuse resting in
the responsibility of the members of the legislature to their constituents. However, there are two
kinds of limitations on the power of taxation: the inherent limitations and the constitutional limitations.
One of the inherent limitations is that a tax may be levied only for public purposes:
The power to tax can be resorted to only for a constitutionally valid public
purpose. By the same token, taxes may not be levied for purely private purposes,
for building up of private fortunes, or for the redress of private wrongs. They cannot
be levied for the improvement of private property, or for the benefit, and promotion of
private enterprises, except where the aid is incident to the public benefit. It is wellsettled principle of constitutional law that no general tax can be levied except for the
purpose of raising money which is to be expended for public use. Funds cannot be
exacted under the guise of taxation to promote a purpose that is not of public
interest. Without such limitation, the power to tax could be exercised or employed
as an authority to destroy the economy of the people. A tax, however, is not held
void on the ground of want of public interest unless the want of such interest is
clear. (71 Am. Jur. pp. 371-372)
In the case at bar, the plaintiff paid the amount of P6,698,144.00 to the Fertilizer and
Pesticide Authority pursuant to the P10 per bag of fertilizer sold imposition under LOI 1465 which, in
turn, remitted the amount to the defendant Planters Products, Inc. thru the latters depository bank,
Far East Bank and Trust Co. Thus, by virtue of LOI 1465 the plaintiff, Fertiphil Corporation, which is
a private domestic corporation, became poorer by the amount ofP6,698,144.00 and the defendant,
Planters Product, Inc., another private domestic corporation, became richer by the amount
of P6,698,144.00.
Tested by the standards of constitutionality as set forth in the afore-quoted jurisprudence, it is
quite evident that LOI 1465 insofar as it imposes the amount of P10 per fertilizer bag sold in the
country and orders that the said amount should go to the defendant Planters Product, Inc. is
unlawful because it violates the mandate that a tax can be levied only for a public purpose and not to
benefit, aid and promote a private enterprise such as Planters Product, Inc. [12]

PPI moved for reconsideration but its motion was denied. [13] PPI then filed a notice of appeal with the RTC but
it failed to pay the requisite appeal docket fee. In a separate but related proceeding, this Court [14] allowed the appeal
of PPI and remanded the case to the CA for proper disposition.
CA Decision
On November 28, 2003, the CA handed down its decision affirming with modification that of the RTC, with the
following fallo:
IN
VIEW
OF ALL THE
FOREGOING,
the
decision
appealed
from
hereby AFFIRMED, subject to the MODIFICATION that the award of attorneys fees
hereby DELETED.[15]

is
is

In affirming the RTC decision, the CA ruled that the lis mota of the complaint for collection was the
constitutionality of LOI No. 1465, thus:
The question then is whether it was proper for the trial court to exercise its power to judicially
determine the constitutionality of the subject statute in the instant case.
As a rule, where the controversy can be settled on other grounds, the courts will not resolve
the constitutionality of a law (Lim v. Pacquing, 240 SCRA 649 [1995]). The policy of the courts is to
avoid ruling on constitutional questions and to presume that the acts of political departments are
valid, absent a clear and unmistakable showing to the contrary.
However, the courts are not precluded from exercising such power when the following
requisites are obtaining in a controversy before it: First, there must be before the court an actual
case calling for the exercise of judicial review. Second, the question must be ripe for
adjudication. Third, the person challenging the validity of the act must have standing to
challenge. Fourth, the question of constitutionality must have been raised at the earliest opportunity;
and lastly, the issue of constitutionality must be the very lis mota of the case (Integrated Bar of the
Philippines v. Zamora, 338 SCRA 81 [2000]).
Indisputably, the present case was primarily instituted for collection and damages. However,
a perusal of the complaint also reveals that the instant action is founded on the claim that the levy
imposed was an unlawful and unconstitutional special assessment. Consequently, the requisite that
the constitutionality of the law in question be the very lis mota of the case is present, making it
proper for the trial court to rule on the constitutionality of LOI 1465. [16]
The CA held that even on the assumption that LOI No. 1465 was issued under the police power of the state, it
is still unconstitutional because it did not promote public welfare. The CA explained:
In declaring LOI 1465 unconstitutional, the trial court held that the levy imposed under the
said law was an invalid exercise of the States power of taxation inasmuch as it violated the inherent
and constitutional prescription that taxes be levied only for public purposes. It reasoned out that the
amount collected under the levy was remitted to the depository bank of PPI, which the latter used to
advance its private interest.
On the other hand, appellant submits that the subject statutes passage was a valid exercise
of police power. In addition, it disputes the court a quos findings arguing that the collections under
LOI 1465 was for the benefit of Planters Foundation, Incorporated (PFI), a foundation created by law
to hold in trust for millions of farmers, the stock ownership of PPI.
Of the three fundamental powers of the State, the exercise of police power has been
characterized as the most essential, insistent and the least limitable of powers, extending as it does
to all the great public needs. It may be exercised as long as the activity or the property sought to be

regulated has some relevance to public welfare (Constitutional Law, by Isagani A. Cruz, p. 38, 1995
Edition).
Vast as the power is, however, it must be exercised within the limits set by the Constitution,
which requires the concurrence of a lawful subject and a lawful method. Thus, our courts have laid
down the test to determine the validity of a police measure as follows: (1) the interests of the public
generally, as distinguished from those of a particular class, requires its exercise; and (2) the means
employed are reasonably necessary for the accomplishment of the purpose and not unduly
oppressive upon individuals (National Development Company v. Philippine Veterans Bank, 192
SCRA 257 [1990]).
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country
is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to
achieve this is by no means a measure that will promote the public welfare. The governments
commitment to support the successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to
treat the self-interest of a favored entity, like PPI, as identical with the general interest of the
countrys farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statutes
public purpose is spoiled by private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals.[17]
The CA did not accept PPIs claim that the levy imposed under LOI No. 1465 was for the benefit of Planters
Foundation, Inc., a foundation created to hold in trust the stock ownership of PPI. The CA stated:
Appellant next claims that the collections under LOI 1465 was for the benefit of Planters
Foundation, Incorporated (PFI), a foundation created by law to hold in trust for millions of farmers,
the stock ownership of PFI on the strength of Letter of Undertaking (LOU) issued by then Prime
Minister Cesar Virata on April 18, 1985 and affirmed by the Secretary of Justice in an Opinion
dated October 12, 1987, to wit:
2. Upon the effective date of this Letter of Undertaking, the Republic shall
cause FPA to include in its fertilizer pricing formula a capital recovery component,
the proceeds of which will be used initially for the purpose of funding the unpaid
portion of the outstanding capital stock of Planters presently held in trust by Planters
Foundation, Inc. (Planters Foundation), which unpaid capital is estimated at
approximately P206 million (subject to validation by Planters and Planters
Foundation) (such unpaid portion of the outstanding capital stock of Planters being
hereafter referred to as the Unpaid Capital), and subsequently for such capital
increases as may be required for the continuing viability of Planters.
The capital recovery component shall be in the minimum amount of P10 per
bag, which will be added to the price of all domestic sales of fertilizer in
the Philippines by any importer and/or fertilizer mother company. In this connection,
the Republic hereby acknowledges that the advances by Planters to Planters
Foundation which were applied to the payment of the Planters shares now held in
trust by Planters Foundation, have been assigned to, among others, the
Creditors. Accordingly, the Republic, through FPA, hereby agrees to deposit the
proceeds of the capital recovery component in the special trust account designated
in the notice dated April 2, 1985, addressed by counsel for the Creditors to Planters
Foundation. Such proceeds shall be deposited by FPA on or before the 15 th day of
each month.

The capital recovery component shall continue to be charged and collected

until payment in full of (a) the Unpaid Capital and/or (b) any shortfall in the payment
of the Subsidy Receivables, (c) any carrying cost accruing from the date hereof on
the amounts which may be outstanding from time to time of the Unpaid Capital
and/or the Subsidy Receivables and (d) the capital increases contemplated in
paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to Planters of
servicing its debts, taking into account both its peso and foreign currencydenominated obligations. (Records, pp. 42-43)
Appellants proposition is open to question, to say the least. The LOU issued by then Prime
Minister Virata taken together with the Justice Secretarys Opinion does not preponderantly
demonstrate that the collections made were held in trust in favor of millions of
farmers. Unfortunately for appellant, in the absence of sufficient evidence to establish its claims, this
Court is constrained to rely on what is explicitly provided in LOI 1465 that one of the primary aims
in imposing the levy is to support the successful rehabilitation and continued viability of PPI. [18]
PPI moved for reconsideration but its motion was denied. [19] It then filed the present petition with this Court.
Issues
Petitioner PPI raises four issues for Our consideration, viz.:
I
THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE
DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTION AND DAMAGES
WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE
CASE. NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY
WHICH HAS NO STANDING TO DO SO.
II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER
SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION
CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK
OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF
TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.
III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED
TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN
EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED
RIGHTS BY VIRTUE OF THE PRINCIPLE OF OPERATIVE FACT PRIOR TO ANY DECLARATION
OF UNCONSTITUTIONALITY OF LOI 1465.
IV
THE PRINCIPLE OF UNJUST VEXATION (SHOULD BE ENRICHMENT) FINDS NO APPLICATION
IN THE INSTANT CASE.[20] (Underscoring supplied)
Our Ruling
We shall first tackle the procedural issues of locus standi and the jurisdiction of the RTC to resolve
constitutional issues.

Fertiphil has locus standi because it suffered direct injury;

doctrine of standing is a mere procedural technicality which
may be waived.
PPI argues that Fertiphil has no locus standi to question the constitutionality of LOI No. 1465 because it does
not have a personal and substantial interest in the case or will sustain direct injury as a result of its
enforcement.[21] It asserts that Fertiphil did not suffer any damage from the CRC imposition because incidence of
the levy fell on the ultimate consumer or the farmers themselves, not on the seller fertilizer company. [22]
We cannot agree. The doctrine of locus standi or the right of appearance in a court of justice has been
adequately discussed by this Court in a catena of cases. Succinctly put, the doctrine requires a litigant to have a
material interest in the outcome of a case. In private suits, locus standirequires a litigant to be a real party in
interest, which is defined as the party who stands to be benefited or injured by the judgment in the suit or the party
entitled to the avails of the suit.[23]
In public suits, this Court recognizes the difficulty of applying the doctrine especially when plaintiff asserts a
public right on behalf of the general public because of conflicting public policy issues. [24] On one end, there is the
right of the ordinary citizen to petition the courts to be freed from unlawful government intrusion and illegal official
action. At the other end, there is the public policy precluding excessive judicial interference in official acts, which
may unnecessarily hinder the delivery of basic public services.
In this jurisdiction, We have adopted the direct injury test to determine locus standi in public
suits. In People v. Vera,[25] it was held that a person who impugns the validity of a statute must have a personal and
substantial interest in the case such that he has sustained, or will sustain direct injury as a result. The direct injury
test in public suits is similar to the real party in interest rule for private suits under Section 2, Rule 3 of the 1997
Rules of Civil Procedure.[26]
Recognizing that a strict application of the direct injury test may hamper public interest, this Court relaxed
the requirement in cases of transcendental importance or with far reaching implications. Being a mere procedural
technicality, it has also been held that locus standi may be waived in the public interest.[27]

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus
standi to file it. Fertiphil suffered a direct injury from the enforcement of LOI No. 1465. It was required, and it did
pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market. It may be true that Fertiphil has
passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the
constitutionality of the LOI or from seeking a refund. As seller, it bore the ultimate burden of paying the levy. It faced
the possibility of severe sanctions for failure to pay the levy. The fact of payment is sufficient injury to Fertiphil.
Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its
product the levy. The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more
expensive. The harm to their business consists not only in fewer clients because of the increased price, but also in
adopting alternative corporate strategies to meet the demands of LOI No. 1465. Fertiphil and other fertilizer sellers
may have shouldered all or part of the levy just to be competitive in the market. The harm occasioned on the
business of Fertiphil is sufficient injury for purposes of locus standi.
Even assuming arguendo that there is no direct injury, We find that the liberal policy consistently adopted by
this Court on locus standi must apply. The issues raised by Fertiphil are of paramount public importance. It involves
not only the constitutionality of a tax law but, more importantly, the use of taxes for public purpose. Former President
Marcos issued LOI No. 1465 with the intention of rehabilitating an ailing private company. This is clear from the text
of the LOI. PPI is expressly named in the LOI as the direct beneficiary of the levy. Worse, the levy was made
dependent and conditional upon PPI becoming financially viable. The LOI provided that the capital contribution
shall be collected until adequate capital is raised to make PPI viable.

The constitutionality of the levy is already in doubt on a plain reading of the statute. It is Our constitutional
duty to squarely resolve the issue as the final arbiter of all justiciable controversies. The doctrine of standing, being a
mere procedural technicality, should be waived, if at all, to adequately thresh out an important constitutional issue.
RTC may resolve constitutional issues; the constitutional
issue was adequately raised in the complaint; it is the lis mota
of the case.
PPI insists that the RTC and the CA erred in ruling on the constitutionality of the LOI. It asserts that the
constitutionality of the LOI cannot be collaterally attacked in a complaint for collection. [28] Alternatively, the resolution
of the constitutional issue is not necessary for a determination of the complaint for collection. [29]
Fertiphil counters that the constitutionality of the LOI was adequately pleaded in its complaint. It claims that
the constitutionality of LOI No. 1465 is the very lis mota of the case because the trial court cannot determine its claim
without resolving the issue.[30]
It is settled that the RTC has jurisdiction to resolve the constitutionality of a statute, presidential decree or an
executive order. This is clear from Section 5, Article VIII of the 1987 Constitution, which provides:

SECTION 5. The Supreme Court shall have the following powers:

xxxx
(2)
Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the
Rules of Court may provide, final judgments and orders of lower courts in:
(a)
All cases in which the constitutionality or validity of any treaty,
international or executive agreement, law, presidential decree, proclamation, order,
instruction, ordinance, or regulation is in question. (Underscoring supplied)
In Mirasol v. Court of Appeals,[31] this Court recognized the power of the RTC to resolve constitutional issues,
thus:
On the first issue. It is settled that Regional Trial Courts have the authority and jurisdiction
to consider the constitutionality of a statute, presidential decree, or executive order. The Constitution
vests the power of judicial review or the power to declare a law, treaty, international or executive
agreement, presidential decree, order, instruction, ordinance, or regulation not only in this Court, but
in all Regional Trial Courts.[32]
In the recent case of Equi-Asia Placement, Inc. v. Department of Foreign Affairs,[33] this Court reiterated:
There is no denying that regular courts have jurisdiction over cases involving the validity or
constitutionality of a rule or regulation issued by administrative agencies. Such jurisdiction, however,
is not limited to the Court of Appeals or to this Court alone for even the regional trial courts can take
cognizance of actions assailing a specific rule or set of rules promulgated by administrative
bodies. Indeed, the Constitution vests the power of judicial review or the power to declare a law,
treaty, international or executive agreement, presidential decree, order, instruction, ordinance, or
regulation in the courts, including the regional trial courts. [34]
Judicial review of official acts on the ground of unconstitutionality may be sought or availed of through any of
the actions cognizable by courts of justice, not necessarily in a suit for declaratory relief. Such review may be had in
criminal actions, as in People v. Ferrer[35] involving the constitutionality of the now defunct Anti-Subversion law, or in
ordinary actions, as in Krivenko v. Register of Deeds[36] involving the constitutionality of laws prohibiting aliens from

acquiring public lands. The constitutional issue, however, (a) must be properly raised andpresented in the
case, and (b) its resolution is necessary to a determination of the case, i.e., the issue of constitutionality must be the
very lis motapresented.[37]
Contrary to PPIs claim, the constitutionality of LOI No. 1465 was properly and adequately raised in the
complaint for collection filed with the RTC. The pertinent portions of the complaint allege:
6. The CRC of P10 per bag levied under LOI 1465 on domestic sales of all grades of
fertilizer in the Philippines, is unlawful, unjust, uncalled for, unreasonable, inequitable and
oppressive because:
xxxx
(c) It favors only one private domestic corporation, i.e., defendant PPPI,
and imposed at the expense and disadvantage of the other fertilizer
importers/distributors who were themselves in tight business situation and were then
exerting all efforts and maximizing management and marketing skills to remain
viable;
xxxx
(e) It was a glaring example of crony capitalism, a forced program through
which the PPI, having been presumptuously masqueraded as the fertilizer industry
itself, was the sole and anointed beneficiary;
7. The CRC was an unlawful; and unconstitutional special assessment and its imposition is
tantamount to illegal exaction amounting to a denial of due process since the persons of entities
which had to bear the burden of paying the CRC derived no benefit therefrom; that on the contrary it
was used by PPI in trying to regain its former despicable monopoly of the fertilizer industry to the
detriment of other distributors and importers.[38] (Underscoring supplied)
The constitutionality of LOI No. 1465 is also the very lis mota of the complaint for collection. Fertiphil filed
the complaint to compel PPI to refund the levies paid under the statute on the ground that the law imposing the levy
is unconstitutional. The thesis is that an unconstitutional law is void. It has no legal effect. Being void, Fertiphil had
no legal obligation to pay the levy. Necessarily, all levies duly paid pursuant to an unconstitutional law should be
refunded under the civil code principle against unjust enrichment. The refund is a mere consequence of the law
being declared unconstitutional. The RTC surely cannot order PPI to refund Fertiphil if it does not declare the LOI
unconstitutional. It is the unconstitutionality of the LOI which triggers the refund. The issue of constitutionality is the
very lis mota of the complaint with the RTC.
The P10 levy under LOI No. 1465 is an exercise of the power
of taxation.
At any rate, the Court holds that the RTC and the CA did not err in ruling against the constitutionality of the
LOI.
PPI insists that LOI No. 1465 is a valid exercise either of the police power or the power of taxation. It claims
that the LOI was implemented for the purpose of assuring the fertilizer supply and distribution in the country and for
benefiting a foundation created by law to hold in trust for millions of farmers their stock ownership in PPI.
Fertiphil counters that the LOI is unconstitutional because it was enacted to give benefit to a private
company. The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is
enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the
people or public interest.

Police power and the power of taxation are inherent powers of the State. These powers are distinct and
have different tests for validity. Police power is the power of the State to enact legislation that may interfere with
personal liberty or property in order to promote the general welfare, [39] while the power of taxation is the power to levy
taxes to be used for public purpose. The main purpose of police power is the regulation of a behavior or conduct,
while taxation is revenue generation. The lawful subjects and lawful means tests are used to determine the
validity of a law enacted under the police power. [40] The power of taxation, on the other hand, is circumscribed by
inherent and constitutional limitations.
We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While it is true that the power of taxation can be used as an implement of police power, [41] the primary
purpose of the levy is revenue generation. If the purpose is primarily revenue, or if revenue is, at least, one of the
real and substantial purposes, then the exaction is properly called a tax. [42]
In Philippine Airlines, Inc. v. Edu,[43] it was held that the imposition of a vehicle registration fee is not an
exercise by the State of its police power, but of its taxation power, thus:
It is clear from the provisions of Section 73 of Commonwealth Act 123 and Section 61 of the
Land Transportation and Traffic Code that the legislative intent and purpose behind the law requiring
owners of vehicles to pay for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the operating expenses of the
administering agency. x x x Fees may be properly regarded as taxes even though they also serve as
an instrument of regulation.
Taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil.
148). If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial
purposes, then the exaction is properly called a tax. Such is the case of motor vehicle registration
fees. The same provision appears as Section 59(b) in the Land Transportation Code. It is patent
therefrom that the legislators had in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a tax or fee. x x x Simply put, if the
exaction under Rep. Act 4136 were merely a regulatory fee, the imposition in Rep. Act 5448 need
not be an additional tax. Rep. Act 4136 also speaks of other fees such as the special permit fees
for certain types of motor vehicles (Sec. 10) and additional fees for change of registration (Sec.
11). These are not to be understood as taxes because such fees are very minimal to be revenueraising. Thus, they are not mentioned by Sec. 59(b) of the Code as taxes like the motor vehicle
registration fee and chauffeurs license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of Sec. 61. [44] (Underscoring supplied)
The P10 levy under LOI No. 1465 is too excessive to serve a mere regulatory purpose. The levy, no doubt,
was a big burden on the seller or the ultimate consumer. It increased the price of a bag of fertilizer by as much as
five percent.[45] A plain reading of the LOI also supports the conclusion that the levy was for revenue
generation. The LOI expressly provided that the levy was imposed until adequate capital is raised to make PPI
viable.
Taxes are exacted only for a public purpose. The P10 levy is
unconstitutional because it was not for a public purpose. The
levy was imposed to give undue benefit to PPI.
An inherent limitation on the power of taxation is public purpose. Taxes are exacted only for a public
purpose. They cannot be used for purely private purposes or for the exclusive benefit of private persons. [46] The
reason for this is simple. The power to tax exists for the general welfare; hence, implicit in its power is the limitation
that it should be used only for a public purpose. It would be a robbery for the State to tax its citizens and use the
funds generated for a private purpose. As an old United States case bluntly put it: To lay with one hand, the power
of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid
private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law
and is called taxation.[47]

The term public purpose is not defined. It is an elastic concept that can be hammered to fit modern
standards. Jurisprudence states that public purpose should be given a broad interpretation. It does not only
pertain to those purposes which are traditionally viewed as essentially government functions, such as building roads
and delivery of basic services, but also includes those purposes designed to promote social justice. Thus, public
money may now be used for the relocation of illegal settlers, low-cost housing and urban or agrarian reform.
While the categories of what may constitute a public purpose are continually expanding in light of the
expansion of government functions, the inherent requirement that taxes can only be exacted for a public purpose still
stands. Public purpose is the heart of a tax law. When a tax law is only a mask to exact funds from the public when
its true intent is to give undue benefit and advantage to a private enterprise, that law will not satisfy the requirement
of public purpose.
The purpose of a law is evident from its text or inferable from other secondary sources. Here, We agree with
the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public purpose.
First, the LOI expressly provided that the levy be imposed to benefit PPI, a private company. The purpose is
explicit from Clause 3 of the law, thus:
3.

The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula
a capital contribution component of not less than P10 per bag. This capital contribution shall be
collected until adequate capital is raised to make PPI viable. Such capital contribution shall be
applied by FPA to all domestic sales of fertilizers in the Philippines.[48] (Underscoring supplied)

It is a basic rule of statutory construction that the text of a statute should be given a literal meaning. In this
case, the text of the LOI is plain that the levy was imposed in order to raise capital for PPI. The framers of the LOI
did not even hide the insidious purpose of the law. They were cavalier enough to name PPI as the ultimate
beneficiary of the taxes levied under the LOI. We find it utterly repulsive that a tax law would expressly name a
private company as the ultimate beneficiary of the taxes to be levied from the public. This is a clear case of crony
capitalism.
Second, the LOI provides that the imposition of the P10 levy was conditional and dependent upon PPI
becoming financially viable. This suggests that the levy was actually imposed to benefit PPI. The LOI notably does
not fix a maximum amount when PPI is deemed financially viable. Worse, the liability of Fertiphil and other
domestic sellers of fertilizer to pay the levy is made indefinite. They are required to continuously pay the levy until
adequate capital is raised for PPI.
Third, the RTC and the CA held that the levies paid under the LOI were directly remitted and deposited by
FPA to Far East Bank and Trust Company, the depositary bank of PPI. [49] This proves that PPI benefited from the
LOI. It is also proves that the main purpose of the law was to give undue benefit and advantage to PPI.
Fourth, the levy was used to pay the corporate debts of PPI. A reading of the Letter of
Understanding[50] dated May 18, 1985 signed by then Prime Minister Cesar Virata reveals that PPI was in deep
financial problem because of its huge corporate debts. There were pending petitions for rehabilitation against PPI
before the Securities and Exchange Commission. The government guaranteed payment of PPIs debts to its foreign
creditors. To fund the payment, President Marcos issued LOI No. 1465. The pertinent portions of the letter of
understanding read:
Republic of the Philippines
Office of the Prime Minister
Manila
LETTER OF UNDERTAKING

TO: THE BANKING AND FINANCIAL INSTITUTIONS

LISTED IN ANNEX A HERETO WHICH ARE
CREDITORS (COLLECTIVELY, THE CREDITORS)
OF PLANTERS PRODUCTS, INC. (PLANTERS)
Gentlemen:
This has reference to Planters which is the principal importer and distributor of fertilizer,
pesticides and agricultural chemicals in the Philippines. As regards Planters, the Philippine
Government confirms its awareness of the following: (1) that Planters has outstanding obligations in
foreign currency and/or pesos, to the Creditors, (2) that Planters is currently experiencing financial
difficulties, and (3) that there are presently pending with the Securities and Exchange Commission of
the Philippines a petition filed at Planters own behest for the suspension of payment of all its
obligations, and a separate petition filed by Manufacturers Hanover Trust Company, Manila Offshore
Branch for the appointment of a rehabilitation receiver for Planters.
In connection with the foregoing, the Republic of the Philippines (the Republic) confirms
that it considers and continues to consider Planters as a major fertilizer distributor. Accordingly, for
and in consideration of your expressed willingness to consider and participate in the effort to
rehabilitate Planters, the Republic hereby manifests its full and unqualified support of the successful
rehabilitation and continuing viability of Planters, and to that end, hereby binds and obligates itself to
the creditors and Planters, as follows:
xxxx
2. Upon the effective date of this Letter of Undertaking, the Republic shall cause FPA
to include in its fertilizer pricing formula a capital recovery component, the proceeds of which will be
used initially for the purpose of funding the unpaid portion of the outstanding capital stock of
Planters presently held in trust by Planters Foundation, Inc. (Planters Foundation), which unpaid
capital is estimated at approximately P206 million (subject to validation by Planters and Planters
Foundation) such unpaid portion of the outstanding capital stock of Planters being hereafter referred
to as the Unpaid Capital), and subsequently for such capital increases as may be required for the
continuing viability of Planters.
xxxx
The capital recovery component shall continue to be charged and collected until payment in
full of (a) the Unpaid Capital and/or (b) any shortfall in the payment of the Subsidy Receivables, (c)
any carrying cost accruing from the date hereof on the amounts which may be outstanding from time
to time of the Unpaid Capital and/or the Subsidy Receivables, and (d) the capital increases
contemplated in paragraph 2 hereof. For the purpose of the foregoing clause (c), the carrying cost
shall be at such rate as will represent the full and reasonable cost to Planters of servicing its debts,
taking into account both its peso and foreign currency-denominated obligations.
REPUBLIC OF THE PHILIPPINES
By:
(signed)
CESAR E. A. VIRATA
Prime Minister and Minister of Finance[51]
It is clear from the Letter of Understanding that the levy was imposed precisely to pay the corporate debts of
PPI. We cannot agree with PPI that the levy was imposed to ensure the stability of the fertilizer industry in the
country. The letter of understanding and the plain text of the LOI clearly indicate that the levy was exacted for the
benefit of a private corporation.

