G.R. No.

L- 41383

August 15, 1988

PHILIPPINE AIRLINES, INC., plaintiff-appellant,

vs.
ROMEO F. EDU in his capacity as Land Transportation Commissioner, and
UBALDO CARBONELL, in his capacity as National Treasurer, defendantsappellants.
Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.
GUTIERREZ, JR., J.:
What is the nature of motor vehicle registration fees? Are they taxes or
regulatory fees?
This question has been brought before this Court in the past. The parties are, in
effect, asking for a re-examination of the latest decision on this issue.
This appeal was certified to us as one involving a pure question of law by the
Court of Appeals in a case where the then Court of First Instance of Rizal
dismissed the portion-about complaint for refund of registration fees paid under
protest.
The disputed registration fees were imposed by the appellee, Commissioner
Romeo F. Elevate pursuant to Section 8, Republic Act No. 4136, otherwise
known as the Land Transportation and Traffic Code.
The Philippine Airlines (PAL) is a corporation organized and existing under the
laws of the Philippines and engaged in the air transportation business under a
legislative franchise, Act No. 42739, as amended by Republic Act Nos. 25). and
269.1 Under its franchise, PAL is exempt from the payment of taxes. The
pertinent provision of the franchise provides as follows:
Section 13. In consideration of the franchise and rights hereby
granted, the grantee shall pay to the National Government
during the life of this franchise a tax of two per cent of the gross
revenue or gross earning derived by the grantee from its
operations under this franchise. Such tax shall be due and
payable quarterly and shall be in lieu of all taxes of any kind,
nature or description, levied, established or collected by any
municipal, provincial or national automobiles, Provided, that if,
after the audit of the accounts of the grantee by the
Commissioner of Internal Revenue, a deficiency tax is shown to
be due, the deficiency tax shall be payable within the ten days
from the receipt of the assessment. The grantee shall pay the
tax on its real property in conformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of
1956) PAL has, since 1956, not been paying motor vehicle registration fees.
Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued
a regulation requiring all tax exempt entities, among them PAL to pay motor
vehicle registration fees.
Despite PAL's protestations, the appellee refused to register the appellant's
motor vehicles unless the amounts imposed under Republic Act 4136 were paid.
The appellant thus paid, under protest, the amount of P19,529.75 as registration
fees of its motor vehicles.
After paying under protest, PAL through counsel, wrote a letter dated May
19,1971, to Commissioner Edu demanding a refund of the amounts paid,
invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where it was held
that motor vehicle registration fees are in reality taxes from the payment of
which PAL is exempt by virtue of its legislative franchise.
Appellee Edu denied the request for refund basing his action on the decision in
Republic v. Philippine Rabbit Bus Lines, Inc., (32 SCRA 211, March 30, 1970) to
the effect that motor vehicle registration fees are regulatory exceptional. and not
revenue measures and, therefore, do not come within the exemption granted to
PAL? under its franchise. Hence, PAL filed the complaint against Land
Transportation Commissioner Romeo F. Edu and National Treasurer Ubaldo
Carbonell with the Court of First Instance of Rizal, Branch 18 where it was
docketed as Civil Case No. Q-15862.
Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI
Carbonell in his capacity as National Treasurer, filed a motion to dismiss
alleging that the complaint states no cause of action. In support of the motion to
dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus
Lines, Inc., (supra) that registration fees of motor vehicles are not taxes, but
regulatory fees imposed as an incident of the exercise of the police power of the
state. They contended that while Act 4271 exempts PAL from the payment of
any tax except two per cent on its gross revenue or earnings, it does not exempt
the plaintiff from paying regulatory fees, such as motor vehicle registration fees.
The resolution of the motion to dismiss was deferred by the Court until after trial
on the merits.
On April 24, 1973, the trial court rendered a decision dismissing the appellant's
complaint "moved by the later ruling laid down by the Supreme Court in the case
or Republic v. Philippine Rabbit Bus Lines, Inc., (supra)." From this judgment,
PAL appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc.
(supra) cited by PAL and Commissioner Romeo F. Edu respectively, discuss the
main points of contention in the case at bar.
Resolving the issue in the Philippine Rabbit case, this Court held:
"The registration fee which defendant-appellee had to pay was
imposed by Section 8 of the Revised Motor Vehicle Law
(Republic Act No. 587 [1950]). Its heading speaks of
"registration fees." The term is repeated four times in the body
thereof. Equally so, mention is made of the "fee for registration."
(Ibid., Subsection G) A subsection starts with a categorical
statement "No fees shall be charged." (lbid., Subsection H) The
conclusion is difficult to resist therefore that the Motor Vehicle
Act requires the payment not of a tax but of a registration fee
under the police power. Hence the incipient, of the section relied
upon by defendant-appellee under the Back Pay Law, It is not
held liable for a tax but for a registration fee. It therefore cannot
make use of a backpay certificate to meet such an obligation.
Any vestige of any doubt as to the correctness of the above
conclusion should be dissipated by Republic Act No. 5448.
([1968]. Section 3 thereof as to the imposition of additional tax
on privately-owned passenger automobiles, motorcycles and
scooters was amended by Republic Act No. 5470 which is (sic)
approved on May 30, 1969.) A special science fund was thereby
created and its title expressly sets forth that a tax on privatelyowned passenger automobiles, motorcycles and scooters was
imposed. The rates thereof were provided for in its Section 3
which clearly specifies the" Philippine tax."(Cooley to be paid as
distinguished from the registration fee under the Motor Vehicle
Act. There cannot be any clearer expression therefore of the
legislative will, even on the assumption that the earlier
legislation could by subdivision the point be susceptible of the
interpretation that a tax rather than a fee was levied. What is
thus most apparent is that where the legislative body relies on
its authority to tax it expressly so states, and where it is
enacting a regulatory measure, it is equally exploded (at p.
22,1969
In direct refutation is the ruling in Calalang v. Lorenzo (supra), where the Court,
on the other hand, held:
The charges prescribed by the Revised Motor Vehicle Law for
the registration of motor vehicles are in section 8 of that law
called "fees". But the appellation is no impediment to their being
considered taxes if taxes they really are. For not the name but

the object of the charge determines whether it is a tax or a fee.

Geveia speaking, taxes are for revenue, whereas fees are
exceptional. for purposes of regulation and inspection and are
for that reason limited in amount to what is necessary to cover
the cost of the services rendered in that connection. Hence, a
charge fixed by statute for the service to be person,-When by an
officer, where the charge has no relation to the value of the
services performed and where the amount collected eventually
finds its way into the treasury of the branch of the government
whose officer or officers collected the chauffeur, is not a fee but
a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)
From the data submitted in the court below, it appears that the
expenditures of the Motor Vehicle Office are but a small
portionabout 5 per centumof the total collections from motor
vehicle registration fees. And as proof that the money collected
is not intended for the expenditures of that office, the law itself
provides that all such money shall accrue to the funds for the
construction and maintenance of public roads, streets and
bridges. It is thus obvious that the fees are not collected for
regulatory purposes, that is to say, as an incident to the
enforcement of regulations governing the operation of motor
vehicles on public highways, for their express object is to
provide revenue with which the Government is to discharge one
of its principal functionsthe construction and maintenance of
public highways for everybody's use. They are veritable taxes,
not merely fees.
As a matter of fact, the Revised Motor Vehicle Law itself now
regards those fees as taxes, for it provides that "no other taxes
or fees than those prescribed in this Act shall be imposed," thus
implying that the charges therein imposedthough called
feesare of the category of taxes. The provision is contained in
section 70, of subsection (b), of the law, as amended by section
17 of Republic Act 587, which reads:
Sec. 70(b) No other taxes or fees than those
prescribed in this Act shall be imposed for the
registration or operation or on the ownership of
any motor vehicle, or for the exercise of the
profession of chauffeur, by any municipal
corporation, the provisions of any city charter to
the
contrary
notwithstanding:
Provided,
however, That any provincial board, city or
municipal council or board, or other competent
authority may exact and collect such
reasonable and equitable toll fees for the use of

such bridges and ferries, within their respective

jurisdiction, as may be authorized and approved
by the Secretary of Public Works and
Communications, and also for the use of such
public roads, as may be authorized by the
President of the Philippines upon the
recommendation of the Secretary of Public
Works and Communications, but in none of
these cases, shall any toll fee." be charged or
collected until and unless the approved
schedule of tolls shall have been posted levied,
in a conspicuous place at such toll station. (at
pp. 213-214)
Motor vehicle registration fees were matters originally governed by the Revised
Motor Vehicle Law (Act 3992 [19511) as amended by Commonwealth Act 123
and Republic Acts Nos. 587 and 1621.
Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the
Land Transportation Code, (as amended by Rep. Acts Nos. 5715 and 64-67,
P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).
Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and
remained unsegregated, by Rep. Act Nos. 587 and 1603) states:
Section 73. Disposal of moneys collected.Twenty per centum
of the money collected under the provisions of this Act shall
accrue to the road and bridge funds of the different provinces
and chartered cities in proportion to the centum shall during the
next previous year and the remaining eighty per centum shall be
deposited in the Philippine Treasury to create a special fund for
the construction and maintenance of national and provincial
roads and bridges. as well as the streets and bridges in the
chartered cities to be alloted by the Secretary of Public Works
and Communications for projects recommended by the Director
of Public Works in the different provinces and chartered cities.
....
Presently, Sec. 61 of the Land Transportation and Traffic Code provides:
Sec. 61. Disposal of Mortgage. CollectedMonies collected
under the provisions of this Act shall be deposited in a special
trust account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in
accordance with the provisions of the" Philippine Highway Act of
1935. "Provided, however, That the amount necessary to

maintain and equip the Land Transportation Commission but

not to exceed twenty per cent of the total collection during one
year, shall be set aside for the purpose. (As amended by RA
64-67, approved August 6, 1971).
It appears clear from the above provisions that the legislative intent and purpose
behind the law requiring owners of vehicles to pay for their registration is mainly
to raise funds for the construction and maintenance of highways and to a much
lesser degree, pay for the operating expenses of the administering agency. On
the other hand, the Philippine Rabbit case mentions a presumption arising from
the use of the term "fees," which appears to have been favored by the
legislature to distinguish fees from other taxes such as those mentioned in
Section 13 of Rep. Act 4136 which reads:
Sec. 13. Payment of taxes upon registration.No original
registration of motor vehicles subject to payment of taxes,
customs s duties or other charges shall be accepted unless
proof of payment of the taxes due thereon has been presented
to the Commission.
referring to taxes other than those imposed on the registration, operation or
ownership of a motor vehicle (Sec. 59, b, Rep. Act 4136, as amended).
Fees may be properly regarded as taxes even though they also serve as an
instrument of regulation, As stated by a former presiding judge of the Court of
Tax Appeals and writer on various aspects of taxpayers
It is possible for an exaction to be both tax arose. regulation.
License fees are changes. looked to as a source of revenue as
well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506)
This is true, for example, of automobile license fees. Isabela
such case, the fees may properly be regarded as taxes even
though they also serve as an instrument of regulation. If the
purpose is primarily revenue, or if revenue is at least one of the
real and substantial purposes, then the exaction is properly
called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing
Cooley on Taxation (2nd Ed.) 592, 593; Calalang v. Lorenzo. 97
Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) These exactions
are sometimes called regulatory taxes. (See Secs. 4701, 4711,
4741, 4801, 4811, 4851, and 4881, U.S. Internal Revenue Code
of 1954, which classify taxes on tobacco and alcohol as
regulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 1213, citing Cooley on Taxation, 2nd Edition, 591-593).
Indeed, taxation may be made the implement of the state's police power (Lutz v.
Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and
substantial purposes, then the exaction is properly called a tax (Umali, Id.) Such
is the case of motor vehicle registration fees. The conclusions become
inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang
case. The same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had in mind a
regulatory tax as the law refers to the imposition on the registration, operation or
ownership of a motor vehicle as a "tax or fee." Though nowhere in Rep. Act
4136 does the law specifically state that the imposition is a tax, Section 591593). speaks of "taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the profession of chauffeur
..." making the intent to impose a tax more apparent. Thus, even Rep. Act 5448
cited by the respondents, speak of an "additional" tax," where the law could
have referred to an original tax and not one in addition to the tax already
imposed on the registration, operation, or ownership of a motor vehicle under
Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 were merely a
regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax.
Rep. Act 4136 also speaks of other "fees," such as the special permit fees for
certain types of motor vehicles (Sec. 10) and additional fees for change of
registration (Sec. 11). These are not to be understood as taxes because such
fees are very minimal to be revenue-raising. Thus, they are not mentioned by
Sec. 591-593). of the Code as taxes like the motor vehicle registration fee and
chauffers' license fee. Such fees are to go into the expenditures of the Land
Transportation Commission as provided for in the last proviso of see. 61,
aforequoted.
It is quite apparent that vehicle registration fees were originally simple
exceptional. intended only for rigidly purposes in the exercise of the State's
police powers. Over the years, however, as vehicular traffic exploded in number
and motor vehicles became absolute necessities without which modem life as
we know it would stand still, Congress found the registration of vehicles a very
convenient way of raising much needed revenues. Without changing the earlier
deputy. of registration payments as "fees," their nature has become that of
"taxes."
In view of the foregoing, we rule that motor vehicle registration fees as at
present exacted pursuant to the Land Transportation and Traffic Code are
actually taxes intended for additional revenues. of government even if one fifth
or less of the amount collected is set aside for the operating expenses of the
agency administering the program.
May the respondent administrative agency be required to refund the amounts
stated in the complaint of PAL?
The answer is NO.

The claim for refund is made for payments given in 1971. It is not clear from the
records as to what payments were made in succeeding years. We have ruled
that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed all earlier
tax exemptions Of corporate taxpayers found in legislative franchises similar to
that invoked by PAL in this case.
In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals, et al.
(G.R. No. 615)." July 11, 1985), this Court ruled:
Under its original franchise, Republic Act No. 21); enacted in
1957, petitioner Radio Communications of the Philippines, Inc.,
was subject to both the franchise tax and income tax. In 1964,
however, petitioner's franchise was amended by Republic Act
No. 41-42). to the effect that its franchise tax of one and onehalf percentum (1-1/2%) of all gross receipts was provided as
"in lieu of any and all taxes of any kind, nature, or description
levied, established, or collected by any authority whatsoever,
municipal, provincial, or national from which taxes the grantee is
hereby expressly exempted." The issue raised to this Court now
is the validity of the respondent court's decision which ruled that
the exemption under Republic Act No. 41-42). was repealed by
Section 24 of Republic Act No. 5448 dated June 27, 1968 which
reads:
"(d) The provisions of existing special or
general laws to the contrary notwithstanding, all
corporate taxpayers not specifically exempt
under Sections 24 (c) (1) of this Code shall pay
the rates provided in this section. All
corporations, agencies, or instrumentalities
owned or controlled by the government,
including the Government Service Insurance
System and the Social Security System but
excluding educational institutions, shall pay
such rate of tax upon their taxable net income
as are imposed by this section upon
associations or corporations engaged in a
similar business or industry. "
An examination of Section 24 of the Tax Code as amended
shows clearly that the law intended all corporate taxpayers to
pay income tax as provided by the statute. There can be no
doubt as to the power of Congress to repeal the earlier
exemption it granted. Article XIV, Section 8 of the 1935
Constitution and Article XIV, Section 5 of the Constitution as
amended in 1973 expressly provide that no franchise shall be
granted to any individual, firm, or corporation except under the

condition that it shall be subject to amendment, alteration, or

repeal by the legislature when the public interest so requires.
There is no question as to the public interest involved. The
country needs increased revenues. The repealing clause is
clear and unambiguous. There is a listing of entities entitled to
tax exemption. The petitioner is not covered by the provision.
Considering the foregoing, the Court Resolved to DENY the
petition for lack of merit. The decision of the respondent court is
affirmed.
Any registration fees collected between June 27, 1968 and April 9, 1979, were
correctly imposed because the tax exemption in the franchise of PAL was
repealed during the period. However, an amended franchise was given to PAL
in 1979. Section 13 of Presidential Decree No. 1590, now provides:
In consideration of the franchise and rights hereby granted, the
grantee shall pay to the Philippine Government during the
lifetime of this franchise whichever of subsections (a) and (b)
hereunder will result in a lower taxes.)
(a) The basic corporate income tax based on
the grantee's annual net taxable income
computed in accordance with the provisions of
the Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the
gross revenues. derived by the grantees from
all specific. without distinction as to transport or
nontransport corporations; provided that with
respect to international airtransport service,
only the gross passengers, mail, and freight
revenues. from its outgoing flights shall be
subject to this law.
The tax paid by the grantee under either of the above
alternatives shall be in lieu of all other taxes, duties, royalties,
registration, license and other fees and charges of any kind,
nature or description imposed, levied, established, assessed, or
collected by any municipal, city, provincial, or national authority
or government, agency, now or in the future, including but not
limited to the following:
xxx xxx xxx
(5) All taxes, fees and other charges on the registration, license,
acquisition, and transfer of airtransport equipment, motor

vehicles, and all other personal or real property of the gravitates

(Pres. Decree 1590, 75 OG No. 15, 3259, April 9, 1979).
PAL's current franchise is clear and specific. It has removed the ambiguity found
in the earlier law. PAL is now exempt from the payment of any tax, fee, or other
charge on the registration and licensing of motor vehicles. Such payments are
already included in the basic tax or franchise tax provided in Subsections (a)
and (b) of Section 13, P.D. 1590, and may no longer be exacted.
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund
of registration fees paid in 1971 is DENIED. The Land Transportation
Franchising and Regulatory Board (LTFRB) is enjoined functions-the collecting
any tax, fee, or other charge on the registration and licensing of the petitioner's
motor vehicles from April 9, 1979 as provided in Presidential Decree No. 1590.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco,
Padilla, Bidin, Sarmiento, Cortes, Grio Aquino and Medialdea, JJ., concur.

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, defendantappellee.
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 byproducts 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.

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).

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).

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).

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

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.
Paras, C. J., Bengzon, Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, and
Concepcion, JJ., concur.