All told, the RTC and the CA did not err in holding that the levy imposed under LOI No. 1465 was not for a
public purpose. LOI No. 1465 failed to comply with the public purpose requirement for tax laws.
The LOI is still unconstitutional even if enacted under the
police power; it did not promote public interest.
Even if We consider LOI No. 1695 enacted under the police power of the State, it would still be invalid for
failing to comply with the test of lawful subjects and lawful means. Jurisprudence states the test as follows: (1)
the interest of the public generally, as distinguished from those of particular class, requires its exercise; and (2) the
means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon
individuals.[52]
For the same reasons as discussed, LOI No. 1695 is invalid because it did not promote public interest. The
law was enacted to give undue advantage to a private corporation. We quote with approval the CA ratiocination on
this point, thus:
It is upon applying this established tests that We sustain the trial courts holding LOI 1465
unconstitutional. To be sure, ensuring the continued supply and distribution of fertilizer in the country
is an undertaking imbued with public interest. However, the method by which LOI 1465 sought to
achieve this is by no means a measure that will promote the public welfare. The governments
commitment to support the successful rehabilitation and continued viability of PPI, a private
corporation, is an unmistakable attempt to mask the subject statutes impartiality. There is no way to
treat the self-interest of a favored entity, like PPI, as identical with the general interest of the
countrys farmers or even the Filipino people in general. Well to stress, substantive due process
exacts fairness and equal protection disallows distinction where none is needed. When a statutes
public purpose is spoiled by private interest, the use of police power becomes a travesty which must
be struck down for being an arbitrary exercise of government power. To rule in favor of appellant
would contravene the general principle that revenues derived from taxes cannot be used for purely
private purposes or for the exclusive benefit of private individuals. (Underscoring supplied)
The general rule is that an unconstitutional law is void; the
doctrine of operative fact is inapplicable.
PPI also argues that Fertiphil cannot seek a refund even if LOI No. 1465 is declared unconstitutional. It
banks on the doctrine of operative fact, which provides that an unconstitutional law has an effect before being
declared unconstitutional. PPI wants to retain the levies paid under LOI No. 1465 even if it is subsequently declared
to be unconstitutional.
We cannot agree. It is settled that no question, issue or argument will be entertained on appeal, unless it has
been raised in the court a quo.[53] PPI did not raise the applicability of the doctrine of operative fact with the RTC and
the CA. It cannot belatedly raise the issue with Us in order to extricate itself from the dire effects of an
unconstitutional law.
At any rate, We find the doctrine inapplicable. The general rule is that an unconstitutional law is void. It
produces no rights, imposes no duties and affords no protection. It has no legal effect. It is, in legal contemplation,
inoperative as if it has not been passed.[54] Being void, Fertiphil is not required to pay the levy. All levies paid should
be refunded in accordance with the general civil code principle against unjust enrichment. The general rule is
supported by Article 7 of the Civil Code, which provides:
ART. 7. Laws are repealed only by subsequent ones, and their violation or non-observance
shall not be excused by disuse or custom or practice to the contrary.
When the courts declare a law to be inconsistent with the Constitution, the former shall be
void and the latter shall govern.
The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair
play.[55] It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a

determination of unconstitutionality is an operative fact and may have consequences which cannot always be
ignored. The past cannot always be erased by a new judicial declaration. [56]
The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those
who have relied on the invalid law. Thus, it was applied to a criminal case when a declaration of unconstitutionality
would put the accused in double jeopardy[57] or would put in limbo the acts done by a municipality in reliance upon a
law creating it.[58]
Here, We do not find anything iniquitous in ordering PPI to refund the amounts paid by Fertiphil under LOI
No. 1465. It unduly benefited from the levy. It was proven during the trial that the levies paid were remitted and
deposited to its bank account. Quite the reverse, it would be inequitable and unjust not to order a refund. To do so
would unjustly enrich PPI at the expense of Fertiphil. Article 22 of the Civil Code explicitly provides that every
person who, through an act of performance by another comes into possession of something at the expense of the
latter without just or legal ground shall return the same to him. We cannot allow PPI to profit from an
unconstitutional law. Justice and equity dictate that PPI must refund the amounts paid by Fertiphil.
WHEREFORE,
2003 is AFFIRMED.
SO ORDERED.

the

petition

is DENIED. The

Court

of

Appeals

Decision

dated November

28,

THIRD DIVISION
COMMISSIONER OF INTERNAL
REVENUE,

G.R. No. 159647

Petitioner,

Present:

CENTRAL LUZON DRUG

Promulgated:
CORPORATION,
Respondent.
April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

PANGANIBAN, J.:
T
he 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax
deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private
establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432
unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that
withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the
law.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to set aside the August 29,
2002 Decision[2]and the August 11, 2003 Resolution [3] of the Court of Appeals (CA) in CA-GR SP No. 67439. The
assailed Decision reads as follows:
WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in
toto. No costs.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The CA narrated the antecedent facts as follows:
Respondent is a domestic corporation primarily engaged in retailing of medicines and other
pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style
Mercury Drug.
From January to December 1996, respondent granted twenty (20%) percent sales discount to
qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432
and its Implementing Rules and Regulations. For the said period, the amount allegedly representing
the 20% sales discount granted by respondent to qualified senior citizens totaledP904,769.00.
On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996
declaring therein that it incurred net losses from its operations.
On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the
amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to

qualified senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from
petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a
Petition for Review.
On February 12, 2001, the Tax Court rendered a Decision[5] dismissing respondents Petition
for lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:
x x x, if no tax has been paid to the government, erroneously or illegally, or if
no amount is due and collectible from the taxpayer, tax refund or tax credit is
unavailing. Moreover, whether the recovery of the tax is made by means of a claim
for refund or tax credit, before recovery is allowed[,] it must be first established that
there was an actual collection and receipt by the government of the tax sought to be
recovered. x x x.
x x x
xxx
xxx
Prescinding from the above, it could logically be deduced that tax credit is
premised on the existence of tax liability on the part of taxpayer. In other words, if
there is no tax liability, tax credit is not available.
Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,
granted respondents motion for reconsideration and ordered herein petitioner to issue a Tax
Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the
CA] in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of
Internal Revenue promulgated on May 31, 2001, to wit:
[6]

However, Sec. 229 clearly does not apply in the instant case because the
tax sought to be refunded or credited by petitioner was not erroneously paid or
illegally collected. We take exception to the CTAs sweeping but unfounded
statement that both tax refund and tax credit are modes of recovering taxes which
are either erroneously or illegally paid to the government. Tax refunds or credits do
not exclusively pertain to illegally collected or erroneously paid taxes as they may be
other circumstances where a refund is warranted. The tax refund provided under
Section 229 deals exclusively with illegally collected or erroneously paid taxes but
there are other possible situations, such as the refund of excess estimated
corporate quarterly income tax paid, or that of excess input tax paid by a VATregistered person, or that of excise tax paid on goods locally produced or
manufactured but actually exported. The standards and mechanics for the grant of
a refund or credit under these situations are different from that under Sec. 229. Sec.
4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in any way
refer to illegally collected or erroneously paid taxes, x x x.[7]

Ruling of the Court of Appeals

The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax
credit certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No.
(RA) 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a
tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just
compensation for the taking of private property for public use.
Hence this Petition.[8]

The Issues
Petitioner raises the following issues for our consideration:
Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as
a tax credit instead of as a deduction from gross income or gross sales.
Whether the Court of Appeals erred in holding that respondent is entitled to a refund. [9]
These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still
claim the 20 percent sales discount as a tax credit.
The Courts Ruling
The Petition is not meritorious.
Sole Issue:
Claim of 20 Percent Sales Discount
as Tax Credit Despite Net Loss
Section 4a) of RA 7432[10] grants to senior citizens the privilege of obtaining a 20 percent discount on their
purchase of medicine from any private establishment in the country.[11] The latter may then claim the cost of the
discount as a tax credit.[12] But can such credit be claimed, even though an establishment operates at a loss?
We answer in the affirmative.
Tax Credit versus
Tax Deduction
Although the term is not specifically defined in our Tax Code, [13] tax credit generally refers to an amount that is
subtracted directly from ones total tax liability. [14] It is an allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of
estimated tax, and investment tax credits.[17]
Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a
subtraction from income for tax purposes, [18] or an amount that is allowed by law to reduce income prior to [the]
application of the tax rate to compute the amount of tax which is due. [19] An example of a tax deduction is any of the
allowable deductions enumerated in Section 34[20] of the Tax Code.
A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -whenever applicable -- theincome tax that is determined after applying the corresponding tax rates to taxable
income.[21] A tax deduction, on the other, reduces the income that is subject to tax [22] in order to arrive at taxable
income.[23] To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used
only after the tax has been computed; a tax deduction, before.
Tax Liability Required
for Tax Credit
Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax
credit can be applied. Without that liability, any tax credit application will be useless. There will be no reason for
deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be

presented shortly, the existence of a tax credit or its grantby law is not the same as the availment or use of such
credit. While the grant is mandatory, the availment or use is not.
If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will
obviously be no tax liability against which any tax credit can be applied.[24] For the establishment to choose the
immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains
that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments.
Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability
that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen,
simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted
from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move.
But it breathes.
Prior Tax Payments Not
Required for Tax Credit
While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the
contrary, for theexistence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The
Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been
previously paid.
For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations
-- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -again when paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude
to the prior payment of taxes, even if not made to our government.
Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not
subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable
to either activity. This input tax may either be the VAT on the purchase or importation of goods or services that is
merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the
transitional input tax determined in accordance with Section 111(A). The latter type may in fact be an amount
equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of goods, materials and
supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said items. [25] Clearly from
this provision, the tax credit refers to an input tax that is either due only or given a value by mere comparison with the
VAT actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.
In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the
purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or
in the manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into
with the government, again, no prior tax payments are needed for the use of the tax credit.
More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under
Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -again not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have
not been applied against output taxes.[26] Where a taxpayer is engaged in zero-rated or effectively zero-rated sales
and also in taxable or exempt sales, the amount of creditable input taxes due that are not directly and entirely
attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales.
Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows
that the prior payment of taxes is not a requisite.
It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even
though no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax
rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is
subjected to the condition that a foreign tax credit will be given by the domiciliary country in an amount equivalent to
taxes that are merely deemed paid. [27] Although true, this provision actually refers to the tax credit as a condition only

for the imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our
government but the domiciliary country that credits against the income tax payable to the latter by the foreign
corporation, the tax to be foregone or spared.[28]
In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the
income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a
domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such
taxes incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall
simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and
further conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it.
In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant
or allow tax credits, even though no prior tax payments have been made.
Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is
taxed in the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed
as a credit against the tax levied in the latter.[29] Apparently, payment is made to the state of source, not the state of
residence. No tax, therefore, has been previously paid to the latter.
Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the
incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg.
(BP) 391, include tax creditsequivalent to either five percent of the net value earned, or five or ten percent of the net
local content of exports.[30] In order to avail of such credits under the said law and still achieve its objectives, no prior
tax payments are necessary.
From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of
a tax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by
private establishments concerned. [31] However, we do not agree with its finding [32] that the carry-over of tax
credits under the said special law to succeeding taxable periods, and even their application against internal revenue
taxes, did not necessitate the existence of a tax liability.
The examples above show that a tax liability is certainly important in the availment or use, not the existence or
grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is
no different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432,
since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply
such credit, where no tax is due, will be an improvident usance.
Sections 2.i and 4 of Revenue
Regulations No. 2-94 Erroneous
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. [33]
In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.
[34]
To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is
indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20
percent discount that shall be deducted by the said establishments from their gross income for income tax purposes
and from their gross sales for value-added tax or other percentage tax purposes. [35] In ordinary business language,
the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited
against taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of
anything.[36] To be more precise, it is in business parlance a deduction or lowering of an amount of money; [37] or a
reduction from the full amount or value of something, especially a price. [38] In business there are many kinds of
discount, the most common of which is that affecting the income statement[39] or financial report upon which
the income tax is based.

Business Discounts
Deducted from Gross Sales
A cash discount, for example, is one granted by business establishments to credit customers for their prompt
payment.[40] It is a reduction in price offered to the purchaser if payment is made within a shorter period of time than
the maximum time specified. [41] Also referred to as a sales discount on the part of the seller and a purchase
discount on the part of the buyer, it may be expressed in such terms as 5/10, n/30.[42]
A quantity discount, however, is a reduction in price allowed for purchases made in large quantities, justified
by savings in packaging, shipping, and handling. [43] It is also called a volume or bulk discount.[44]
A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers
to retailers[45]is known as a trade discount. No entry for it need be made in the manual or computerized books of
accounts, since the purchase or sale is already valued at the net price actually charged the buyer. [46] The purpose for
the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold
are also suggested.[47] Even a chain discount -- a series of discounts from one list price -- is recorded at net. [48]
Finally, akin to a trade discount is a functional discount. It is a suppliers price discount given to a purchaser
based on the [latters] role in the [formers] distribution system. [49] This role usually involves warehousing or
advertising.
Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted
accounting principles (GAAP) in the country, this type of discount is reflected in the income statement[50] as a line
item deducted -- along with returns, allowances, rebates and other similar expenses -- from gross sales to arrive
at net sales.[51] This type of presentation is resorted to, because the accounts receivable and sales figures that arise
from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the manual and
computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices. [52]
This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple,
more convenient to apply than the net method, and produces no material errors over time.[53]
However, under the net method used in recording trade, chain or functional discounts, only the net amounts of
the invoices -- after the discounts have been deducted -- are recorded in the books of accounts[54] and reflected in the
financial statements. A separate line item cannot be shown, [55] because the transactions themselves involving
both accounts receivable and sales have already been entered into, net of the said discounts.
The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts
whose sum -- along withsales returns, allowances and cost of goods sold[56] -- is deducted from gross sales to come
up with the gross income, profit or margin[57] derived from business.[58] In another provision therein, sales
discounts that are granted and indicated in the invoices at the time of sale -- and that do not depend upon the
happening of any future event -- may be excluded from the gross sales within the same quarter they were given. [59]
While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax
purposes already embraced in the former. After all, these two provisions affirm that sales discounts are amounts that
are always deductible from gross sales.
Reason for the Senior Citizen Discount:
The Law, Not Prompt Payment
A distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction
of the discount from the invoice price of the medicine sold to the senior citizen. [60] It is, therefore, expected that for
each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -and the net amount thereof collected -- immediately upon perfection of the sale. [61] Although prompt payment is
made for an arms-length transaction by the senior citizen, the real and compelling reason for the private
establishment giving the discount is that the law itself makes it mandatory.

What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above
discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To
be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private
establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this
benefit has been erroneously likened and confined to a sales discount.
To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales
discount. However, to a private establishment, the effect is different from a simple reduction in price that results from
such discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier
discourse, this benefit cannot and should not be treated as atax deduction.
To stress, the effect of a sales discount on the income statement and income tax return of an establishment
covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the
former is a deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a
discount is not necessarily a sales discount, and a tax credit for a simple discount privilege should not be
automatically treated like a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law
does not distinguish, we ought not to distinguish.
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount
deductible from gross incomefor income tax purposes, or from gross sales for VAT or other percentage tax
purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is
improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in
the income statement and cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax
credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not
even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful
purpose. The definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a rule
out of harmony with the statute is a mere nullity;[62] it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a
statute by the executive officers whose duty it is to enforce it x x x. [63] In the scheme of judicial tax administration,
the need for certainty and predictability in the implementation of tax laws is crucial. [64] Our tax authorities fill in the
details that Congress may not have the opportunity or competence to provide. [65] The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be followed by the courts. [66] Courts, however, will
not uphold these authorities interpretations when clearly absurd, erroneous or improper.
In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a
meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in
granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may
not enlarge, alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not
contemplated by the legislature.[67]
In case of conflict, the law must prevail. [68] A regulation adopted pursuant to law is law. [69] Conversely, a
regulation or any portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law.
[70]

Availment of Tax
Credit Voluntary

Third, the word may in the text of the statute[71] implies that the availability of the tax credit benefit is neither
unrestricted nor mandatory.[72] There is no absolute right conferred upon respondent, or any similar taxpayer, to avail
itself of the tax credit remedy whenever it chooses; neither does it impose a duty on the part of the government to sit
back and allow an important facet of tax collection to be at the sole control and discretion of the taxpayer. [73] For the
tax authorities to compel respondent to deduct the 20 percent discount from either its gross income or its gross
sales[74] is, therefore, not only to make an imposition without basis in law, but also to blatantly contravene the law
itself.
What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative.
Respondent is given two options -- either to claim or not to claim the cost of the discounts as a tax credit. In fact, it
may even ignore the credit and simply consider the gesture as an act of beneficence, an expression of its social
conscience.
Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can
easily be applied. If there is none, the credit cannot be used and will just have to be carried over and
revalidated[75] accordingly. If, however, the business continues to operate at a loss and no other taxes are due, thus
compelling it to close shop, the credit can never be applied and will be lost altogether.
In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts
can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit
whenever it pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. The
plain meaning rule or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are
clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation.[76]

Tax Credit Benefit

Deemed Just Compensation
Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it
stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the
private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be
deemed as their just compensation for private property taken by the State for public use. [77]
The concept of public use is no longer confined to the traditional notion of use by the public, but held
synonymous with public interest, public benefit, public welfare, and public convenience.[78] The discount privilege to
which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens
belong. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced
subsidy corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just
compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the
discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State,
such issuance -- when not done within areasonable time from the grant of the discounts -- cannot be considered
as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues.[79]
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent
domain.[80] Tax measures are but enforced contributions exacted on pain of penal sanctions [81] and clearly imposed
for a public purpose.[82] In recent years, the power to tax has indeed become a most effective tool to realize social
justice, public welfare, and the equitable distribution of wealth.[83]
While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on
the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is
not entitled thereto.[84] For this reason, a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body
can alter that fact.
To put it differently, a private establishment that merely breaks even [85] -- without the discounts yet -- will surely
start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent,
and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already raised
earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from
either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter.
Grant of Tax Credit
Intended by the Legislature
Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a
whole and to establish a program beneficial to them. [86] These objectives are consonant with the constitutional policy
of making health x x x services available to all the people at affordable cost [87] and of giving priority for the needs of
the x x x elderly.[88] Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory
objectives.
Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no
cash outlay is required from the government for the availment or use of such credit. The deliberations on February 5,
1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true

intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We
quote from those deliberations as follows:
"THE CHAIRMAN (Rep. Unico).
By the way, before that ano, about deductions from taxable
income. I think we incorporated there a provision na - on the responsibility of
the private hospitals and drugstores, hindi ba?
SEN. ANGARA.
THE CHAIRMAN.

Oo.
(Rep. Unico), So, I think we have to put in also a provision here about the
deductions from taxable income of that private hospitals, di ba ganon 'yan?

MS. ADVENTO.

Kaya lang po sir, and mga discounts po nila affecting government and public
institutions, so, puwede na po nating hindi isama yung mga less deductions
ng taxable income.

THE CHAIRMAN.

(Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin?

MS. ADVENTO.

Singit na po ba yung 15% on credit. (inaudible/did not use the microphone).

SEN. ANGARA.

Hindi pa, hindi pa.

THE CHAIRMAN.

(Rep. Unico) Ah, 'di pa ba naisama natin?

SEN. ANGARA.

Oo. You want to insert that?

THE CHAIRMAN

(Rep. Unico).

SEN. ANGARA.

In the case of private hospitals they got the grant of 15% discount, provided that,
the private hospitals can claim the expense as a tax credit.

REP. AQUINO.

Yah could be allowed as deductions in the perpetrations of (inaudible) income.

SEN. ANGARA.

I-tax credit na lang natin para walang cash-out ano?

REP. AQUINO.

Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered.

THE CHAIRMAN.

Yung ang proposal ni Senator Shahani, e.

(Rep. Unico). Sa kuwan lang yon, as private hospitals lang.

REP. AQUINO.

Ano ba yung establishments na covered?

SEN. ANGARA.

Restaurant lodging houses, recreation centers.

REP. AQUINO.

All establishments covered siguro?

SEN. ANGARA.
REP. AQUINO.
SEN. ANGARA.

REP. AQUINO.

From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go
back to Section 4 ha?
Oho.
Letter A. To capture that thought, we'll say the grant of 20% discount from all
establishments et cetera, et cetera, provided that said establishments provided that private establishments may claim the cost as a tax credit.
Ganon ba 'yon?
Yah.

SEN. ANGARA.

Dahil kung government, they don't need to claim it.

THE CHAIRMAN.

(Rep. Unico). Tax credit.

SEN. ANGARA.

As a tax credit [rather] than a kuwan - deduction, Okay.

REP. AQUINO

Okay.

SEN. ANGARA.

Sige Okay. Di subject to style na lang sa Letter A". [89]

Special Law
Over General Law
Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. x x x [T]he
rule is that on a specific matter the special law shall prevail over the general law, which shall be resorted to only to
supply deficiencies in the former.[90] In addition, [w]here there are two statutes, the earlier special and the later
general -- the terms of the general broad enough to include the matter provided for in the special -- the fact that one
is special and the other is general creates a presumption that the special is to be considered as remaining an
exception to the general,[91] one as a general law of the land, the other as the law of a particular case. [92] It is a
canon of statutory construction that a later statute,general in its terms and not expressly repealing a prior
special statute, will ordinarily not affect the special provisions of such earlier statute. [93]
RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a
later law. When the former states that a tax credit may be claimed, then the requirement of prior tax payments under
certain provisions of the latter, as discussed above, cannot be made to apply. Neither can the instances of or
references to a tax deduction under the Tax Code[94] be made to restrict RA 7432. No provision of any revenue
regulation can supplant or modify the acts of Congress.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of
AppealsAFFIRMED. No pronouncement as to costs.
SO ORDERED.

EN BANC
CARLOS SUPERDRUG CORP.,
doing business under the name
and style Carlos Superdrug,

G.R. No. 166494

Present:
VELASCO, JR., and
NACHURA, JJ.

DEPARTMENT OF SOCIAL
WELFARE and DEVELOPMENT
(DSWD), DEPARTMENT OF
Promulgated:
HEALTH (DOH), DEPARTMENT
OF FINANCE (DOF), DEPARTMENT
June 29, 2007
OF JUSTICE (DOJ), and
DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG),
Respondents.
x ---------------------------------------------------------------------------------------- x
DECISION
AZCUNA, J.:
This is a petition[1] for Prohibition with Prayer for Preliminary Injunction assailing the constitutionality of
Section 4(a) of Republic Act (R.A.) No. 9257,[2] otherwise known as the Expanded Senior Citizens Act of 2003.
Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.
Public respondents, on the other hand, include the Department of Social Welfare and Development (DSWD),
the Department of Health (DOH), the Department of Finance (DOF), the Department of Justice (DOJ), and the
Department of Interior and Local Government (DILG) which have been specifically tasked to monitor the
drugstores compliance with the law; promulgate the implementing rules and regulations for the effective
implementation of the law; and prosecute and revoke the licenses of erring drugstore establishments.
The antecedents are as follows:
On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, [3] was signed into law by President Gloria
Macapagal-Arroyo and it became effective on March 21, 2004. Section 4(a) of the Act states:
SEC. 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the
following:
(a)
the grant of twenty percent (20%) discount from all establishments relative to the
utilization of services in hotels and similar lodging establishments, restaurants and recreation
centers, and purchase of medicines in all establishments for the exclusive use or enjoyment of
senior citizens, including funeral and burial services for the death of senior citizens;
...
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the cost of
the discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted.Provided, further, That the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code, as
amended.[4]

On May 28, 2004, the DSWD approved and adopted the Implementing Rules and Regulations of R.A. No.
9257, Rule VI, Article 8 of which states:
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts
granted under Rule V, Section 4 Discounts for Establishments; [5] Section 9, Medical and Dental
Services in Private Facilities[,][6] and Sections 10[7] and 11[8] Air, Sea and Land Transportation as tax
deduction based on the net cost of the goods sold or services rendered. Provided, That the cost of
the discount shall be allowed as deduction from gross income for the same taxable year that the
discount is granted; Provided, further, That the total amount of the claimed tax deduction net of value
added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be
subject to proper documentation and to the provisions of the National Internal Revenue Code, as
amended; Provided, finally, that the implementation of the tax deduction shall be subject to the
Revenue Regulations to be issued by the Bureau of Internal Revenue (BIR) and approved by the
Department of Finance (DOF).[9]
On July 10, 2004, in reference to the query of the Drug Stores Association of the Philippines (DSAP)
concerning the meaning of a tax deduction under the Expanded Senior Citizens Act, the DOF, through Director IV
Ma. Lourdes B. Recente, clarified as follows:
1)
The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax
Deduction (under the Expanded Senior Citizens Act).
1.1.
The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act)
grants twenty percent (20%) discount from all establishments relative to the utilization of
transportation services, hotels and similar lodging establishment, restaurants and recreation
centers and purchase of medicines anywhere in the country, the costs of which may be
claimed by the private establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability
due to the government of the amount of discounts such establishment has granted to a
senior citizen. The establishment recovers the full amount of discount given to a senior
citizen and hence, the government shoulders 100% of the discounts granted.
It must be noted, however, that conceptually, a tax credit scheme under the
Philippine tax system, necessitates that prior payments of taxes have been made and the
taxpayer is attempting to recover this tax payment from his/her income tax due. The tax
credit scheme under R.A. No. 7432 is, therefore, inapplicable since no tax payments have
previously occurred.
1.2.
The provision under R.A. No. 9257, on the other hand, provides that the
establishment concerned may claim the discounts under Section 4(a), (f), (g) and (h) as tax
deduction from gross income, based on the net cost of goods sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross
income, in computing for its tax liability, the amount of discounts granted to senior citizens.
Effectively, the government loses in terms of foregone revenues an amount equivalent to the
marginal tax rate the said establishment is liable to pay the government. This will be an
amount equivalent to 32% of the twenty percent (20%) discounts so granted. The
establishment shoulders the remaining portion of the granted discounts.
It may be necessary to note that while the burden on [the] government is slightly
diminished in terms of its percentage share on the discounts granted to senior citizens, the
number of potential establishments that may claim tax deductions, have however, been
broadened. Aside from the establishments that may claim tax credits under the old law,
more establishments were added under the new law such as: establishments providing
medical and dental services, diagnostic and laboratory services, including professional fees

of attending doctors in all private hospitals and medical facilities, operators of domestic air
and sea transport services, public railways and skyways and bus transport services.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction
Gross Sales
xxxxxx
Less : Cost of goods sold
xxxxx
Net Sales
xxxxx x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x
Other deductions:
xxxx
Net Taxable Income
xxxxx
Tax Due
xxx
Less: Tax Credit
-Net Tax Due
--

Tax Credit
xxxxxx
xxxxx
xxxxxx
-xxxx
xxxxx
xxx
______x x
xx

As shown above, under a tax deduction scheme, the tax deduction on discounts was
subtracted from Net Sales together with other deductions which are considered as operating
expenses before the Tax Due was computed based on the Net Taxable Income. On the other hand,
under a tax credit scheme, the amount of discounts which is the tax credit item, was deducted
directly from the tax due amount.[10]
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the Policies and Guidelines to
Implement the Relevant Provisions of Republic Act 9257, otherwise known as the Expanded Senior Citizens Act of
2003[11] was issued by the DOH, providing the grant of twenty percent (20%) discount in the purchase of unbranded
generic medicines from all establishments dispensing medicines for the exclusive use of the senior citizens.
On November 12, 2004, the DOH issued Administrative Order No 177 [12] amending A.O. No. 171. Under A.O.
No. 177, the twenty percent discount shall not be limited to the purchase of unbranded generic medicines only, but
shall extend to both prescription and non-prescription medicines whether branded or generic. Thus, it stated that
[t]he grant of twenty percent (20%) discount shall be provided in the purchase of medicines from all establishments
dispensing medicines for the exclusive use of the senior citizens.
Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act based on the
following grounds:[13]
1)

The law is confiscatory because it infringes Art. III, Sec. 9 of the Constitution which
provides that private property shall not be taken for public use without just compensation;

2)

It violates the equal protection clause (Art. III, Sec. 1) enshrined in our Constitution
which states that no person shall be deprived of life, liberty or property without due process
of law, nor shall any person be denied of the equal protection of the laws; and

3)

The 20% discount on medicines violates the constitutional guarantee in Article XIII,
Section 11 that makes essential goods, health and other social services available to all
people at affordable cost.[14]

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private
property. Compelling drugstore owners and establishments to grant the discount will result in a loss of profit
and capital because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed
to provide a scheme whereby drugstores will be justly compensated for the discount.

Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is the validity
of the tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend
to senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for
the discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise,
it is an amount that is allowed by law[15] to reduce the income prior to the application of the tax rate to compute the
amount of tax which is due.[16] Being a tax deduction, the discount does not reduce taxes owed on a peso for peso
basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private
establishments concerned. The discounts given would have entered the coffers and formed part of the gross sales of
the private establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private
property for public use or benefit.[17] This constitutes compensable taking for which petitioners would ordinarily
become entitled to a just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify the meaning
of the word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken
shall be real, substantial, full and ample.[18]
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet
the definition of just compensation.[19]
Having said that, this raises the question of whether the State, in promoting the health and welfare of a
special group of citizens, can impose upon private establishments the burden of partly subsidizing a government
program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nationbuilding, and to grant benefits and privileges to them for their improvement and well-being as the State considers
them an integral part of our society.[20]
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the
Act provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of
the Constitution, it is the duty of the family to take care of its elderly members while the State may
design programs of social security for them. In addition to this, Section 10 in the Declaration of
Principles and State Policies provides: The State shall provide social justice in all phases of national
development. Further, Article XIII, Section 11, provides: The State shall adopt an integrated and
comprehensive approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women and children. Consonant with
these constitutional principles the following are the declared policies of this Act:
...
(f) To recognize the important role of the private sector in the improvement of the
welfare of senior citizens and to actively seek their partnership.[21]

To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and
dental services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses,
carnivals, and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel;
utilization of services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases
of medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in general
terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and
flexible response to conditions and circumstances, thus assuring the greatest benefits. [22]Accordingly, it has been
described as the most essential, insistent and the least limitable of powers, extending as it does to all the great
public needs.[23] It is [t]he power vested in the legislature by the constitution to make, ordain, and establish all
manner of wholesome and reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant
to the constitution, as they shall judge to be for the good and welfare of the commonwealth, and of the subjects of the
same.[24]
For this reason, when the conditions so demand as determined by the legislature, property rights must bow
to the primacy of police power because property rights, though sheltered by due process, must yield to general
welfare.[25]
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea
of petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in
the absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis
for its nullification in view of the presumption of validity which every law has in its favor. [26]
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and come up with a
financial report, so that they have not been able to show properly whether or not the tax deduction scheme really
works greatly to their disadvantage.[27]
In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to
the DOF Opinion, for everyP1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by
them as only P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as
an example. According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it
at P39.60 (or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to P7.92, then
it would have to sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the
government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full amount of the discount
which isP7.92. In short, only 32% of the 20% discount will be reimbursed to the drugstores. [28]
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost of the
discount shall be deducted from gross income, [29] the amount of income derived from all sources before deducting
allowable expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis,
which should not be the case. An income statement, showing an accounting of petitioners sales, expenses, and net
profit (or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent
any financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they
give the discount. In addition, the computation was erroneously based on the assumption that their customers
consisted wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the
discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their
medicines given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners

to peg the mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result
of this decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive,
simply because they cannot afford to raise their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing
component of the business. While the Constitution protects property rights, petitioners must accept the realities of
business and the State, in the exercise of police power, can intervene in the operations of a business which may
result in an impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the
precept for the protection of property, various laws and jurisprudence, particularly on agrarian reform and the
regulation of contracts and public utilities, continuously serve as a reminder that the right to property can be
relinquished upon the command of the State for the promotion of public good. [30]
Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners
and the other private establishments concerned. This being the case, the means employed in invoking the active
participation of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly
related. Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation
of the same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act.
[31]

WHEREFORE, the petition is DISMISSED for lack of merit.

No costs.
SO ORDERED.

G.R. No. 175356, December 03, 2013

MANILA MEMORIAL PARK, INC. AND LA FUNERARIA PAZ-SUCAT, INC., Petitioners, v. SECRETARY OF THE
DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT AND THE SECRETARY OF THE DEPARTMENT
OF FINANCE, Respondent.
DECISION
DEL CASTILLO, J.:
When a party challenges the constitutionality of a law, the burden of proof rests upon him. 1
Before us is a Petition for Prohibition2 under Rule 65 of the Rules of Court filed by petitioners Manila Memorial Park,
Inc. and La Funeraria Paz-Sucat, Inc., domestic corporations engaged in the business of providing funeral and burial
services, against public respondents Secretaries of the Department of Social Welfare and Development (DSWD) and
the Department of Finance (DOF).
Petitioners assail the constitutionality of Section 4 of Republic Act (RA) No. 7432, 3 as amended by RA 9257,4 and the
implementing rules and regulations issued by the DSWD and DOF insofar as these allow business establishments to
claim the 20% discount given to senior citizens as a tax deduction.
Factual Antecedents
On April 23, 1992, RA 7432 was passed into law, granting senior citizens the following privileges:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services,
hotels and similar lodging establishment[s], restaurants and recreation centers and purchase of medicine anywhere
in the country: Provided, That private establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees charged by theaters, cinema houses and concert
halls, circuses, carnivals and other similar places of culture, leisure, and amusement;
c) exemption from the payment of individual income taxes: Provided, That their annual taxable income does not
exceed the property level as determined by the National Economic and Development Authority (NEDA) for that year;
d) exemption from training fees for socioeconomic programs undertaken by the OSCA as part of its work;
e) free medical and dental services in government establishment[s] anywhere in the country, subject to guidelines to
be issued by the Department of Health, the Government Service Insurance System and the Social Security System;
f) to the extent practicable and feasible, the continuance of the same benefits and privileges given by the
Government Service Insurance System (GSIS), Social Security System (SSS) and PAG-IBIG, as the case may be,
as are enjoyed by those in actual service.
On August 23, 1993, Revenue Regulations (RR) No. 02-94 was issued to implement RA 7432. Sections 2(i) and 4 of
RR No. 02-94 provide:
Sec. 2. DEFINITIONS. For purposes of these regulations:
i. Tax Credit refers to the amount representing the 20% discount granted to a qualified senior citizen by all
establishments relative to their utilization of transportation services, hotels and similar lodging establishments,
restaurants, drugstores, recreation centers, theaters, cinema houses, concert halls, circuses, carnivals and other
similar places of culture, leisure and amusement, which discount shall be deducted by the said establishments from
their gross income for income tax purposes and from their gross sales for value-added tax or other percentage tax
purposes.

xxx
Sec. 4. RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE ESTABLISHMENTS. Private
establishments, i.e., transport services, hotels and similar lodging establishments, restaurants, recreation centers,
drugstores, theaters, cinema houses, concert halls, circuses, carnivals and other similar places of culture[,] leisure
and amusement, giving 20% discounts to qualified senior citizens are required to keep separate and accurate
record[s] of sales made to senior citizens, which shall include the name, identification number, gross sales/receipts,
discounts, dates of transactions and invoice number for every transaction.
The amount of 20% discount shall be deducted from the gross income for income tax purposes and from gross sales
of the business enterprise concerned for purposes of the VAT and other percentage taxes.
In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,5 the Court declared Sections 2(i) and 4 of
RR No. 02-94 as erroneous because these contravene RA 7432, 6 thus:
RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn,
the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny
such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.
First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent
discount that shall be deducted by the said establishments from their gross income for income tax purposes and
from their gross sales for value-added tax or other percentage tax purposes. In ordinary business language, the tax
credit represents the amount of such discount. However, the manner by which the discount shall be credited against
taxes has not been clarified by the revenue regulations.
By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of anything.
To be more precise, it is in business parlance a deduction or lowering of an amount of money; or a reduction from
the full amount or value of something, especially a price. In business there are many kinds of discount, the most
common of which is that affecting the income statement or financial report upon which the income tax is based.
xxx
Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible
from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect,
the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering
that the latter has to be deducted from gross sales in order to compute the gross income in the income statement
and cannot be deducted again, even for purposes of computing the income tax.
When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount when
claimed shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit
benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount which is not even
identical to the discount privilege that is granted by law does not define it at all and serves no useful purpose. The
definition must, therefore, be stricken down.
Laws Not Amended
by Regulations
Second, the law cannot be amended by a mere regulation. In fact, a regulation that operates to create a rule out of
harmony with the statute is a mere nullity; it cannot prevail.
It is a cardinal rule that courts will and should respect the contemporaneous construction placed upon a statute by
the executive officers whose duty it is to enforce it x x x. In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial. Our tax authorities fill in the details that
Congress may not have the opportunity or competence to provide. The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts. Courts, however, will not uphold
these authorities interpretations when clearly absurd, erroneous or improper.

In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning
utterly in contrast to what RA 7432 provides. Their interpretation has muddled x x x the intent of Congress in granting
a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge,
alter or restrict the provisions of the law it administers; it cannot engraft additional requirements not contemplated by
the legislature.
In case of conflict, the law must prevail. A regulation adopted pursuant to law is law. Conversely, a regulation or any
portion thereof not adopted pursuant to law is no law and has neither the force nor the effect of law. 7
On February 26, 2004, RA 92578 amended certain provisions of RA 7432, to wit:
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services for the
death of senior citizens;
xxx
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax deduction based on the net cost
of the goods sold or services rendered: Provided, That the cost of the discount shall be allowed as deduction from
gross income for the same taxable year that the discount is granted. Provided, further, That the total amount of the
claimed tax deduction net of value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the National Internal Revenue Code,
as amended.
To implement the tax provisions of RA 9257, the Secretary of Finance issued RR No. 4-2006, the pertinent provision
of which provides:
SEC. 8. AVAILMENT BY ESTABLISHMENTS OF SALES DISCOUNTS AS DEDUCTION FROM GROSS INCOME.
Establishments enumerated in subparagraph (6) hereunder granting sales discounts to senior citizens on the sale of
goods and/or services specified thereunder are entitled to deduct the said discount from gross income subject to the
following conditions:
(1) Only that portion of the gross sales EXCLUSIVELY USED, CONSUMED OR ENJOYED BY THE SENIOR
CITIZEN shall be eligible for the deductible sales discount.
(2)

The gross selling price and the sales discount MUST BE SEPARATELY INDICATED IN THE OFFICIAL
RECEIPT OR SALES INVOICE issued by the establishment for the sale of goods or services to the senior
citizen.

(3)

Only the actual amount of the discount granted or a sales discount not exceeding 20% of the gross selling
price can be deducted from the gross income, net of value added tax, if applicable, for income tax purposes,
and from gross sales or gross receipts of the business enterprise concerned, for VAT or other percentage tax
purposes.

(4)

The discount can only be allowed as deduction from gross income for the same taxable year that the discount
is granted.

(5)

The business establishment giving sales discounts to qualified senior citizens is required to keep separate and
accurate record[s] of sales, which shall include the name of the senior citizen, TIN, OSCA ID, gross
sales/receipts, sales discount granted, [date] of [transaction] and invoice number for every sale transaction to
senior citizen.

(6)

Only the following business establishments which granted sales discount to senior citizens on their sale of
goods and/or services may claim the said discount granted as deduction from gross income, namely:
xxx
(i) Funeral parlors and similar establishments The beneficiary or any person who shall shoulder the funeral

and burial expenses of the deceased senior citizen shall claim the discount, such as casket, embalmment,
cremation cost and other related services for the senior citizen upon payment and presentation of [his] death
certificate.
The DSWD likewise issued its own Rules and Regulations Implementing RA 9257, to wit:
RULE VI
DISCOUNTS AS TAX DEDUCTION OF ESTABLISHMENTS
Article 8. Tax Deduction of Establishments. The establishment may claim the discounts granted under Rule V,
Section 4 Discounts for Establishments, Section 9, Medical and Dental Services in Private Facilities and Sections
10 and 11 Air, Sea and Land Transportation as tax deduction based on the net cost of the goods sold or services
rendered.Provided, That the cost of the discount shall be allowed as deduction from gross income for the same
taxable year that the discount is granted; Provided, further, That the total amount of the claimed tax deduction net of
value added tax if applicable, shall be included in their gross sales receipts for tax purposes and shall be subject to
proper documentation and to the provisions of the National Internal Revenue Code, as amended; Provided, finally,
that the implementation of the tax deduction shall be subject to the Revenue Regulations to be issued by the Bureau
of Internal Revenue (BIR) and approved by the Department of Finance (DOF).
Feeling aggrieved by the tax deduction scheme, petitioners filed the present recourse, praying that Section 4 of RA
7432, as amended by RA 9257, and the implementing rules and regulations issued by the DSWD and the DOF be
declared unconstitutional insofar as these allow business establishments to claim the 20% discount given to senior
citizens as a tax deduction; that the DSWD and the DOF be prohibited from enforcing the same; and that the tax
credit treatment of the 20% discount under the former Section 4 (a) of RA 7432 be reinstated.
Issues
Petitioners raise the following issues:
A.
WHETHER THE PETITION PRESENTS AN ACTUAL CASE OR CONTROVERSY.
B.
WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND X X X ITS IMPLEMENTING RULES AND
REGULATIONS, INSOFAR AS THEY PROVIDE THAT THE TWENTY PERCENT (20%) DISCOUNT TO SENIOR
CITIZENS MAY BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL.9
Petitioners Arguments
Petitioners emphasize that they are not questioning the 20% discount granted to senior citizens but are only assailing
the constitutionality of the tax deduction scheme prescribed under RA 9257 and the implementing rules and
regulations issued by the DSWD and the DOF.10
Petitioners posit that the tax deduction scheme contravenes Article III, Section 9 of the Constitution, which provides
that: [p]rivate property shall not be taken for public use without just compensation. 11 In support of their position,
petitioners cite Central Luzon Drug Corporation,12 where it was ruled that the 20% discount privilege constitutes
taking of private property for public use which requires the payment of just compensation, 13 and Carlos Superdrug
Corporation v. Department of Social Welfare and Development,14where it was acknowledged that the tax deduction
scheme does not meet the definition of just compensation. 15
Petitioners likewise seek a reversal of the ruling in Carlos Superdrug Corporation16 that the tax deduction scheme
adopted by the government is justified by police power.17 They assert that [a]lthough both police power and the
power of eminent domain have the general welfare for their object, there are still traditional distinctions between the
two18 and that eminent domain cannot be made less supreme than police power. 19 Petitioners further claim that the
legislature, in amending RA 7432, relied on an erroneous contemporaneous construction that prior payment of taxes
is required for tax credit.20

Petitioners also contend that the tax deduction scheme violates Article XV, Section 4 21 and Article XIII, Section 1122 of
the Constitution because it shifts the States constitutional mandate or duty of improving the welfare of the elderly to
the private sector.23 Under the tax deduction scheme, the private sector shoulders 65% of the discount because only
35%24 of it is actually returned by the government.25Consequently, the implementation of the tax deduction scheme
prescribed under Section 4 of RA 9257 affects the businesses of petitioners. 26 Thus, there exists an actual case or
controversy of transcendental importance which deserves judicious disposition on the merits by the highest court of
the land.27ChanRoblesVirtualawlibrary
Respondents Arguments
Respondents, on the other hand, question the filing of the instant Petition directly with the Supreme Court as this
disregards the hierarchy of courts.28 They likewise assert that there is no justiciable controversy as petitioners failed
to prove that the tax deduction treatment is not a fair and full equivalent of the loss sustained by them. 29 As to the
constitutionality of RA 9257 and its implementing rules and regulations, respondents contend that petitioners failed to
overturn its presumption of constitutionality.30 More important, respondents maintain that the tax deduction scheme is
a legitimate exercise of the States police power.31chanroblesvirtualawlibrary
Our Ruling
The Petition lacks merit.
There exists an actual case or controversy.
We shall first resolve the procedural issue.
When the constitutionality of a law is put in issue, judicial review may be availed of only if the following requisites
concur: (1) the existence of an actual and appropriate case; (2) the existence of personal and substantial interest on
the part of the party raising the [question of constitutionality]; (3) recourse to judicial review is made at the earliest
opportunity; and (4) the [question of constitutionality] is the lis motaof the case.32
In this case, petitioners are challenging the constitutionality of the tax deduction scheme provided in RA 9257 and the
implementing rules and regulations issued by the DSWD and the DOF. Respondents, however, oppose the Petition
on the ground that there is no actual case or controversy. We do not agree with respondents.
An actual case or controversy exists when there is a conflict of legal rights or an assertion of opposite legal claims
susceptible of judicial resolution.33 The Petition must therefore show that the governmental act being challenged
has a direct adverse effect on the individual challenging it.34 In this case, the tax deduction scheme challenged by
petitioners has a direct adverse effect on them. Thus, it cannot be denied that there exists an actual case or
controversy.
The validity of the 20% senior citizen discount and tax deduction scheme under RA 9257, as an exercise of
police power of the State, has already been settled in Carlos Superdrug Corporation.
Petitioners posit that the resolution of this case lies in the determination of whether the legally mandated 20% senior
citizen discount is an exercise of police power or eminent domain. If it is police power, no just compensation is
warranted. But if it is eminent domain, the tax deduction scheme is unconstitutional because it is not a peso for peso
reimbursement of the 20% discount given to senior citizens. Thus, it constitutes taking of private property without
payment of just compensation.
At the outset, we note that this question has been settled in Carlos Superdrug Corporation.35 In that case, we ruled:
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital
because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a
scheme whereby drugstores will be justly compensated for the discount.
Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is the validity of the

tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to
senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise,
it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the
amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso
basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a
just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the takers gain but the owners loss. The word just is used to intensify the meaning of the
word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be
real, substantial, full and ample.
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation.
Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group
of citizens, can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nation-building, and
to grant benefits and privileges to them for their improvement and well-being as the State considers them an integral
part of our society.
The priority given to senior citizens finds its basis in the Constitution as set forth in the law itself. Thus, the Act
provides:
SEC. 2. Republic Act No. 7432 is hereby amended to read as follows:
SECTION 1. Declaration of Policies and Objectives. Pursuant to Article XV, Section 4 of the Constitution, it is the
duty of the family to take care of its elderly members while the State may design programs of social security for them.
In addition to this, Section 10 in the Declaration of Principles and State Policies provides: The State shall provide
social justice in all phases of national development. Further, Article XIII, Section 11, provides: The State shall adopt
an integrated and comprehensive approach to health development which shall endeavor to make essential goods,
health and other social services available to all the people at affordable cost. There shall be priority for the needs of
the underprivileged sick, elderly, disabled, women and children. Consonant with these constitutional principles the
following are the declared policies of this Act:

(f) To recognize the important role of the private sector in the improvement of the welfare of senior citizens
and to actively seek their partnership.
To implement the above policy, the law grants a twenty percent discount to senior citizens for medical and dental
services, and diagnostic and laboratory fees; admission fees charged by theaters, concert halls, circuses, carnivals,
and other similar places of culture, leisure and amusement; fares for domestic land, air and sea travel; utilization of
services in hotels and similar lodging establishments, restaurants and recreation centers; and purchases of

medicines for the exclusive use or enjoyment of senior citizens. As a form of reimbursement, the law provides that
business establishments extending the twenty percent discount to senior citizens may claim the discount as a tax
deduction.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general welfare
for its object. Police power is not capable of an exact definition, but has been purposely veiled in general terms to
underscore its comprehensiveness to meet all exigencies and provide enough room for an efficient and flexible
response to conditions and circumstances, thus assuring the greatest benefits. Accordingly, it has been described as
the most essential, insistent and the least limitable of powers, extending as it does to all the great public needs. It is
[t]he power vested in the legislature by the constitution to make, ordain, and establish all manner of wholesome and
reasonable laws, statutes, and ordinances, either with penalties or without, not repugnant to the constitution, as they
shall judge to be for the good and welfare of the commonwealth, and of the subjects of the same.
For this reason, when the conditions so demand as determined by the legislature, property rights must bow to the
primacy of police power because property rights, though sheltered by due process, must yield to general welfare.
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the
absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for
its nullification in view of the presumption of validity which every law has in its favor.
Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly oppressive to
their business, because petitioners have not taken time to calculate correctly and come up with a financial report, so
that they have not been able to show properly whether or not the tax deduction scheme really works greatly to their
disadvantage.
In treating the discount as a tax deduction, petitioners insist that they will incur losses because, referring to the DOF
Opinion, for every P1.00 senior citizen discount that petitioners would give, P0.68 will be shouldered by them as only
P0.32 will be refunded by the government by way of a tax deduction.
To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive maintenance drug Norvasc as an
example. According to the latter, it acquires Norvasc from the distributors at P37.57 per tablet, and retails it at P39.60
(or at a margin of 5%). If it grants a 20% discount to senior citizens or an amount equivalent to P7.92, then it would
have to sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the government will
allow a tax deduction, only P2.53 per tablet will be refunded and not the full amount of the discount which is P7.92. In
short, only 32% of the 20% discount will be reimbursed to the drugstores.
Petitioners computation is flawed. For purposes of reimbursement, the law states that the cost of the discount shall
be deducted from gross income, the amount of income derived from all sources before deducting allowable
expenses, which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting of petitioners sales, expenses, and net profit
(or loss) for a given period could have accurately reflected the effect of the discount on their income. Absent any
financial statement, petitioners cannot substantiate their claim that they will be operating at a loss should they give
the discount. In addition, the computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the amount of the discount.
Furthermore, it is unfair for petitioners to criticize the law because they cannot raise the prices of their medicines
given the cutthroat nature of the players in the industry. It is a business decision on the part of petitioners to peg the
mark-up at 5%. Selling the medicines below acquisition cost, as alleged by petitioners, is merely a result of this
decision. Inasmuch as pricing is a property right, petitioners cannot reproach the law for being oppressive, simply
because they cannot afford to raise their prices for fear of losing their customers to competition.
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of
the business. While the Constitution protects property rights, petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the operations of a business which may result in an
impairment of property rights in the process.

Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for
the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of
contracts and public utilities, continuously serve as x x x reminder[s] that the right to property can be relinquished
upon the command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the
other private establishments concerned. This being the case, the means employed in invoking the active participation
of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4 (a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the
same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative
act.36 (Bold in the original; underline supplied)
We, thus, found that the 20% discount as well as the tax deduction scheme is a valid exercise of the police power of
the State.
No compelling reason has been proffered to overturn, modify or abandon the ruling in Carlos Superdrug
Corporation.
Petitioners argue that we have previously ruled in Central Luzon Drug Corporation37 that the 20% discount is an
exercise of the power of eminent domain, thus, requiring the payment of just compensation. They urge us to reexamine our ruling in Carlos Superdrug Corporation38 which allegedly reversed the ruling inCentral Luzon Drug
Corporation.39 They also point out that Carlos Superdrug Corporation40 recognized that the tax deduction scheme
under the assailed law does not provide for sufficient just compensation.
We agree with petitioners observation that there are statements in Central Luzon Drug Corporation41describing the
20% discount as an exercise of the power of eminent domain, viz.:
[T]he privilege enjoyed by senior citizens does not come directly from the State, but rather from the private
establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as
their just compensation for private property taken by the State for public use.
The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous
with public interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior
citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts
given would have entered the coffers and formed part of the gross sales of the private establishments concerned,
were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation.
This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts
given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such
issuance when not done within a reasonable time from the grant of the discounts cannot be considered asjust
compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its
revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the
reduction in its revenues.
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax
measures are but enforced contributions exacted on pain of penal sanctions and clearly imposed for a public
purpose. In recent years, the power to tax has indeed become a most effective tool to realize social justice, public
welfare, and the equitable distribution of wealth.
While it is a declared commitment under Section 1 of RA 7432, social justice cannot be invoked to trample on the
rights of property owners who under our Constitution and laws are also entitled to protection. The social justice
consecrated in our [C]onstitution [is] not intended to take away rights from a person and give them to another who is
not entitled thereto. For this reason, a just compensation for income that is taken away from respondent becomes
necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body
can alter that fact.