G.R. Nos. L-19824, L-19825 and 19826

July 9, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
BACOLOD-MURCIA MILLING CO., INC., MA-AO SUGAR CENTRAL CO.,
INC., and TALISAY-SILAY MILLING COMPANY, defendants-appellants.
Meer, Meer and Meer, Enrique M. Fernando and Emma Quisumbing-Fernando
for defendants-appellants.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General
Antonio Torres and Solicitor Ceferino Padua, for plaintiff-appellee.
REGALA, J.:
This is a joint appeal by three sugar centrals, Bacolod Murcia Milling Co., Inc.,
Ma-ao Sugar Central Co., Inc., and Talisay-Silay Milling Co., sister companies
under one controlling ownership and management, from a decision of the Court
of First Instance of Manila finding them liable for special assessments under
Section 15 of Republic Act No. 632.
Republic Act No. 632 is the charter of the Philippine Sugar Institute, Philsugin for
short, a semi-public corporation created for the following purposes and
objectives:
(a) To conduct research work for the sugar industry in all its phases,
either agricultural or industrial, for the purpose of introducing into the
sugar industry such practices or processes that will reduce the cost of
production, increase and improve the industrialization of the by-products
of sugar cane, and achieve greater efficiency in the industry;
(b) To improve existing methods of raising sugar cane and of sugar
manufacturing;
(c) To insure a permanent, sufficient and balanced production of sugar
and its by-products for local consumption and exportation;
(d) To establish and maintain such balanced relation between
production and consumption of sugar and its by-products, and such
marketing conditions therefor, as well insure stabilized prices at a level
sufficient to cover the cost of production plus a reasonable profit;
(e) To promote the effective merchandising of sugar and its by-products
in the domestic and foreign markets so that those engaged in the sugar
industry will be placed on a basis of economic security; and

(f) To improve the living and economic conditions of laborers engaged in

the sugar industry by the gradual and effective correction of the
inequalities existing in the industry. (Section 2, Rep. Act 632)
To realize and achieve these ends, Sections 15 and 16 of the aforementioned
law provide:
Sec. 15. Capitalization. To raise the necessary funds to carry out the
provisions of this Act and the purposes of the corporation, there shall be
levied on the annual sugar production a tax of TEN CENTAVOS [P0.10]
per picul of sugar to be collected for a period of five (5) years beginning
the crop year 1951-1952. The amount shall be borne by the sugar cane
planters and the sugar centrals in the proportion of their corresponding
milling share, and said levy shall constitute a lien on their sugar
quedans and/or warehouse receipts.
Sec. 16. Special Fund. The proceeds of the foregoing levy shall be
set aside to constitute a special fund to be known as the "Sugar
Research and Stabilization Fund," which shall be available exclusively
for the use of the corporation. All the income and receipts derived from
the special fund herein created shall accrue to, and form part of the said
fund to be available solely for the use of the corporation.
The specific and general powers of the Philsugin are set forth in Section 8 of the
same law, to wit:
Sec. 3. Specific and General Powers. For carrying out the purposes
mentioned in the preceding section, the PHILSUGIN shall have the
following powers:
(a) To establish, keep, maintain and operate, or help establish, keep,
maintain, and operate one central experiment station and such number
of regional experiment stations in any part of the Philippines as may be
necessary to undertake extensive research in sugar cane culture and
manufacture, including studies as to the feasibility of merchandising
sugar cane farms, the control and eradication of pests, the selected and
propagation of high-yielding varieties of sugar cane suited to Philippine
climatic conditions, and such other pertinent studies as will be useful in
adjusting the sugar industry to a position independent of existing trade
preference in the American market;
(b) To purchase such machinery, materials, equipment and supplies as
may be necessary to prosecute successfully such researches and
experimental work;

(c) To explore and expand the domestic and foreign markets for sugar
and its by-products to assure mutual benefits to consumers and
producers, and to promote and maintain a sufficient general production
of sugar and its by-products by an efficient coordination of the
component elements of the sugar industry of the country;
(d) To buy, sell, assign, own, operate, rent or lease, subject to existing
laws, machineries, equipment, materials, merchant vessels, rails,
railroad lines, and any other means of transportation, warehouses,
buildings, and any other equipment and material to the production,
manufacture, handling, transportation and warehousing of sugar and its
by-products;
(e) To grant loans, on reasonable terms, to planters when it deems such
loans advisable;
(f) To enter, make and execute contracts of any kind as may be
necessary or incidental to the attainment of its purposes with any
person, firm, or public or private corporation, with the Government of the
Philippines or of the United States, or any state, territory, or persons
therefor, or with any foreign government and, in general, to do
everything directly or indirectly necessary or incidental to, or in
furtherance of, the purposes of the corporation;
(g) To do all such other things, transact all such business and perform
such functions directly or indirectly necessary, incidental or conducive to
the attainment of the purposes of the corporation; and
(h) Generally, to exercise all the powers of a Corporation under the
Corporation Law insofar as they are not inconsistent with the provisions
of this Act.
The facts of this case bearing relevance to the issue under consideration, as
recited by the lower court and accepted by the appellants, are the following:
x x x during the 5 crop years mentioned in the law, namely 1951-1952,
1952-1953, 1953-1954, 1954-1955 and 1955-1956, defendant BacolodMurcia Milling Co., Inc., has paid P267,468.00 but left an unpaid
balance of P216,070.50; defendant Ma-ao Sugar Central Co., Inc., has
paid P117,613.44 but left unpaid balance of P235,800.20; defendant
Talisay-Silay Milling Company has paid P251,812.43 but left unpaid
balance of P208,193.74; and defendant Central Azucarera del Danao
made a payment of P49,897.78 but left unpaid balance of P48,059.77.
There is no question regarding the correctness of the amounts paid and
the amounts that remain unpaid.

From the evidence presented, on which there is no controversy, it was

disclosed that on September 3, 1951, the Philippine Sugar Institute,
known as the PHILSUGIN for short, acquired the Insular Sugar Refinery
for a total consideration of P3,070,909.60 payable, in accordance with
the deed of sale Exhibit A, in 3 installments from the process of the
sugar tax to be collected, under Republic Act 632. The evidence further
discloses that the operation of the Insular Sugar Refinery for the years,
1954, 1955, 1956 and 1957 was disastrous in the sense that
PHILSUGIN incurred tremendous losses as shown by an examination of
the statements of income and expenses marked Exhibits 5, 6, 7 and 8.
Through the testimony of Mr. Cenon Flor Cruz, former acting general
manager of PHILSUGIN and at present technical consultant of said
entity, presented by the defendants as witnesses, it has been shown
that the operation of the Insular Sugar Refinery has consumed 70% of
the thinking time and effort of the PHILSUGIN management. x x x .
Contending that the purchase of the Insular Sugar Refinery with money from the
Philsugin Fund was not authorized by Republic Act 632 and that the continued
operation of the said refinery was inimical to their interests, the appellants
refused to continue with their contributions to the said fund. They maintained
that their obligation to contribute or pay to the said Fund subsists only to the limit
and extent that they are benefited by such contributions since Republic Act 632
is not a revenue measure but an Act which establishes a "Special
assessments." Adverting to the finding of the lower court that proceeds of the
said Fund had been used or applied to absorb the "tremendous losses" incurred
by Philsugin in its "disastrous operation" of the said refinery, the appellants
herein argue that they should not only be released from their obligation to pay
the said assessment but be refunded, besides, of all that they might have
previously paid thereunder.
The appellants' thesis is simply to the effect that the "10 centavos per picul of
sugar" authorized to be collected under Sec. 15 of Republic 632 is a special
assessment. As such, the proceeds thereof may be devoted only to the specific
purpose for which the assessment was authorized, a special assessment being
a levy upon property predicated on the doctrine that the property against which it
is levied derives some special benefit from the improvement. It is not a tax
measure intended to raise revenues for the Government. Consequently, once it
has been determined that no benefit accrues or inures to the property owners
paying the assessment, or that the proceeds from the said assessment are
being misapplied to the prejudice of those against whom it has been levied, then
the authority to insist on the payment of the said assessment ceases.
On the other hand, the lower court adjudged the appellants herein liable under
the aforementioned law, Republic Act 632, upon the following considerations:
First, Subsection d) of Section 3 of Republic Act 632 authorizes Philsugin to buy
and operate machineries, equipment, merchant vessels, etc., and any other

equipment and material for the production, manufacture, handling, transportation

and warehousing of sugar and its by-products. It was, therefore, authorized to
purchase and operate a sugar refinery.
Secondly, the corporate powers of the Philsugin are vested in and exercised by
a board of directors composed of 5 members, 3 of whom shall be appointed
upon recommendation of the National Federation of Sugar Cane Planters and 2
upon recommendation of the Philippine Sugar Association. (Sec. 4, Rep. Act
632). It has not been shown that this particular provision was not observed in
this case. Therefore, the appellants herein may not rightly claim that there had
been a misapplication of the Philsugin funds when the same was used to
procure the Insular Sugar Refinery because the decision to purchase the said
refinery was made by a board in which the applicants were fully and duly
represented, the appellants being members of the Philippine Sugar Association.
Thirdly, all financial transactions of the Philsugin are audited by the General
Auditing Office, which must be presumed to have passed upon the legality and
prudence of the disbursements of the Fund. Additionally, other offices of the
Government review such transactions as reflected in the annual report obliged
of the Philsugin to prepare. Among those offices are the Office of the President
of the Philippines, the Administrator of Economic Coordination and the Presiding
Officers of the two chambers of Congress. With all these safeguards against any
imprudent or unauthorized expenditure of Philsugin Funds, the acquisition of the
Insular Sugar Refinery must be upheld in its legality and propriety.
Fourthly, it would be dangerous to sanction the unilateral refusal of the
appellants herein to continue with their contribution to the Fund for that conduct
is no different "from the case of an ordinary taxpayer who refuses to pay his
taxes on the ground that the money is being misappropriated by Government
officials." This is taking the law into their own hands.
Against the above ruling of the trial court, the appellants contend:
First. It is fallacious to argue that no mismanagement or abuse of corporate
power could have been committed by Philsugin solely because its charter
incorporates so many devices or safeguards to preclude such abuse. This
reasoning of the lower court does not reconcile with that actually happened in
this case.
Besides, the appellants contend that the issue on hand is not whether Philsugin
abused or not its powers when it purchased the Insular Sugar Refinery. The
issue, rather, is whether Philsugin had any power or authority at all to acquire
the said refinery. The appellants deny that Philsugin is possessed of any such
authority because what it is empowered to purchase is not a "sugar refinery but
a central experiment station or perhaps at the most a sugar central to be used
for that purpose." (Sec. 3[a], Rep. Act 632) For this distinction, the appellants

cite the case of Collector vs. Ledesma, G.R. No. L-12158, May 27, 1959, in
which this Court ruled that
We are of the opinion that a "sugar central," as that term is used in
Section 189, applies to "a large mill that makes sugar out of the cane
brought from a wide surrounding territory," or a sugar mill which
manufactures sugar for a number of plantations. The term "sugar
central" could not have been intended by Congress to refer to all sugar
mills or sugar factories as contended by respondent. If respondent's
interpretation is to be followed, even sugar mills run by animal power
(trapiche) would be considered sugar central. We do not think Congress
ever intended to place owners of (trapiches) in the same category as
operators of sugar centrals.
That sugar mills are not the same as sugar centrals may also be
gleaned from Commonwealth Act No. 470 (Assessment Law). In
prescribing the principle governing valuation and assessment of real
property. Section 4 of said Act provides
"Machinery permanently used or in stalled in sugar centrals, mills, or
refineries shall be assessed."
This clearly indicates that "Sugar centrals" are not the same as "sugar
mills" or "sugar refineries."
Second. The appellants' refusal to continue paying the assessment under
Republic Act 632 may not rightly be equated with a taxpayer's refusal to pay his
ordinary taxes precisely because there is a substantial distinction between a
"special assessment" and an ordinary tax. The purpose of the former is to
finance the improvement of particular properties, with the benefits of the
improvement accruing or inuring to the owners thereof who, after all, pay the
assessment. The purpose of an ordinary tax, on the other hand, is to provide the
Government with revenues needed for the financing of state affairs. Thus, while
the refusal of a citizen to pay his ordinary taxes may not indeed be sanctioned
because it would impair government functions, the same would not hold true in
the case of a refusal to comply with a special assessment.
Third. Upon a host of decisions of the United States Supreme Court, the
imposition or collection of a special assessment upon property owners who
receive no benefit from such assessment amounts to a denial of due process.
Thus, in the case of Norwood vs. Baer, 172 US 269, the ruling was laid down
that
As already indicated, the principle underlying special assessments to
meet the cost of public improvements is that the property upon which
they are imposed is peculiarly benefited, and therefore, the panels do

not, in fact, pay anything in excess of what they received by reason of

such improvement.

rehabilitation and stabilization of the threatened sugar industry. In other

words, the act is primarily an exercise of the police power.

unless a corresponding benefit is realized by the property owner, the exaction of

a special assessment would be "manifestly unfair" (Seattle vs. Kelleher 195 U.S.
351) and "palpably arbitrary or plain abuse" (Gast Realty Investment Co. vs.
Schneider Granite Co., 240 U.S. 57). In other words, the assessment is violative
of the due process guarantee of the constitution (Memphis vs. Charleston Ry v.
Pace, 282 U.S. 241).

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 to 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 law-making 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; Marcy Inc. vs. Mayo,
103 Fla. 552, 139 So. 121)

We find for the appellee.

The nature of a "special assessment" similar to the case at bar has already been
discussed and explained by this Court in the case of Lutz vs. Araneta, 98 Phil.
148. For in this Lutz case, Commonwealth Act 567, otherwise known as the
Sugar Adjustment Act, 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. (Sec. 3).1wph1.t
Under Section 6 of the said law, Commonwealth Act 567, all collections made
thereunder "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." It then proceeds to enumerate the said
purposes, among which are "to place the sugar industry in a position to maintain
itself; ... to readjust the benefits derived from the sugar industry ... so that all
might continue profitably to engage therein; to limit the production of sugar to
areas more economically suited to the production thereof; and to afford laborers
employed in the industry a living wage and to improve their living and working
conditions.
The plaintiff in the above case, Walter Lutz, contended that the aforementioned
tax or special assessment was unconstitutional because it was being "levied for
the aid and support of the sugar industry exclusively," and therefore, not for a
public purpose. In rejecting the theory advanced by the said plaintiff, this Court
said:
The basic defect in the plaintiff's position in 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 Section 6, will show
that the tax is levied with a regulatory purpose, to provide means for the

As stated in Johnson vs. State ex rel. Marcy, with reference to the citrus
industry in Florida
"The protection of a large industry constituting one of the great
source 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 So. 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 full 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'cullock vs. Maryland, 4 Wheat. 316, 4 L.
Ed. 579).
On the authority of the above case, then, We hold that the special assessment
at bar may be considered as similarly as the above, that is, that the levy for the
Philsugin Fund is not so much an exercise of the power of taxation, nor the

imposition of a special assessment, but, the exercise of the police power for the
general welfare of the entire country. It is, therefore, an exercise of a sovereign
power which no private citizen may lawfully resist.
Besides, under Section 2(a) of the charter, the Philsugin is authorized "to
conduct research work for the sugar industry in all its phases, either agricultural
or industrial, for the purpose of introducing into the sugar industry such practices
or processes that will reduce the cost of production, ..., and achieve greater
efficiency in the industry." This provision, first of all, more than justifies the
acquisition of the refinery in question. The case dispute that the operation of a
sugar refinery is a phase of sugar production and that from such operation may
be learned methods of reducing the cost of sugar manufactured no less than it
may afford the opportunity to discover the more effective means of achieving
progress in the industry. Philsugin's experience alone of running a refinery is a
gain to the entire industry. That the operation resulted in a financial loss is by no
means an index that the industry did not profit therefrom, as other farms of a
different nature may have been realized. Thus, from its financially unsuccessful
venture, the Philsugin could very well have advanced in its appreciation of the
problems of management faced by sugar centrals. It could have understood
more clearly the difficulties of marketing sugar products. It could have known
with better intimacy the precise area of the industry in need of the more help
from the government. The view of the appellants herein, therefore, that they
were not benefited by the unsuccessful operation of the refinery in question is
not entirely accurate.
Furthermore, Section 2(a) specifies a field of research which, indeed, would be
difficult to carry out save through the actual operation of a refinery. Quite
obviously, the most practical or realistic approach to the problem of what
"practices or processes" might most effectively cut the cost of production is to
experiment on production itself. And yet, how can such an experiment be carried
out without the tools, which is all that a refinery is?
In view of all the foregoing, the decision appealed from is hereby affirmed, with
costs.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.
Makalintal, J., took no part.

G.R. No. 166494

June 29, 2007

establishments for the exclusive use or enjoyment of senior citizens, including

funeral and burial services for the death of senior citizens;

CARLOS SUPERDRUG CORP., doing business under the name and style
"Carlos Superdrug," ELSIE M. CANO, doing business under the name and
style "Advance Drug," Dr. SIMPLICIO L. YAP, JR., doing business under
the name and style "City Pharmacy," MELVIN S. DELA SERNA, doing
business under the name and style "Botica dela Serna," and LEYTE SERVWELL CORP., doing business under the name and style "Leyte Serv-Well
Drugstore," petitioners,
vs.
DEPARTMENT OF SOCIAL WELFARE and DEVELOPMENT (DSWD),
DEPARTMENT OF HEALTH (DOH), DEPARTMENT OF FINANCE (DOF),
DEPARTMENT OF JUSTICE (DOJ), and DEPARTMENT OF INTERIOR and
LOCAL GOVERNMENT (DILG), respondents.

...
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
4
Internal Revenue Code, as amended.
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:

DECISION
AZCUNA, J.:
1

This is a petition for Prohibition with Prayer for Preliminary Injunction assailing
2
the constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257, 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:
3

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, 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

Article 8. Tax Deduction of Establishments. The establishment may claim the

5
discounts granted under Rule V, Section 4 Discounts for Establishments;
6
7
Section 9, Medical and Dental Services in Private Facilities[,] and Sections 10
8
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
9
Revenue (BIR) and approved by the Department of Finance (DOF).
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.

Tax Deduction on Discounts x x x x --

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.

Tax Due x x x x x x

Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x

Less: Tax Credit -- ______x x

Net Tax Due -- x x

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:

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
10
tax due amount.
Meanwhile, on October 1, 2004, Administrative Order (A.O.) No. 171 or the
Policies and Guidelines to Implement the Relevant Provisions of Republic Act
11
9257, otherwise known as the "Expanded Senior Citizens Act of 2003" 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.
12

On November 12, 2004, the DOH issued Administrative Order No 177

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
13
Citizens Act based on the following grounds:

Tax Deduction Tax Credit

Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:

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
14
services available to all people at affordable cost."

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.

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

The Court believes so.

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 tax-deductible expense
that is subtracted from the gross income and results in a lower taxable income.
15
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
16
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
17
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
18
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.
19
As such, it would not meet the definition of just compensation.

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
20
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
21
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
22
assuring the greatest benefits.
Accordingly, it has been described as "the
most essential, insistent and the least limitable of powers, extending as it does
23
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
24
of the commonwealth, and of the subjects of the same."

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.

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
25
welfare.

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.

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
26
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
27
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
28
will be reimbursed to the drugstores.

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
30
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
31
a legislative act.
WHEREFORE, the petition is DISMISSED for lack of merit.
No costs.

Petitioners computation is flawed. For purposes of reimbursement, the law

29
states that the cost of the discount shall be deducted from gross income, the

SO ORDERED.

G.R. Nos. 167274-75

July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.
DECISION
TINGA, J.:
Simple and uncomplicated is the central issue involved, yet whopping is the
amount at stake in this case.
After much wrangling in the Court of Tax Appeals (CTA) and the Court of
Appeals, Fortune Tobacco Corporation (Fortune Tobacco) was granted a tax
refund or tax credit representing specific taxes erroneously collected from its
tobacco products. The tax refund is being re-claimed by the Commissioner of
Internal Revenue (Commissioner) in this petition.
The following undisputed facts, summarized by the Court of Appeals, are quoted
1
in the assailed Decision dated 28 September 2004:

Camel Filters Box 20s P1.00

Winston F Kings

P5.00

Winston Lights

P5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands

were subject to ad valorem tax pursuant to then Section 142 of the Tax Code of
1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect
whereby a shift from the ad valorem tax (AVT) system to the specific tax system
was made and subjecting the aforesaid cigarette brands to specific tax under
[S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997,
pertinent provisions of which are quoted thus:
Section 145. Cigars and Cigarettes(A) Cigars. There shall be levied, assessed and collected on cigars a
tax of One peso (P1.00) per cigar.
"(B) Cigarettes packed by hand. There shall be levied, assessesed
and collected on cigarettes packed by hand a tax of Forty centavos
(P0.40) per pack.

CAG.R. SP No. 80675

(C) Cigarettes packed by machine. There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:

xxxx
2

Petitioner is a domestic corporation duly organized and existing under and by

virtue of the laws of the Republic of the Philippines, with principal address at
Fortune Avenue, Parang, Marikina City.
Petitioner is the manufacturer/producer of, among others, the following cigarette
brands, with tax rate classification based on net retail price prescribed by Annex
"D" to R.A. No. 4280, to wit:
Brand

Tax Rate

Champion M 100

P1.00

Salem M 100

P1.00

Salem M King

P1.00

Camel F King

P1.00

Camel Lights Box 20s P1.00

(1) If the net retail price (excluding the excise tax and the valueadded tax) is above Ten pesos (P10.00) per pack, the tax shall
be Twelve (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value
added tax) exceeds Six pesos and Fifty centavos (P6.50) but
does not exceed Ten pesos (P10.00) per pack, the tax shall be
Eight Pesos (P8.00) per pack.
(3) If the net retail price (excluding the excise tax and the valueadded tax) is Five pesos (P5.00) but does not exceed Six Pesos
and fifty centavos (P6.50) per pack, the tax shall be Five pesos
(P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the valueadded tax) is below Five pesos (P5.00) per pack, the tax shall
be One peso (P1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the domestic

market after the effectivity of R.A. No. 8240 shall be taxed under the highest
classification of any variant of that brand.
The excise tax from any brand of cigarettes within the next three (3) years from
the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from
each brand on October 1, 1996. Provided, however, that in cases were (sic) the
excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result
in an increase in excise tax of more than seventy percent (70%), for a brand of
cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the
increase shall be effective in 1997 and one hundred percent (100%) of the
increase shall be effective in 1998.

SECTION ARTICLES

PRESENT
SPECIFIC
TAX
RATE PRIOR TO
JAN. 1, 2000

NEW SPECIFIC
TAX
RATE
EFFECTIVE
JAN. 1, 2000

145

P1.00/cigar

P1.12/cigar

(A)
(B)Cigarettes
packed by machine

(1) Net retail price P12.00/pack

(excluding VAT and
excise)
exceeds
P10.00 per pack

P13.44/ pack

(2) Exceeds P10.00 P8.00/pack

per pack

P8.96/pack

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2)
(3) and (4) hereof, shall be increased by twelve percent (12%) on January
1, 2000. (Emphasis supplied)

(3) Net retail price P5.00/pack

(excluding VAT and
excise) is P5.00 to
P6.50 per pack

P5.60/pack

New brands shall be classified according to their current net retail price.

(4) Net Retail Price P1.00/pack

(excluding VAT and
excise) is below
P5.00 per pack

P1.12/pack

Duly registered or existing brands of cigarettes or new brands thereof packed by

machine shall only be packed in twenties.

For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and value-added tax. For brands which are
marketed only outside Metro [M]anila, the net retail price shall mean the price
at which the cigarette is sold in five (5) major supermarkets in the region
excluding the amount intended to cover the applicable excise tax and the valueadded tax.
The classification of each brand of cigarettes based on its average retail price as
of October 1, 1996, as set forth in Annex "D," shall remain in force until revised
by Congress.
Variant of a brand shall refer to a brand on which a modifier is prefixed and/or
suffixed to the root name of the brand and/or a different brand which carries the
same logo or design of the existing brand.
To implement the provisions for a twelve percent (12%) increase of excise tax
on, among others, cigars and cigarettes packed by machines by January 1,
2000, the Secretary of Finance, upon recommendation of the respondent
Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99,
dated December 16, 1999, which provides the increase on the applicable tax
rates on cigar and cigarettes as follows:

Revenue Regulations No. 17-99 likewise provides in the last paragraph of

Section 1 thereof, "(t)hat the new specific tax rate for any existing brand of
cigars, cigarettes packed by machine, distilled spirits, wines and
fermented liquor shall not be lower than the excise tax that is actually
being paid prior to January 1, 2000."
For the period covering January 1-31, 2000, petitioner allegedly paid specific
taxes on all brands manufactured and removed in the total amounts of
P585,705,250.00.
On February 7, 2000, petitioner filed with respondents Appellate Division a
claim for refund or tax credit of its purportedly overpaid excise tax for the month
of January 2000 in the amount of P35,651,410.00
On June 21, 2001, petitioner filed with respondents Legal Service a letter dated
June 20, 2001 reiterating all the claims for refund/tax credit of its overpaid excise
taxes filed on various dates, including the present claim for the month of January
2000 in the amount of P35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant
petition for review with this Court on December 11, 2001, in order to comply with
the two-year period for filing a claim for refund.

1997; and (2) Whether or not petitioner is entitled to a refund of P35,651,410.00

as alleged overpaid excise tax for the month of January 2000.
xxxx

In his answer filed on January 16, 2002, respondent raised the following Special
and Affirmative Defenses;
4. Petitioners alleged claim for refund is subject to administrative
routinary investigation/examination by the Bureau;
5. The amount of P35,651,410 being claimed by petitioner as alleged
overpaid excise tax for the month of January 2000 was not properly
documented.

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s]
disposed in CTA Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the instant petition
meritorious and in accordance with law. Accordingly, respondent is hereby
ORDERED to REFUND to petitioner the amount of P35,651.410.00 representing
erroneously paid excise taxes for the period January 1 to January 31, 2000.
SO ORDERED.

6. In an action for tax refund, the burden of proof is on the taxpayer to

establish its right to refund, and failure to sustain the burden is fatal to
its claim for refund/credit.
7. Petitioner must show that it has complied with the provisions of
Section 204(C) in relation [to] Section 229 of the Tax Code on the
prescriptive period for claiming tax refund/credit;
8. Claims for refund are construed strictly against the claimant for the
same partake of tax exemption from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99
is a valid implementing regulation which has the force and effect of law."
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that the said case
questions the CTAs December 4, 2003 decision in CTA Case No. 6612 granting
3
respondents claim for refund of the amount of P355,385,920.00 representing
erroneously or illegally collected specific taxes covering the period January 1,
2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a
reconsideration thereof.
xxxx
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax
Appeals reduced the issues to be resolved into two as stipulated by the parties,
to wit: (1) Whether or not the last paragraph of Section 1 of Revenue
Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of
Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of

Herein petitioner sought reconsideration of the above-quoted decision. In [twin]

resolution[s] [both] dated July 15, 2003, the Tax Court, in an apparent change of
heart, granted the petitioners consolidated motions for reconsideration, thereby
denying the respondents claim for refund.
However, on consolidated motions for reconsideration filed by the respondent in
CTA Case Nos. 6363 and 6383, the July 15, 2002 resolution was set aside, and
the Tax Court ruled, this time with a semblance of finality, that the respondent is
entitled to the refund claimed. Hence, in a resolution dated November 4, 2003,
the tax court reinstated its December 21, 2002 Decision and disposed as
follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby
REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND
petitioner the total amount of P680,387,025.00 representing erroneously paid
excise taxes for the period January 1, 2000 to January 31, 2000 and February 1,
2000 to December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision
in CTA Case No. 6612 granting the prayer for the refund of the amount of
P355,385,920.00 representing overpaid excise tax for the period covering
January 1, 2002 to December 31, 2002. The tax court disposed of the case as
follows:
IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND to petitioner the
amount of P355,385,920.00 representing overpaid excise tax for the period
covering January 1, 2002 to December 31, 2002.

SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was denied in a
4
Resolution dated March 17, 2004. (Emphasis supplied) (Citations omitted)
The Commissioner appealed the aforesaid decisions of the CTA. The petition
questioning the grant of refund in the amount of P680,387,025.00 was docketed
as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the
amount of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The
petitions were consolidated and eventually denied by the Court of Appeals. The
5
appellate court also denied reconsideration in its Resolution dated 1 March
2005.
6

In its Memorandum 22 dated November 2006, filed on behalf of the

Commissioner, the Office of the Solicitor General (OSG) seeks to convince the
Court that the literal interpretation given by the CTA and the Court of Appeals of
Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax
imposable on 1 January 2000 than that imposable during the transition period.
Instead of an increase of 12% in the tax rate effective on 1 January 2000 as
allegedly mandated by the Tax Code, the appellate courts ruling would result in
a significant decrease in the tax rate by as much as 66%.
The OSG argues that Section 145 of the Tax Code admits of several
interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be the
higher tax imposed under the specific tax system and the tax imposed
under the ad valorem tax system plus the 12% increase imposed by par.
5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply to
the brands of cigarettes listed under Annex "D" referred to in par. 8,
Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail price
as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even if
the resulting figure will be lower than the amount already being paid at
the end of the transition period. This is the interpretation followed by
7
both the CTA and the Court of Appeals.
This being so, the interpretation which will give life to the legislative intent to
raise revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and
must, therefore, be construed strictly against the taxpayer, such as Fortune
Tobacco.

In its Memorandum dated 10 November 2006, Fortune Tobacco argues that the
CTA and the Court of Appeals merely followed the letter of the law when they
ruled that the basis for the 12% increase in the tax rate should be the net retail
price of the cigarettes in the market as outlined in paragraph C, sub paragraphs
(1)-(4), Section 145 of the Tax Code. The Commissioner allegedly has gone
beyond his delegated rule-making power when he promulgated, enforced and
implemented Revenue Regulation No. 17-99, which effectively created a
separate classification for cigarettes based on the excise tax "actually being paid
9
prior to January 1, 2000."
It should be mentioned at the outset that there is no dispute between the fact of
payment of the taxes sought to be refunded and the receipt thereof by the
Bureau of Internal Revenue (BIR). There is also no question about the
mathematical accuracy of Fortune Tobaccos claim since the documentary
evidence in support of the refund has not been controverted by the revenue
agency. Likewise, the claims have been made and the actions have been filed
within the two (2)-year prescriptive period provided under Section 229 of the Tax
Code.
The power to tax is inherent in the State, such power being inherently legislative,
based on the principle that taxes are a grant of the people who are taxed, and
the grant must be made by the immediate representatives of the people; and
10
where the people have laid the power, there it must remain and be exercised.
This entire controversy revolves around the interplay between Section 145 of the
Tax Code and Revenue Regulation 17-99. The main issue is an inquiry into
whether the revenue regulation has exceeded the allowable limits of legislative
delegation.
For ease of reference, Section 145 of the Tax Code is again reproduced in full
as follows:
Section 145. Cigars and Cigarettes(A) Cigars.There shall be levied, assessed and collected on cigars a
tax of One peso (P1.00) per cigar.
(B). Cigarettes packed by hand.There shall be levied, assessed and
collected on cigarettes packed by hand a tax of Forty centavos (P0.40)
per pack.
(C) Cigarettes packed by machine.There shall be levied, assessed
and collected on cigarettes packed by machine a tax at the rates
prescribed below:

(1) If the net retail price (excluding the excise tax and the valueadded tax) is above Ten pesos (P10.00) per pack, the tax shall
be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value
added tax) exceeds Six pesos and Fifty centavos (P6.50) but
does not exceed Ten pesos (P10.00) per pack, the tax shall be
Eight Pesos (P8.00) per pack.
(3) If the net retail price (excluding the excise tax and the valueadded tax) is Five pesos (P5.00) but does not exceed Six Pesos
and fifty centavos (P6.50) per pack, the tax shall be Five pesos
(P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the valueadded tax) is below Five pesos (P5.00) per pack, the tax shall
be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the domestic
market after the effectivity of R.A. No. 8240 shall be taxed under the highest
classification of any variant of that brand.

at which the cigarette is sold in five (5) major intended to cover the applicable
excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average retail price as
of October 1, 1996, as set forth in Annex "D," shall remain in force until revised
by Congress.
Variant of a brand shall refer to a brand on which a modifier is prefixed and/or
suffixed to the root name of the brand and/or a different brand which carries the
11
same logo or design of the existing brand. (Emphasis supplied)
Revenue Regulation 17-99, which was issued pursuant to the unquestioned
authority of the Secretary of Finance to promulgate rules and regulations for the
12
effective implementation of the Tax Code,
interprets the above-quoted
provision and reflects the 12% increase in excise taxes in the following manner:

DESCRIPTION
SECTION
ARTICLES
145

The excise tax from any brand of cigarettes within the next three (3) years from
the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from
each brand on October 1, 1996. Provided, however, That in cases where the
excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will
result in an increase in excise tax of more than seventy percent (70%), for a
brand of cigarette, the increase shall take effect in two tranches: fifty percent
(50%) of the increase shall be effective in 1997 and one hundred percent
(100%) of the increase shall be effective in 1998.

PRESENT
OF SPECIFIC TAX
RATES PRIOR
TO JAN. 1, 2000

(A)

P1.00/cigar

NEW SPECIFIC
TAX
RATE
Effective Jan.. 1,
2000
P1.12/cigar

(B)Cigarettes packed
by Machine
(1) Net Retail Price P12.00/pack
(excluding VAT and
Excise)
exceeds
P10.00 per pack

P13.44/pack

(2) Net Retail Price P8.00/pack

(excluding VAT and
Excise) is P6.51 up to
P10.00 per pack

P8.96/pack

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2)
(3) and (4) hereof, shall be increased by twelve percent (12%) on January
1, 2000.

(3) Net Retail Price P5.00/pack

(excluding VAT and
excise) is P5.00 to
P6.50 per pack

P5.60/pack

New brands shall be classified according to their current net retail price.

(4) Net Retail Price P1.00/pack

(excluding VAT and
excise) is below P5.00
per pack)

P1.12/pack

Duly registered or existing brands of cigarettes or new brands thereof packed by

machine shall only be packed in twenties.

For the above purpose, net retail price shall mean the price at which the
cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for
brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and value-added tax. For brands which are
marketed only outside Metro Manila, the net retail price shall mean the price

This table reflects Section 145 of the Tax Code insofar as it mandates a 12%
increase effective on 1 January 2000 based on the taxes indicated under

paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99

went further and added that "[T]he new specific tax rate for any existing brand of
cigars, cigarettes packed by machine, distilled spirits, wines and fermented
liquor shall not be lower than the excise tax that is actually being paid prior to
13
January 1, 2000."

emphasized that tax administrators are not allowed to expand or contract the
legislative mandate and that the "plain meaning rule" or verba legis in statutory
construction should be applied such that 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.

Parenthetically, Section 145 states that during the transition period, i.e., within
the next three (3) years from the effectivity of the Tax Code, the excise tax from
any brand of cigarettes shall not be lower than the tax due from each brand on 1
October 1996. This qualification, however, is conspicuously absent as regards
the 12% increase which is to be applied on cigars and cigarettes packed by
machine, among others, effective on 1 January 2000. Clearly and unmistakably,
Section 145 mandates a new rate of excise tax for cigarettes packed by
machine due to the 12% increase effective on 1 January 2000 without regard to
whether the revenue collection starting from this period may turn out to be lower
than that collected prior to this date.

As we have previously declared, rule-making power must be confined to details

for regulating the mode or proceedings in order to carry into effect the law as it
has been enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because
any resulting discrepancy between the two will always be resolved in favor of the
17
basic law.