To put it differently, a private establishment that merely breaks even without the discounts yet will surely start to
incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all
its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it
will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either
its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that the tax
credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better
position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the
latter.42 (Italics in the original; emphasis supplied)
The above was partly incorporated in our ruling in Carlos Superdrug Corporation43 when we statedpreliminarily that
Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of private property.
Compelling drugstore owners and establishments to grant the discount will result in a loss of profit and capital
because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2) the law failed to provide a
scheme whereby drugstores will be justly compensated for the discount.
Examining petitioners arguments, it is apparent that what petitioners are ultimately questioning is the validity of the
tax deduction scheme as a reimbursement mechanism for the twenty percent (20%) discount that they extend to
senior citizens.
Based on the afore-stated DOF Opinion, the tax deduction scheme does not fully reimburse petitioners for the
discount privilege accorded to senior citizens. This is because the discount is treated as a deduction, a taxdeductible expense that is subtracted from the gross income and results in a lower taxable income. Stated otherwise,
it is an amount that is allowed by law to reduce the income prior to the application of the tax rate to compute the
amount of tax which is due. Being a tax deduction, the discount does not reduce taxes owed on a peso for peso
basis but merely offers a fractional reduction in taxes owed.
Theoretically, the treatment of the discount as a deduction reduces the net income of the private establishments
concerned. The discounts given would have entered the coffers and formed part of the gross sales of the private
establishments, were it not for R.A. No. 9257.
The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for
public use or benefit. This constitutes compensable taking for which petitioners would ordinarily become entitled to a
just compensation.
Just compensation is defined as the full and fair equivalent of the property taken from its owner by the expropriator.
The measure is not the takers gain but the owners loss. The word just is used to intensify the meaning of the
word compensation, and to convey the idea that the equivalent to be rendered for the property to be taken shall be
real, substantial, full and ample.
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet the
definition of just compensation.
Having said that, this raises the question of whether the State, in promoting the health and welfare of a special group
of citizens, can impose upon private establishments the burden of partly subsidizing a government program.
The Court believes so.44
This, notwithstanding, we went on to rule in Carlos Superdrug Corporation45 that the 20% discount and tax deduction
scheme is a valid exercise of the police power of the State.
The present case, thus, affords an opportunity for us to clarify the above-quoted statements in Central Luzon Drug
Corporation46 and Carlos Superdrug Corporation.47
First, we note that the above-quoted disquisition on eminent domain in Central Luzon Drug Corporation48is obiter
dicta and, thus, not binding precedent. As stated earlier, in Central Luzon Drug Corporation,49 we ruled that the BIR
acted ultra vires when it effectively treated the 20% discount as a tax deduction, under Sections 2.i and 4 of RR No.
2-94, despite the clear wording of the previous law that the same should be treated as a tax credit. We were,

therefore, not confronted in that case with the issue as to whether the 20% discount is an exercise of police power or
eminent domain.
Second, although we adverted to Central Luzon Drug Corporation50 in our ruling in Carlos Superdrug
Corporation,51 this referred only to preliminary matters. A fair reading of Carlos Superdrug Corporation52would show
that we categorically ruled therein that the 20% discount is a valid exercise of police power. Thus, even if the current
law, through its tax deduction scheme (which abandoned the tax credit scheme under the previous law), does not
provide for a peso for peso reimbursement of the 20% discount given by private establishments, no constitutional
infirmity obtains because, being a valid exercise of police power, payment of just compensation is not warranted.
We have carefully reviewed the basis of our ruling in Carlos Superdrug Corporation53 and we find no cogent reason
to overturn, modify or abandon it. We also note that petitioners arguments are a mere reiteration of those raised and
resolved in Carlos Superdrug Corporation.54 Thus, we sustain Carlos Superdrug Corporation.55
Nonetheless, we deem it proper, in what follows, to amplify our explanation in Carlos Superdrug Corporation56 as to
why the 20% discount is a valid exercise of police power and why it may not, under the specific circumstances of this
case, be considered as an exercise of the power of eminent domain contrary to the obiter in Central Luzon Drug
Corporation.57ChanRoblesVirtualawlibrary
Police power versus eminent domain.
Police power is the inherent power of the State to regulate or to restrain the use of liberty and property for public
welfare.58 The only limitation is that the restriction imposed should be reasonable, not oppressive. 59In other words, to
be a valid exercise of police power, it must have a lawful subject or objective and a lawful method of accomplishing
the goal.60 Under the police power of the State, property rights of individuals may be subjected to restraints and
burdens in order to fulfill the objectives of the government. 61 The State may interfere with personal liberty, property,
lawful businesses and occupations to promote the general welfare [as long as] the interference [is] reasonable and
not arbitrary.62 Eminent domain, on the other hand, is the inherent power of the State to take or appropriate private
property for public use.63 The Constitution, however, requires that private property shall not be taken without due
process of law and the payment of just compensation. 64
Traditional distinctions exist between police power and eminent domain.
In the exercise of police power, a property right is impaired by regulation, 65 or the use of property is merely
prohibited, regulated or restricted66 to promote public welfare. In such cases, there is no compensable taking, hence,
payment of just compensation is not required. Examples of these regulations are property condemned for being
noxious or intended for noxious purposes (e.g., a building on the verge of collapse to be demolished for public safety,
or obscene materials to be destroyed in the interest of public morals) 67 as well as zoning ordinances prohibiting the
use of property for purposes injurious to the health, morals or safety of the community (e.g., dividing a citys territory
into residential and industrial areas).68It has, thus, been observed that, in the exercise of police power (as
distinguished from eminent domain), although the regulation affects the right of ownership, none of the bundle of
rights which constitute ownership is appropriated for use by or for the benefit of the public. 69
On the other hand, in the exercise of the power of eminent domain, property interests are appropriated and applied
to some public purpose which necessitates the payment of just compensation therefor. Normally, the title to and
possession of the property are transferred to the expropriating authority. Examples include the acquisition of lands for
the construction of public highways as well as agricultural lands acquired by the government under the agrarian
reform law for redistribution to qualified farmer beneficiaries. However, it is a settled rule that the acquisition of title or
total destruction of the property is not essential for taking under the power of eminent domain to be
present.70 Examples of these include establishment of easements such as where the land owner is perpetually
deprived of his proprietary rights because of the hazards posed by electric transmission lines constructed above his
property71 or the compelled interconnection of the telephone system between the government and a private
company.72 In these cases, although the private property owner is not divested of ownership or possession, payment
of just compensation is warranted because of the burden placed on the property for the use or benefit of the public.
The 20% senior citizen discount is an exercise of police power.

It may not always be easy to determine whether a challenged governmental act is an exercise of police power or
eminent domain. The very nature of police power as elastic and responsive to various social conditions 73 as well as
the evolving meaning and scope of public use74 and just compensation75 in eminent domain evinces that these are
not static concepts. Because of the exigencies of rapidly changing times, Congress may be compelled to adopt or
experiment with different measures to promote the general welfare which may not fall squarely within the traditionally
recognized categories of police power and eminent domain. The judicious approach, therefore, is to look at the
nature and effects of the challenged governmental act and decide, on the basis thereof, whether the act is the
exercise of police power or eminent domain. Thus, we now look at the nature and effects of the 20% discount to
determine if it constitutes an exercise of police power or eminent domain.
The 20% discount is intended to improve the welfare of senior citizens who, at their age, are less likely to be gainfully
employed, more prone to illnesses and other disabilities, and, thus, in need of subsidy in purchasing basic
commodities. It may not be amiss to mention also that the discount serves to honor senior citizens who presumably
spent the productive years of their lives on contributing to the development and progress of the nation. This distinct
cultural Filipino practice of honoring the elderly is an integral part of this law.
As to its nature and effects, the 20% discount is a regulation affecting the ability of private establishments to price
their products and services relative to a special class of individuals, senior citizens, for which the Constitution affords
preferential concern.76 In turn, this affects the amount of profits or income/gross sales that a private establishment
can derive from senior citizens. In other words, the subject regulation affects the pricing, and, hence, the profitability
of a private establishment. However, it does not purport to appropriate or burden specific properties, used in the
operation or conduct of the business of private establishments, for the use or benefit of the public, or senior citizens
for that matter, but merely regulates the pricing of goods and services relative to, and the amount of profits or
income/gross sales that such private establishments may derive from, senior citizens.
The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally regarded as police power measures. 77These laws generally
regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment
of these corporations considering that they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments
from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of
a given establishment but only to the class of senior citizens. Nonetheless, to the degree material to the resolution of
this case, the 20% discount may be properly viewed as belonging to the category of price regulatory measures which
affect the profitability of establishments subjected thereto.
On its face, therefore, the subject regulation is a police power measure.
The obiter in Central Luzon Drug Corporation,78 however, describes the 20% discount as an exercise of the power of
eminent domain and the tax credit, under the previous law, equivalent to the amount of discount given as the just
compensation therefor. The reason is that (1) the discount would have formed part of the gross sales of the
establishment were it not for the law prescribing the 20% discount, and (2) the permanent reduction in total revenues
is a forced subsidy corresponding to the taking of private property for public use or benefit.
The flaw in this reasoning is in its premise. It presupposes that the subject regulation, which impacts the pricing and,
hence, the profitability of a private establishment, automatically amounts to a deprivation of property without due
process of law. If this were so, then all price and rate of return on investment control laws would have to be
invalidated because they impact, at some level, the regulated establishments profits or income/gross sales, yet there
is no provision for payment of just compensation. It would also mean that government cannot set price or rate of
return on investment limits, which reduce the profits or income/gross sales of private establishments, if no just
compensation is paid even if the measure is not confiscatory. The obiter is, thus, at odds with the settled doctrine that
the State can employ police power measures to regulate the pricing of goods and services, and, hence, the
profitability of business establishments in order to pursue legitimate State objectives for the common good, provided
that the regulation does not go too far as to amount to taking. 79

In City of Manila v. Laguio, Jr.,80 we recognized that

x x x a taking also could be found if government regulation of the use of property went too far. When regulation
reaches a certain magnitude, in most if not in all cases there must be an exercise of eminent domain and
compensation to support the act. While property may be regulated to a certain extent, if regulation goes too far it will
be recognized as a taking.
No formula or rule can be devised to answer the questions of what is too far and when regulation becomes a taking.
In Mahon, Justice Holmes recognized that it was a question of degree and therefore cannot be disposed of by
general propositions. On many other occasions as well, the U.S. Supreme Court has said that the issue of when
regulation constitutes a taking is a matter of considering the facts in each case. The Court asks whether justice and
fairness require that the economic loss caused by public action must be compensated by the government and thus
borne by the public as a whole, or whether the loss should remain concentrated on those few persons subject to the
public action.81
The impact or effect of a regulation, such as the one under consideration, must, thus, be determined on a case-tocase basis. Whether that line between permissible regulation under police power and taking under eminent domain
has been crossed must, under the specific circumstances of this case, be subject to proof and the one assailing the
constitutionality of the regulation carries the heavy burden of proving that the measure is unreasonable, oppressive
or confiscatory. The time-honored rule is that the burden of proving the unconstitutionality of a law rests upon the one
assailing it and the burden becomes heavier when police power is at issue. 82ChanRoblesVirtualawlibrary
The 20% senior citizen discount has not been shown to be unreasonable, oppressive or confiscatory.
In Alalayan v. National Power Corporation,83 petitioners, who were franchise holders of electric plants, challenged the
validity of a law limiting their allowable net profits to no more than 12% per annum of their investments plus twomonth operating expenses. In rejecting their plea, we ruled that, in an earlier case, it was found that 12% is a
reasonable rate of return and that petitioners failed to prove that the aforesaid rate is confiscatory in view of the
presumption of constitutionality.84
We adopted a similar line of reasoning in Carlos Superdrug Corporation85 when we ruled that petitioners therein
failed to prove that the 20% discount is arbitrary, oppressive or confiscatory. We noted that no evidence, such as a
financial report, to establish the impact of the 20% discount on the overall profitability of petitioners was presented in
order to show that they would be operating at a loss due to the subject regulation or that the continued
implementation of the law would be unconscionably detrimental to the business operations of petitioners. In the case
at bar, petitioners proceeded with a hypothetical computation of the alleged loss that they will suffer similar to what
the petitioners in Carlos Superdrug Corporation86 did. Petitioners went directly to this Court without first establishing
the factual bases of their claims. Hence, the present recourse must, likewise, fail.
Because all laws enjoy the presumption of constitutionality, courts will uphold a laws validity if any set of facts may
be conceived to sustain it.87 On its face, we find that there are at least two conceivable bases to sustain the subject
regulations validity absent clear and convincing proof that it is unreasonable, oppressive or confiscatory. Congress
may have legitimately concluded that business establishments have the capacity to absorb a decrease in profits or
income/gross sales due to the 20% discount without substantially affecting the reasonable rate of return on their
investments considering (1) not all customers of a business establishment are senior citizens and (2) the level of its
profit margins on goods and services offered to the general public. Concurrently, Congress may have, likewise,
legitimately concluded that the establishments, which will be required to extend the 20% discount, have the capacity
to revise their pricing strategy so that whatever reduction in profits or income/gross sales that they may sustain
because of sales to senior citizens, can be recouped through higher mark-ups or from other products not subject of
discounts. As a result, the discounts resulting from sales to senior citizens will not be confiscatory or unduly
oppressive.
In sum, we sustain our ruling in Carlos Superdrug Corporation88 that the 20% senior citizen discount and tax
deduction scheme are valid exercises of police power of the State absent a clear showing that it is arbitrary,
oppressive or confiscatory.
Conclusion

In closing, we note that petitioners hypothesize, consistent with our previous ratiocinations, that the discount will
force establishments to raise their prices in order to compensate for its impact on overall profits or income/gross
sales. The general public, or those not belonging to the senior citizen class, are, thus, made to effectively shoulder
the subsidy for senior citizens. This, in petitioners view, is unfair.
As already mentioned, Congress may be reasonably assumed to have foreseen this eventuality. But, more
importantly, this goes into the wisdom, efficacy and expediency of the subject law which is not proper for judicial
review. In a way, this law pursues its social equity objective in a non-traditional manner unlike past and existing direct
subsidy programs of the government for the poor and marginalized sectors of our society. Verily, Congress must be
given sufficient leeway in formulating welfare legislations given the enormous challenges that the government faces
relative to, among others, resource adequacy and administrative capability in implementing social reform measures
which aim to protect and uphold the interests of those most vulnerable in our society. In the process, the individual,
who enjoys the rights, benefits and privileges of living in a democratic polity, must bear his share in supporting
measures intended for the common good. This is only fair.
In fine, without the requisite showing of a clear and unequivocal breach of the Constitution, the validity of the assailed
law must be sustained.
Refutation of the Dissent
The main points of Justice Carpios Dissent may be summarized as follows: (1) the discussion on eminent domain
in Central Luzon Drug Corporation89 is not obiter dicta; (2) allowable taking, in police power, is limited to property that
is destroyed or placed outside the commerce of man for public welfare; (3) the amount of mandatory discount is
private property within the ambit of Article III, Section 990 of the Constitution; and (4) the permanent reduction in a
private establishments total revenue, arising from the mandatory discount, is a taking of private property for public
use or benefit, hence, an exercise of the power of eminent domain requiring the payment of just compensation.
I
We maintain that the discussion on eminent domain in Central Luzon Drug Corporation91 is obiter dicta.
As previously discussed, in Central Luzon Drug Corporation,92 the BIR, pursuant to Sections 2.i and 4 of RR No. 294, treated the senior citizen discount in the previous law, RA 7432, as a tax deduction instead of a tax credit despite
the clear provision in that law which stated
SECTION 4. Privileges for the Senior Citizens. The senior citizens shall be entitled to the following:
a) The grant of twenty percent (20%) discount from all establishments relative to utilization of transportation services,
hotels and similar lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in
the country: Provided, That private establishments may claim the cost as tax credit; (Emphasis supplied)
Thus, the Court ruled that the subject revenue regulation violated the law, viz:
The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction
from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment
only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a
tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant
are void. Basic is the rule that administrative regulations cannot amend or revoke the law.93
As can be readily seen, the discussion on eminent domain was not necessary in order to arrive at this conclusion. All
that was needed was to point out that the revenue regulation contravened the law which it sought to implement. And,
precisely, this was done in Central Luzon Drug Corporation94 by comparing the wording of the previous law vis--vis
the revenue regulation; employing the rules of statutory construction; and applying the settled principle that a
regulation cannot amend the law it seeks to implement.
A close reading of Central Luzon Drug Corporation95 would show that the Court went on to state that the tax credit
can be deemed as just compensation only to explain why the previous law provides for a tax credit instead of a tax
deduction. The Court surmised that the tax credit was a form of just compensation given to the establishments
covered by the 20% discount. However, the reason why the previous law provided for a tax credit and not a tax

deduction was not necessary to resolve the issue as to whether the revenue regulation contravenes the law. Hence,
the discussion on eminent domain is obiter dicta.
A court, in resolving cases before it, may look into the possible purposes or reasons that impelled the enactment of a
particular statute or legal provision. However, statements made relative thereto are not always necessary in resolving
the actual controversies presented before it. This was the case in Central Luzon Drug Corporation96 resulting in that
unfortunate statement that the tax credit can be deemed as just compensation. This, in turn, led to the erroneous
conclusion, by deductive reasoning, that the 20% discount is an exercise of the power of eminent domain. The
Dissent essentially adopts this theory and reasoning which, as will be shown below, is contrary to settled principles in
police power and eminent domain analysis.
II
The Dissent discusses at length the doctrine on taking in police power which occurs when private property is
destroyed or placed outside the commerce of man. Indeed, there is a whole class of police power measures which
justify the destruction of private property in order to preserve public health, morals, safety or welfare. As earlier
mentioned, these would include a building on the verge of collapse or confiscated obscene materials as well as those
mentioned by the Dissent with regard to property used in violating a criminal statute or one which constitutes a
nuisance. In such cases, no compensation is required.
However, it is equally true that there is another class of police power measures which do not involve the destruction
of private property but merely regulate its use. The minimum wage law, zoning ordinances, price control laws, laws
regulating the operation of motels and hotels, laws limiting the working hours to eight, and the like would fall under
this category. The examples cited by the Dissent, likewise, fall under this category: Article 157 of the Labor Code,
Sections 19 and 18 of the Social Security Law, and Section 7 of the Pag-IBIG Fund Law. These laws merely regulate
or, to use the term of the Dissent, burden the conduct of the affairs of business establishments. In such cases,
payment of just compensation is not required because they fall within the sphere of permissible police power
measures. The senior citizen discount law falls under this latter category.
III
The Dissent proceeds from the theory that the permanent reduction of profits or income/gross sales, due to the 20%
discount, is a taking of private property for public purpose without payment of just compensation.
At the outset, it must be emphasized that petitioners never presented any evidence to establish that they were
forced to suffer enormous losses or operate at a loss due to the effects of the assailed law. They came directly to this
Court and provided a hypothetical computation of the loss they would allegedly suffer due to the operation of the
assailed law. The central premise of the Dissents argument that the 20% discount results in a permanent reduction
in profits or income/gross sales, or forces a business establishment to operate at a loss is, thus, wholly
unsupported by competent evidence. To be sure, the Court can invalidate a law which, on its face, is arbitrary,
oppressive or confiscatory.97 But this is not the case here.
In the case at bar, evidence is indispensable before a determination of a constitutional violation can be made
because of the following reasons.
First, the assailed law, by imposing the senior citizen discount, does not take any of the properties used by a
business establishment like, say, the land on which a manufacturing plant is constructed or the equipment being
used to produce goods or services.
Second, rather than taking specific properties of a business establishment, the senior citizen discount lawmerely
regulates the prices of the goods or services being sold to senior citizens by mandating a 20% discount. Thus, if a
product is sold at P10.00 to the general public, then it shall be sold at P8.00 (i.e., P10.00 less 20%) to senior citizens.
Note that the law does not impose at what specific price the product shall be sold, only that a 20% discount shall be
given to senior citizens based on the price set by the business establishment. A business establishment is, thus, free
to adjust the prices of the goods or services it provides to the general public. Accordingly, it can increase the price of
the above product to P20.00 but is required to sell it at P16.00 (i.e., P20.00 less 20%) to senior citizens.

Third, because the law impacts the prices of the goods or services of a particular establishment relative to its sales to
senior citizens, its profits or income/gross sales are affected. The extent of the impact would, however, depend on
the profit margin of the business establishment on a particular good or service. If a product costs P5.00 to produce
and is sold at P10.00, then the profit98 is P5.0099 or a profit margin100 of 50%.101 Under the assailed law, the aforesaid
product would have to be sold at P8.00 to senior citizens yet the business would still earn P3.00 102 or a 30%103 profit
margin. On the other hand, if the product costs P9.00 to produce and is required to be sold at P8.00 to senior
citizens, then the business would experience a loss of P1.00. 104 But note that since not all customers of a business
establishment are senior citizens, the business establishment may continue to earn P1.00 from non-senior citizens
which, in turn, can offset any loss arising from sales to senior citizens.
Fourth, when the law imposes the 20% discount in favor of senior citizens, it does not prevent the business
establishment from revising its pricing strategy. By revising its pricing strategy, a business establishment can recoup
any reduction of profits or income/gross sales which would otherwise arise from the giving of the 20% discount. To
illustrate, suppose A has two customers: X, a senior citizen, and Y, a non-senior citizen. Prior to the law, A sells his
products at P10.00 a piece to X and Y resulting in income/gross sales of P20.00 (P10.00 + P10.00). With the
passage of the law, A must now sell his product to X at P8.00 (i.e., P10.00 less 20%) so that his income/gross sales
would be P18.00 (P8.00 + P10.00) or lower by P2.00. To prevent this from happening, A decides to increase the price
of his products to P11.11 per piece. Thus, he sells his product to X at P8.89 (i.e., P11.11 less 20%) and to Y at
P11.11. As a result, his income/gross sales would still be P20.00 105 (P8.89 + P11.11). The capacity, then, of business
establishments to revise their pricing strategy makes it possible for them not to suffer any reduction in profits or
income/gross sales, or, in the alternative, mitigate the reduction of their profits or income/gross sales even after the
passage of the law. In other words, business establishments have the capacity to adjust their prices so that they may
remain profitable even under the operation of the assailed law.
The Dissent, however, states that
The explanation by the majority that private establishments can always increase their prices to recover the
mandatory discount will only encourage private establishments to adjust their prices upwards to the prejudice of
customers who do not enjoy the 20% discount. It was likewise suggested that if a company increases its prices,
despite the application of the 20% discount, the establishment becomes more profitable than it was before the
implementation of R.A. 7432. Such an economic justification is self-defeating, for more consumers will suffer from the
price increase than will benefit from the 20% discount. Even then, such ability to increase prices cannot legally
validate a violation of the eminent domain clause.106
But, if it is possible that the business establishment, by adjusting its prices, will suffer no reduction in its profits or
income/gross sales (or suffer some reduction but continue to operate profitably) despite giving the discount, what
would be the basis to strike down the law? If it is possible that the business establishment, by adjusting its prices, will
not be unduly burdened, how can there be a finding that the assailed law is an unconstitutional exercise of police
power or eminent domain?
That there may be a burden placed on business establishments or the consuming public as a result of the operation
of the assailed law is not, by itself, a ground to declare it unconstitutional for this goes into the wisdom and
expediency of the law. The cost of most, if not all, regulatory measures of the government on business
establishments is ultimately passed on to the consumers but that, by itself, does not justify the wholesale nullification
of these measures. It is a basic postulate of our democratic system of government that the Constitution is a social
contract whereby the people have surrendered their sovereign powers to the State for the common good. 107 All
persons may be burdened by regulatory measures intended for the common good or to serve some important
governmental interest, such as protecting or improving the welfare of a special class of people for which the
Constitution affords preferential concern. Indubitably, the one assailing the law has the heavy burden of proving that
the regulation is unreasonable, oppressive or confiscatory, or has gone too far as to amount to a taking. Yet, here,
the Dissent would have this Court nullify the law without any proof of such nature.
Further, this Court is not the proper forum to debate the economic theories or realities that impelled Congress to shift
from the tax credit to the tax deduction scheme. It is not within our power or competence to judge which scheme is
more or less burdensome to business establishments or the consuming public and, thereafter, to choose which
scheme the State should use or pursue. The shift from the tax credit to tax deduction scheme is a policy
determination by Congress and the Court will respect it for as long as there is no showing, as here, that the subject

regulation has transgressed constitutional limitations.