By adding the qualification that the tax due after the 12% increase becomes
effective shall not be lower than the tax actually paid prior to 1 January 2000,
Revenue Regulation No. 17-99 effectively imposes a tax which is the higher
amount between the ad valorem tax being paid at the end of the three (3)-year
transition period and the specific tax under paragraph C, sub-paragraph (1)-(4),
as increased by 12%a situation not supported by the plain wording of Section
145 of the Tax Code.
This is not the first time that national revenue officials had ventured in the area
of unauthorized administrative legislation.
14

In Commissioner of Internal Revenue v. Reyes, respondent was not informed

in writing of the law and the facts on which the assessment of estate taxes was
made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic
Act (R.A.) No. 8424. She was merely notified of the findings by the
Commissioner, who had simply relied upon the old provisions of the law and
Revenue Regulation No. 12-85 which was based on the old provision of the law.
The Court held that in case of discrepancy between the law as amended and the
implementing regulation based on the old law, the former necessarily prevails.
The law must still be followed, even though the existing tax regulation at that
15
time provided for a different procedure.
16

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation, the

tax authorities gave the term "tax credit" in Sections 2(i) and 4 of Revenue
Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides.
Their interpretation muddled up the intent of Congress to grant a mere discount
privilege and not a sales discount. The Court, striking down the revenue
regulation, held that an administrative agency issuing regulations may not
enlarge, alter or restrict the provisions of the law it administers, and it cannot
engraft additional requirements not contemplated by the legislature. The Court

18

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,

Commissioner Jose Ong issued Revenue Memorandum Order (RMO) No. 1591, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91,
imposing a 5% lending investors tax under the 1977 Tax Code, as amended by
Executive Order (E.O.) No. 273, on pawnshops. The Commissioner anchored
the imposition on the definition of lending investors provided in the 1977 Tax
Code which, according to him, was broad enough to include pawnshop
operators. However, the Court noted that pawnshops and lending investors were
subjected to different tax treatments under the Tax Code prior to its amendment
by the executive order; that Congress never intended to treat pawnshops in the
same way as lending investors; and that the particularly involved section of the
Tax Code explicitly subjected lending investors and dealers in securities only to
percentage tax. And so the Court affirmed the invalidity of the challenged
circulars, stressing that "administrative issuances must not override, supplant or
modify the law, but must remain consistent with the law they intend to carry
19
out."
20

In Philippine Bank of Communications v. Commissioner of Internal Revenue,

the then acting Commissioner issued RMC 7-85, changing the prescriptive
period of two years to ten years for claims of excess quarterly income tax
payments, thereby creating a clear inconsistency with the provision of Section
230 of the 1977 Tax Code. The Court nullified the circular, ruling that the BIR did
not simply interpret the law; rather it legislated guidelines contrary to the statute
passed by Congress. The Court held:
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts

will not countenance administrative issuances that override, instead of remaining

21
consistent and in harmony with, the law they seek to apply and implement.
22

In Commissioner of Internal Revenue v. CA, et al., the central issue was the
validity of RMO 4-87 which had construed the amnesty coverage under E.O. No.
41 (1986) to include only assessments issued by the BIR after the promulgation
of the executive order on 22 August 1986 and not assessments made to that
date. Resolving the issue in the negative, the Court held:
x x x all such issuances must not override, but must remain consistent and in
harmony with, the law they seek to apply and implement. Administrative rules
and regulations are intended to carry out, neither to supplant nor to modify, the
23
law.
xxx
If, as the Commissioner argues, Executive Order No. 41 had not been intended
to include 1981-1985 tax liabilities already assessed (administratively) prior to
22 August 1986, the law could have simply so provided in its exclusionary
clauses. It did not. The conclusion is unavoidable, and it is that the executive
order has been designed to be in the nature of a general grant of tax amnesty
24
subject only to the cases specifically excepted by it.
In the case at bar, the OSGs argument that by 1 January 2000, the excise tax
on cigarettes should be the higher tax imposed under the specific tax system
and the tax imposed under the ad valorem tax system plus the 12% increase
imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful
attempt to justify what is clearly an impermissible incursion into the limits of
administrative legislation. Such an interpretation is not supported by the clear
language of the law and is obviously only meant to validate the OSGs thesis
that Section 145 of the Tax Code is ambiguous and admits of several
interpretations.
The contention that the increase of 12% starting on 1 January 2000 does not
apply to the brands of cigarettes listed under Annex "D" is likewise
unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply
states that, "[T]he classification of each brand of cigarettes based on its average
net retail price as of October 1, 1996, as set forth in Annex D, shall remain in
force until revised by Congress." This declaration certainly does not lend itself to
the interpretation given to it by the OSG. As plainly worded, the average net
retail prices of the listed brands under Annex "D," which classify cigarettes
according to their net retail price into low, medium or high, obviously remain the
bases for the application of the increase in excise tax rates effective on 1
January 2000.

The foregoing leads us to conclude that Revenue Regulation No. 17-99 is

indeed indefensibly flawed. The Commissioner cannot seek refuge in his claim
that the purpose behind the passage of the Tax Code is to generate additional
revenues for the government. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. However, as borne by the
25
legislative record, the shift from the ad valorem system to the specific tax
system is likewise meant to promote fair competition among the players in the
industries concerned, to ensure an equitable distribution of the tax burden and to
simplify tax administration by classifying cigarettes, among others, into high,
medium and low-priced based on their net retail price and accordingly
graduating tax rates.
At any rate, this advertence to the legislative record is merely gratuitous
because, as we have held, the meaning of the law is clear on its face and free
from the ambiguities that the Commissioner imputes. We simply cannot
26
disregard the letter of the law on the pretext of pursuing its spirit.
Finally, the Commissioners contention that a tax refund partakes the nature of a
tax exemption does not apply to the tax refund to which Fortune Tobacco is
entitled. There is parity between tax refund and tax exemption only when the
former is based either on a tax exemption statute or a tax refund statute.
Obviously, that is not the situation here. Quite the contrary, Fortune Tobaccos
claim for refund is premised on its erroneous payment of the tax, or better still
the governments exaction in the absence of a law.
Tax exemption is a result of legislative grace. And he who claims an exemption
from the burden of taxation must justify his claim by showing that the legislature
27
intended to exempt him by words too plain to be mistaken. The rule is that tax
exemptions must be strictly construed such that the exemption will not be held to
be conferred unless the terms under which it is granted clearly and distinctly
28
show that such was the intention.
A claim for tax refund may be based on statutes granting tax exemption or tax
refund. In such case, the rule of strict interpretation against the taxpayer is
applicable as the claim for refund partakes of the nature of an exemption, a
legislative grace, which cannot be allowed unless granted in the most explicit
and categorical language. The taxpayer must show that the legislature intended
29
to exempt him from the tax by words too plain to be mistaken.
Tax refunds (or tax credits), on the other hand, are not founded principally on
legislative grace but on the legal principle which underlies all quasi-contracts
30
abhorring a persons unjust enrichment at the expense of another. The
dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract,
31
solutio indebiti, which covers not only mistake in fact but also mistake in law.

32

The Government is not exempt from the application of solutio indebiti. Indeed,
the taxpayer expects fair dealing from the Government, and the latter has the
duty to refund without any unreasonable delay what it has erroneously
33
collected. If the State expects its taxpayers to observe fairness and honesty in
paying their taxes, it must hold itself against the same standard in refunding
excess (or erroneous) payments of such taxes. It should not unjustly enrich itself
34
at the expense of taxpayers. And so, given its essence, a claim for tax refund
necessitates only preponderance of evidence for its approbation like in any other
ordinary civil case.
Under the Tax Code itself, apparently in recognition of the pervasive quasicontract principle, a claim for tax refund may be based on the following: (a)
erroneously or illegally assessed or collected internal revenue taxes; (b)
penalties imposed without authority; and (c) any sum alleged to have been
35
excessive or in any manner wrongfully collected.
What is controlling in this case is the well-settled doctrine of strict interpretation
in the imposition of taxes, not the similar doctrine as applied to tax exemptions.
The rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose.
Accordingly, the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the provisions of a taxing
act are not to be extended by implication. In answering the question of who is
subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor presumed to be imposed
36
beyond what statutes expressly and clearly import. As burdens, taxes should
37
not be unduly exacted nor assumed beyond the plain meaning of the tax laws.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in
CA G.R. SP No. 80675, dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.
SO ORDERED.
DANTE O. TINGA
Associate Justice

G.R. No. 160756

March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC.,

Petitioner,
vs.
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.

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

DECISION
CORONA, J.:
1

In this original petition for certiorari and mandamus, petitioner Chamber of Real
Estate and Builders Associations, Inc. is questioning the constitutionality of
2
Section 27 (E) of Republic Act (RA) 8424 and the revenue regulations (RRs)
issued by the Bureau of Internal Revenue (BIR) to implement said provision and
3
those involving creditable withholding taxes.

(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 72003, is unconstitutional.
Overview of the Assailed Provisions

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.

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
4
greater than the normal corporate income tax imposed under Section 27(A). 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:

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). [MCIT] on Domestic Corporations. -

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. 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

(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.

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

(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
5
RR 9-98 implementing Section 27(E). 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.

xxx

xxx

(2) 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
6
8424 involving the withholding of taxes. Under Section 2.57.2(J) of RR No. 298, 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.

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

5.0%

With a selling price of more than two Million Pesos 5.0%

(P2,000,000.00).

million pesos (P2,000,000.00)

xxx

xxx

xxx

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.

xxx

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 Exempt
accordance with Sec. 2.57.5 of these regulations.
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 1.5%
(P500,000.00) or less.
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (P500,000.00) but not more than Two Million Pesos
(P2,000,000.00).

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

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.

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
7
conveyances have been reported and the taxes thereof have been duly paid:
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.
8

On February 11, 2003, RR No. 7-2003 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

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 298], 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

xxx

xxx

c. In the case of domestic corporations.

xxx

xxx

xxx

(ii) 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.

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
9
mota of the case.
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
10
from the giving of advisory opinion that does not really settle legal issues.
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
11
from a hypothetical or abstract difference or dispute. On the other hand, a
question is considered ripe for adjudication when the act being challenged has a
12
direct adverse effect on the individual challenging it.
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
13
Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:
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
14
the law is enough to awaken judicial duty.
If the assailed provisions are indeed unconstitutional, there is no better time than
the present to settle such question once and for all.

Existence of a Justiciable Controversy

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

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
15
from the enforcement of [the assailed provisions].
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
16
governmental act being challenged. In Holy Spirit Homeowners Association,
17
Inc. v. Defensor, 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
18
that they have been disqualified and eliminated from the selection process.
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
19
when paramount public interest is involved. 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
20
this petition.

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 under-declaration of
23
income or over-deduction of expenses otherwise called tax shelters.
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
24
tax shelters, Your Honor.
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.

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
21
corporations. It was devised as a relatively simple and effective revenueraising 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
22
and our economic advancement.

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
25
corporation commenced its operations. This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to
26
the MCIT.
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
27
the three immediately succeeding years.
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
28
legitimate business reverses.

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
29
countries.
At present, the United States of America, Mexico, Argentina, Tunisia, Panama
30
and Hungary have their own versions of the MCIT.
MCIT Is Not Violative of Due Process

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
37
the tax) to its constituency who are to pay it. 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,
38
Jr. v. Ancheta, et al., we held that the due process clause may properly be
39
invoked to invalidate, in appropriate cases, a revenue measure when it
40
amounts to a confiscation of property. 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
41
the taxpayer. There must be a factual foundation to such an unconstitutional
42
taint. 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
43
broad standard, there is a need for proof of such persuasive character.
44

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
31
gross income, were not taken into account. Thus, pegging the tax base of the
MCIT to a corporations gross income is tantamount to a confiscation of capital
32
because gross income, unlike net income, is not "realized gain."
We disagree.

Petitioner is correct in saying that income is distinct from capital. 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
45
income denotes a flow of wealth during a definite period of time. Income is
46
gain derived and severed from capital. 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.

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
33
promote public interest and the common good.
34

Taxation is an inherent attribute of sovereignty. It is a power that is purely

35
legislative. Essentially, this means that in the legislature primarily lies the
discretion to determine the nature (kind), object (purpose), extent (rate),
36
coverage (subjects) and situs (place) of taxation. It has the authority to
prescribe a certain tax at a specific rate for a particular public purpose on

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
48
capital spent by a corporation in the sale of its goods, i.e., the cost of goods
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
49
rate.
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
50
taxation.

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
58
as unconstitutional simply because of its yokes. Taxation is necessarily
59
burdensome because, by its nature, it adversely affects property rights. The
party alleging the laws unconstitutionality has the burden to demonstrate the
60
supposed violations in understandable terms.
RR 9-98 Merely Clarifies Section 27(E) of RA 8424

The United States has a similar alternative minimum tax (AMT) system which is
51
generally characterized by a lower tax rate but a broader tax base. Since our
income tax laws are of American origin, interpretations by American courts of
52
our parallel tax laws have persuasive effect on the interpretation of these laws.
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
53
Circuit stated in Okin v. Commissioner:
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
54
is constitutional.
The U.S. Court declared that the congressional intent to ensure that corporate
taxpayers would contribute a minimum amount of taxes was a legitimate
55
governmental end to which the AMT bore a reasonable relation.
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
56
that it chooses to tax. This is because deductions are a matter of legislative
57
grace.

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
61
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.

Philippines. Such authority is derived from Section 57(B) of RA 8424 which

provides:

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
62
contravention of law" 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
63
which calls for the payment of the net income at the end of the taxable period.

SEC. 57. Withholding of Tax at Source.

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
64
consistent and in harmony with, the law they seek to apply and implement. It is
65
well-settled that an administrative agency cannot amend an act of Congress.
We have long recognized that the method of withholding tax at source is a
66
procedure of collecting income tax which is sanctioned by our tax laws. 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,
67
to improve the governments cash flow. 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
68
means and remedies.
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

xxx

xxx

xxx

(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.
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
69
order to extinguish its possible tax obligation.
They are installments on the
70
annual tax which may be due at the end of the taxable year.
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
71
the end of the taxable year. 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 non-resident 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 298], 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 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 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
72
FMV. This final tax is also withheld at source.
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

c)
The
income
recipient
is
still
required to file an
income tax return, as

73

income.

prescribed in Sec. 51
and Sec. 52 of the
74
NIRC, as amended.

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
75
assets.
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.

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
76
corporations primary purposes, the same is not passive income
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.

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-

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
77
functions. 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
78
ordinarily deserve to be given weight and respect by the courts 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
79
requirement applies to the power to tax. The CWT does not impose new taxes
80
nor does it increase taxes. 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
81
litigation before they are granted a refund. 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.1avvphi1
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
82
prohibitive "up-front" regulatory fees from at least 20 government agencies.
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
83
entity. Sales on installment are taxed on a per-installment basis. 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
84
house and lot units.
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
85
circumstances." 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
86
and (4) apply equally to all members of the same class.
The taxing power has the authority to make reasonable classifications for
87
purposes of taxation. Inequalities which result from a singling out of one
88
particular class for taxation, or exemption, infringe no constitutional limitation.
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
89
other capital goods yet these are not similarly subjected to the CWT. As
already discussed, the Secretary may adopt any reasonable method to carry out
90
its functions. 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
91
their transactions with said 5,000 corporations.
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
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
92
thing in the world to understand is the income tax." 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.

RENATO C. CORONA
Associate Justice

G.R. No. L-75697

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 overregulated 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.
Teehankee, (C.J.), Yap, Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano,
Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

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,
1
especially on the matter of tax refunds. 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
2
review of the Decision of the Court of Appeals dismissing its petition for review
3
of the resolution of the Court of Tax Appeals (CTA) which, in turn, denied its
claim for refund.
4

The factual antecedents 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 of P79,009.00, 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 facto warrant 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
5
respondent Court on March 10, 1994.
6

Petitioner filed a Petition for Review 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.
7

The Court of Appeals denied petitioners Motion for Reconsideration dated

8
November 8, 1994 in its Resolution dated February 21, 1995 because the
motion merely restated the grounds which have already been considered and
9
passed upon in its Decision.

13

On September 2, 1997, petitioner filed a Reply 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.
14

The OSG filed a Rejoinder 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.

10

Petitioner thus filed the instant Petition for Review 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
11
subject of the instant petition is inconsistent with a final decision 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.

15

In its Resolution 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
16
Memorandum dated September 18, 1997 in due time, while the OSG filed its
17
Memorandum dated April 27, 1998 only on April 29, 1998 after several
extensions.
The petition must be denied.

12

The Office of the Solicitor General (OSG) filed a Comment dated May 16, 1996
on behalf of respondents asserting that the claimed refund of P54,104.00 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.

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
18
there has been an abuse or improvident exercise of its authority.
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.

x x x 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.

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
19
tax credit for the succeeding taxable year.
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
20
amount subject of the instant claim for refund. 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

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
23
should be resolved together with the previous claims.

- 25,623.00

Claim for refund in CTA Case No. 4439 (C.A.-G.R. Sp. No. 32300)
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
P146,854.00 Balance as of April 16, 1990
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
- 59,510.00 Claim for refund in CTA Case No. 4528 (C.A.-G.R. Sp. No. 32890)
instant claim for refund, against its 1990 tax liability as it had elected in its 1989
P87,344.00 Balance as of January 2, 1991
return, or at least, whether petitioners tax credit of P172,477.00 was applied to
its approved refunds as it claims.
- 33,240.00 Income tax liability for calendar year 1990 applied as of April 15,
1991
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
P54,104.00 Balance as of April 15, 1991 now subject of the instant claim
for
21
have petitioners allegation that its tax due for 1990 was P33,240.00 and that
refund
this was applied against its remaining tax credits using its own "first in, first out"
method of computation.
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.
It would have been different had petitioner not included the P54,104.00
Instead, it anchors its assertion of entitlement to refund on an alleged finding in
22
creditable taxes for 1989 in the total amount it elected to apply against its 1990
C.A.-G.R. Sp. No. 32890 involving the same parties to the effect that petitioner
tax liabilities. Then, all that would have been required of petitioner are: proof that
charged its 1990 income tax liability to its tax credit for 1988 and not its 1989 tax
it filed a claim for refund within the two (2)-year prescriptive period provided
credit. Hence, its excess creditable taxes withheld of P54,104.00 for 1989 was
under Section 230 of the NIRC; evidence that the income upon which the taxes
left untouched and may be refunded.
were withheld was included in its return; and to establish the fact of withholding
24
by a copy of the statement (BIR Form No. 1743.1) issued by the payor to the
Note should be taken, however, that nowhere in the case referred to by
payee showing the amount paid and the amount of tax withheld therefrom.
petitioner did the Court of Appeals make a categorical determination that
However, since petitioner opted to apply its aggregate excess credits as tax
petitioners tax liability for 1990 was applied against its 1988 tax credit. The
credit for 1990, it was incumbent upon it to present its tax return for 1990 to
statement adverted to by petitioner was actually presented in the appellate
show that the claimed refund had not been automatically credited and applied to
courts decision in CA-G.R. Sp No. 32890 as part of petitioners own narration of
its 1990 tax liabilities.
facts. The pertinent portion of the decision reads:
It would appear from petitioners submission as follows:

The grant of a refund is founded on the assumption that the tax return is valid,
25
i.e., that the facts stated therein are true and correct. 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
26
"B" of its Petition for Review 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.
27

In BPI-Family Savings Bank v. Court of Appeals, 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
28
taxpayer.
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
29
Internal Revenue, 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
30
collection to be at the sole control and discretion of the taxpayer.
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.
31
8424 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:

(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) carryover 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
32
is the rule, exemption therefrom is the exception.

(A) Pay the balance of the tax still due; or

WHEREFORE, the instant petition is DENIED. The challenged decision of the

Court of Appeals is hereby AFFIRMED. No pronouncement as to costs.

(B) Carry-over the excess credit; or

SO ORDERED

G.R. No. L-25043

April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own

respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.
Leido, Andrada, Perez and Associates for petitioners.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to
their grandchildren by hereditary succession the following properties:
(1) Agricultural lands with a total area of 19,000 hectares, situated in the
municipality of Nasugbu, Batangas province;
(2) A residential house and lot located at Wright St., Malate, Manila; and
(3) Shares of stocks in different corporations.
To manage the above-mentioned properties, said children, namely, Antonio
Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y
Compania.
AGRICULTURAL LANDS
At the conclusion of the Second World War, the tenants who have all been tilling
the lands in Nasugbu for generations expressed their desire to purchase from
Roxas y Cia. the parcels which they actually occupied. For its part, the
Government, in consonance with the constitutional mandate to acquire big
landed estates and apportion them among landless tenants-farmers, persuaded
the Roxas brothers to part with their landholdings. Conferences were held with
the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell
13,500 hectares to the Government for distribution to actual occupants for a
price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.
It turned out however that the Government did not have funds to cover the
purchase price, and so a special arrangement was made for the Rehabilitation
Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00
as loan. Collateral for such loan were the lands proposed to be sold to the
farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the
lands for the same price but by installment, and contracted with the

Rehabilitation Finance Corporation to pay its loan from the proceeds of the
yearly amortizations paid by the farmers.
In 1953 and 1955 Roxas y Cia. derived from said installment payments a net
gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported
for income tax purposes as gain on the sale of capital asset held for more than
one year pursuant to Section 34 of the Tax Code.
RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at
Wright St., Malate, Manila, which they inherited from their grandparents. After
Antonio and Eduardo got married, they resided somewhere else leaving only
Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia.
rentals for the house in the sum of P8,000.00 a year.
ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from
Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of
P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for
dealers of securities for 1952 plus P10.00 compromise penalty for late payment.
The assessment for real estate dealer's tax was based on the fact that Roxas y
Cia. received house rentals from Jose Roxas in the amount of P8,000.00.
Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a
yearly rental income therefrom in the amount of P3,000.00 or more is
considered a real estate dealer and is liable to pay the corresponding fixed tax.
The Commissioner of Internal Revenue justified his demand for the fixed tax on
dealers of securities against Roxas y Cia., on the fact that said partnership
made profits from the purchase and sale of securities.
In the same assessment, the Commissioner assessed deficiency income taxes
against the Roxas Brothers for the years 1953 and 1955, as follows:

Antonio Roxas
Eduardo Roxas
Jose Roxas

1953
P7,010.00
7,281.00
6,323.00

1955
P5,813.00
5,828.00
5,588.00

The deficiency income taxes resulted from the inclusion as income of Roxas y
Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the
sale of the Nasugbu farm lands to the tenants, and the disallowance of
deductions from gross income of various business expenses and contributions
claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y

Cia. subdivided its Nasugbu farm lands and sold them to the farmers on
installment, the Commissioner considered the partnership as engaged in the
business of real estate, hence, 100% of the profits derived therefrom was taxed.

Contributions to

The following deductions were disallowed:

Philippines Herald's fund for Manila's

neediest families
100.00

ROXAS Y CIA.:
1953

Tickets for Banquet

S. Osmea

1955
in

honor

of P
40.00

Gifts of San Miguel beer

1955

Philippine Air Force Chapel

100.00

Manila Police Trust Fund

150.00

Philippines Herald's fund for Manila's

neediest families

100.00

Contributions
to
Contribution
to
Our Lady of Fatima Chapel, FEU 50.00
ANTONIO ROXAS:

1953

Contributions to
Pasay City Firemen Christmas Fund
Pasay City Police Dept. X'mas fund

1955

50.00

Contributions
to
Philippines
Herald's fund for Manila's
neediest families
120.00

Contributions
to
Philippines
Herald's fund for Manila's
neediest families
120.00

The Roxas brothers protested the assessment but inasmuch as said protest was
denied, they instituted an appeal in the Court of Tax Appeals on January 9,
1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965
sustaining the assessment except the demand for the payment of the fixed tax
on dealer of securities and the disallowance of the deductions for contributions
to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The
Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with
respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas
who are hereby ordered to pay the respondent Commissioner of Internal
Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00,
respectively, as deficiency income taxes for the years 1953 and 1955,
plus 5% surcharge and 1% monthly interest as provided for in Sec.
51(a) of the Revenue Code; and modified with respect to the partnership
Roxas y Cia. in the sense that it should pay only P150.00, as real estate
dealer's tax. With costs against petitioners.

Contributions to
Baguio City Police Christmas fund
Pasay City Firemen Christmas fund
Pasay City Police Christmas fund
EDUARDO ROXAS:

1953

25.00

450.00

JOSE ROXAS:

28.00

Contributions to

1955

Hijas de Jesus' Retiro de Manresa

25.00

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The
Commissioner of Internal Revenue did not appeal.

25.00

The issues:

50.00

(1) Is the gain derived from the sale of the Nasugbu farm lands an
ordinary gain, hence 100% taxable?

(2) Are the deductions for business expenses and contributions

deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate
dealers?

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the
farmers are capital assets, and the gain derived from the sale thereof is capital
gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS

The Commissioner of Internal Revenue contends that Roxas y Cia. could be

considered a real estate dealer because it engaged in the business of selling
real estate. The business activity alluded to was the act of subdividing the
Nasugbu farm lands and selling them to the farmers-occupants on installment.
To bolster his stand on the point, he cites one of the purposes of Roxas y Cia.
as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que
pueden pertenecer a ella en el futuro, alquilandoles por los plazos y
demas condiciones, estime convenientes y vendiendo aquellas que a
juicio de sus gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the
Commissioner of Internal Revenue cannot be favorably accepted by Us in this
isolated transaction with its peculiar circumstances in spite of the fact that there
were hundreds of vendees. Although they paid for their respective holdings in
installment for a period of ten years, it would nevertheless not make the vendor
Roxas y Cia. a real estate dealer during the ten-year amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was not only in consonance with, but
more in obedience to the request and pursuant to the policy of our Government
to allocate lands to the landless. It was the bounden duty of the Government to
pay the agreed compensation after it had persuaded Roxas y Cia. to sell its
haciendas, and to subsequently subdivide them among the farmers at very
reasonable terms and prices. However, the Government could not comply with
its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's
burden, went out of its way and sold lands directly to the farmers in the same
way and under the same terms as would have been the case had the
Government done it itself. For this magnanimous act, the municipal council of
Nasugbu passed a resolution expressing the people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore
it should be exercised with caution to minimize injury to the proprietary rights of
a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the "hen that lays the golden egg". And, in order to maintain the
general public's trust and confidence in the Government this power must be
used justly and not treacherously. It does not conform with Our sense of justice
in the instant case for the Government to persuade the taxpayer to lend it a
helping hand and later on to penalize him for duly answering the urgent call.

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to
a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer
given as gifts to various persons. The deduction were claimed as representation
expenses. Representation expenses are deductible from gross income as
expenditures incurred in carrying on a trade or business under Section 30(a) of
the Tax Code provided the taxpayer proves that they are reasonable in amount,
ordinary and necessary, and incurred in connection with his business. In the
case at bar, the evidence does not show such link between the expenses and
the business of Roxas y Cia. The findings of the Court of Tax Appeals must
therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City Police,
Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police
Trust Fund, Philippines Herald's fund for Manila's neediest families and Our
Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City
Firemen and Baguio City Police are not deductible for the reason that the
Christmas funds were not spent for public purposes but as Christmas gifts to the
families of the members of said entities. Under Section 39(h), a contribution to a
government entity is deductible when used exclusively for public purposes. For
this reason, the disallowance must be sustained. On the other hand, the
contribution to the Manila Police trust fund is an allowable deduction for said
trust fund belongs to the Manila Police, a government entity, intended to be used
exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest families
were disallowed on the ground that the Philippines Herald is not a corporation or
an association contemplated in Section 30 (h) of the Tax Code. It should be
noted however that the contributions were not made to the Philippines Herald
but to a group of civic spirited citizens organized by the Philippines Herald solely
for charitable purposes. There is no question that the members of this group of
citizens do not receive profits, for all the funds they raised were for Manila's
neediest families. Such a group of citizens may be classified as an association
organized exclusively for charitable purposes mentioned in Section 30(h) of the
Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to
Our Lady of Fatima chapel at the Far Eastern University on the ground that the

said university gives dividends to its stockholders. Located within the premises
of the university, the chapel in question has not been shown to belong to the
Catholic Church or any religious organization. On the other hand, the lower court
found that it belongs to the Far Eastern University, contributions to which are not
deductible under Section 30(h) of the Tax Code for the reason that the net
income of said university injures to the benefit of its stockholders. The
disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax
upon it, because although it earned a rental income of P8,000.00 per annum in
1952, said rental income came from Jose Roxas, one of the partners. Section
194 of the Tax Code, in considering as real estate dealers owners of real estate
receiving rentals of at least P3,000.00 a year, does not provide any qualification
as to the persons paying the rentals. The law, which states: 1wph1.t
. . . "Real estate dealer" includes any person engaged in the business of
buying, selling, exchanging, leasing or renting property on his own
account as principal and holding himself out as a full or part-time dealer
in real estate or as an owner of rental property or properties rented or
offered to rent for an aggregate amount of three thousand pesos or
more a year: . . . (Emphasis supplied) .
is too clear and explicit to admit construction. The findings of the Court of Tax
Appeals or, this point is sustained.1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas,
Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency
income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed
*
as follows:
ANTONIO ROXAS
Net income per return

P315,476.59

Add: 1/3 share, profits in Roxas y Cia.

P 153,249.15

Less amount declared

146,135.46

amounting to P21,126.06 disallowed

from partnership but allowed to partners
Net income per review

P315,663.26

Less: Exemptions

4,200.00

Net taxable income

P311,463.26

Tax due

154,169.00

Tax paid

154,060.00

Deficiency

P
109.00
==========

EDUARDO ROXAS
P
304,166.92

Net income per return

Add: 1/3 share, profits in Roxas y Cia

P 153,249.15

Less profits declared

146,052.58

Amount understated

P 7,196.57

Less 1/3 share in contributions

amounting to P21,126.06 disallowed
from partnership but allowed to partners 7,042.02

155.55

Net income per review

P304,322.47

Less: Exemptions

4,800.00

Net taxable income

P299,592.47

Amount understated

P 7,113.69

Tax Due

P147,250.00

Contributions disallowed

115.00

Tax paid

147,159.00

P 7,228.69

Deficiency

P91.00
===========

Less

1/3

share

of

contributions 7,042.02

186.67

JOSE ROXAS
Net income per return

P222,681.76

Add: 1/3 share, profits in Roxas y Cia.

P153,429.15

Less amount reported

146,135.46

Amount understated

7,113.69

Less 1/3 share of contributions

disallowed from partnership but allowed
as deductions to partners
7,042.02

71.67

Net income per review

P222,753.43

Less: Exemption

1,800.00

Net income subject to tax

P220,953.43

Tax due

P102,763.00

Tax paid

102,714.00

Deficiency

P
49.00
===========

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby

ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and
Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the
respective sums of P109.00, P91.00 and P49.00 as their individual deficiency
income tax all corresponding for the year 1955. No costs. So ordered.
Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.
Zaldivar, J., took no part.
Concepcion, C.J., is on leave.

G.R. No. L-23645

October 29, 1968

BENJAMIN P. GOMEZ, petitioner-appellee,

vs.
ENRICO PALOMAR, in his capacity as Postmaster General, HON. BRIGIDO
R. VALENCIA, in his capacity as Secretary of Public Works and
Communications, and DOMINGO GOPEZ, in his capacity as Acting
Postmaster of San Fernando, Pampanga, respondent-appellants.
Lorenzo P. Navarro and Narvaro Belar S. Navarro for petitioner-appellee.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Frine
C. Zaballero and Solicitor Dominador L. Quiroz for respondents-appellants.
CASTRO, J.:
This appeal puts in issue the constitutionality of Republic Act 1635,
2
amended by Republic Act 2631, which provides as follows:

as

To help raise funds for the Philippine Tuberculosis Society, the Director
of Posts shall order for the period from August nineteen to September
thirty every year the printing and issue of semi-postal stamps of different
denominations with face value showing the regular postage charge plus
the additional amount of five centavos for the said purpose, and during
the said period, no mail matter shall be accepted in the mails unless it
bears such semi-postal stamps: Provided, That no such additional
charge of five centavos shall be imposed on newspapers. The additional
proceeds realized from the sale of the semi-postal stamps shall
constitute a special fund and be deposited with the National Treasury to
be expended by the Philippine Tuberculosis Society in carrying out its
noble work to prevent and eradicate tuberculosis.
The respondent Postmaster General, in implementation of the law, thereafter
issued four (4) administrative orders numbered 3 (June 20, 1958), 7 (August 9,
1958), 9 (August 28, 1958), and 10 (July 15, 1960). All these administrative
orders were issued with the approval of the respondent Secretary of Public
Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
Such semi-postal stamps could not be made available during the period
from August 19 to September 30, 1957, for lack of time. However, two
denominations of such stamps, one at "5 + 5" centavos and another at
"10 + 5" centavos, will soon be released for use by the public on their
mails to be posted during the same period starting with the year 1958.
xxx

xxx

xxx

During the period from August 19 to September 30 each year starting in

1958, no mail matter of whatever class, and whether domestic or
foreign, posted at any Philippine Post Office and addressed for delivery
in this country or abroad, shall be accepted for mailing unless it bears at
least one such semi-postal stamp showing the additional value of five
centavos intended for the Philippine Tuberculosis Society.
In the case of second-class mails and mails prepaid by means of mail
permits or impressions of postage meters, each piece of such mail shall
bear at least one such semi-postal stamp if posted during the period
above stated starting with the year 1958, in addition to being charged
the usual postage prescribed by existing regulations. In the case of
business reply envelopes and cards mailed during said period, such
stamp should be collected from the addressees at the time of delivery.
Mails entitled to franking privilege like those from the office of the
President, members of Congress, and other offices to which such
privilege has been granted, shall each also bear one such semi-postal
stamp if posted during the said period.
Mails posted during the said period starting in 1958, which are found in
street or post-office mail boxes without the required semi-postal stamp,
shall be returned to the sender, if known, with a notation calling for the
affixing of such stamp. If the sender is unknown, the mail matter shall be
treated as nonmailable and forwarded to the Dead Letter Office for
proper disposition.
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
In the case of the following categories of mail matter and mails entitled
to franking privilege which are not exempted from the payment of the
five centavos intended for the Philippine Tuberculosis Society, such
extra charge may be collected in cash, for which official receipt (General
Form No. 13, A) shall be issued, instead of affixing the semi-postal
stamp in the manner hereinafter indicated:
1. Second-class mail. Aside from the postage at the second-class
rate, the extra charge of five centavos for the Philippine Tuberculosis
Society shall be collected on each separately-addressed piece of
second-class mail matter, and the total sum thus collected shall be
entered in the same official receipt to be issued for the postage at the
second-class rate. In making such entry, the total number of pieces of
second-class mail posted shall be stated, thus: "Total charge for TB
Fund on 100 pieces . .. P5.00." The extra charge shall be entered
separate from the postage in both of the official receipt and the Record
of Collections.

2. First-class and third-class mail permits. Mails to be posted without

postage affixed under permits issued by this Bureau shall each be
charged the usual postage, in addition to the five-centavo extra charge
intended for said society. The total extra charge thus received shall be
entered in the same official receipt to be issued for the postage
collected, as in subparagraph 1.

In view of this development, the petitioner brough suit for declaratory relief in the
Court of First Instance of Pampanga, to test the constitutionality of the statute,
as well as the implementing administrative orders issued, contending that it
violates the equal protection clause of the Constitution as well as the rule of
uniformity and equality of taxation. The lower court declared the statute and the
orders unconstitutional; hence this appeal by the respondent postal authorities.

3. Metered mail. For each piece of mail matter impressed by postage

meter under metered mail permit issued by this Bureau, the extra
charge of five centavos for said society shall be collected in cash and an
official receipt issued for the total sum thus received, in the manner
indicated in subparagraph 1.

For the reasons set out in this opinion, the judgment appealed from must be
reversed.
I.

4. Business reply cards and envelopes. Upon delivery of business

reply cards and envelopes to holders of business reply permits, the fivecentavo charge intended for said society shall be collected in cash on
each reply card or envelope delivered, in addition to the required
postage which may also be paid in cash. An official receipt shall be
issued for the total postage and total extra charge received, in the
manner shown in subparagraph 1.

Before reaching the merits, we deem it necessary to dispose of the respondents'

contention that declaratory relief is unavailing because this suit was filed after
the petitioner had committed a breach of the statute. While conceding that the
mailing by the petitioner of a letter without the additional anti-TB stamp was a
violation of Republic Act 1635, as amended, the trial court nevertheless refused
to dismiss the action on the ground that under section 6 of Rule 64 of the Rules
of Court, "If before the final termination of the case a breach or violation of ... a
statute ... should take place, the action may thereupon be converted into an
ordinary action."

5. Mails entitled to franking privilege. Government agencies, officials,

and other persons entitled to the franking privilege under existing laws
may pay in cash such extra charge intended for said society, instead of
affixing the semi-postal stamps to their mails, provided that such mails
are presented at the post-office window, where the five-centavo extra
charge for said society shall be collected on each piece of such mail
matter. In such case, an official receipt shall be issued for the total sum
thus collected, in the manner stated in subparagraph 1.

The prime specification of an action for declaratory relief is that it must be

brought "before breach or violation" of the statute has been committed. Rule 64,
section 1 so provides. Section 6 of the same rule, which allows the court to treat
an action for declaratory relief as an ordinary action, applies only if the breach or
3
violation occurs after the filing of the action but before the termination thereof.

Mail under permits, metered mails and franked mails not presented at
the post-office window shall be affixed with the necessary semi-postal
stamps. If found in mail boxes without such stamps, they shall be
treated in the same way as herein provided for other mails.
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government
and its Agencies and Instrumentalities Performing Governmental Functions."
Adm. Order 10, amending Adm. Order 3, as amended, exempts "copies of
periodical publications received for mailing under any class of mail matter,
including newspapers and magazines admitted as second-class mail."
The FACTS. On September l5, 1963 the petitioner Benjamin P. Gomez mailed a
letter at the post office in San Fernando, Pampanga. Because this letter,
addressed to a certain Agustin Aquino of 1014 Dagohoy Street, Singalong,
Manila did not bear the special anti-TB stamp required by the statute, it was
returned to the petitioner.

Hence, if, as the trial court itself admitted, there had been a breach of the statute
before the firing of this action, then indeed the remedy of declaratory relief
cannot be availed of, much less can the suit be converted into an ordinary
action.
Nor is there merit in the petitioner's argument that the mailing of the letter in
question did not constitute a breach of the statute because the statute appears
to be addressed only to postal authorities. The statute, it is true, in terms
provides that "no mail matter shall be accepted in the mails unless it bears such
semi-postal stamps." It does not follow, however, that only postal authorities can
be guilty of violating it by accepting mails without the payment of the anti-TB
stamp. It is obvious that they can be guilty of violating the statute only if there
are people who use the mails without paying for the additional anti-TB stamp.
Just as in bribery the mere offer constitutes a breach of the law, so in the matter
of the anti-TB stamp the mere attempt to use the mails without the stamp
constitutes a violation of the statute. It is not required that the mail be accepted
by postal authorities. That requirement is relevant only for the purpose of fixing
the liability of postal officials.