Unavoidably, the lack of evidence constrains the Dissent to rely on speculative and hypotheticalargumentation when
it states that the 20% discount is a significant amount and not a minimal loss (which erroneously assumes that the
discount automatically results in a loss when it is possible that the profit margin is greater than 20% and/or the
pricing strategy can be revised to prevent or mitigate any reduction in profits or income/gross sales as illustrated
above),108 and not all private establishments make a 20% profit margin (which conversely implies that there are those
who make more and, thus, would not be greatly affected by this regulation). 109
In fine, because of the possible scenarios discussed above, we cannot assume that the 20% discount results in a
permanent reduction in profits or income/gross sales, much less that business establishments are forced to operate
at a loss under the assailed law. And, even if we gratuitously assume that the 20% discount results in some degree
of reduction in profits or income/gross sales, we cannot assume that such reduction is arbitrary, oppressive or
confiscatory. To repeat, there is no actual proof to back up this claim, and it could be that the loss suffered by a
business establishment was occasioned through its fault or negligence in not adapting to the effects of the assailed
law. The law uniformly applies to all business establishments covered thereunder. There is, therefore, no unjust
discrimination as the aforesaid business establishments are faced with the same constraints.
The necessity of proof is all the more pertinent in this case because, as similarly observed by Justice Velasco in
his Concurring Opinion, the law has been in operation for over nine years now. However, the grim picture painted by
petitioners on the unconscionable losses to be indiscriminately suffered by business establishments, which should
have led to the closure of numerous business establishments, has not come to pass.
Verily, we cannot invalidate the assailed law based on assumptions and conjectures. Without adequate proof, the
presumption of constitutionality must prevail.
IV
At this juncture, we note that the Dissent modified its original arguments by including a new paragraph, to wit:
Section 9, Article III of the 1987 Constitution speaks of private property without any distinction. It does not state that
there should be profit before the taking of property is subject to just compensation. The private property referred to
for purposes of taking could be inherited, donated, purchased, mortgaged, or as in this case, part of the gross sales
of private establishments. They are all private property and any taking should be attended by corresponding payment
of just compensation. The 20% discount granted to senior citizens belong to private establishments, whether these
establishments make a profit or suffer a loss. In fact, the 20% discount applies to non-profit establishments like
country, social, or golf clubs which are open to the public and not only for exclusive membership. The issue of profit
or loss to the establishments is immaterial.110
Two things may be said of this argument.
First, it contradicts the rest of the arguments of the Dissent. After it states that the issue of profit or loss is immaterial,
the Dissent proceeds to argue that the 20% discount is not a minimal loss 111 and that the 20% discount forces
business establishments to operate at a loss.112 Even the obiter in Central Luzon Drug Corporation,113 which the
Dissent essentially adopts and relies on, is premised on the permanent reduction of total revenues and the loss that
business establishments will be forced to suffer in arguing that the 20% discount constitutes a taking under the
power of eminent domain. Thus, when the Dissent now argues that the issue of profit or loss is immaterial, it
contradicts itself because it later argues, in order to justify that there is a taking under the power of eminent domain
in this case, that the 20% discount forces business establishments to suffer a significant loss or to operate at a loss.
Second, this argument suffers from the same flaw as the Dissents original arguments. It is an erroneous
characterization of the 20% discount.
According to the Dissent, the 20% discount is part of the gross sales and, hence, private property belonging to
business establishments. However, as previously discussed, the 20% discount is not private property actually owned
and/or used by the business establishment. It should be distinguished from properties like lands or buildings actually
used in the operation of a business establishment which, if appropriated for public use, would amount to a taking
under the power of eminent domain.

Instead, the 20% discount is a regulatory measure which impacts the pricing and, hence, the profitability of business
establishments. At the time the discount is imposed, no particular property of the business establishment can be said
to be taken. That is, the State does not acquire or take anything from the business establishment in the way that it
takes a piece of private land to build a public road. While the 20% discount may form part of the potential profits or
income/gross sales114 of the business establishment, as similarly characterized by Justice Bersamin in his Concurring
Opinion, potential profits or income/gross sales are not private property, specifically cash or money, already
belonging to the business establishment. They are a mere expectancy because they are potential fruits of the
successful conduct of the business.
Prior to the sale of goods or services, a business establishment may be subject to State regulations, such as the
20% senior citizen discount, which may impact the level or amount of profits or income/gross sales that can be
generated by such establishment. For this reason, the validity of the discount is to be determined based on its overall
effects on the operations of the business establishment.
Again, as previously discussed, the 20% discount does not automatically result in a 20% reduction in profits, or, to
align it with the term used by the Dissent, the 20% discount does not mean that a 20% reduction in gross sales
necessarily results. Because (1) the profit margin of a product is not necessarily less than 20%, (2) not all customers
of a business establishment are senior citizens, and (3) the establishment may revise its pricing strategy, such
reduction in profits or income/gross sales may be prevented or, in the alternative, mitigated so that the business
establishment continues to operate profitably. Thus, even if we gratuitously assume that some degree of reduction in
profits or income/gross sales occurs because of the 20% discount, it does not follow that the regulation is
unreasonable, oppressive or confiscatory because the business establishment may make the necessary adjustments
to continue to operate profitably. No evidence was presented by petitioners to show otherwise. In fact, no evidence
was presented by petitioners at all.
Justice Leonen, in his Concurring and Dissenting Opinion, characterizes profits (or income/gross sales) as an
inchoate right. Another way to view it, as stated by Justice Velasco in his Concurring Opinion, is that the business
establishment merely has a right to profits. The Constitution adverts to it as the right of an enterprise to a reasonable
return on investment.115 Undeniably, this right, like any other right, may be regulated under the police power of the
State to achieve important governmental objectives like protecting the interests and improving the welfare of senior
citizens.
It should be noted though that potential profits or income/gross sales are relevant in police power and eminent
domain analyses because they may, in appropriate cases, serve as an indicia when a regulation has gone too far
as to amount to a taking under the power of eminent domain. When the deprivation or reduction of profits or
income/gross sales is shown to be unreasonable, oppressive or confiscatory, then the challenged governmental
regulation may be nullified for being a taking under the power of eminent domain. In such a case, it is not profits or
income/gross sales which are actually taken and appropriated for public use. Rather, when the regulation causes an
establishment to incur losses in an unreasonable, oppressive or confiscatory manner, what is actually taken is capital
and the right of the business establishment to a reasonable return on investment. If the business losses are not
halted because of the continued operation of the regulation, this eventually leads to the destruction of the business
and the total loss of the capital invested therein. But, again, petitioners in this case failed to prove that the subject
regulation is unreasonable, oppressive or confiscatory.
V.
The Dissent further argues that we erroneously used price and rate of return on investment control laws to justify the
senior citizen discount law. According to the Dissent, only profits from industries imbued with public interest may be
regulated because this is a condition of their franchises. Profits of establishments without franchises cannot be
regulated permanently because there is no law regulating their profits. The Dissent concludes that the permanent
reduction of total revenues or gross sales of business establishments without franchises is a taking of private
property under the power of eminent domain.
In making this argument, it is unfortunate that the Dissent quotes only a portion of the ponencia

The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment
of these corporations considering that they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments
from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of
a given establishment but only to the class of senior citizens. x x x 116
The above paragraph, in full, states
The subject regulation may be said to be similar to, but with substantial distinctions from, price control or rate of
return on investment control laws which are traditionally regarded as police power measures. These laws generally
regulate public utilities or industries/enterprises imbued with public interest in order to protect consumers from
exorbitant or unreasonable pricing as well as temper corporate greed by controlling the rate of return on investment
of these corporations considering that they have a monopoly over the goods or services that they provide to the
general public. The subject regulation differs therefrom in that (1) the discount does not prevent the establishments
from adjusting the level of prices of their goods and services, and (2) the discount does not apply to all customers of
a given establishment but only to the class of senior citizens. Nonetheless, to the degree material to the
resolution of this case, the 20% discount may be properly viewed as belonging to the category of price
regulatory measures which affects the profitability of establishments subjected thereto. (Emphasis supplied)
The point of this paragraph is to simply show that the State has, in the past, regulated prices and profits of business
establishments. In other words, this type of regulatory measures is traditionally recognized as police power measures
so that the senior citizen discount may be considered as a police power measure as well. What is more, the
substantial distinctions between price and rate of return on investment control laws vis--vis the senior citizen
discount law provide greater reason to uphold the validity of the senior citizen discount law. As previously discussed,
the ability to adjust prices allows the establishment subject to the senior citizen discount to prevent or mitigate any
reduction of profits or income/gross sales arising from the giving of the discount. In contrast, establishments subject
to price and rate of return on investment control laws cannot adjust prices accordingly.
Certainly, there is no intention to say that price and rate of return on investment control laws are the justification for
the senior citizen discount law. Not at all. The justification for the senior citizen discount lawis the plenary powers of
Congress. The legislative power to regulate business establishments is broad and covers a wide array of areas and
subjects. It is well within Congress legislative powers to regulate the profits or income/gross sales of industries and
enterprises, even those without franchises. For what are franchises but mere legislative enactments?
There is nothing in the Constitution that prohibits Congress from regulating the profits or income/gross sales of
industries and enterprises without franchises. On the contrary, the social justice provisions of the Constitution enjoin
the State to regulate the acquisition, ownership, use, and disposition of property and its increments. 117 This may
cover the regulation of profits or income/gross sales of all businesses, without qualification, to attain the objective of
diffusing wealth in order to protect and enhance the right of all the people to human dignity.118 Thus, under the social
justice policy of the Constitution, business establishments may be compelled to contribute to uplifting the plight of
vulnerable or marginalized groups in our society provided that the regulation is not arbitrary, oppressive or
confiscatory, or is not in breach of some specific constitutional limitation.
When the Dissent, therefore, states that the profits of private establishments which are non-franchisees cannot be
regulated permanently, and there is no such law regulating their profits permanently, 119 it is assuming what it ought
to prove. First, there are laws which, in effect, permanently regulate profits or income/gross sales of establishments
without franchises, and RA 9257 is one such law. And, second, Congress can regulate such profits or income/gross
sales because, as previously noted, there is nothing in the Constitution to prevent it from doing so. Here, again, it
must be emphasized that petitioners failed to present any proof to show that the effects of the assailed law on their
operations has been unreasonable, oppressive or confiscatory.
The permanent regulation of profits or income/gross sales of business establishments, even those without
franchises, is not as uncommon as the Dissent depicts it to be.
For instance, the minimum wage law allows the State to set the minimum wage of employees in a given region or
geographical area. Because of the added labor costs arising from the minimum wage, a permanent reduction of

profits or income/gross sales would result, assuming that the employer does not increase the prices of his goods or
services. To illustrate, suppose it costs a company P5.00 to produce a product and it sells the same at P10.00 with a
50% profit margin. Later, the State increases the minimum wage. As a result, the company incurs greater labor costs
so that it now costs P7.00 to produce the same product. The profit per product of the company would be reduced to
P3.00 with a profit margin of 30%. The net effect would be the same as in the earlier example of granting a 20%
senior citizen discount. As can be seen, the minimum wage law could, likewise, lead to a permanent reduction of
profits. Does this mean that the minimum wage law should, likewise, be declared unconstitutional on the mere plea
that it results in a permanent reduction of profits? Taking it a step further, suppose the company decides to increase
the price of its product in order to offset the effects of the increase in labor cost; does this mean that the minimum
wage law, following the reasoning of the Dissent, is unconstitutional because the consuming public is effectively
made to subsidize the wage of a group of laborers, i.e., minimum wage earners?
The same reasoning can be adopted relative to the examples cited by the Dissent which, according to it, are valid
police power regulations. Article 157 of the Labor Code, Sections 19 and 18 of the Social Security Law, and Section
7 of the Pag-IBIG Fund Law would effectively increase the labor cost of a business establishment. This would, in
turn, be integrated as part of the cost of its goods or services. Again, if the establishment does not increase its prices,
the net effect would be a permanent reduction in its profits or income/gross sales. Following the reasoning of the
Dissent that any form of permanent taking of private property (including profits or income/gross sales) 120 is an
exercise of eminent domain that requires the State to pay just compensation, 121 then these statutory provisions
would, likewise, have to be declared unconstitutional. It does not matter that these benefits are deemed part of the
employees legislated wages because the net effect is the same, that is, it leads to higher labor costs and a
permanent reduction in the profits or income/gross sales of the business establishments. 122
The point then is this most, if not all, regulatory measures imposed by the State on business establishments
impact, at some level, the latters prices and/or profits or income/gross sales. 123 If the Court were to sustain the
Dissents theory, then a wholesale nullification of such measures would inevitably result. The police power of the
State and the social justice provisions of the Constitution would, thus, be rendered nugatory.
There is nothing sacrosanct about profits or income/gross sales. This, we made clear in Carlos Superdrug
Corporation:124
Police power as an attribute to promote the common good would be diluted considerably if on the mere plea of
petitioners that they will suffer loss of earnings and capital, the questioned provision is invalidated. Moreover, in the
absence of evidence demonstrating the alleged confiscatory effect of the provision in question, there is no basis for
its nullification in view of the presumption of validity which every law has in its favor.
xxx
The Court is not oblivious of the retail side of the pharmaceutical industry and the competitive pricing component of
the business. While the Constitution protects property rights, petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the operations of a business which may result in an
impairment of property rights in the process.
Moreover, the right to property has a social dimension. While Article XIII of the Constitution provides the precept for
the protection of property, various laws and jurisprudence, particularly on agrarian reform and the regulation of
contracts and public utilities, continuously serve as a reminder that the right to property can be relinquished upon the
command of the State for the promotion of public good.
Undeniably, the success of the senior citizens program rests largely on the support imparted by petitioners and the
other private establishments concerned. This being the case, the means employed in invoking the active participation
of the private sector, in order to achieve the purpose or objective of the law, is reasonably and directly related.
Without sufficient proof that Section 4(a) of R.A. No. 9257 is arbitrary, and that the continued implementation of the
same would be unconscionably detrimental to petitioners, the Court will refrain from quashing a legislative act. 125
In conclusion, we maintain that the correct rule in determining whether the subject regulatory measure has amounted
to a taking under the power of eminent domain is the one laid down in Alalayan v. National Power
Corporation126 and followed in Carlos Superdrug Corporation127 consistent with long standing principles in police
power and eminent domain analysis. Thus, the deprivation or reduction of profits or income/gross sales must be

clearly shown to be unreasonable, oppressive or confiscatory. Under the specific circumstances of this case, such
determination can only be made upon the presentation of competent proof which petitioners failed to do. A law, which
has been in operation for many years and promotes the welfare of a group accorded special concern by the
Constitution, cannot and should not be summarily invalidated on a mere allegation that it reduces the profits or
income/gross sales of business establishments.
WHEREFORE, the Petition is hereby DISMISSED for lack of merit.chanRoblesvirtualLawlibrary
EN BANC
G.R. No. L-10405

December 29, 1960

WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner-appellant,

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

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

because its members were made to believe that the projected feeder roads in question were "public roads and not
private streets of a private subdivision"'; that, "in order to give a semblance of legality, when there is absolutely none,
to the aforementioned appropriation", respondents Zulueta executed on December 12, 1953, while he was a member
of the Senate of the Philippines, an alleged deed of donation copy of which is annexed to the petition of the
four (4) parcels of land constituting said projected feeder roads, in favor of the Government of the Republic of the
Philippines; that said alleged deed of donation was, on the same date, accepted by the then Executive Secretary;
that being subject to an onerous condition, said donation partook of the nature of a contract; that, such, said donation
violated the provision of our fundamental law prohibiting members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is unconstitutional, as well as null and voidab
initio, for the construction of the projected feeder roads in question with public funds would greatly enhance or
increase the value of the aforementioned subdivision of respondent Zulueta, "aside from relieving him from the
burden of constructing his subdivision streets or roads at his own expense"; that the construction of said projected
feeder roads was then being undertaken by the Bureau of Public Highways; and that, unless restrained by the court,
the respondents would continue to execute, comply with, follow and implement the aforementioned illegal provision
of law, "to the irreparable damage, detriment and prejudice not only to the petitioner but to the Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared null and void; that the
alleged deed of donation of the feeder roads in question be "declared unconstitutional and, therefor, illegal"; that a
writ of injunction be issued enjoining the Secretary of Public Works and Communications, the Director of the Bureau
of Public Works and Highways and Jose C. Zulueta from ordering or allowing the continuance of the abovementioned feeder roads project, and from making and securing any new and further releases on the aforementioned
item of Republic Act No. 920, and the disbursing officers of the Department of Public Works and Highways from
making any further payments out of said funds provided for in Republic Act No. 920; and that pending final hearing
on the merits, a writ of preliminary injunction be issued enjoining the aforementioned parties respondent from making
and securing any new and further releases on the aforesaid item of Republic Act No. 920 and from making any
further payments out of said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal capacity to sue", and that
the petition did "not state a cause of action". In support to this motion, respondent Zulueta alleged that the Provincial
Fiscal of Rizal, not its provincial governor, should represent the Province of Rizal, pursuant to section 1683 of the
Revised Administrative Code; that said respondent is " not aware of any law which makes illegal the appropriation of
public funds for the improvements of . . . private property"; and that, the constitutional provision invoked by petitioner
is inapplicable to the donation in question, the same being a pure act of liberality, not a contract. The other
respondents, in turn, maintained that petitioner could not assail the appropriation in question because "there is no
actual bona fide case . . . in which the validity of Republic Act No. 920 is necessarily involved" and petitioner "has not
shown that he has a personal and substantial interest" in said Act "and that its enforcement has caused or will cause
him a direct injury."
Acting upon said motions to dismiss, the lower court rendered the aforementioned decision, dated October 29, 1953,
holding that, since public interest is involved in this case, the Provincial Governor of Rizal and the provincial fiscal
thereof who represents him therein, "have the requisite personalities" to question the constitutionality of the disputed
item of Republic Act No. 920; that "the legislature is without power appropriate public revenues for anything but a
public purpose", that the instructions and improvement of the feeder roads in question, if such roads where private
property, would not be a public purpose; that, being subject to the following condition:
The within donation is hereby made upon the condition that the Government of the Republic of the
Philippines will use the parcels of land hereby donated for street purposes only and for no other purposes
whatsoever; it being expressly understood that should the Government of the Republic of the Philippines

violate the condition hereby imposed upon it, the title to the land hereby donated shall, upon such violation,
ipso facto revert to the DONOR, JOSE C. ZULUETA. (Emphasis supplied.)
which is onerous, the donation in question is a contract; that said donation or contract is "absolutely forbidden by the
Constitution" and consequently "illegal", for Article 1409 of the Civil Code of the Philippines, declares in existence
and void from the very beginning contracts "whose cause, objector purpose is contrary to law, morals . . . or public
policy"; that the legality of said donation may not be contested, however, by petitioner herein, because his "interest
are not directly affected" thereby; and that, accordingly, the appropriation in question "should be upheld" and the
case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the aforementioned motions to
dismiss, which as much, are deemed to have admitted hypothetically the allegations of fact made in the petition of
appellant herein. According to said petition, respondent Zulueta is the owner of several parcels of residential land
situated in Pasig, Rizal, and known as the Antonio Subdivision, certain portions of which had been reserved for the
projected feeder roads aforementioned, which, admittedly, were private property of said respondent when Republic
Act No. 920, appropriating P85,000.00 for the "construction, reconstruction, repair, extension and improvement" of
said roads, was passed by Congress, as well as when it was approved by the President on June 20, 1953. The
petition further alleges that the construction of said roads, to be undertaken with the aforementioned appropriation of
P85,000.00, would have the effect of relieving respondent Zulueta of the burden of constructing his subdivision
streets or roads at his own expenses, 1and would "greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in question was "clearly for a
private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. 2However, respondent Zulueta
contended, in his motion to dismiss that:
A law passed by Congress and approved by the President can never be illegal because Congress is the
source of all laws . . . Aside from the fact that movant is not aware of any law which makes illegal the
appropriation of public funds for the improvement of what we, in the meantime, may assume as private
property . . . (Record on Appeal, p. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the nature of the Government
established under the Constitution of the Republic of the Philippines and the system of checks and balances
underlying our political structure. Moreover, it is refuted by the decisions of this Court invalidating legislative
enactments deemed violative of the Constitution or organic laws. 3
As regards the legal feasibility of appropriating public funds for a public purpose, the principle according to Ruling
Case Law, is this:
It is a general rule that the legislature is without power to appropriate public revenue for anything but a public
purpose. . . . It is the essential character of the direct object of the expenditure which must determine its
validity as justifying a tax, and not the magnitude of the interest to be affected nor the degree to which the
general advantage of the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental to the public or to the state, which results from the promotion of private interest and the
prosperity of private enterprises or business, does not justify their aid by the use public money. (25 R.L.C.
pp. 398-400; Emphasis supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:

In accordance with the rule that the taxing power must be exercised for public purposes only,
discussedsupra sec. 14, money raised by taxation can be expended only for public purposes and not for the
advantage of private individuals. (85 C.J.S. pp. 645-646; emphasis supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
Generally, under the express or implied provisions of the constitution, public funds may be used only for
public purpose. The right of the legislature to appropriate funds is correlative with its right to tax, and, under
constitutional provisions against taxation except for public purposes and prohibiting the collection of a tax for
one purpose and the devotion thereof to another purpose, no appropriation of state funds can be made for
other than for a public purpose.
xxx

xxx

xxx

The test of the constitutionality of a statute requiring the use of public funds is whether the statute is
designed to promote the public interest, as opposed to the furtherance of the advantage of individuals,
although each advantage to individuals might incidentally serve the public. (81 C.J.S. pp. 1147; emphasis
supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from being patently sound, are a
necessary corollary to our democratic system of government, which, as such, exists primarily for the promotion of the
general welfare. Besides, reflecting as they do, the established jurisprudence in the United States, after whose
constitutional system ours has been patterned, said views and jurisprudence are, likewise, part and parcel of our own
constitutional law.lawphil.net
This notwithstanding, the lower court felt constrained to uphold the appropriation in question, upon the ground that
petitioner may not contest the legality of the donation above referred to because the same does not affect him
directly. This conclusion is, presumably, based upon the following premises, namely: (1) that, if valid, said donation
cured the constitutional infirmity of the aforementioned appropriation; (2) that the latter may not be annulled without a
previous declaration of unconstitutionality of the said donation; and (3) that the rule set forth in Article 1421 of the
Civil Code is absolute, and admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or approval, not upon
events occurring, or acts performed, subsequently thereto, unless the latter consists of an amendment of the organic
law, removing, with retrospective operation, the constitutional limitation infringed by said statute. Referring to the
P85,000.00 appropriation for the projected feeder roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, latter on, became Republic Act 920, was passed by
Congress, or, when said bill was approved by the President and the disbursement of said sum became effective, or
on June 20, 1953 (see section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to be
constructed belonged then to respondent Zulueta, the result is that said appropriation sought a private purpose, and
hence, was null and void. 4 The donation to the Government, over five (5) months after the approval and effectivity of
said Act, made, according to the petition, for the purpose of giving a "semblance of legality", or legalizing, the
appropriation in question, did not cure its aforementioned basic defect. Consequently, a judicial nullification of said
donation need not precede the declaration of unconstitutionality of said appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to exceptions. For instance,
the creditors of a party to an illegal contract may, under the conditions set forth in Article 1177 of said Code, exercise
the rights and actions of the latter, except only those which are inherent in his person, including therefore, his right to

the annulment of said contract, even though such creditors are not affected by the same, except indirectly, in the
manner indicated in said legal provision.
Again, it is well-stated that the validity of a statute may be contested only by one who will sustain a direct injury in
consequence of its enforcement. Yet, there are many decisions nullifying, at the instance of taxpayers, laws providing
for the disbursement of public funds, 5upon the theory that "the expenditure of public funds by an officer of the State
for the purpose of administering an unconstitutional act constitutes a misapplication of such funds," which may be
enjoined at the request of a taxpayer. 6Although there are some decisions to the contrary, 7the prevailing view in the
United States is stated in the American Jurisprudence as follows:
In the determination of the degree of interest essential to give the requisite standing to attack the
constitutionality of a statute, the general rule is that not only persons individually affected, but alsotaxpayers,
have sufficient interest in preventing the illegal expenditure of moneys raised by taxation and may therefore
question the constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761; emphasis
supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs. Mellon (262 U.S. 447),
insofar as federal laws are concerned, upon the ground that the relationship of a taxpayer of the U.S. to its Federal
Government is different from that of a taxpayer of a municipal corporation to its government. Indeed, under
the composite system of government existing in the U.S., the states of the Union are integral part of the Federation
from an international viewpoint, but, each state enjoys internally a substantial measure of sovereignty, subject to the
limitations imposed by the Federal Constitution. In fact, the same was made by representatives ofeach state of the
Union, not of the people of the U.S., except insofar as the former represented the people of the respective States,
and the people of each State has, independently of that of the others, ratified said Constitution. In other words, the
Federal Constitution and the Federal statutes have become binding upon the people of the U.S. in consequence of
an act of, and, in this sense, through the respective states of the Union of which they are citizens. The peculiar
nature of the relation between said people and the Federal Government of the U.S. is reflected in the election of its
President, who is chosen directly, not by the people of the U.S., but by electors chosen by each State, in such
manner as the legislature thereof may direct (Article II, section 2, of the Federal Constitution).lawphi1.net
The relation between the people of the Philippines and its taxpayers, on the other hand, and the Republic of the
Philippines, on the other, is not identical to that obtaining between the people and taxpayers of the U.S. and its
Federal Government. It is closer, from a domestic viewpoint, to that existing between the people and taxpayers of
each state and the government thereof, except that the authority of the Republic of the Philippines over the people of
the Philippines is more fully direct than that of the states of the Union, insofar as the simple and unitarytype of our
national government is not subject to limitations analogous to those imposed by the Federal Constitution upon the
states of the Union, and those imposed upon the Federal Government in the interest of the Union. For this reason,
the rule recognizing the right of taxpayers to assail the constitutionality of a legislation appropriating local or state
public funds which has been upheld by the Federal Supreme Court (Crampton vs.Zabriskie, 101 U.S. 601) has
greater application in the Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a land by the Province of
Tayabas, two (2) taxpayers thereof were allowed to intervene for the purpose of contesting the price being paid to the
owner thereof, as unduly exorbitant. It is true that in Custodio vs. President of the Senate (42 Off. Gaz., 1243), a
taxpayer and employee of the Government was not permitted to question the constitutionality of an appropriation for
backpay of members of Congress. However, in Rodriguez vs. Treasurer of the Philippines and
Barredo vs. Commission on Elections (84 Phil., 368; 45 Off. Gaz., 4411), we entertained the action of taxpayers

impugning the validity of certain appropriations of public funds, and invalidated the same. Moreover, the reason that
impelled this Court to take such position in said two (2) cases the importance of the issues therein raised is
present in the case at bar. Again, like the petitioners in the Rodriguez and Barredo cases, petitioner herein is not
merely a taxpayer. The Province of Rizal, which he represents officially as its Provincial Governor, is our most
populated political subdivision, 8and, the taxpayers therein bear a substantial portion of the burden of taxation, in the
Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently justify petitioners action
in contesting the appropriation and donation in question; that this action should not have been dismissed by the
lower court; and that the writ of preliminary injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to the lower court for
further proceedings not inconsistent with this decision, with the costs of this instance against respondent Jose C.
Zulueta. It is so ordered.