Nevertheless, we are of the view that the petitioner's choice of remedy is correct
because this suit was filed not only with respect to the letter which he mailed on
September 15, 1963, but also with regard to any other mail that he might send in
the future. Thus, in his complaint, the petitioner prayed that due course be given
to "other mails without the semi-postal stamps which he may deliver for mailing
... if any, during the period covered by Republic Act 1635, as amended, as well
as other mails hereafter to be sent by or to other mailers which bear the required
postage, without collection of additional charge of five centavos prescribed by
the same Republic Act." As one whose mail was returned, the petitioner is
certainly interested in a ruling on the validity of the statute requiring the use of
additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1. It is said that the statute is violative of the equal protection clause of the
Constitution. More specifically the claim is made that it constitutes mail users
into a class for the purpose of the tax while leaving untaxed the rest of the
population and that even among postal patrons the statute discriminatorily
grants exemption to newspapers while Administrative Order 9 of the respondent
Postmaster General grants a similar exemption to offices performing
governmental functions. .
The five centavo charge levied by Republic Act 1635, as amended, is in the
nature of an excise tax, laid upon the exercise of a privilege, namely, the
privilege of using the mails. As such the objections levelled against it must be
viewed in the light of applicable principles of taxation.
To begin with, it is settled that the legislature has the inherent power to select
4
the subjects of taxation and to grant exemptions. This power has aptly been
5
described as "of wide range and flexibility." Indeed, it is said that in the field of
taxation, more than in other areas, the legislature possesses the greatest
6
freedom in classification. The reason for this is that traditionally, classification
has been a device for fitting tax programs to local needs and usages in order to
7
achieve an equitable distribution of the tax burden.
That legislative classifications must be reasonable is of course undenied. But
what the petitioner asserts is that statutory classification of mail users must bear
some reasonable relationship to the end sought to be attained, and that absent
such relationship the selection of mail users is constitutionally impermissible.
This is altogether a different proposition. As explained in Commonwealth v. Life
8
Assurance Co.:

While the principle that there must be a reasonable relationship between

classification made by the legislation and its purpose is undoubtedly true
in some contexts, it has no application to a measure whose sole
purpose is to raise revenue ... So long as the classification imposed is
based upon some standard capable of reasonable comprehension, be
that standard based upon ability to produce revenue or some other
legitimate distinction, equal protection of the law has been afforded. See
Allied Stores of Ohio, Inc. v. Bowers, supra, 358 U.S. at 527, 79 S. Ct.
at 441; Brown Forman Co. v. Commonwealth of Kentucky, 2d U.S. 56,
573, 80 S. Ct. 578, 580 (1910).
We are not wont to invalidate legislation on equal protection grounds except by
the clearest demonstration that it sanctions invidious discrimination, which is all
that the Constitution forbids. The remedy for unwise legislation must be sought
in the legislature. Now, the classification of mail users is not without any reason.
It is based on ability to pay, let alone the enjoyment of a privilege, and on
administrative convinience. In the allocation of the tax burden, Congress must
have concluded that the contribution to the anti-TB fund can be assured by
those whose who can afford the use of the mails.
The classification is likewise based on considerations of administrative
convenience. For it is now a settled principle of law that "consideration of
practical administrative convenience and cost in the administration of tax laws
afford adequate ground for imposing a tax on a well recognized and defined
9
class." In the case of the anti-TB stamps, undoubtedly, the single most
important and influential consideration that led the legislature to select mail
users as subjects of the tax is the relative ease and convenienceof collecting the
tax through the post offices. The small amount of five centavos does not justify
the great expense and inconvenience of collecting through the regular means of
collection. On the other hand, by placing the duty of collection on postal
authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail
users into a class. Mail users were already a class by themselves even before
the enactment of the statue and all that the legislature did was merely to select
their class. Legislation is essentially empiric and Republic Act 1635, as
amended, no more than reflects a distinction that exists in fact. As Mr. Justice
Frankfurter said, "to recognize differences that exist in fact is living law; to
10
disregard [them] and concentrate on some abstract identities is lifeless logic."
Granted the power to select the subject of taxation, the State's power to grant
exemption must likewise be conceded as a necessary corollary. Tax exemptions
are too common in the law; they have never been thought of as raising issues
under the equal protection clause.

It is thus erroneous for the trial court to hold that because certain mail users are
exempted from the levy the law and administrative officials have sanctioned an
invidious discrimination offensive to the Constitution. The application of the
lower courts theory would require all mail users to be taxed, a conclusion that is
hardly tenable in the light of differences in status of mail users. The Constitution
does not require this kind of equality.

considerations of administrative convenience and cost afford an adequate

ground for classification. The same considerations may induce the legislature to
impose a flat tax which in effect is a charge for the transaction, operating equally
16
on all persons within the class regardless of the amount involved. As Mr.
Justice Holmes said in sustaining the validity of a stamp act which imposed a flat
rate of two cents on every $100 face value of stock transferred:

As the United States Supreme Court has said, the legislature may withhold the
burden of the tax in order to foster what it conceives to be a beneficent
11
enterprise. This is the case of newspapers which, under the amendment
introduced by Republic Act 2631, are exempt from the payment of the additional
stamp.

One of the stocks was worth $30.75 a share of the face value of $100,
the other $172. The inequality of the tax, so far as actual values are
concerned, is manifest. But, here again equality in this sense has to
yield to practical considerations and usage. There must be a fixed and
indisputable mode of ascertaining a stamp tax. In another sense,
moreover, there is equality. When the taxes on two sales are equal, the
same number of shares is sold in each case; that is to say, the same
privilege is used to the same extent. Valuation is not the only thing to be
considered. As was pointed out by the court of appeals, the familiar
stamp tax of 2 cents on checks, irrespective of income or earning
capacity, and many others, illustrate the necessity and practice of
17
sometimes substituting count for weight ...

As for the Government and its instrumentalities, their exemption rests on the
State's sovereign immunity from taxation. The State cannot be taxed without its
consent and such consent, being in derogation of its sovereignty, is to be strictly
12
construed. Administrative Order 9 of the respondent Postmaster General,
which lists the various offices and instrumentalities of the Government exempt
from the payment of the anti-TB stamp, is but a restatement of this well-known
principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out
tuberculosis to the exclusion of other diseases which, it is said, are equally a
menace to public health. But it is never a requirement of equal protection that all
13
evils of the same genus be eradicated or none at all. As this Court has had
occasion to say, "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
14
applied."
2. The petitioner further argues that the tax in question is invalid, first, because it
is not levied for a public purpose as no special benefits accrue to mail users as
taxpayers, and second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public
purpose the petitioner means benefit to a taxpayer as a return for what he pays,
then it is sufficient answer to say that the only benefit to which the taxpayer is
constitutionally entitled is that derived from his enjoyment of the privileges of
living in an organized society, established and safeguarded by the devotion of
taxes to public purposes. Any other view would preclude the levying of taxes
except as they are used to compensate for the burden on those who pay them
and would involve the abandonment of the most fundamental principle of
15
government that it exists primarily to provide for the common good.
Nor is the rule of uniformity and equality of taxation infringed by the imposition of
a flat rate rather than a graduated tax. A tax need not be measured by the
weight of the mail or the extent of the service rendered. We have said that

According to the trial court, the money raised from the sales of the anti-TB
stamps is spent for the benefit of the Philippine Tuberculosis Society, a private
organization, without appropriation by law. But as the Solicitor General points
out, the Society is not really the beneficiary but only the agency through which
the State acts in carrying out what is essentially a public function. The money is
18
treated as a special fund and as such need not be appropriated by law.
3. Finally, the claim is made that the statute is so broadly drawn that to execute
it the respondents had to issue administrative orders far beyond their powers.
Indeed, this is one of the grounds on which the lower court invalidated Republic
Act 1631, as amended, namely, that it constitutes an undue delegation of
legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10,
provides that for certain classes of mail matters (such as mail permits, metered
mails, business reply cards, etc.), the five-centavo charge may be paid in cash
instead of the purchase of the anti-TB stamp. It further states that mails
deposited during the period August 19 to September 30 of each year in mail
boxes without the stamp should be returned to the sender, if known, otherwise
they should be treated as nonmailable.
It is true that the law does not expressly authorize the collection of five centavos
except through the sale of anti-TB stamps, but such authority may be implied in
so far as it may be necessary to prevent a failure of the undertaking. The
authority given to the Postmaster General to raise funds through the mails must
be liberally construed, consistent with the principle that where the end is
19
required the appropriate means are given.

The anti-TB stamp is a distinctive stamp which shows on its face not only the
amount of the additional charge but also that of the regular postage. In the case
of business reply cards, for instance, it is obvious that to require mailers to affix
the anti-TB stamp on their cards would be to make them pay much more
because the cards likewise bear the amount of the regular postage.
It is likewise true that the statute does not provide for the disposition of mails
which do not bear the anti-TB stamp, but a declaration therein that "no mail
matter shall be accepted in the mails unless it bears such semi-postal stamp" is
a declaration that such mail matter is nonmailable within the meaning of section
1952 of the Administrative Code. Administrative Order 7 of the Postmaster
General is but a restatement of the law for the guidance of postal officials and
employees. As for Administrative Order 9, we have already said that in listing
the offices and entities of the Government exempt from the payment of the
stamp, the respondent Postmaster General merely observed an established
principle, namely, that the Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is
dismissed, without pronouncement as to costs.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Angeles and
Capistrano,
JJ.,
concur.
Zaldivar, J., is on leave.

Separate Opinions
FERNANDO, J., concurring:
I join fully the rest of my colleagues in the decision upholding Republic Act No.
1635 as amended by Republic Act No. 2631 and the majority opinion
expounded with Justice Castro's usual vigor and lucidity subject to one
qualification. With all due recognition of its inherently persuasive character, it
would seem to me that the same result could be achieved if reliance be had on
police power rather than the attribute of taxation, as the constitutional basis for
the challenged legislation.
1. For me, the state in question is an exercise of the regulatory power connected
with the performance of the public service. I refer of course to the government
postal function, one of respectable and ancient lineage. The United States
Constitution of 1787 vests in the federal government acting through Congress
1
the power to establish post offices. The first act providing for the organization of
government departments in the Philippines, approved Sept. 6, 1901, provided
2
for the Bureau of Post Offices in the Department of Commerce and Police. Its
creation is thus a manifestation of one of the many services in which the

government may engage for public convenience and public interest. Such being
the case, it seems that any legislation that in effect would require increase cost
of postage is well within the discretionary authority of the government.
It may not be acting in a proprietary capacity but in fixing the fees that it collects
for the use of the mails, the broad discretion that it enjoys is undeniable. In that
3
sense, the principle announced in Esteban v. Cabanatuan City, in an opinion by
our Chief Justice, while not precisely controlling furnishes for me more than
ample support for the validity of the challenged legislation. Thus: "Certain
exactions, imposable under an authority other than police power, are not
subject, however, to qualification as to the amount chargeable, unless the
Constitution or the pertinent laws provide otherwise. For instance, the rates of
taxes, whether national or municipal, need not be reasonable, in the absence of
such constitutional or statutory limitation. Similarly, when a municipal corporation
fixes the fees for the use of its properties, such as public markets, it does not
wield the police power, or even the power of taxation. Neither does it assert
governmental authority. It exercises merely a proprietary function. And, like any
private owner, it is in the absence of the aforementioned limitation, which
does not exist in the Charter of Cabanatuan City (Republic Act No. 526) free
to charge such sums as it may deem best, regardless of the reasonableness of
the amount fixed, for the prospective lessees are free to enter into the
corresponding contract of lease, if they are agreeable to the terms thereof or,
otherwise, not enter into such contract."
2. It would appear likewise that an expression of one's personal view both as to
the attitude and awareness that must be displayed by inferior tribunals when the
"delicate and awesome" power of passing on the validity of a statute would not
be inappropriate. "The Constitution is the supreme law, and statutes are written
4
and enforced in submission to its commands." It is likewise common place in
constitutional law that a party adversely affected could, again to quote from
Cardozo, "invoke, when constitutional immunities are threatened, the judgment
5
of the courts."
Since the power of judicial review flows logically from the judicial function of
ascertaining the facts and applying the law and since obviously the Constitution
is the highest law before which statutes must bend, then inferior tribunals can, in
the discharge of their judicial functions, nullify legislative acts. As a matter of
fact, in clear cases, such is not only their power but their duty. In the language of
the present Chief Justice: "In fact, whenever the conflicting claims of the parties
to a litigation cannot properly be settled without inquiring into the validity of an
act of Congress or of either House thereof, the courts have, not only jurisdiction
to pass upon said issue but, also, the duty to do so, which cannot be evaded
without violating the fundamental law and paving the way to its eventual
6
destruction."
Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals,
must ever be kept in mind. Thus: "It must be evident to any one that the power

to declare a legislative enactment void is one which the judge, conscious of the
fallibility of the human judgment, will shrink from exercising in any case where
he can conscientiously and with due regard to duty and official oath decline the
7
responsibility."
There must be a caveat however to the above Cooley pronouncement. Such
should not be the case, to paraphrase Freund, when the challenged legislation
imperils freedom of the mind and of the person, for given such an undesirable
situation, "it is freedom that commands a momentum of respect." Here then,
fidelity to the great ideal of liberty enshrined in the Constitution may require the
judiciary to take an uncompromising and militant stand. As phrased by us in a
recent decision, "if the liberty involved were freedom of the mind or the person,
the standard of its validity of governmental acts is much more rigorous and
8
exacting."
So much for the appropriate judicial attitude. Now on the question of awareness
of the controlling constitutional doctrines.
There is nothing I can add to the enlightening discussion of the equal protection
aspect as found in the majority opinion. It may not be amiss to recall to mind,
9
however, the language of Justice Laurel in the leading case of People v. Vera,
to the effect that the basic individual right of equal protection "is a restraint on all
the three grand departments of our government and on the subordinate
instrumentalities and subdivisions thereof, and on many constitutional powers,
10
like the police power, taxation and eminent domain." Nonetheless, no jurist
was more careful in avoiding the dire consequences to what the legislative body
might have deemed necessary to promote the ends of public welfare if the equal
protection guaranty were made to constitute an insurmountable obstacle.
A similar sense of realism was invariably displayed by Justice Frankfurter, as is
quite evident from the various citations from his pen found in the majority
opinion. For him, it would be a misreading of the equal protection clause to
ignore actual conditions and settled practices. Not for him the at times academic
and sterile approach to constitutional problems of this sort. Thus: "It would be a
narrow conception of jurisprudence to confine the notion of 'laws' to what is
found written on the statute books, and to disregard the gloss which life has
written upon it. Settled state practice cannot supplant constitutional guaranties,
but it can establish what is state law. The Equal Protection Clause did not write
an empty formalism into the Constitution. Deeply embedded traditional ways of
carrying out state policy, such as those of which petitioner complains, are often
11
tougher and truer law than the dead words of the written text." This too, from
the same distinguished jurist: "The Constitution does not require things which
are different in fact or opinion to be treated in law as though they were the
12
same."
Now, as to non-delegation. It is to be admitted that the problem of nondelegation of legislative power at times occasions difficulties. Its strict view has

been announced by Justice Laurel in the aforecited case of People v. Vera in

this language. Thus: "In testing whether a statute constitutes an undue
delegation of legislative power or not, it is usual to inquire whether the statute
was complete in all its terms and provisions when it left the hands of the
legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature. .... In United States v. Ang Tang Ho ..., this court
adhered to the foregoing rule; it held an act of the legislature void in so far as it
undertook to authorize the Governor-General, in his discretion, to issue a
proclamation fixing the price of rice and to make the sale of it in violation of the
13
proclamation a crime."
Only recently, the present Chief Justice reaffirmed the above view in Pelaez v.
14
Auditor General,
specially where the delegation deals not with an
administrative function but one essentially and eminently legislative in character.
What could properly be stigmatized though to quote Justice Cardozo, is
delegation of authority that is "unconfined and vagrant, one not canalized within
15
banks which keep it from overflowing."
This is not the situation as it presents itself to us. What was delegated was
power not legislative in character. Justice Laurel himself, in a later case, People
16
v. Rosenthal, admitted that within certain limits, there being a need for coping
with the more intricate problems of society, the principle of "subordinate
legislation" has been accepted, not only in the United States and England, but in
practically all modern governments. This view was reiterated by him in a 1940
17
decision, Pangasinan Transportation Co., Inc. v. Public Service Commission.
Thus: "Accordingly, with the growing complexity of modern life, the multiplication
of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the
delegation of greater powers by the legislature, and toward the approval of the
practice by the courts."
In the light of the above views of eminent jurists, authoritative in character, of
both the equal protection clause and the non-delegation principle, it is apparent
how far the lower court departed from the path of constitutional orthodoxy in
nullifying Republic Act No. 1635 as amended. Fortunately, the matter has been
set right with the reversal of its decision, the opinion of the Court, manifesting its
fealty to constitutional law precepts, which have been reiterated time and time
again and for the soundest of reasons.