EN BANC
G.R. No. L-7859

December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme
Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue, defendant-appellee.
Ernesto J. Gonzaga for appellant.
Office of the Solicitor General Ambrosio Padilla, First Assistant Solicitor General Guillermo E. Torres and Solicitor
Felicisimo R. Rosete for appellee.

REYES, J.B L., J.:

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by
Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our
industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the
"eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed
"to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to
stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United
States market and the imposition of the export taxes."
In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a
graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of
lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise
a tax equivalent to the difference between the money value of the rental or consideration collected and the
amount representing 12 per centum of the assessed value of such land.
According to section 6 of the law
SEC. 6. All collections made under this Act shall accrue to a special fund in the Philippine Treasury, to be
known as the 'Sugar Adjustment and Stabilization Fund,' and shall be paid out only for any or all of the
following purposes or to attain any or all of the following objectives, as may be provided by law.
First, to place the sugar industry in a position to maintain itself, despite the gradual loss of the preferntial
position of the Philippine sugar in the United States market, and ultimately to insure its continued existence
notwithstanding the loss of that market and the consequent necessity of meeting competition in the free
markets of the world;
Second, to readjust the benefits derived from the sugar industry by all of the component elements thereof
the mill, the landowner, the planter of the sugar cane, and the laborers in the factory and in the field so
that all might continue profitably to engage therein;lawphi1.net

Third, to limit the production of sugar to areas more economically suited to the production thereof; and
Fourth, to afford labor employed in the industry a living wage and to improve their living and working
conditions: Provided, That the President of the Philippines may, until the adjourment of the next regular
session of the National Assembly, make the necessary disbursements from the fund herein created (1) for
the establishment and operation of sugar experiment station or stations and the undertaking of researchers
(a) to increase the recoveries of the centrifugal sugar factories with the view of reducing manufacturing
costs, (b) to produce and propagate higher yielding varieties of sugar cane more adaptable to different
district conditions in the Philippines, (c) to lower the costs of raising sugar cane, (d) to improve the buying
quality of denatured alcohol from molasses for motor fuel, (e) to determine the possibility of utilizing the other
by-products of the industry, (f) to determine what crop or crops are suitable for rotation and for the utilization
of excess cane lands, and (g) on other problems the solution of which would help rehabilitate and stabilize
the industry, and (2) for the improvement of living and working conditions in sugar mills and sugar
plantations, authorizing him to organize the necessary agency or agencies to take charge of the expenditure
and allocation of said funds to carry out the purpose hereinbefore enumerated, and, likewise, authorizing the
disbursement from the fund herein created of the necessary amount or amounts needed for salaries, wages,
travelling expenses, equipment, and other sundry expenses of said agency or agencies.
Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma,
seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under
section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void,
being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public
purpose for which a tax may be constitutioally levied. The action having been dismissed by the Court of First
Instance, the plaintifs appealed the case directly to this Court (Judiciary Act, section 17).
The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth Act No. 567 is
a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6 (heretofore quoted in full), will
show that the tax is levied with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. In other words, the act is primarily an exercise of the police power.
This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar
occupying a leading position among its export products; that it gives employment to thousands of laborers in fields
and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange
needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its
promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent
for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and
in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be
readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain
(Sligh vs. Kirkwood, 237 U. S. 52, 59 L. Ed. 835; Johnson vs. State ex rel. Marey, 99 Fla. 1311, 128 So. 853; Maxcy
Inc. vs. Mayo, 103 Fla. 552, 139 So. 121).
As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida
The protection of a large industry constituting one of the great sources of the state's wealth and therefore
directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to
such an extent by public interests as to be within the police power of the sovereign. (128 Sp. 857).

Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern,
it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and
expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of
reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no
relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally
valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment.
Taxation may be made the implement of the state's police power (Great Atl. & Pac. Tea Co. vs. Grosjean, 301 U. S.
412, 81 L. Ed. 1193; U. S. vs. Butler, 297 U. S. 1, 80 L. Ed. 477; M'Culloch vs. Maryland, 4 Wheat. 316, 4 L. Ed.
579).
That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint;
indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure
of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of
taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation" (Carmichael vs. Southern Coal & Coke Co., 301 U. S. 495,
81 L. Ed. 1245, citing numerous authorities, at p. 1251).
From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization
Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is
being protected. It may be that other industries are also in need of similar protection; that the legislature is not
required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate
Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown
because there are other instances to which it might have been applied;" and that "the legislative authority, exerted
within its proper field, need not embrace all the evils within its reach" (N. L. R. B. vs. Jones & Laughlin Steel Corp.
301 U. S. 1, 81 L. Ed. 893).
Even from the standpoint that the Act is a pure tax measure, it cannot be said that the devotion of tax money to
experimental stations to seek increase of efficiency in sugar production, utilization of by-products and solution of
allied problems, as well as to the improvements of living and working conditions in sugar mills or plantations, without
any part of such money being channeled directly to private persons, constitutes expenditure of tax money for private
purposes, (compare Everson vs. Board of Education, 91 L. Ed. 472, 168 ALR 1392, 1400).
The decision appealed from is affirmed, with costs against appellant. So ordered.

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

PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I,
dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro
V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer
of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial
Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc.,
represented by Director Pedro Borgonia located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the
amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated
to apply for the payment of the back taxes and for the redemption of the property in question, if the
amount is less than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia,
who represents the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be
returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare;
Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice
of Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties
amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate of
Title No. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal
Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the
sale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare,

then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The
certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the
complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal
Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98100) to the complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31,
1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon.
Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale.
Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of
P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its
questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into
the following agreed stipulation of facts:
1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is
admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone
who is actually holding the position of Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon
located in Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be
served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school
under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon,
amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at
public auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to
defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his
favor was issued by the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this stipulation of facts will be the
subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation
of facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a
Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein
they opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the school building
and school lot used for educational purposes of the Abra Valley College, Inc., are exempted from the payment of
taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner school for
residential purposes. He thus ruled for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal (Per
Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for
review on certiorari with prayer for preliminary injunction before this Court, which petition was filed on August 17,
1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58).
Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND
BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE
PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER
ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY
TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE
COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use
thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution.
Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision
of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in question which were subjected to
seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the
permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the inlaws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being
used and rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as
Annex "8" (Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph
3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for
"Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409,
otherwise known as the Assessment Law, provides:
The following are exempted from real property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, scientific or educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide,
norm and standard to determine tax exemption, and not the mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while
it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still
these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for
religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in
the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that
the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of
the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the
incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of
lodging place, also qualifies for exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs.
Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop
of the Missionary District, 14 SCRA 991 [1965], thus

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

CITY ASSESSOR OF CEBU

CITY,
Petitioner,

G.R. No. 152904

ASSOCIATION OF BENEVOLA
Promulgated:
DE CEBU, INC.,
Respondent.
June 8, 2007
x-----------------------------------------------------------------------------------------x
DECISION
VELASCO, JR., J.:
Is a medical arts center built by a hospital to house its doctors a separate commercial establishment or an
appurtenant to the hospital? This is the core issue to be resolved in the instant petition where petitioner insists on a
35% assessment rate on the building which he considers commercial in nature contrary to respondents position that
it is a special real property entitled to a 10% assessment rate for purposes of realty tax.
The Case
This Petition for Review on Certiorari [1] under Rule 45 assails the October 31, 2001 Decision [2] of the Court of
Appeals (CA) in CA-G.R. SP No. 62548, which affirmed the January 24, 2000 Decision [3] and October 25, 2000
Resolution[4] of the Central Board of Assessment Appeals (CBAA); and the March 11, 2002 Resolution [5] of the same
court denying petitioners Motion for Reconsideration. [6] The CBAA upheld the February 10, 1999 Decision of the
Local Board of Assessment Appeals (LBAA), which overturned the 35% assessment rate of respondent Cebu City
Assessor and ruled that petitioner is entitled to a 10% assessment.
The Facts
Respondent Association of Benevola de Cebu, Inc. is a non-stock, non-profit organization organized under
the laws of the Republic of thePhilippines and is the owner of Chong Hua Hospital (CHH) in Cebu City. In the late
1990s, respondent constructed the CHH Medical Arts Center (CHHMAC). Thereafter, an April 17, 1998 Certificate
of Occupancy[7] was issued to the center with a classification of Commercial [Clinic].
Petitioner City Assessor of Cebu City assessed the CHHMAC building under Tax Declaration (TD) No. 97
GR-04-024-02529 as commercial with a market value of PhP 28,060,520 and an assessed value of PhP 9,821,180
at the assessment level of 35% for commercial buildings, and not at the 10% special assessment currently imposed
for CHH and its other separate buildingsthe CHHs Dietary and Records Departments.
Thus, respondent filed its September 15, 1998 letter-petition with the Cebu City LBAA for reconsideration,
asserting that CHHMAC is part of CHH and ought to be imposed the same special assessment level of 10% with that
of CHH. On September 25, 1998, respondent formally filed its appeal with the LBAA which was docketed as Case
No. 4406, TD No. 97 GR-04-024-02529 entitled Association Benevola de Cebu, Inc. v. City Assessor.
In the September 30, 1998 Order, the LBAA directed petitioner to conduct an ocular inspection of the subject
property and to submit a report on the scheduled date of hearing. In the October 7, 1998 hearing, the parties were
required to submit their respective position papers.
In its position paper, petitioner argued that CHHMAC is a newly constructed five-storey building situated
about 100 meters away from CHH and, based on actual inspection, was ascertained that it is not a part of the CHH
building but a separate building which is actually used as commercial clinic/room spaces for renting out to physicians
and, thus, classified as commercial. Petitioner contended that in turn the medical specialists in CHHMAC charge
consultation fees for patients who consult for diagnosis and relief of bodily ailment together with the ancillary (or
support) services which include the areas of anesthesia, radiology, pathology, and more. Petitioner concluded the

foregoing set up to be ultimately geared for commercial purposes, and thus having the proper classification as
commercial under Building Permit No. B01-9750087 pursuant to Section 10 of the Local Assessment Regulations
No. 1-92 issued by the Department of Finance (DOF).
On the other hand, respondent contended in its position paper that CHHMAC building is actually, directly,
and exclusively part of CHH and should have a special assessment level of 10% as provided under City Tax
Ordinance LXX. Respondent asserted that the CHHMAC building is similarly situated as the buildings of CHH,
housing its Dietary and Records Departments, are completely separate from the main CHH building and are imposed
the 10% special assessment level. In fine, respondent argued that the CHHMAC, though not actually indispensable,
is nonetheless incidental and reasonably necessary to CHHs operations.
The Ruling of the Local Board of Assessment Appeals
On February 10, 1999, the LBAA rendered a Decision,[8] the dispositive portion of which reads:
WHEREFORE, premises considered, the appealed decision imposing a thirty five (35)
percent assessment level of TD No. 97 GR-04-024-02529 on the Chong Hua Hospital
Medical Arts building is reversed and set aside and other [sic] one issued declaring that the
building is entitled to a ten (10) percent assessment level.
In reversing the ruling of petitioner City Assessor of Cebu City, the LBAA reasoned that it is of public
knowledge that hospitals have plenty of spaces leased out to medical practitioners, which is both an accepted and
desirable fact; thus, respondents claim is not disputed that such is a must for a tertiary hospital like CHH. The LBAA
held that it is inconsequential that a separate building was constructed for that purpose pointing out that departments
or services of other institutions and establishments are also not always housed in the same building.
Thus, the LBAA pointed to the fact that respondents Dietary and Records Departments which are housed in
separate buildings were similarly imposed with CHH the special assessment level of 10%, ratiocinating in turn that
there is no reason therefore why a higher level would be imposed for CHHMAC as it is similarly situated with the
Dietary and Records Departments of the CHH.
The Ruling of the Central Board of Assessment Appeals
Aggrieved, petitioner filed its March 15, 1999 Notice of Appeal[9] and March 16, 1999 Appeal
Memorandum[10] before the CBAA Visayas Field Office which docketed the appeal as CBAA Case No. V-15, In Re:
LBAA Case No. 4406, TD No. 97 GR-04-024-02529 entitled City Assessor of Cebu City v. Local Board of
Assessment Appeals of Cebu City and Associacion Benevola de Cebu, Inc. On June 3, 1999, respondent filed its
Answer[11] to petitioners appeal.
Subsequently, on January 24, 2000, the CBAA rendered a Decision [12] affirming in toto the LBAA Decision
and resolved the issue of whether the subject building of CHHMAC is part and parcel of CHH. It agreed with the
above disquisition of the LBAA that it is a matter of public knowledge that hospitals lease out spaces to its accredited
medical practitioners, and in particular it is of public knowledge that before the CHHMAC was constructed, the
accredited doctors of CHH were housed in the main hospital building of CHH. Moreover, citing Herrera v. Quezon
City Board of Assessment Appeals[13] later applied in Abra Valley College, Inc. v. Aquino,[14] the CBAA held that the
fact that the subject building is detached from the main hospital building is of no consequence as the exemption in
favor of property used exclusively for charitable or educational purposes is not only limited to property actually
indispensable to the hospital, but also extends to facilities which are incidental and reasonably necessary for the
accomplishment of such purposes.
Through its October 25, 2000 Resolution,[15] the CBAA denied petitioners Motion for Reconsideration. [16]
The Ruling of the Court of Appeals

Not satisfied, petitioner brought before the CA a petition for review [17] under Rule 43 of the Rules of Court,
docketed as CA-G.R. SP No. 62548, ascribing error on the CBAA in dismissing his appeal and in affirming the
February 10, 1999 Decision[18] of the LBAA.
On October 31, 2001, the appellate court rendered the assailed Decision [19] which affirmed the January 24,
2000 Decision of the CBAA. It agreed with the CBAA that CHHMAC is part and parcel of CHH in line with the ruling
in Herrera[20] on what the term appurtenant thereto means. Thus, the CA held that the facilities and utilities of
CHHMAC are undoubtedly necessary and indispensable for the CHH to achieve its ultimate purpose.
The CA likewise ruled that the fact that rentals are paid by CHH accredited doctors and medical specialists
for spaces in CHHMAC has no bearing on its classification as a hospital since CHHMAC serves also as a place for
medical check-up, diagnosis, treatment, and care for its patients as well as a specialized out-patient department of
CHH where treatment and diagnosis are done by accredited medical specialists in their respective fields of
anesthesia, radiology, pathology, and more.
The appellate court also applied Secs. 215 and 216 of the Local Government Code (Republic Act No. 7160)
which classify lands, buildings, and improvements actually, directly, and exclusively used for hospitals as special
cases of real property and not as commercial. Thus, CHHMAC being an integral part of CHH is not commercial but
special and should be imposed the 10% special assessment, the same as CHH, instead of the 35% for commercial
establishments.
Lastly, the CA pointed out that courts generally will not interfere in matters which are addressed to the sound
discretion of the government agencies entrusted with the regulation of activities under their special technical
knowledge and trainingtheir findings and conclusions are accorded not only respect but even finality.
Through the assailed March 11, 2002 Resolution,[21] the CA denied petitioners Motion for Reconsideration.
The Issues
Hence, before us is the instant petition with the solitary issue, as follows:
WHETHER OR NOT THERE IS SERIOUS ERROR BY THE COURT OF APPEALS IN
AFFIRMING THE DECISION OF THE CENTRAL BOARD OF ASSESSMENT APPEALS
THAT THE NEW BUILDING CHONG HUA HOSPITAL AND MEDICAL ARTS CENTER
(CHHMAC) IS AN ESSENTIAL PART OF THE OLD BUILDING KNOWN AS CHONG HUA
HOSPITAL. IN THE NEGATIVE, WHETHER OR NOT THE NEW BUILDING IS LIABLE TO
PAY THE 35% ASSESSMENT LEVEL. AND WHETHER OR NOT THE COURT OF
APPEALS COULD INTERFERE WITH THE FINDINGS OF THE CENTRAL BOARD OF
ASSESSMENT APPEALS, A GOVERNMENT AGENCY HAVING SPECIAL TECHNICAL
KNOWLEDGE AND TRAINING ON THE MATTER SUBJECT OF THE PRESENT CASE.[22]
The Courts Ruling
The petition is devoid of merit.
It is petitioners strong belief that the subject building, CHHMAC, which is built on a rented land and situated
about 100 meters from the main building of CHH, is not an extension nor an integral part of CHH and thus should not
enjoy the 10% special assessment. Petitioner anchors the classification of CHHMAC as commercial, first, on Sec.
10 of Local Assessment Regulations No. 1-92 issued by the DOF, which provides:
SEC. 10. Actual use of Real Property as basis of Assessment.Real Property shall be
classified, valued and assessed on the basis of its actual use regardless of where located,
whoever owns it, and whoever uses it. (Sec. 217, R.A. 7160)
A. Actual use refers to the purpose for which the property is principally or predominantly
utilized by the person in possession of the property. (Sec. 199 (b), R.A. 7160)

Secondly, the result of the inspection on subject building by the City Assessors inspection team shows that
CHHMAC is a commercial establishment based on the following: (1) CHHMAC is exclusively intended for lease to
doctors; (2) there are neither operating rooms nor beds for patients; and (3) the doctors renting the spaces earn
income from the patients who avail themselves of their services. Thus, petitioner argues that CHHMAC is principally
and actually used for lease to doctors, and respondent as owner of CHHMAC derives rental income from it; hence,
CHHMAC was built and is intended for profit and functions commercially.
Moreover, petitioner asserts that CHHMAC is not part of the CHH main building as it is exclusively used as
private clinics of physicians who pay rental fees to petitioner. And while the private clinics might be considered
facilities, they are not incidental to nor reasonably necessary for the accomplishment of the hospitals purposes as
CHH can still function and accomplish its purpose without the existence of CHHMAC. In addition, petitioner
contends that the Abra Valley College, Inc.[23] ruling is not applicable to the instant case for schools, the subject
matter in said case, are already entitled to special assessment. Besides, petitioner points CHHMAC is not among
the facilities mentioned in said case. Further, petitioner argues that CHHMAC is not in the same category as nurses
homes and housing facilities for the hospital staff as these are clearly not for profit, that is, not commercial, and are
clearly incidental and reasonably necessary for the hospitals purposes.
We are not persuaded.
A careful review of the records compels us to affirm the assailed CA Decision as we find no reversible error
for us to reverse or alter it.
Chong Hua Hospital Medical Arts Center is an integral part of Chong Hua Hospital
We so hold that CHHMAC is an integral part of CHH.
It is undisputed that the doctors and medical specialists holding clinics in CHHMAC are those duly accredited
by CHH, that is, they are consultants of the hospital and the ones who can treat CHHs patients confined in it. This
fact alone takes away CHHMAC from being categorized as commercial since a tertiary hospital like CHH is
required by law to have a pool of physicians who comprises the required medical departments in various medical
fields. As aptly pointed out by respondent:
Chong Hua Hospital is a duly licensed tertiary hospital and is covered by Dept. of Health
(DOH) Adm. Order No. 68-A and the 1989 Revised Rules and Regulations governing the
registration, licensure and operation of hospitals in the Philippines. Under Sec. 6, sub-sec.
6.3, it is mandated by law, that respondent appellee in order to retain its classification as a
TERTIARY HOSPITAL, must be fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other licensed physicians
rendering services in the field of medicine, pediatrics, obstetrics and gynecology, surgery, and
their sub-specialties, ICCU and ancillary services which is precisely the function of the Chong
Hua Hospital Medical Arts Center.[24]
Sec. 6.3, Administrative Order No. (AO) 68-A, Series of 1989, Revised Rules and Regulations Governing the
Registration, Licensure and Operation of Hospitals in the Philippines pertinently provides:
Tertiary Hospital is fully departmentalized and equipped with the service
capabilities needed to support certified medical specialists and other licensed physicians
rendering services in the field of Medicine, Pediatrics, Obstetrics and Gynecology, Surgery,
their subspecialties and ancillary services. (Emphasis supplied.)

Moreover, AO 68-A likewise provides what clinic service and medical ancillary service are, thus:
11.3.2 Clinical ServiceThe medical services to patients shall be performed by the
medical staff appointed by the governing body of the institution. x x x
11.3.3 Medical Ancillary ServiceThese are support services which include Anesthesia
Department, Pathology Department, Radiology Department, Out-Patient Department (OPD),
Emergency Service, Dental, Pharmacy, Medical Records and Medical Social Services.
Based on these provisions, these physicians holding offices or clinics in CHHMAC, duly appointed or
accredited by CHH, precisely fulfill and carry out their roles in the hospitals services for its patients through the
CHHMAC. The fact that they are holding office in a separate building, like at CHHMAC, does not take away the
essence and nature of their services vis--vis the over-all operation of the hospital and the benefits to the hospitals
patients. Given what the law requires, it is clear that CHHMAC is an integral part of CHH.
These accredited physicians normally hold offices within the premises of the hospital; in which case there is
no question as to the conduct of their business in the ambit of diagnosis, treatment and/or confinement of
patients. This was the case before 1998 and before CHHMAC was built. Verily, their transfer to a more spacious
and, perhaps, convenient place and location for the benefit of the hospitals patients does not remove them from
being an integral part of the overall operation of the hospital.
Conversely, it would have been different if CHHMAC was also open for non-accredited physicians, that is,
any medical practitioner, for then respondent would be running a commercial building for lease only to doctors which
would indeed subject the CHHMAC to the commercial level of 35% assessment.
Moreover, the CHHMAC, being hundred meters away from the CHH main building, does not denigrate from
its being an integral part of the latter. As aptly applied by the CBAA, the Herrera ruling on what constitutes property
exempt from taxation is indeed applicable in the instant case, thus:
Moreover, the exemption in favor of property used exclusively for charitable or
educational purposes is not limited to property actually indispensable therefore (Cooley on
Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably
necessary for the accomplishment of said purposes, such as, in the case of hospitals, a
school for training nurses, a nurses home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents (84 C.J.S., 621), such as
athletic fields, including a farm used for the inmates of the institution (Cooley on Taxation,
Vol. 2, p. 1430).[25]
Verily, being an integral part of CHH, CHHMAC should be under the same special assessment level of as
that of the former.
The CHHMAC facility is definitely incidental to and reasonably necessary for the operations
of Chong Hua Hospital
Given our discussion above, the CHHMAC facility, while seemingly not indispensable to the operations of
CHH, is definitely incidental to and reasonably necessary for the operations of the hospital. Considering the legal
requirements and the ramifications of the medical and clinical operations that have been transferred to the CHHMAC
from the CHH main building in light of the accredited physicians transfer of offices in 1998 after the CHHMAC
building was finished, it cannot be gainsaid that the services done in CHHMAC are indispensable and essential to
the hospitals operation.

For one, as found by the appellate court, the CHHMAC facility is primarily used by the hospitals accredited
physicians to perform medical check-up, diagnosis, treatment, and care of patients. For another, it also serves as a
specialized outpatient department of the hospital.
Indubitably, the operation of the hospital is not only for confinement and surgical operations where hospital
beds and operating theaters are required. Generally, confinement is required in emergency cases and where a
patient necessitates close monitoring. The usual course is that patients have to be diagnosed, and then treatment
and follow-up consultations follow or are required. Other cases may necessitate surgical operations or other medical
intervention and confinement. Thus, the more the patients, the more important task of diagnosis, treatment, and care
that may or may not require eventual confinement or medical operation in the CHHMAC.
Thus, the importance of CHHMAC in the operation of CHH cannot be over-emphasized nor
disputed. Clearly, it plays a key role and provides critical support to hospital operations.
Charging rentals for the offices used by its accredited physicians cannot be equated to a commercial
venture
Finally, respondents charge of rentals for the offices and clinics its accredited physicians occupy cannot be
equated to a commercial venture, which is mainly for profit.
Respondents explanation on this point is well taken. First, CHHMAC is only for its consultants or accredited
doctors and medical specialists. Second, the charging of rentals is a practical necessity: (1) to recoup the
investment cost of the building, (2) to cover the rentals for the lot CHHMAC is built on, and (3) to maintain the
CHHMAC building and its facilities. Third, as correctly pointed out by respondent, it pays the proper taxes for its
rental income. And, fourth, if there is indeed any net income from the lease income of CHHMAC, such does not
inure to any private or individual person as it will be used for respondents other charitable projects.
Given the foregoing arguments, we fail to see any reason why the CHHMAC building should be classified as
commercial and be imposed the commercial level of 35% as it is not operated primarily for profit but as an integral
part of CHH. The CHHMAC, with operations being devoted for the benefit of the CHHs patients, should be accorded
the 10% special assessment.
In this regard, we point with approbation the appellate courts application of Sec. 216 in relation with Sec.
215 of the Local Government Code on the proper classification of the subject CHHMAC building as special and not
commercial. Secs. 215 and 216 pertinently provide:
SEC. 215. Classes of Real Property for Assessment Purposes.For purposes of
assessment, real property shall be classified as residential, agricultural, commercial,
industrial, mineral, timberland or special.
xxxx
SEC. 216. Special Classes of Real Property.All lands, buildings, and other
improvements thereon actually, directly and exclusively used for hospitals, cultural or
scientific purposes, and those owned and used by local water districts, and governmentowned or controlled corporations rendering essential public services in the supply and
distribution of water and/or generation and transmission of electric power shall be classified
as special. (Emphasis supplied.)
Thus, applying the above provisos in line with City Tax Ordinance LXX of Cebu City, the 10% special
assessment should be imposed for the CHHMAC building which should be classified as special.
WHEREFORE, the petition is DENIED for lack of merit and the October 31, 2001 Decision and March 11,
2002 Resolution of the CA are hereby AFFIRMED. No pronouncement as to costs.

CHAMBER OF REAL

G.R. No. 160756

ESTATE AND BUILDERS

ASSOCIATIONS, INC.,
Petitioner,

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents.

Promulgated:

CORONA, J.:
In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 [2] and the revenue
regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner
of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 998. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no
realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on
the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital

assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT
on the gross selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has not yet
been determined. They contravene the equal protection clause as well because the CWT is being levied upon real
estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2%
of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).
[4]
If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT
over the normal tax shall be carried forward and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1)

Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end
of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for
the taxable year.

(2)

Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward
and credited against the normal income tax for the three (3) immediately succeeding
taxable years.

(3)

Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because of force majeure, or because
of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that shall
define the terms and conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.

(4)

Gross Income Defined. For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term gross income shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

For trading or merchandising concern, cost of goods sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods to
the place where the goods are actually sold including insurance while the goods are in
transit.

For a manufacturing concern, cost of goods manufactured and sold shall

include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means
gross receipts less sales returns, allowances, discounts and cost of services. Cost of
services shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks,
cost of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). [5] The pertinent portions
thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1)

Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, normal income tax means the
income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at
32% effective January 1, 2000 and thereafter.

xxx

(2)

xxx

xxx

Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income
tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual
basis and credited against the normal income tax for the three (3) immediately
succeeding taxable years.

xxx

xxx

xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated
RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes. [6] Under Section 2.57.2(J) of
RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by
persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital assets, sold by
an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the following schedule

Those which are exempt from a

withholding tax at source as prescribed in
Sec. 2.57.5 of these regulations.

xx
x
x

xx
xxx

Exempt
Gross
selling price shall
mean
the
consideration
stated
in
the
sales document
or the fair market
value determined
in
accordance
with Section 6 (E)
of the Code, as
amended,
whichever
is
higher. In
an
exchange,
the
fair market value
of the property
received
in
exchange,
as
determined in the
Income
Tax
Regulations shall
be used.

With a selling price of five hundred

thousand pesos (P500,000.00) or less.
1.5%

With a selling price of more than five

hundred thousand pesos (P500,000.00)
but not more than two million pesos
(P2,000,000.00).

3.0%

With selling price of more than two

million
pesos
(P2,000,000.00)
5.0%

Where
the consideration
or part thereof is
payable on installment, no withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

the tax shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx

xxx

xxx

(J)

Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary
asset. - A [CWT] based on the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or exchange of real property, other
than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance
with the following schedule:

Where the seller/transferor is exempt from

[CWT] in accordance with Sec. 2.57.5 of these
regulations.
Exempt

Upon the following values of real property, where

the seller/transferor is habitually engaged in the
real estate business.

With a selling price of Five Hundred Thousand

Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00).

xxx

xxx

5.0%

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is
higher. In an exchange, the fair market value of the property received in exchange shall be
considered as the consideration.

xxx

xxx

xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the
year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment
sale not on the installment plan (that is, payments in the year of sale exceed 25%
of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first
installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than capital asset has
been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such
transfers and conveyances have been reported and the taxes thereof have been duly paid: [7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges subject to the
creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR]
or his duly authorized representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.
On February 11, 2003, RR No. 7-2003 [8] was promulgated, providing for the guidelines in determining whether
a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real
property. - Gains/Income derived from sale, exchange, or other disposition of real
properties shall, unless otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are classified as capital assets or
ordinary assets;

a.

In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

xxx

(ii)

xxx

The sale of real property located in the Philippines, classified as

ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of
the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.

xxx

c.

xxx

xxx

xxx

In the case of domestic corporations.

xxx

(ii)

xxx

xxx

The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to
the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of
the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx

xxx

xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied:
(1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be
ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the
question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality
must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of
advisory opinion that does not really settle legal issues. [10]

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which
is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. [11] On the
other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect
on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated
in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question
once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege
any material interest or any wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. [16] In Holy Spirit
Homeowners Association, Inc. v. Defensor,[17] we held that the association had legal standing because its members
stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no
dispute that the individual members of petitioner association are residents of the NGC. As such they
are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements
of an actual case, ripeness or legal standing when paramount public interest is involved. [19] The questioned MCIT
and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance to society make it proper for us to
take cognizance of this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true
income of corporations.[21] It was devised as a relatively simple and effective revenue-raising instrument compared to
the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make
some minimum contribution to the support of the public sector. The congressional deliberations on this are
illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement. [22]

Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to make a reasonable contribution to the
public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through underdeclaration of income or over-deduction of expenses otherwise called tax shelters. [23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in
and year out and paid no tax. So, if the corporation has been losing for the past five years to ten
years, then that corporation has no business to be in business. It is dead. Why continue if you are
losing year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.
[24]

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and its tax
payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion
and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and
other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the
law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year
in which the corporation commenced its operations. [25] This grace period allows a new business to stabilize first and
make its ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years. [27]

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing
countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of
room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions
and exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed
this method. Okay, those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions
of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account. [31] Thus, pegging the tax base of the MCIT to a corporations
gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized
gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The
exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens
obliges it to promote public interest and the common good. [33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely legislative. [35] Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. [36] It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields
the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against
whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no
limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it. [37] Nevertheless, it is circumscribed by constitutional
limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life,
liberty or property without due process of law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure [39] when it amounts to a confiscation
of property.[40] But in the same case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.
[41]
There must be a factual foundation to such an unconstitutional taint. [42] This merely adheres to the authoritative

doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.[43]

Petitioner is correct in saying that income is distinct from capital. [44] Income means all the wealth which flows
into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in
time while income denotes a flow of wealth during a definite period of time. [45] Income is gain derived and severed
from capital.[46] For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words,
it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in
the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the capital is not
being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax,
and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross
income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate. [49]

Statutes
taxing
the gross "receipts,"
"earnings,"
or
"income" of
particular
corporations are found in many jurisdictions. Tax thereon is generally held to be within the power
of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a
lower tax rate but a broader tax base. [51] Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the interpretation of these laws. [52] Although our
MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are

comparable. On the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit
stated inOkin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. [54]

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation. [55]

American courts have also emphasized that Congress has the power to condition, limit or deny deductions
from gross income in order to arrive at the net that it chooses to tax. [56] This is because deductions are a matter of
legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of
the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor
does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. [58] Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. [59] The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms. [60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E)

[MCIT] on Domestic Corporations.

(1)
Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal
income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its
gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount
of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net
income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which
posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.
Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.
[61]

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends
that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with
grave abuse of discretion amounting to lack of jurisdiction and patently in contravention of law [62] because they
ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the
sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per
transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment
of the net income at the end of the taxable period. [63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER
THE COLLECTION OF CWT ON SALES OF REAL
PROPERTY CONSIDERED AS ORDINARY ASSETS
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject
to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the
law they seek to apply and implement.[64] It is well-settled that an administrative agency cannot amend an act of
Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws. [66] The withholding tax system was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection
of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns

and third, to improve the governments cash flow. [67] This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more
complicated means and remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any
person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424
which provides:

SEC. 57. Withholding of Tax at Source.

xxx

(B)

xxx

xxx

Withholding of Creditable Tax at Source. The [Secretary] may, upon the

recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to
the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on
the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME

TAX OF INDIVIDUALS OR CORPORATIONS ENGAGED IN
THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business
income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible
tax obligation. [69] They are installments on the annual tax which may be due at the end of the taxable year. [70]

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the end of the taxable year. [71] Precisely, Section 4(a)(ii)
and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains
to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property.

- Gains/Income derived from sale, exchange, or other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether
the subject properties are classified as capital assets or ordinary assets;

xxx

xxx

xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and nonresident aliens engaged in trade or business in the Philippines;

xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)
(1) of the Code, as the case may be, based on net taxable income.

xxx

xxx

xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 298], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In
lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the
taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality
and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is
he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such
a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY

ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.[72]

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets
are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as
follows:

FWT

CWT

a) The amount of income tax

withheld by the withholding agent is
constituted as a full and final
payment of the income tax due from
the payee on the said income.

a) Taxes withheld on certain income

payments are intended to equal or at
least approximate the tax due of the
payee on said income.

b)The liability for payment of the

tax rests primarily on the payor as a
withholding agent.

b) Payee of income is required to

report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more than
the tax due.

c) The payee is not required to file

an income tax return for the
particular income.[73]

c) The income recipient is still required

to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of
the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the
provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax
involving ordinary assets.[75]

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way
as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income
payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section
57(B) on CWT should also be limited to passive income:

SEC. 57.

Withholding of Tax at Source.

(A)
Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)
(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall
be withheld by payor-corporation and/or person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.

(B)
Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation
of the [CIR], require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by
law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the taxable
year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to
natural or juridical persons, residing in the Philippines. There is no requirement that this income be passive
income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income
other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the
same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section
57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed by an administrative agency, the agency
may adopt any reasonable method to carry out its functions. [77] Similarly, considering that the law uses the general
term income, the Secretary and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts[78] in view of the rule-making authority given to those who formulate them and their specific expertise in their
respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives
its members of their property without due process of law because, in their line of business, gain is never assured by
mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or
earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to the power to tax. [79]The CWT
does not impose new taxes nor does it increase taxes. [80] It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund. [81] This argument is misleading.
The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT
as a method of collecting the tax.

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain
loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to
the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and prohibitive
up-front regulatory fees from at least 20 government agencies. [82]

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches of the
government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate
entity. Sales on installment are taxed on a per-installment basis. [83] Petitioners desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is
being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not
similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a
real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis. The only difference is that goods produced by
the real estate business are house and lot units. [84]

Again, we disagree.

The equal protection clause under the Constitution means that no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in
like circumstances.[85] Stated differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of
the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class. [86]

The taxing power has the authority to make reasonable classifications for purposes of taxation. [87] Inequalities
which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.
[88]
The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize
that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition
of the CWT, is not their production processes but the prices of their goods sold and the number of transactions
involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds
of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the
withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.[89] As already discussed, the Secretary may adopt any reasonable method to carry out its
functions.[90] Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales
of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to
CWT for their transactions with said 5,000 corporations. [91]

SECTION 2.58.2 OF RR NO. 2-98

IMPLEMENTS SECTION 58 OF RA 8424

MERELY

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost
exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring

real property shall be effected by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfer has been reported, and the capital
gains or [CWT], if any, has been paid: xxxx any violation of this provision by the Register of

Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis
supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in the world
understand is the income tax.[92] When a party questions the constitutionality of an income tax measure, it has
contend not only with Einsteins observation but also with the vast and well-established jurisprudence in support
the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden
convincing the Court that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

to
to
of
of

G.R. No. L-45987

May 5, 1939

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
CAYAT, defendant-appellant.
Sinai Hamada y Cario for appellant.
Office of the Solicitor-General Tuason for appellee.
MORAN, J.:
Prosecuted for violation of Act No. 1639 (secs. 2 and 3), the accused, Cayat, a native of Baguio, Benguet, Mountain
Province, was sentenced by the justice of the peace court of Baguio to pay a fine of five pesos (P5) or suffer
subsidiary imprisonment in case of insolvency. On appeal of the Court of First Instance, the following information was
filed against him:
That on or about the 25th day of January, 1937, in the City of Baguio, Commonwealth of the Philippines, and
within the jurisdiction of this court, the above-named accused, Cayat, being a member of the non-Christian
tribes, did then and there willfully, unlawfully, and illegally receive, acquire, and have in his possession and
under his control or custody, one bottle of A-1-1 gin, an intoxicating liquor, other than the so-called native
wines and liquors which the members of such tribes have been accustomed themselves to make prior to the
passage of Act No. 1639.
Accused interposed a demurrer which was overruled. At the trial, he admitted all the facts alleged in the information,
but pleaded not guilty to the charge for the reasons adduced in his demurrer and submitted the case on the
pleadings. The trial court found him guilty of the crime charged and sentenced him to pay a fine of fifty pesos (P50)
or supper subsidiary imprisonment in case of insolvency. The case is now before this court on appeal. Sections 2 and
3 of Act No. 1639 read:
SEC. 2. It shall be unlawful for any native of the Philippine Islands who is a member of a non-Christian tribe
within the meaning of the Act Numbered Thirteen hundred and ninety-seven, to buy, receive, have in his
possession, or drink any ardent spirits, ale, beer, wine, or intoxicating liquors of any kind, other than the socalled native wines and liquors which the members of such tribes have been accustomed themselves to
make prior to the passage of this Act, except as provided in section one hereof; and it shall be the duty of
any police officer or other duly authorized agent of the Insular or any provincial, municipal or township
government to seize and forthwith destroy any such liquors found unlawfully in the possession of any
member of a non-Christian tribe.
SEC. 3. Any person violating the provisions of section one or section two of this Act shall, upon conviction
thereof, be punishable for each offense by a fine of not exceeding two hundred pesos or by imprisonment for
a term not exceeding six months, in the discretion of the court.
The accused challenges the constitutionality of the Act on the following grounds:
(1) That it is discriminatory and denies the equal protection of the laws;
(2) That it is violative of the due process clause of the Constitution: and.

(3) That it is improper exercise of the police power of the state.

Counsel for the appellant holds out his brief as the "brief for the non-Christian tribes." It is said that as these less
civilized elements of the Filipino population are "jealous of their rights in a democracy," any attempt to treat them with
discrimination or "mark them as inferior or less capable rate or less entitled" will meet with their instant challenge. As
the constitutionality of the Act here involved is questioned for purposes thus mentioned, it becomes imperative to
examine and resolve the issues raised in the light of the policy of the government towards the non-Christian tribes
adopted and consistently followed from the Spanish times to the present, more often with sacrifice and tribulation but
always with conscience and humanity.
As early as 1551, the Spanish Government had assumed an unvarying solicitous attitude toward these inhabitants,
and in the different laws of the Indies, their concentration in so-called "reducciones" (communities) have been
persistently attempted with the end in view of according them the "spiritual and temporal benefits" of civilized life.
Throughout the Spanish regime, it had been regarded by the Spanish Government as a sacred "duty to conscience
and humanity" to civilize these less fortunate people living "in the obscurity of ignorance" and to accord them the "the
moral and material advantages" of community life and the "protection and vigilance afforded them by the same laws."
(Decree of the Governor-General of the Philippines, Jan. 14, 1887.) This policy had not been deflected from during
the American period. President McKinley in his instructions to the Philippine Commission of April 7, 1900, said:
In dealing with the uncivilized tribes of the Islands, the Commission should adopt the same course followed
by Congress in permitting the tribes of our North American Indians to maintain their tribal organization and
government, and under which many of those tribes are now living in peace and contentment, surrounded by
civilization to which they are unable or unwilling to conform. Such tribal government should, however, be
subjected to wise and firm regulation; and, without undue or petty interference, constant and active effort
should be exercised to prevent barbarous practices and introduce civilized customs.
Since then and up to the present, the government has been constantly vexed with the problem of determining "those
practicable means of bringing about their advancement in civilization and material prosperity." (See, Act No. 253.)
"Placed in an alternative of either letting them alone or guiding them in the path of civilization," the present
government "has chosen to adopt the latter measure as one more in accord with humanity and with the national
conscience." (Memorandum of Secretary of the Interior, quoted in Rubi vs. Provincial Board of Mindoro, 39 Phil., 660,
714.) To this end, their homes and firesides have been brought in contact with civilized communities through a
network of highways and communications; the benefits of public education have to them been extended; and more
lately, even the right of suffrage. And to complement this policy of attraction and assimilation, the Legislature has
passed Act No. 1639 undoubtedly to secure for them the blessings of peace and harmony; to facilitate, and not to
mar, their rapid and steady march to civilization and culture. It is, therefore, in this light that the Act must be
understood and applied.
It is an established principle of constitutional law that the guaranty of the equal protection of the laws is not equal
protection of the laws is not violated by a legislation based on reasonable classification. And the classification, to be
reasonable, (1) must rest on substantial distinctions; (2) must be germane to the purposes of the law; (3) must not be
limited to existing conditions only; and (4) must apply equally to all members of the same class. (Borgnis vs.Falk Co.,
133 N.W., 209; Lindsley vs. Natural Carbonic Gas Co., 220 U.S. 61; 55 Law. ed., Rubi vs. Provincial Board of
Mindoro, 39 Phil., 660; People and Hongkong & Shanghai Banking Corporation vs. Vera and Cu Unjieng, 37 Off. Gaz
., 187.)
Act No. 1639 satisfies these requirements. The classification rests on real and substantial, not merely imaginary or
whimsical, distinctions. It is not based upon "accident of birth or parentage," as counsel to the appellant asserts, but

upon the degree of civilization and culture. "The term 'non-Christian tribes' refers, not to religious belief, but, in a way,
to the geographical area, and, more directly, to natives of the Philippine Islands of a low grade of civilization, usually
living in tribal relationship apart from settled communities." (Rubi vs. Provincial Board of Mindoro, supra.) This
distinction is unquestionably reasonable, for the Act was intended to meet the peculiar conditions existing in the nonChristian tribes. The exceptional cases of certain members thereof who at present have reached a position of cultural
equality with their Christian brothers, cannot affect the reasonableness of the classification thus established.
That it is germane to the purposes of law cannot be doubted. The prohibition "to buy, receive, have in his possession,
or drink any ardent spirits, ale, beer, wine, or intoxicating liquors of any kind, other than the so-called native wines
and liquors which the members of such tribes have been accustomed themselves to make prior to the passage of
this Act.," is unquestionably designed to insure peace and order in and among the non-Christian tribes. It has been
the sad experience of the past, as the observations of the lower court disclose, that the free use of highly intoxicating
liquors by the non-Christian tribes have often resulted in lawlessness and crimes, thereby hampering the efforts of
the government to raise their standard of life and civilization.
The law is not limited in its application to conditions existing at the time of its enactment. It is intended to apply for all
times as long as those conditions exist. The Act was not predicated, as counsel for appellant asserts, upon the
assumption that the non-Christians are "impermeable to any civilizing influence." On the contrary, the Legislature
understood that the civilization of a people is a slow process and that hand in hand with it must go measures of
protection and security.
Finally, that the Act applies equally to all members of the class is evident from a perusal thereof. That it may be unfair
in its operation against a certain number non-Christians by reason of their degree of culture, is not an argument
against the equality of its application.
Appellants contends that that provision of the law empowering any police officer or other duly authorized agent of the
government to seize and forthwith destroy any prohibited liquors found unlawfully in the possession of any member
of the non-Christian tribes is violative of the due process of law provided in the Constitution. But this provision is not
involved in the case at bar. Besides, to constitute due process of law, notice and hearing are not always necessary.
This rule is especially true where much must be left to the discretion of the administrative officials in applying a law to
particular cases. (McGehee, Due Process of Law p. 371, cited with approval in Rubivs. Provincial Board of
Mindoro, supra.) Due process of law means simply: (1) that there shall be a law prescribed in harmony with the
general powers of the legislative department of the government; (2) that it shall be reasonable in its operation; (3)
that it shall be enforced according to the regular methods of procedure prescribed; and (4) that it shall be applicable
alike to all citizens of the state or to all of the class. (U.S. vs. Ling Su Fan, 10 Phil., 104, affirmed on appeal by the
United States Supreme Court, 218 U.S., 302: 54 Law. ed., 1049.) Thus, a person's property may be seized by the
government in payment of taxes without judicial hearing; or property used in violation of law may be confiscated
(U.S. vs. Surla, 20 Phil., 163, 167), or when the property constitutes corpus delicti, as in the instant case
(Moreno vs. Ago Chi, 12 Phil., 439, 442).
Neither is the Act an improper exercise of the police power of the state. It has been said that the police power is the
most insistent and least limitable of all powers of the government. It has been aptly described as a power coextensive with self-protection and constitutes the law of overruling necessity. Any measure intended to promote the
health, peace, morals, education and good order of the people or to increase the industries of the state, develop its
resources and add to its wealth and prosperity (Barbier vs. Connolly, 113 U.S., 27), is a legitimate exercise of the
police power, unless shown to be whimsical or capricious as to unduly interfere with the rights of an individual, the
same must be upheld.

Act No. 1639, as above stated, is designed to promote peace and order in the non-Christian tribes so as to remove
all obstacles to their moral and intellectual growth and, eventually, to hasten their equalization and unification with the
rest of their Christian brothers. Its ultimate purpose can be no other than to unify the Filipino people with a view to a
greater Philippines.
The law, then, does not seek to mark the non-Christian tribes as "an inferior or less capable race." On the contrary,
all measures thus far adopted in the promotion of the public policy towards them rest upon a recognition of their
inherent right to equality in tht enjoyment of those privileges now enjoyed by their Christian brothers. But as there
can be no true equality before the law, if there is, in fact, no equality in education, the government has endeavored,
by appropriate measures, to raise their culture and civilization and secure for them the benefits of their progress, with
the ultimate end in view of placing them with their Christian brothers on the basis of true equality. It is indeed
gratifying that the non-Christian tribes "far from retrograding, are definitely asserting themselves in a competitive
world," as appellant's attorney impressively avers, and that they are "a virile, up-and -coming people eager to take
their place in the world's social scheme." As a matter of fact, there are now lawyers, doctors and other professionals
educated in the best institutions here and in America. Their active participation in the multifarious welfare activities of
community life or in the delicate duties of government is certainly a source of pride and gratification to people of the
Philippines. But whether conditions have so changed as to warrant a partial or complete abrogation of the law, is a
matter which rests exclusively within the prerogative of the National Assembly to determine. In the constitutional
scheme of our government, this court can go no farther than to inquire whether the Legislature had the power to
enact the law. If the power exists, and we hold it does exist, the wisdom of the policy adopted, and the adequacy
under existing conditions of the measures enacted to forward it, are matters which this court has no authority to pass
upon. And, if in the application of the law, the educated non-Christians shall incidentally suffer, the justification still
exists in the all-comprehending principle of salus populi suprema est lex. When the public safety or the public morals
require the discontinuance of a certain practice by certain class of persons, the hand of the Legislature cannot be
stayed from providing for its discontinuance by any incidental inconvenience which some members of the class may
suffer. The private interests of such members must yield to the paramount interests of the nation (Cf. Boston Beer
Co. vs. Mass., 97 U.S., 25; 24 law. ed., 989).
Judgment is affirmed, with costs against appellant.

EN BANC

CHAMBER OF REAL

G.R. No. 160756

ESTATE AND BUILDERS

ASSOCIATIONS, INC.,
Petitioner,

Present:
MENDOZA, JJ.

THE HON. EXECUTIVE

SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 [2] and the revenue
regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and those involving
creditable withholding taxes.[3]
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner
of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 998. Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no
realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on
the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue regulations are
contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital
assets and second, respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT
on the gross selling price or fair market value of the real properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has not yet
been determined. They contravene the equal protection clause as well because the CWT is being levied upon real
estate enterprises but not on other business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2%
of its gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).
[4]
If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT
over the normal tax shall be carried forward and credited against the normal income tax for the three immediately
succeeding taxable years. Section 27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1)

Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end
of the taxable year, as defined herein, is hereby imposed on a corporation taxable
under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this Section for
the taxable year.

(2)

Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal
income tax as computed under Subsection (A) of this Section shall be carried forward

and credited against the normal income tax for the three (3) immediately succeeding
taxable years.

(3)

Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because of force majeure, or because
of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that shall
define the terms and conditions under which he may suspend the imposition of the
[MCIT] in a meritorious case.

(4)

Gross Income Defined. For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term gross income shall mean gross sales less sales
returns, discounts and allowances and cost of goods sold. Cost of goods sold shall
include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

For trading or merchandising concern, cost of goods sold shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods to
the place where the goods are actually sold including insurance while the goods are in
transit.

For a manufacturing concern, cost of goods manufactured and sold shall

include all costs of production of finished goods, such as raw materials used, direct
labor and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means
gross receipts less sales returns, allowances, discounts and cost of services. Cost of
services shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee
benefits of personnel, consultants and specialists directly rendering the service and (B)
cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks,
cost of services shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E). [5] The pertinent portions
thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1)

Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the
fourth (4th) taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall be imposed whenever
such corporation has zero or negative taxable income or whenever the amount of
minimum corporate income tax is greater than the normal income tax due from such
corporation.

For purposes of these Regulations, the term, normal income tax means the
income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at
32% effective January 1, 2000 and thereafter.

xxx

(2)

xxx

xxx

Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income
tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual
basis and credited against the normal income tax for the three (3) immediately
succeeding taxable years.

xxx

xxx

xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated
RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes. [6] Under Section 2.57.2(J) of
RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than capital assets, by
persons residing in the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx

xxx

xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital assets, sold by
an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is
habitually engaged in the real estate business in accordance with the following schedule
Those which are exempt from a
withholding tax at source as prescribed in
Sec. 2.57.5 of these regulations.

xx
x
x

xx
xxx

Exempt

With a selling price of five hundred

thousand pesos (P500,000.00) or less.
1.5%

With a selling price of more than five

hundred thousand pesos (P500,000.00)
but not more than two million pesos
(P2,000,000.00).

3.0%

With selling price of more than two

million
pesos
(P2,000,000.00)

Gross
selling price shall
mean
the
consideration
stated
in
the
sales document
or the fair market
value determined
in
accordance
with Section 6 (E)
of the Code, as
amended,
whichever
is
higher. In
an
exchange,
the
fair market value
of the property
received
in
exchange,
as
determined in the
Income
Tax
Regulations shall
be used.

5.0%
Where
the consideration
or part thereof is
payable on installment, no withholding tax is required to be made on the periodic installment
payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

the tax shall be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx
(J)

xxx

xxx

Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary
asset. - A [CWT] based on the gross selling price/total amount of consideration or the
fair market value determined in accordance with Section 6(E) of the Code, whichever is
higher, paid to the seller/owner for the sale, transfer or exchange of real property, other
than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance
with the following schedule:

Where the seller/transferor is exempt from

[CWT] in accordance with Sec. 2.57.5 of these
regulations.
Exempt

Upon the following values of real property, where

the seller/transferor is habitually engaged in the
real estate business.