G.R. No. L-43082

June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased,

plaintiff-appellant,
vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.
Pablo Lorenzo and Delfin Joven for plaintiff-appellant.
Office of the Solicitor-General Hilado for defendant-appellant.
LAUREL, J.:
On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the
estate of Thomas Hanley, deceased, brought this action in the Court of First
Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the
Collector of Internal Revenue, for the refund of the amount of P2,052.74, paid by
the plaintiff as inheritance tax on the estate of the deceased, and for the
collection of interst thereon at the rate of 6 per cent per annum, computed from
September 15, 1932, the date when the aforesaid tax was [paid under protest.
The defendant set up a counterclaim for P1,191.27 alleged to be interest due on
the tax in question and which was not included in the original assessment. From
the decision of the Court of First Instance of Zamboanga dismissing both the
plaintiff's complaint and the defendant's counterclaim, both parties appealed to
this court.
It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga,
Zamboanga, leaving a will (Exhibit 5) and considerable amount of real and
personal properties. On june 14, 1922, proceedings for the probate of his will
and the settlement and distribution of his estate were begun in the Court of First
Instance of Zamboanga. The will was admitted to probate. Said will provides,
among other things, as follows:
4. I direct that any money left by me be given to my nephew Matthew
Hanley.
5. I direct that all real estate owned by me at the time of my death be not
sold or otherwise disposed of for a period of ten (10) years after my
death, and that the same be handled and managed by the executors,
and proceeds thereof to be given to my nephew, Matthew Hanley, at
Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that
he be directed that the same be used only for the education of my
brother's children and their descendants.
6. I direct that ten (10) years after my death my property be given to the
above mentioned Matthew Hanley to be disposed of in the way he
thinks most advantageous.

xxx

xxx

xxx

8. I state at this time I have one brother living, named Malachi Hanley,
and that my nephew, Matthew Hanley, is a son of my said brother,
Malachi Hanley.
The Court of First Instance of Zamboanga considered it proper for the best
interests of ther estate to appoint a trustee to administer the real properties
which, under the will, were to pass to Matthew Hanley ten years after the two
executors named in the will, was, on March 8, 1924, appointed trustee. Moore
took his oath of office and gave bond on March 10, 1924. He acted as trustee
until February 29, 1932, when he resigned and the plaintiff herein was appointed
in his stead.
During the incumbency of the plaintiff as trustee, the defendant Collector of
Internal Revenue, alleging that the estate left by the deceased at the time of his
death consisted of realty valued at P27,920 and personalty valued at P1,465,
and allowing a deduction of P480.81, assessed against the estate an inheritance
tax in the amount of P1,434.24 which, together with the penalties for deliquency
in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the
date of payment and a surcharge of 25 per cent on the tax, amounted to
P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary
proceedings pending before the Court of First Instance of Zamboanga (Special
proceedings No. 302) praying that the trustee, plaintiff herein, be ordered to pay
to the Government the said sum of P2,052.74. The motion was granted. On
September 15, 1932, the plaintiff paid said amount under protest, notifying the
defendant at the same time that unless the amount was promptly refunded suit
would be brought for its recovery. The defendant overruled the plaintiff's protest
and refused to refund the said amount hausted, plaintiff went to court with the
result herein above indicated.
In his appeal, plaintiff contends that the lower court erred:
I. In holding that the real property of Thomas Hanley, deceased, passed
to his instituted heir, Matthew Hanley, from the moment of the death of
the former, and that from the time, the latter became the owner thereof.
II. In holding, in effect, that there was deliquency in the payment of
inheritance tax due on the estate of said deceased.
III. In holding that the inheritance tax in question be based upon the
value of the estate upon the death of the testator, and not, as it should
have been held, upon the value thereof at the expiration of the period of
ten years after which, according to the testator's will, the property could
be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net

amount of the estate subject to said tax, the amounts allowed by the
court as compensation to the "trustees" and paid to them from the
decedent's estate.
V. In not rendering judgment in favor of the plaintiff and in denying his
motion for new trial.
The defendant-appellant contradicts the theories of the plaintiff and assigns the
following error besides:
The lower court erred in not ordering the plaintiff to pay to the defendant
the sum of P1,191.27, representing part of the interest at the rate of 1
per cent per month from April 10, 1924, to June 30, 1931, which the
plaintiff had failed to pay on the inheritance tax assessed by the
defendant against the estate of Thomas Hanley.
The following are the principal questions to be decided by this court in this
appeal: (a) When does the inheritance tax accrue and when must it be satisfied?
(b) Should the inheritance tax be computed on the basis of the value of the
estate at the time of the testator's death, or on its value ten years later? (c) In
determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at bar? Should
the provisions of Act No. 3606 favorable to the tax-payer be given retroactive
effect? (e) Has there been deliquency in the payment of the inheritance tax? If
so, should the additional interest claimed by the defendant in his appeal be paid
by the estate? Other points of incidental importance, raised by the parties in
their briefs, will be touched upon in the course of this opinion.
(a) The accrual of the inheritance tax is distinct from the obligation to pay the
same. Section 1536 as amended, of the Administrative Code, imposes the tax
upon "every transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance,devise, or bequest." The tax
therefore is upon transmission or the transfer or devolution of property of a
decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an
excise or privilege tax imposed on the right to succeed to, receive, or take
property by or under a will or the intestacy law, or deed, grant, or gift to become
operative at or after death. Acording to article 657 of the Civil Code, "the rights
to the succession of a person are transmitted from the moment of his death." "In
other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of
the property of the deceased ancestor. The property belongs to the heirs at the
moment of the death of the ancestor as completely as if the ancestor had
executed and delivered to them a deed for the same before his death." (Bondad
vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil., 195; Suilong &
Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio
vs. Gat-Pandan, 14 Phil., 491; Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs.
Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs.

Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil.,
531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of First Instance of Capiz, 51
Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that
while article 657 of the Civil Code is applicable to testate as well as intestate
succession, it operates only in so far as forced heirs are concerned. But the
language of article 657 of the Civil Code is broad and makes no distinction
between different classes of heirs. That article does not speak of forced heirs; it
does not even use the word "heir". It speaks of the rights of succession and the
transmission thereof from the moment of death. The provision of section 625 of
the Code of Civil Procedure regarding the authentication and probate of a will as
a necessary condition to effect transmission of property does not affect the
general rule laid down in article 657 of the Civil Code. The authentication of a
will implies its due execution but once probated and allowed the transmission is
effective as of the death of the testator in accordance with article 657 of the Civil
Code. Whatever may be the time when actual transmission of the inheritance
takes place, succession takes place in any event at the moment of the
decedent's death. The time when the heirs legally succeed to the inheritance
may differ from the time when the heirs actually receive such inheritance. "Poco
importa", says Manresa commenting on article 657 of the Civil Code, "que
desde el falleimiento del causante, hasta que el heredero o legatario entre en
posesion de los bienes de la herencia o del legado, transcurra mucho o poco
tiempo, pues la adquisicion ha de retrotraerse al momento de la muerte, y asi lo
ordena el articulo 989, que debe considerarse como complemento del
presente." (5 Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas
Hanley having died on May 27, 1922, the inheritance tax accrued as of the date.
From the fact, however, that Thomas Hanley died on May 27, 1922, it does not
follow that the obligation to pay the tax arose as of the date. The time for the
payment on inheritance tax is clearly fixed by section 1544 of the Revised
Administrative Code as amended by Act No. 3031, in relation to section 1543 of
the same Code. The two sections follow:
SEC. 1543. Exemption of certain acquisitions and transmissions. The
following shall not be taxed:
(a) The merger of the usufruct in the owner of the naked title.
(b) The transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the trustees.
(c) The transmission from the first heir, legatee, or donee in
favor of another beneficiary, in accordance with the desire of the
predecessor.

In the last two cases, if the scale of taxation appropriate to the new
beneficiary is greater than that paid by the first, the former must pay the
difference.
SEC. 1544. When tax to be paid. The tax fixed in this article shall be
paid:
(a) In the second and third cases of the next preceding section,
before entrance into possession of the property.
(b) In other cases, within the six months subsequent to the
death of the predecessor; but if judicial testamentary or intestate
proceedings shall be instituted prior to the expiration of said
period, the payment shall be made by the executor or
administrator before delivering to each beneficiary his share.
If the tax is not paid within the time hereinbefore prescribed, interest at
the rate of twelve per centum per annum shall be added as part of the
tax; and to the tax and interest due and unpaid within ten days after the
date of notice and demand thereof by the collector, there shall be further
added a surcharge of twenty-five per centum.
A certified of all letters testamentary or of admisitration shall be
furnished the Collector of Internal Revenue by the Clerk of Court within
thirty days after their issuance.
It should be observed in passing that the word "trustee", appearing in subsection
(b) of section 1543, should read "fideicommissary" or "cestui que trust". There
was an obvious mistake in translation from the Spanish to the English version.
The instant case does fall under subsection (a), but under subsection (b), of
section 1544 above-quoted, as there is here no fiduciary heirs, first heirs,
legatee or donee. Under the subsection, the tax should have been paid before
the delivery of the properties in question to P. J. M. Moore as trustee on March
10, 1924.
(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real
properties are concerned, did not and could not legally pass to the instituted
heir, Matthew Hanley, until after the expiration of ten years from the death of the
testator on May 27, 1922 and, that the inheritance tax should be based on the
value of the estate in 1932, or ten years after the testator's death. The plaintiff
introduced evidence tending to show that in 1932 the real properties in question
had a reasonable value of only P5,787. This amount added to the value of the
personal property left by the deceased, which the plaintiff admits is P1,465,
would generate an inheritance tax which, excluding deductions, interest and
surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose
inheritance taxes takes its being and if, upon the death of the decedent,
succession takes place and the right of the estate to tax vests instantly, the tax
should be measured by the vlaue of the estate as it stood at the time of the
decedent's death, regardless of any subsequent contingency value of any
subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C.
L., p. 232; Blakemore and Bancroft, Inheritance Taxes, p. 137. See also
Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.)
"The right of the state to an inheritance tax accrues at the moment of death, and
hence is ordinarily measured as to any beneficiary by the value at that time of
such property as passes to him. Subsequent appreciation or depriciation is
immaterial." (Ross, Inheritance Taxation, p. 72.)
Our attention is directed to the statement of the rule in Cyclopedia of Law of and
Procedure (vol. 37, pp. 1574, 1575) that, in the case of contingent remainders,
taxation is postponed until the estate vests in possession or the contingency is
settled. This rule was formerly followed in New York and has been adopted in
Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and Wisconsin. This
rule, horever, is by no means entirely satisfactory either to the estate or to those
interested in the property (26 R. C. L., p. 231.). Realizing, perhaps, the defects
of its anterior system, we find upon examination of cases and authorities that
New York has varied and now requires the immediate appraisal of the
postponed estate at its clear market value and the payment forthwith of the tax
on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69;
69 N. E., 782; In re Huber, 86 N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate
of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E.,
958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun
vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq. H. L., 659; 23 Eng. Rul.
Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).
But whatever may be the rule in other jurisdictions, we hold that a transmission
by inheritance is taxable at the time of the predecessor's death, notwithstanding
the postponement of the actual possession or enjoyment of the estate by the
beneficiary, and the tax measured by the value of the property transmitted at
that time regardless of its appreciation or depreciation.
(c) Certain items are required by law to be deducted from the appraised gross in
arriving at the net value of the estate on which the inheritance tax is to be
computed (sec. 1539, Revised Administrative Code). In the case at bar, the
defendant and the trial court allowed a deduction of only P480.81. This sum
represents the expenses and disbursements of the executors until March 10,
1924, among which were their fees and the proven debts of the deceased. The
plaintiff contends that the compensation and fees of the trustees, which
aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also
be deducted under section 1539 of the Revised Administrative Code which
provides, in part, as follows: "In order to determine the net sum which must bear
the tax, when an inheritance is concerned, there shall be deducted, in case of a

resident, . . . the judicial expenses of the testamentary or intestate proceedings,

. . . ."
A trustee, no doubt, is entitled to receive a fair compensation for his services
(Barney vs. Saunders, 16 How., 535; 14 Law. ed., 1047). But from this it does
not follow that the compensation due him may lawfully be deducted in arriving at
the net value of the estate subject to tax. There is no statute in the Philippines
which requires trustees' commissions to be deducted in determining the net
value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore,
though a testamentary trust has been created, it does not appear that the
testator intended that the duties of his executors and trustees should be
separated. (Ibid.; In re Vanneck's Estate, 161 N. Y. Supp., 893; 175 App. Div.,
363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph
5 of his will, the testator expressed the desire that his real estate be handled and
managed by his executors until the expiration of the period of ten years therein
provided. Judicial expenses are expenses of administration (61 C. J., p. 1705)
but, in State vs. Hennepin County Probate Court (112 N. W., 878; 101 Minn.,
485), it was said: ". . . The compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the benefit of the
legatees or devises, does not come properly within the class or reason for
exempting administration expenses. . . . Service rendered in that behalf have no
reference to closing the estate for the purpose of a distribution thereof to those
entitled to it, and are not required or essential to the perfection of the rights of
the heirs or legatees. . . . Trusts . . . of the character of that here before the
court, are created for the the benefit of those to whom the property ultimately
passes, are of voluntary creation, and intended for the preservation of the
estate. No sound reason is given to support the contention that such expenses
should be taken into consideration in fixing the value of the estate for the
purpose of this tax."
(d) The defendant levied and assessed the inheritance tax due from the estate
of Thomas Hanley under the provisions of section 1544 of the Revised
Administrative Code, as amended by section 3 of Act No. 3606. But Act No.
3606 went into effect on January 1, 1930. It, therefore, was not the law in force
when the testator died on May 27, 1922. The law at the time was section 1544
above-mentioned, as amended by Act No. 3031, which took effect on March 9,
1922.
It is well-settled that inheritance taxation is governed by the statute in force at
the time of the death of the decedent (26 R. C. L., p. 206; 4 Cooley on Taxation,
4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to
guess the outcome of pending measures. Of course, a tax statute may be made
retroactive in its operation. Liability for taxes under retroactive legislation has
been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49
Law. ed., 232 Sup. Ct. Rep., 44.) But legislative intent that a tax statute should
operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct.
Rep., 491; Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale

vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S., 221.) "A statute
should be considered as prospective in its operation, whether it enacts, amends,
or repeals an inheritance tax, unless the language of the statute clearly
demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P.
1602.) Though the last paragraph of section 5 of Regulations No. 65 of the
Department of Finance makes section 3 of Act No. 3606, amending section
1544 of the Revised Administrative Code, applicable to all estates the
inheritance taxes due from which have not been paid, Act No. 3606 itself
contains no provisions indicating legislative intent to give it retroactive effect. No
such effect can begiven the statute by this court.
The defendant Collector of Internal Revenue maintains, however, that certain
provisions of Act No. 3606 are more favorable to the taxpayer than those of Act
No. 3031, that said provisions are penal in nature and, therefore, should operate
retroactively in conformity with the provisions of article 22 of the Revised Penal
Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031.
Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax
only, instead of on both the tax and the interest, as provided for in Act No. 3031,
and (2) the taxpayer is allowed twenty days from notice and demand by rthe
Collector of Internal Revenue within which to pay the tax, instead of ten days
only as required by the old law.
Properly speaking, a statute is penal when it imposes punishment for an offense
committed against the state which, under the Constitution, the Executive has the
power to pardon. In common use, however, this sense has been enlarged to
include within the term "penal statutes" all status which command or prohibit
certain acts, and establish penalties for their violation, and even those which,
without expressly prohibiting certain acts, impose a penalty upon their
commission (59 C. J., p. 1110). Revenue laws, generally, which impose taxes
collected by the means ordinarily resorted to for the collection of taxes are not
classed as penal laws, although there are authorities to the contrary. (See
Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141 U. S.,
468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs.
Standard Oil Co., 101 Pa. St., 150; State vs. Wheeler, 44 P., 430; 25 Nev. 143.)
Article 22 of the Revised Penal Code is not applicable to the case at bar, and in
the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive
effect.
(e) The plaintiff correctly states that the liability to pay a tax may arise at a
certain time and the tax may be paid within another given time. As stated by this
court, "the mere failure to pay one's tax does not render one delinqent until and
unless the entire period has eplased within which the taxpayer is authorized by
law to make such payment without being subjected to the payment of penalties
for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26
Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the
inheritance tax before the delivery of the decedent's property to the trustee.
Stated otherwise, the defendant contends that delivery to the trustee was
delivery to the cestui que trust, the beneficiery in this case, within the meaning of
the first paragraph of subsection (b) of section 1544 of the Revised
Administrative Code. This contention is well taken and is sustained. The
appointment of P. J. M. Moore as trustee was made by the trial court in
conformity with the wishes of the testator as expressed in his will. It is true that
the word "trust" is not mentioned or used in the will but the intention to create
one is clear. No particular or technical words are required to create a
testamentary trust (69 C. J., p. 711). The words "trust" and "trustee", though apt
for the purpose, are not necessary. In fact, the use of these two words is not
conclusive on the question that a trust is created (69 C. J., p. 714). "To create a
trust by will the testator must indicate in the will his intention so to do by using
language sufficient to separate the legal from the equitable estate, and with
sufficient certainty designate the beneficiaries, their interest in the ttrust, the
purpose or object of the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a concurrence
of three circumstances: (1) Sufficient words to raise a trust; (2) a definite subject;
(3) a certain or ascertain object; statutes in some jurisdictions expressly or in
effect so providing." (69 C. J., pp. 705,706.) There is no doubt that the testator
intended to create a trust. He ordered in his will that certain of his properties be
kept together undisposed during a fixed period, for a stated purpose. The
probate court certainly exercised sound judgment in appointment a trustee to
carry into effect the provisions of the will (see sec. 582, Code of Civil
Procedure).
P. J. M. Moore became trustee on March 10, 1924. On that date trust estate
vested in him (sec. 582 in relation to sec. 590, Code of Civil Procedure). The
mere fact that the estate of the deceased was placed in trust did not remove it
from the operation of our inheritance tax laws or exempt it from the payment of
the inheritance tax. The corresponding inheritance tax should have been paid on
or before March 10, 1924, to escape the penalties of the laws. This is so for the
reason already stated that the delivery of the estate to the trustee was in esse
delivery of the same estate to the cestui que trust, the beneficiary in this case. A
trustee is but an instrument or agent for the cestui que trust (Shelton vs. King,
299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When Moore accepted
the trust and took possesson of the trust estate he thereby admitted that the
estate belonged not to him but to his cestui que trust (Tolentino vs. Vitug, 39
Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial
interest in the estate. He took such legal estate only as the proper execution of
the trust required (65 C. J., p. 528) and, his estate ceased upon the fulfillment of
the testator's wishes. The estate then vested absolutely in the beneficiary (65 C.
J., p. 542).
The highest considerations of public policy also justify the conclusion we have
reached. Were we to hold that the payment of the tax could be postponed or

delayed by the creation of a trust of the type at hand, the result would be plainly
disastrous. Testators may provide, as Thomas Hanley has provided, that their
estates be not delivered to their beneficiaries until after the lapse of a certain
period of time. In the case at bar, the period is ten years. In other cases, the
trust may last for fifty years, or for a longer period which does not offend the rule
against petuities. The collection of the tax would then be left to the will of a
private individual. The mere suggestion of this result is a sufficient warning
against the accpetance of the essential to the very exeistence of government.
(Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs.
Hotchkiss, 100 U. S., 491; 25 Law. ed., 558; Lane County vs. Oregon, 7 Wall.,
71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S.,
194; 26 Sup. Ct. Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren
Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes rests not
upon the privileges enjoyed by, or the protection afforded to, a citizen by the
government but upon the necessity of money for the support of the state
(Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to
or resist the payment of taxes solely because no personal benefit to him can be
pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43 Law.
ed., 740.) While courts will not enlarge, by construction, the government's power
of taxation (Bromley vs. McCaughn, 280 U. S., 124; 74 Law. ed., 226; 50 Sup.
Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to
permit evasions on merely fanciful and insubstantial distictions. (U. S. vs. Watts,
1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story, 369; Fed.
Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18
Phil., 461, 481; Castle Bros., Wolf & Sons vs. McCoy, 21 Phil., 300; Muoz &
Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs.
Rafferty, 39 Phil., 145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When
proper, a tax statute should be construed to avoid the possibilities of tax
evasion. Construed this way, the statute, without resulting in injustice to the
taxpayer, becomes fair to the government.
That taxes must be collected promptly is a policy deeply intrenched in our tax
system. Thus, no court is allowed to grant injunction to restrain the collection of
any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs.
Trinidad, 40 Phil., 252). In the case of Lim Co Chui vs. Posadas (47 Phil., 461),
this court had occassion to demonstrate trenchment adherence to this policy of
the law. It held that "the fact that on account of riots directed against the
Chinese on October 18, 19, and 20, 1924, they were prevented from praying
their internal revenue taxes on time and by mutual agreement closed their
homes and stores and remained therein, does not authorize the Collector of
Internal Revenue to extend the time prescribed for the payment of the taxes or
to accept them without the additional penalty of twenty five per cent." (Syllabus,
No. 3.)
". . . It is of the utmost importance," said the Supreme Court of the United
States, ". . . that the modes adopted to enforce the taxes levied should be
interfered with as little as possible. Any delay in the proceedings of the officers,