With a selling price of Five Hundred Thousand

Pesos (P500,000.00) or less.

1.5%

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).

3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00).

xxx

xxx

5.0%

xxx

Gross selling price shall remain the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is
higher. In an exchange, the fair market value of the property received in exchange shall be
considered as the consideration.

xxx

xxx

xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the
year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.

(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment
sale not on the installment plan (that is, payments in the year of sale exceed 25%
of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first
installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than capital asset has
been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such
transfers and conveyances have been reported and the taxes thereof have been duly paid: [7]

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges subject to the
creditable expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR]
or his duly authorized representative has certified that such transfers and conveyances have been
reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003 [8] was promulgated, providing for the guidelines in determining whether
a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real

property. - Gains/Income derived from sale, exchange, or other disposition of real

properties shall, unless otherwise exempt, be subject to applicable taxes imposed under
the Code, depending on whether the subject properties are classified as capital assets or
ordinary assets;

a.

In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

xxx

(ii)

xxx

The sale of real property located in the Philippines, classified as

ordinary assets, shall be subject to the [CWT] (expanded) under Sec.
2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of
the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.

xxx

c.

xxx

xxx

xxx

In the case of domestic corporations.

xxx

(ii)

xxx

xxx

The sale of land and/or building classified as ordinary asset and other real
property (other than land and/or building treated as capital asset), regardless of the
classification thereof, all of which are located in the Philippines, shall be subject to
the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of
the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.

xxx

xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

xxx

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied:
(1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be
ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the
question of constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality
must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been
assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did
petitioner allege that its members have shut down their businesses as a result of the payment of the
MCIT or CWT. Petitioner has raised concerns in mere abstract and hypothetical form without any
actual, specific and concrete instances cited that the assailed law and revenue regulations have
actually and adversely affected it. Lacking empirical data on which to base any conclusion, any
discussion on the constitutionality of the MCIT or CWT on sales of real property is essentially an
academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

adjudicating abstract issues. Otherwise, adjudication would be no different from the giving of
advisory opinion that does not really settle legal issues. [10]

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which
is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. [11] On the
other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect
on the individual challenging it.[12]

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated
in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question
once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege
any material interest or any wrong that it may suffer from the enforcement of [the assailed
provisions].[15]

Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. [16] In Holy Spirit
Homeowners Association, Inc. v. Defensor,[17] we held that the association had legal standing because its members
stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no
dispute that the individual members of petitioner association are residents of the NGC. As such they
are covered and stand to be either benefited or injured by the enforcement of the IRR, particularly as
regards the selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus,
petitioner association may assail those provisions in the IRR which it believes to be unfavorable to
the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury
arising from the enforcement of the IRR in that they have been disqualified and eliminated from the
selection process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements
of an actual case, ripeness or legal standing when paramount public interest is involved. [19] The questioned MCIT
and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance to society make it proper for us to
take cognizance of this petition.[20]

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true
income of corporations.[21] It was devised as a relatively simple and effective revenue-raising instrument compared to
the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make
some minimum contribution to the support of the public sector. The congressional deliberations on this are
illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of
reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing
in the cost of government. In this regard, the Tax Reform Act introduces for the first time a new
concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement. [22]

Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to make a reasonable contribution to the
public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through underdeclaration of income or over-deduction of expenses otherwise called tax shelters. [23]

Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed
the [MCIT]. Because from experience too, you have corporations which have been losing year in
and year out and paid no tax. So, if the corporation has been losing for the past five years to ten
years, then that corporation has no business to be in business. It is dead. Why continue if you are
losing year in and year out? So, we have this provision to avoid this type of tax shelters, Your Honor.
[24]

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and its tax
payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax evasion
and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and
other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the
law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year
in which the corporation commenced its operations. [25] This grace period allows a new business to stabilize first and
make its ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years. [27]

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.[28]

Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most developing

countries, particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed
out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of
room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before deductions
and exemptions. Of course the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed
this method. Okay, those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions
of the MCIT.[30]
MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other direct
expenses; other major expenditures, such as administrative and interest expenses which are equally necessary to
produce gross income, were not taken into account. [31] Thus, pegging the tax base of the MCIT to a corporations
gross income is tantamount to a confiscation of capital because gross income, unlike net income, is not realized
gain.[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The
exercise of taxing power derives its source from the very existence of the State whose social contract with its citizens
obliges it to promote public interest and the common good. [33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely legislative. [35] Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent
(rate), coverage (subjects) and situs (place) of taxation. [36] It has the authority to prescribe a certain tax at a specific
rate for a particular public purpose on persons or things within its jurisdiction. In other words, the legislature wields
the power to define what tax shall be imposed, why it should be imposed, how much tax shall be imposed, against
whom (or what) it shall be imposed and where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no
limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it. [37] Nevertheless, it is circumscribed by constitutional
limitations. At the same time, like any other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life,
liberty or property without due process of law. In Sison, Jr. v. Ancheta, et al.,[38] we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure [39] when it amounts to a confiscation
of property.[40] But in the same case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere allegation of arbitrariness by the taxpayer.
[41]
There must be a factual foundation to such an unconstitutional taint. [42] This merely adheres to the authoritative
doctrine that, where the due process clause is invoked, considering that it is not a fixed rule but rather a broad
standard, there is a need for proof of such persuasive character.[43]

Petitioner is correct in saying that income is distinct from capital. [44] Income means all the wealth which flows
into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in
time while income denotes a flow of wealth during a definite period of time. [45] Income is gain derived and severed
from capital.[46] For income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words,
it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in
the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the capital is not
being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax,
and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax
due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross
income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate. [49]

Statutes
taxing
the gross "receipts,"
"earnings,"
or
"income" of
particular
corporations are found in many jurisdictions. Tax thereon is generally held to be within the power
of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a
lower tax rate but a broader tax base. [51] Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the interpretation of these laws. [52] Although our
MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their implementation are
comparable. On the question of the AMTs constitutionality, the United States Court of Appeals for the Ninth Circuit
stated inOkin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx

xxx

xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional. [54]

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation. [55]

American courts have also emphasized that Congress has the power to condition, limit or deny deductions
from gross income in order to arrive at the net that it chooses to tax. [56] This is because deductions are a matter of
legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of
the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor
does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. [58] Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. [59] The party alleging the laws
unconstitutionality has the burden to demonstrate the supposed violations in understandable terms. [60]

RR 9-98 MERELY CLARIFIES

SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E)

[MCIT] on Domestic Corporations.

(1)
Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of [MCIT] is greater than the normal
income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its
business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its
gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount
of the net income. But the law also states that the MCIT is to be paid only if it is greater than the normal net
income. Obviously, it may well be the case that the MCIT would be less than the net income of the corporation which
posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.
Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant
bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue regulations on the
collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.
[61]

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends
that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with
grave abuse of discretion amounting to lack of jurisdiction and patently in contravention of law [62] because they
ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the
sale of real estate classified as ordinary assets and (b) they mandate the collection of income tax on a per
transaction basis, i.e., upon consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment
of the net income at the end of the taxable period. [63]

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER

THE COLLECTION OF CWT ON SALES OF REAL
PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject
to the limitation that the rules and regulations must not override, but must remain consistent and in harmony with, the
law they seek to apply and implement.[64] It is well-settled that an administrative agency cannot amend an act of
Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws. [66] The withholding tax system was devised for three primary reasons: first, to
provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection
of income tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns
and third, to improve the governments cash flow. [67] This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through more
complicated means and remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any
person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424
which provides:

SEC. 57. Withholding of Tax at Source.

xxx

(B)

xxx

xxx

Withholding of Creditable Tax at Source. The [Secretary] may, upon the

recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payorcorporation/persons as provided for by law, at the rate of not less than one percent
(1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to
the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on
the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME

TAX OF INDIVIDUALS OR CORPORATIONS ENGAGED IN
THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business
income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible
tax obligation. [69] They are installments on the annual tax which may be due at the end of the taxable year. [70]

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be
deducted from the net income tax payable by the taxpayer at the end of the taxable year. [71] Precisely, Section 4(a)(ii)
and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as ordinary assets remains
to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property.

- Gains/Income derived from sale, exchange, or other disposition of real properties shall unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether
the subject properties are classified as capital assets or ordinary assets;

xxx

xxx

xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and nonresident aliens engaged in trade or business in the Philippines;

xxx

xxx

xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the
[GSP] or current [FMV] as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)
(1) of the Code, as the case may be, based on net taxable income.

xxx

xxx

xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are
located in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 298], as amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In
lieu of the ordinary income tax, however, domestic corporations may become subject to the [MCIT]
under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the
taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be
entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality
and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is
he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said
withholding agents knowledge and privity are limited only to the particular transaction in which he is a party. In such
a case, his basis can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in
connection with the performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY

ASSETS AND CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain
presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at
source.[72]

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets
are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as
follows:

FWT

CWT

a) The amount of income tax

withheld by the withholding agent is
constituted as a full and final
payment of the income tax due from
the payee on the said income.

a) Taxes withheld on certain income

payments are intended to equal or at
least approximate the tax due of the
payee on said income.

b)The liability for payment of the

tax rests primarily on the payor as a
withholding agent.

b) Payee of income is required to

report the income and/or pay the
difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more than
the tax due.

c) The payee is not required to file

an income tax return for the
particular income.[73]

c) The income recipient is still required

to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of
the NIRC, as amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the
provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax
involving ordinary assets.[75]

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way
as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income
payable is the essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive
income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section
57(B) on CWT should also be limited to passive income:

SEC. 57.

Withholding of Tax at Source.

(A)
Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of income tax
return by certain income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2),
24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)
(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall
be withheld by payor-corporation and/or person and paid in the same manner and subject to the
same conditions as provided in Section 58 of this Code.

(B)
Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation
of the [CIR], require the withholding of a tax on the items of income payable to natural or
juridical persons, residing in the Philippines, by payor-corporation/persons as provided for by
law, at the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the taxable
year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations
primary purposes, the same is not passive income[76]

It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to
natural or juridical persons, residing in the Philippines. There is no requirement that this income be passive
income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses any income
other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the
same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section
57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed by an administrative agency, the agency
may adopt any reasonable method to carry out its functions. [77] Similarly, considering that the law uses the general
term income, the Secretary and CIR may specify the kinds of income the rules will apply to based on what is
feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and respect by the
courts[78] in view of the rule-making authority given to those who formulate them and their specific expertise in their
respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives
its members of their property without due process of law because, in their line of business, gain is never assured by
mere receipt of the selling price. As a result, the government is collecting tax from net income not yet gained or
earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes
withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to the power to tax. [79]The CWT
does not impose new taxes nor does it increase taxes. [80] It relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund. [81] This argument is misleading.
The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT
as a method of collecting the tax.

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay
labor wages, materials, cost of money and other expenses which can then save the entity from having to obtain
loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to
the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and prohibitive
up-front regulatory fees from at least 20 government agencies. [82]

Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners
complaints are essentially matters of policy best addressed to the executive and legislative branches of the
government. Besides, the CWT is applied only on the amounts actually received or receivable by the real estate

entity. Sales on installment are taxed on a per-installment basis. [83] Petitioners desire to utilize for its operational and
capital expenses money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is
being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not
similarly imposed a CWT on their sales, even if their manner of doing business is not much different from that of a
real estate enterprise. Like a manufacturing concern, a real estate business is involved in a continuous process of
production and it incurs costs and expenditures on a regular basis. The only difference is that goods produced by
the real estate business are house and lot units. [84]

Again, we disagree.

The equal protection clause under the Constitution means that no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same place and in
like circumstances.[85] Stated differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable
classification. Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of
the law; (3) not be limited to existing conditions only and (4) apply equally to all members of the same class. [86]

The taxing power has the authority to make reasonable classifications for purposes of taxation. [87] Inequalities
which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.
[88]
The real estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize
that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition
of the CWT, is not their production processes but the prices of their goods sold and the number of transactions
involved. The income from the sale of a real property is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds
of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the
withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.[89] As already discussed, the Secretary may adopt any reasonable method to carry out its
functions.[90] Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales
of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to
CWT for their transactions with said 5,000 corporations. [91]

SECTION 2.58.2 OF RR NO. 2-98

IMPLEMENTS SECTION 58 OF RA 8424

MERELY

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost
exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring

real property shall be effected by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfer has been reported, and the capital
gains or [CWT], if any, has been paid: xxxx any violation of this provision by the Register of
Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis
supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in the world to
understand is the income tax.[92] When a party questions the constitutionality of an income tax measure, it has to
contend not only with Einsteins observation but also with the vast and well-established jurisprudence in support of

the plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of
convincing the Court that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M. JUNGCO, petitioners, vs. COURT OF
APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION AND DEVELOPMENT
AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY, BUREAU OF INTERNAL REVENUE, CITY
TREASURER OF OLONGAPO and MUNICIPAL TREASURER OF SUBIC, ZAMBALES, respondents.
DECISION
PANGANIBAN, J.:
The constitutional right to equal protection of the law is not violated by an executive order, issued pursuant to
law, granting tax and duty incentives only to businesses and residents within the secured area of the Subic Special
Economic Zone and denying them to those who live within the Zone but outside such fenced-in territory. The
Constitution does not require absolute equality among residents. It is enough that all persons under like
circumstances or conditions are given the same privileges and required to follow the same obligations. In short, a
classification based on valid and reasonable standards does not violate the equal protection clause.
The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the Court of
Appeals Decision[1] promulgated on August 29, 1996, and Resolution [2] dated November 13, 1996, in CA-GR SP No.
37788.[3] The challenged Decision upheld the constitutionality and validity of Executive Order No. 97-A (EO 97-A),
according to which the grant and enjoyment of the tax and duty incentives authorized under Republic Act No. 7227
(RA 7227) were limited to the business enterprises and residents within the fenced-in area of the Subic Special
Economic Zone (SSEZ).
The assailed Resolution denied the petitioners motion for reconsideration.
The Facts

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227 entitled An Act
Accelerating the Conversion of Military Reservations Into Other Productive Uses, Creating the Bases Conversion
and Development Authority for this Purpose, Providing Funds Therefor and for Other Purposes. Section 12 thereof
created the Subic Special Economic Zone and granted thereto special privileges, as follows:
SEC. 12. Subic Special Economic Zone. -- Subject to the concurrence by resolution of the sangguniang
panlungsod of the City of Olongapo and the sangguniang bayan of the Municipalities of Subic, Morong and Hermosa,
there is hereby created a Special Economic and Free-port Zone consisting of the City of Olongapo and the
Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines and
the United States of America as amended, and within the territorial jurisdiction of the Municipalities of Morong and
Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic Zone whose metes and bounds
shall be delineated in a proclamation to be issued by the President of the Philippines. Within thirty (30) days after the
approval of this Act, each local government unit shall submit its resolution of concurrence to join the Subic Special
Economic Zone to the Office of the President. Thereafter, the President of the Philippines shall issue a proclamation
defining the metes and bounds of the zone as provided herein.
The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions
of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining,
industrial, commercial, financial and investment center to generate employment opportunities in and around the zone
and to attract and promote productive foreign investments;
(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring
free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as
well as provide incentives such as tax and duty-free importations of raw materials, capital and equipment. However,
exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the
Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Philippines;
(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and
national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the
gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to
the National Government, one percent (1%) each to the local government units affected by the declaration of the
zone in proportion to their population area, and other factors. In addition, there is hereby established a development
fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special
Economic Zone to be utilized for the development of municipalities outside the City of Olongapo and the Municipality
of Subic, and other municipalities contiguous to the base areas.
In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and future
shall be allowed and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other
financial institutions within the Subic Special Economic Zone;
(f) Banking and finance shall be liberalized with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than two
hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21) years of
age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall have the
freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in
Section 13 of this Act may also issue working visas renewable every two (2) years to foreign executives and other
aliens possessing highly technical skills which no Filipino within the Subic Special Economic Zone possesses, as
certified by the Department of Labor and Employment. The names of aliens granted permanent residence status and
working visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation
within thirty (30) days after issuance thereof;
(h) The defense of the zone and the security of its perimeters shall be the responsibility of the National Government
in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide and
establish its own security and fire-fighting forces; and

(i) Except as herein provided, the local government units comprising the Subic Special Economic Zone shall retain
their basic autonomy and identity. The cities shall be governed by their respective charters and the municipalities
shall operate and function in accordance with Republic Act No. 7160, otherwise known as the Local Government
Code of 1991.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97), clarifying the
application of the tax and duty incentives thus:
Section 1. On Import Taxes and Duties -- Tax and duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of
other goods into the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties
under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the Philippine
territory shall be subject to duties and taxes under relevant Philippine laws.
Section 2. On All Other Taxes. -- In lieu of all local and national taxes (except import taxes and duties), all business
enterprises in the SSEZ shall be required to pay the tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97-A), specifying
the area within which the tax-and-duty-free privilege was operative, viz.:
Section 1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only
completely tax and duty-free area in the SSEFPZ [Subic Special Economic and Free Port Zone]. Business
enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and duty-free. Consumption items, however, must be
consumed within the Secured Area. Removal of raw materials, capital goods, equipment and consumer items out of
the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual taxes and duties,
except as may be provided herein
On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO 97-A for allegedly
being violative of their right to equal protection of the laws. In a Resolution dated June 27, 1995, this Court referred
the matter to the Court of Appeals, pursuant to Revised Administrative Circular No. 1-95.
Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It delineated the
exact metes and bounds of the Subic Special Economic and Free Port Zone, pursuant to Section 12 of RA 7227.
Ruling of the Court of Appeals

Respondent Court held that there is no substantial difference between the provisions of EO 97-A and Section
12 of RA 7227. In both, the Secured Area is precise and well-defined as xxx the lands occupied by the Subic
Naval Base and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases Agreement
between the Philippines and the United States of America, as amended, xxx. The appellate court concluded that
such being the case, petitioners could not claim that EO 97-A is unconstitutional, while at the same time maintaining
the validity of RA 7227.

The court a quo also explained that the intention of Congress was to confine the coverage of the SSEZ to the
secured area and not to include the entire Olongapo City and other areas mentioned in Section 12 of the law. It
relied on the following deliberations in the Senate:
Senator Paterno. Thank you, Mr. President. My first question is the extent of the economic zone. Since this
will be a free port, in effect, I believe that it is important to delineate or make sure that the delineation will be quite
precise[. M]y question is: Is it the intention that the entire of Olongapo City, the Municipality of Subic and the
Municipality of Dinalupihan will be covered by the special economic zone or only portions thereof?
Senator Shahani. Only portions, Mr. President. In other words, where the actual operations of the free port
will take place.
Senator Paterno. I see. So, we should say, COVERING THE DESIGNATED PORTIONS OR CERTAIN
PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN to make it clear that it is not supposed to cover the
entire area of all of these territories.
Senator Shahani. So, the Gentleman is proposing that the words CERTAIN AREAS ...
The President. The Chair would want to invite the attention of the Sponsor and Senator Paterno to letter C,
which says: THE PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO PROCLAIM, DELINEATE
AND SPECIFY THE METES AND BOUNDS OF OTHER SPECIAL ECONOMIC ZONES WHICH MAY BE CREATED
IN THE CLARK MILITARY RESERVATIONS AND ITS EXTENSIONS.
Probably, this provision can be expanded since, apparently, the intention is that what is referred to in Olongapo
as Metro Olongapo is not by itself ipso jure already a special economic zone.
Senator Paterno. That is correct.
The President. Someone, some authority must declare which portions of the same shall be the economic
zone. Is it the intention of the author that it is the President of the Philippines who will make such delineation?
Senator Shahani. Yes, Mr. President.
The Court of Appeals further justified the limited application of the tax incentives as being within the prerogative
of the legislature, pursuant to its avowed purpose [of serving] some public benefit or interest. It ruled that EO 97-A
merely implements the legislative purpose of [RA 7227].
Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals Decision and
Resolution.
The Issue

Petitioners submit the following issue for the resolution of the Court:
[W]hether or not Executive Order No. 97-A violates the equal protection clause of the Constitution. Specifically the
issue is whether the provisions of Executive Order No. 97-A confining the application of R.A. 7227 within the secured
area and excluding the residents of the zone outside of the secured area is discriminatory or not. [4]

The Courts Ruling

The petition[5] is bereft of merit.

Main Issue: The Constitutionality of EO 97-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of Olongapo, (2) the
Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. However, EO 97-A,
according to them, narrowed down the area within which the special privileges granted to the entire zone would apply
to the present fenced-in former Subic Naval Base only. It has thereby excluded the residents of the first two
components of the zone from enjoying the benefits granted by the law. It has effectively discriminated against them,
without reasonable or valid standards, in contravention of the equal protection guarantee.
On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO 97-A, arguing that
Section 12 of RA 7227 clearly vests in the President the authority to delineate the metes and bounds of the
SSEZ. He adds that the issuance fully complies with the requirements of a valid classification.
We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not violative of the equal
protection clause; neither is it discriminatory. Rather, we find real and substantive distinctions between the
circumstances obtaining inside and those outside the Subic Naval Base, thereby justifying a valid and reasonable
classification.
The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized by substantial distinctions that make real differences, one class may
be treated and regulated differently from another.[6] The classification must also be germane to the purpose of the law
and must apply to all those belonging to the same class. [7] Explaining the nature of the equal protection guarantee,
the Court in Ichong v. Hernandez[8] said:
The equal protection of the law clause is against undue favor and individual or class privilege, as well as hostile
discrimination or the oppression of inequality. It is not intended to prohibit legislation which is limited either [by] the
object to which it is directed or by [the] territory within which it is to operate. It does not demand absolute equality
among residents; it merely requires that all persons shall be treated alike, under like circumstances and
conditions both as to privileges conferred and liabilities enforced. The equal protection clause is not infringed by
legislation which applies only to those persons falling within a specified class, if it applies alike to all persons within
such class, and reasonable grounds exist for making a distinction between those who fall within such class and those
who do not.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3)
not be limited to existing conditions only, and (4) apply equally to all members of the same class. [9]
We first determine the purpose of the law. From the very title itself, it is clear that RA 7227 aims primarily
to accelerate the conversion of military reservations into productive uses. Obviously, the lands covered under the
1947 Military Bases Agreement are its object. Thus, the law avows this policy:
SEC. 2. Declaration of Policies. -- It is hereby declared the policy of the Government to accelerate the sound and
balanced conversion into alternative productive uses of the Clark and Subic military reservations and their extensions
(John Hay Station, Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval Communications Station
and Capas Relay Station), to raise funds by the sale of portions of Metro Manila military camps, and to apply said

funds as provided herein for the development and conversion to productive civilian use of the lands covered under
the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended.
To undertake the above objectives, the same law created the Bases Conversion and Development Authority,
some of whose relevant defined purposes are:
(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying a list of projects
including but not limited to those provided in the Legislative-Executive Bases Council (LEBC) framework plan for the
sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent with
ecological and environmental standards, into other productive uses to promote the economic and social development
of Central Luzon in particular and the country in general;
(c) To encourage the active participation of the private sector in transforming the Clark and Subic military
reservations and their extensions into other productive uses;
Further, in creating the SSEZ, the law declared it a policy to develop the zone into a self-sustaining, industrial,
commercial, financial and investment center.[10]
From the above provisions of the law, it can easily be deduced that the real concern of RA 7227 is to convert the
lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such objective,
Congress deemed it necessary to extend economic incentives to attract and encourage investors, both local and
foreign. Among such enticements are:[11] (1) a separate customs territory within the zone, (2) tax-and-duty-free
importations, (3) restructured income tax rates on business enterprises within the zone, (4) no foreign exchange
control, (5) liberalized regulations on banking and finance, and (6) the grant of resident status to certain investors
and of working visas to certain foreign executives and workers.
We believe it was reasonable for the President to have delimited the application of some incentives to the
confines of the former Subic military base. It is this specific area which the government intends to transform and
develop from its status quo ante as an abandoned naval facility into a self-sustaining industrial and commercial zone,
particularly for big foreign and local investors to use as operational bases for their businesses and industries. Why
the seeming bias for big investors? Undeniably, they are the ones who can pour huge investments to spur economic
growth in the country and to generate employment opportunities for the Filipinos, the ultimate goals of the
government for such conversion. The classification is, therefore, germane to the purposes of the law. And as the
legal maxim goes, The intent of a statute is the law. [12]
Certainly, there are substantial differences between the big investors who are being lured to establish and
operate their industries in the so-called secured area and the present business operators outside the area. On the
one hand, we are talking of billion-peso investments and thousands of new jobs. On the other hand, definitely none
of such magnitude. In the first, the economic impact will be national; in the second, only local. Even more important,
at this time the business activities outside the secured area are not likely to have any impact in achieving the
purpose of the law, which is to turn the former military base to productive use for the benefit of the Philippine
economy. There is, then, hardly any reasonable basis to extend to them the benefits and incentives accorded in RA
7227. Additionally, as the Court of Appeals pointed out, it will be easier to manage and monitor the activities within
the secured area, which is already fenced off, to prevent fraudulent importation of merchandise or smuggling.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. [13] As long as
there are actual and material differences between territories, there is no violation of the constitutional clause. And of

course, anyone, including the petitioners, possessing the requisite investment capital can always avail of the same
benefits by channeling his or her resources or business operations into the fenced-off free port zone.
We believe that the classification set forth by the executive issuance does not apply merely to existing
conditions. As laid down in RA 7227, the objective is to establish a self-sustaining, industrial, commercial, financial
and investment center in the area. There will, therefore, be a long-term difference between such investment center
and the areas outside it.
Lastly, the classification applies equally to all the resident individuals and businesses within the secured
area. The residents, being in like circumstances or contributing directly to the achievement of the end purpose of
the law, are not categorized further. Instead, they are all similarly treated, both in privileges granted and in
obligations required.
All told, the Court holds that no undue favor or privilege was extended. The classification occasioned by EO 97A was not unreasonable, capricious or unfounded. To repeat, it was based, rather, on fair and substantive
considerations that were germane to the legislative purpose.
WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution are
hereby AFFIRMED. Costs against petitioners.
SO ORDERED.