upon whom the duty is developed of collecting the taxes, may derange the
operations of government, and thereby, cause serious detriment to the public."
(Dows vs. Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs.
Rafferty, 32 Phil., 580.)
It results that the estate which plaintiff represents has been delinquent in the
payment of inheritance tax and, therefore, liable for the payment of interest and
surcharge provided by law in such cases.
The delinquency in payment occurred on March 10, 1924, the date when Moore
became trustee. The interest due should be computed from that date and it is
error on the part of the defendant to compute it one month later. The provisions
cases is mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither
the Collector of Internal Revenuen or this court may remit or decrease such
interest, no matter how heavily it may burden the taxpayer.
To the tax and interest due and unpaid within ten days after the date of notice
and demand thereof by the Collector of Internal Revenue, a surcharge of twentyfive per centum should be added (sec. 1544, subsec. (b), par. 2, Revised
Administrative Code). Demand was made by the Deputy Collector of Internal
Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit 29).
The date fixed for the payment of the tax and interest was November 30, 1931.
November 30 being an official holiday, the tenth day fell on December 1, 1931.
As the tax and interest due were not paid on that date, the estate became liable
for the payment of the surcharge.
In view of the foregoing, it becomes unnecessary for us to discuss the fifth error
assigned by the plaintiff in his brief.
We shall now compute the tax, together with the interest and surcharge due
from the estate of Thomas Hanley inaccordance with the conclusions we have
reached.
At the time of his death, the deceased left real properties valued at P27,920 and
personal properties worth P1,465, or a total of P29,385. Deducting from this
amount the sum of P480.81, representing allowable deductions under secftion
1539 of the Revised Administrative Code, we have P28,904.19 as the net value
of the estate subject to inheritance tax.
The primary tax, according to section 1536, subsection (c), of the Revised
Administrative Code, should be imposed at the rate of one per centum upon the
first ten thousand pesos and two per centum upon the amount by which the
share exceed thirty thousand pesos, plus an additional two hundred per centum.
One per centum of ten thousand pesos is P100. Two per centum of P18,904.19
is P378.08. Adding to these two sums an additional two hundred per centum, or

P965.16, we have as primary tax, correctly computed by the defendant, the sum
of P1,434.24.
To the primary tax thus computed should be added the sums collectible under
section 1544 of the Revised Administrative Code. First should be added
P1,465.31 which stands for interest at the rate of twelve per centum per annum
from March 10, 1924, the date of delinquency, to September 15, 1932, the date
of payment under protest, a period covering 8 years, 6 months and 5 days. To
the tax and interest thus computed should be added the sum of P724.88,
representing a surhcarge of 25 per cent on both the tax and interest, and also
P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total
of P3,634.43.
As the plaintiff has already paid the sum of P2,052.74, only the sums of
P1,581.69 is legally due from the estate. This last sum is P390.42 more than the
amount demanded by the defendant in his counterclaim. But, as we cannot give
the defendant more than what he claims, we must hold that the plaintiff is liable
only in the sum of P1,191.27 the amount stated in the counterclaim.
The judgment of the lower court is accordingly modified, with costs against the
plaintiff in both instances. So ordered.
Avancea, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

G.R. No. L-1281

May 31, 1949

JOSEPH E. ICARD, petitioner-appellee,

vs.
THE CITY COUNCIL OF BAGUIO and the city of baguio, respondentappellants.
Jose P. Flores for appellants.
Francisco S. Reyes for appellee.
REYES, J.:
This an appeal from a decision of the court of First Instance of the Mountain
Province.
The facts are not in dispute. The City of Baguio has enacted the following
ordinances:
1. No. 6-v, providing among other things for an amusement tax of P0.20
for every person entering a night club licensed to do business in the city;

There is no showing that petitioner has any business subject to the payment of
the graduated license fee on admission tickets imposed by Ordinance No. 12-V
of the City of Baguio.
Contending that the ordinance above mentioned are unjust and ultra vires,
petitioner brought the present action for declaratory relief to have the said
ordinance declared void and also for the refund of the sum of P254,80 which he
has paid to the city under protest.
In an able and well-considered decision the lower court presided over by Judge
Conrado Sanchez to ordinance No. 12-V on the ground that petitioner had not
been shown to be the owner or operator of any of the enterprises therein
enumerated but declared null and void Ordinance No. 11-V and also that portion
of Ordinance No. 6-V which provides for an amusement tax of P0.20 on every
person entering a night club, without pronouncement as to the legality or
illegality of the remainder of the said ordinance. And in consequence the city of
Baguio was ordered to refund to petitioner the sum of P254. 80 paid as
amusement tax under Ordinance No. 6-V, without special pronouncement as to
costs.
Appealing from the above decision the city Attorney of Baguio as counsel for the
respondents, presents the case here on the following assignment of errors:

2. No. 11-V, providing for a property tax on motor vehicles kept and
operated in the city; and

1. The lower court erred in declaring null and void Ordinance No. 11-V.

3. No. 12-V, imposing a graduated license fee on every admission ticket

sold by enterprises enumerated in said ordinance among them,
cinematographs.

2. The lower court erred in declaring null and void that portion of
Ordinance No. 6-V providing for an amusement tax of P0.20 per person
entering a night club; and

Petitioner, a resident of the City of Baguio is holder of a municipal license for the
operation of a night club called "El Club Monaco. " As owner and operator of
said night club, he has to pay to the National Government an amusement tax on
its total gross receipts under section 260 of the Internal Revenue Code, and to
the City of Baguio the annual license fee provided for in said Ordinance No. 6-V.
But in addition to said amusement tax and license fee, he has also been
required to pay the amusement tax imposed in that same ordinance, which, on
the basis of P0.20 per person entering the night club, amounted to the total sum
of P254,80 for the first quarter of 1946. This sum he paid under protest.

3. The lower court erred in ordering the respondent-appellant the city of

Baguio to refund to the petitioner-appellee the sum of P254,80 paid as
amusement tax under Ordinance No. 6-V.

As owner of a six-passenger automobile for private use a Chevrolet Ford or

Sedan kept and operated in the City of Baguio petitioner has already paid the
sum of P37 as registration fee for 1946 under the Revised Motor Vehicle Law.
But pursuant to Ordinance No. 11-V of said city he would also have to pay in
addition an annual property tax of P15 on the same automobile.

The whole case boils down to this question: Is the City of Baguio empowered to
levy a property tax on motor and an amusement tax on night clubs?
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 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 (Cu Unjieng vs. Patstone, 42 Phil., pp. 818, 830; Pacific Commercial
Co. vs. Romualdez, 49 Phil., pp. 917, 924; Batangas Transportation Co. vs.
Provincial Treasure of Batangas , 52 Phil., pp. 190,196; Baldwin vs. Coty
Council 53 Ala., p. 437; State vs. Smith 31 Lowa, p. 493; 38 Am Jur pp. 68, 72-

73). With the above principle in mind let us now inquire into the authority of the
City of Baguio to levy taxes. That part of the charter of this city which deal with
the subject of taxation is found in section 2553 (b) of the Revised Administrative
Code which empowers its city council. To provide for the levy and collection of
taxes and other city revenues, as provided by law and apply the same to the
payment of the municipal expenses in accordance with appropriations."
As the lower court has correctly interpreted it this provision simply means that
the city of Baguio may impose taxes only in those cases specifically provided in
any law. In other words for authority to levy a tax on specific subjects one must
look elsewhere in the statute book. For had the provision been meant as a
blanket authority to levy taxes, their would have been no need for the phrase "as
provided by law." The insertion of that phrase be speaks the legislative intent to
have the city exercise the law may provide.
There is of course no question as to the authority of the City of Baguio to collect
a license fee on dance halls and night clubs such authority being specifically
given by section 260 of the Internal Revenue Code . As a matter of fact
petitioner has been paying such license fee without objection or protest. But
what is objected to is the tax of P0.20 for every person entering those
amusement places as provided for in Ordinance No. 6-V and this tax is apart
and distinct from the license fee, for the ordinance itself says that it shall be in
addition to the latter. This tax is not authorized by any Act of the Legislature. It is
therefore beyond the power of the City of Baguio to levy.
Our attention has been invited to the fact that the charter of the city of Manila
contains specific provision naming the subject on which the said may levy taxes
and the argument is made that the absence of such specific provision from the
Character of the City of baguio is indicative of the legislative intent to grand the
latter city the general power of taxation. The argument is clearly untenable. The
Manila character also contains a provision (section 2444 [a] of the Revised
Administration Code) empowering that city "to provide for the levy and collection
of taxes for general and special purposes in accordance with law." This is the
counterpart of the provision in the Baguio Charter (section 2553 [b]of the
Revised Administrative Code) already quoted above. Though differently worded
the two provision mean exactly the same thing. If those provision were meant to
grant an over-all authority to levy taxes, surely there would have been no need
for those specific provisions in the Manila Chapter which authorize the
imposition of taxes in certain given cases. Those specific provisions are proof
that the said city is to exercise the power of taxation granted it by section 2444
(a) of the Revised Administrative Code "in accordance with law" or in the
wording of the Baguio Charter, as provided by law." In other words, there must
be specific legislative authority for the tax. Applying these consideration to the
City of Baguio the logical conclusion is that where a given tax is not expressly
authorized by law that city may not impose it despite the provision of section
2553 (b) of the Revised Administrative Code. This accords with the principle

already stated that the power of a municipal corporation to tax, in order to exist,
must be granted expressly, never impliedly or inferentially.
To the plea that the power of taxation is essential to the continued existence of a
city government, the answer is that the City of Baguio is amply provided for by
its Charter. It is authorized to levy and collect license fees on a long list of
occupations (section 2253, id.). In addition, the city derives income from the sale
of public lands within its limits and from the operation of its water system and
electric plant. The city is thus provided with ample means with which to carry on
the functions of government.
Having come to the conclusion that the City of Baguio may not levy taxes as it
pleases but only as the Legislature may specifically provide, we have looked in
the charter of that city for specific provision empowering it to levy an amusement
tax on night clubs and have found none. On the other hand, as the lower court
points out, that power is expressly granted to the City of Manila by section 2444
(m) of the Revised Administrative Code. When it is recollected that, as already
explained, both cities may, under a general provision of their charters, levy taxes
only as the law authorizes, the absence of a similar express grant in the case of
the city of Baguio is proof that the power to levy this particular tax has been
intentionally withheld from it.
Coming now to Ordinance No. 11-V, a reading of its terms strikes us that what is
therein designated as a property tax on Motor vehicles kept in the City of Baguio
has all the earmarks of a municipal license fee, a thing expressly forbidden by
section 70 (b) of the Revised Motor Vehicle Law. But assuming that it is a
property tax (since the point is not raised), we find that, like in the case of the
amusement tax on cabarets and dance halls, there is no legal provision
authorizing its levy by the City of Baguio. It is true that the section of the Revised
Motor Vehicle Law just cited contains a proviso to the effect that nothing in that
statute shall be construed to exempt any motor vehicle from the payment of any
lawful and equitable insular, local or municipal property tax imposed thereon.
But here against the question arises as to whether this proviso is in itself an
authorization form any municipal authority to provide for the imposition of a tax.
The wording of the proviso obviously refers to a tax lawfully imposed so that, in
accord with the views we have expressed above, the City of Baguio may not
collect the tax in the absence of a specific legal provision authorizing it to do so.
It may be remarked in this connection that the charter of the City of Manila does
contain such a provision (section 2444 [n]), Rev. Adm. Code), which is added
proof that the provision under consideration does not of itself authorize the
imposition of the tax.
In view of the foregoing, it is our conclusion that Ordinance No. 6-V, in so far as
it provides for an amusement tax of P0.20 for each person entering a night club,
and Ordinance No. 11-V, which provides for a property tax on motor vehicles,
should be declared illegal and void as beyond the authority of the City of Baguio
to enact.

Wherefore, in so far as the judgment below makes that declaration and orders
the City of Baguio to refund to petitioner-appellee the sum of P254.80 paid as
amusement tax under Ordinance No. 6-V, the same is hereby affirmed, without
special pronouncement as to costs.
Moral, C.J., Paras, Feria, Pablo, Perfecto, Bengzon, Tuason and Montemayor,
JJ., concur.

G.R. No. 45697

November 1, 1939

MANILA ELECTRIC COMPANY, plaintiff-appellant,

vs.
A.L. YATCO, Collector of Internal Revenue, defendant-appellee.
Ross, Lawrence, Selph and Carrascoso for appellant.
Office of the Solicitor-General Tuason for appellee.
MORAN, J.:
In 1935, plaintiff Manila Electric Company, a corporation organized and existing
under the laws of the Philippines, with its principal office and place of business
in the City of Manila, insured with the city of New York Insurance Company and
the United States Guaranty Company, certain real and personal properties
situated in the Philippines. The insurance was entered into in behalf of said
plaintiff by its broker in New York City. The insurance companies are foreign
corporations not licensed to do business in the Philippines and having no agents
therein. The policies contained provisions for the settlement and payment of
losses upon the occurence of any risk insured against, a sample of which is
policy No. 20 of the New York insurance Company attached to and made an
integral part of the agreed statement of facts.
Plaintiff through its broker paid, in New York, to said insurance company
premiums in the sum of P91,696. The Collector of Internal Revenue, under the
authority of section 192 of act No. 2427, as amended, assessed and levied a tax
of one per centum on said premiums, which plaintiff paid under protest. The
protest having been overruled, plaintiff instituted the present action to recover
the tax. The trial court dismissed the complaint, and from the judgment thus
rendered, plaintiff took the instant appeal.
The pertinent portions of the Act here involved read:
SEC. 192. It shall be unlawful for any person, company or corporation,
or forward applications for insurance in or to issue or to deliver or accept
policies of or for any company or companies not having been legally
authorized to transact business in the Philippine Islands, as provided in
this chapter; and any such person, company or corporation violating the
provisions of this section shall be deemed guilty of a penal offense, and
upon conviction thereof, shall for each such offense be punished by a
fine of two hundred pesos, or imprisonment for two months, or both in
the discretion not authorized to transact business in the Philippine Island
may be placed upon terms and conditions as follows:
xxx

xxx

xxx

. . . . And provided further, that the prohibitions of this section shall not
affect the right of an owner of property to apply for and obtain for himself
policies in foreign companies in cases were said owner does not make
use of the services of any agent, company or corporation residing or
doing business in the Philippine Islands. In all case where owners of
property obtain insurance directly with foreign companies, it shall be the
duty of said owners to report to the insurance commissioner and to the
Collector of Internal Revenue each case where insurance has been so
effected, and shall pay the tax of one per centum on premium paid, in
the manner required by law of insurance companies, and shall be
subject to the same penalties for failure to do so.
Appellant maintains that the second paragraph of the provisions of the Act
aforecited is unconstitutional, and has been so declared by the Supreme Court
of the United States in the case of Compania General de Tabacos v. Collector of
Internal Revenue, 275 U.S., 87, 48 Sup. Ct. Rep., 100, 72 Law. ed., 177.
The case relied upon involves a suit to recover from the Collector of Internal
Revenue certain taxes in connection with insurance premiums which the
Tobacco Barcelona, Spain, paid to the Guardian Insurance Company of London,
England, and to Le Comite des Assurances Maritimes de Paris, of Paris,
France. The Tobacco Company, through its head office in Barcelona, insured
against fire with the London Company the merchandise it had in deposit in the
warehouse in the Philippines. As the merchandise were from time to time
shipped to Europe, the head office at Barcelona insured the same with the Paris
Company against marine risks while such merchandise were in transit from the
Philippines to Spain. The London Company, unlike the Paris Company, was
licensed to do insurance business in the Philippines and had an agent therein.
Losses, if any, on policies were to be paid to the Tobacco Company in Paris.
The tax assessed and levied by the Collector of Internal Revenue, under the
same law now involved, was challenged as unconstitutional. The Supreme Court
of the united States sustained the tax with respect to premiums paid to the
London Company and held it erroneous with respect to premiums paid to the
Paris Company.lawphi1.net
The factual basis upon which the imposition of the tax on premiums paid to the
Paris Company was declared erroneous, is stated by the Supreme Court of the
United States thus:
Coming then to the tax on the premiums paid to the Paris Company the
contract of insurance on which the premium was paid was made at
Barcelona in Spain, the headquarters of the Tobacco Company between
the Tobacco Company and the Paris Company, and any losses arising
thereunder were to be paid in Paris. The Paris Company had no
communication whatever with anyone in the Philippine Islands. The
collection of this tax involves an ex-action upon a company of Spain
lawfully doing business in the Philippine Islands effected by reason of a

contract made by that company with a company in Paris on

merchandise shipped from the Philippine Islands for delivery in
Barcelona. It is an imposition upon a contract not made in the
Philippines and having no situs there and to be measured by money
paid as premiums in Paris, with the place of payment of loss, if any, in
Paris. We are very clear that the contract and the premiums paid under
it are not within the jurisdiction of the government of the Philippine
Islands.
And, upon the authority of the cases of Allgeyer v. Lousiana, 165 U.S., 578, 41
Law. ed., 832, and St. Louis Cotton Compress Company v. Arkansas, 250 U.S.,
346, 677 Law. ed., 279, the Supreme Court of the United States held that "as
the state is forbidden to deprive a person of his liberty without due process of
law, it may not compel anyone within its jurisdiction to pay tribute to it for
contracts or money paid to secure the benefits of contract made and to be
performed outside of the state."
On the other hand, the Supreme Court of the United States, in sustaining the
imposition of the tax upon premiums paid by the assured to the London
Company, says:
. . . . Does the fact that while the Tobacco Company and the London
Company were within the jurisdiction of the Philippines they made a
contract outside of the Philippines, prevent the imposition upon the
assured of a tax of 1 per cent upon the money paid by it as a premium
to the London Company? We may properly assume that this tax placed
upon the assured must ultimately be paid by the insurer, and treating its
real incidence as such, the question arises whether making and carrying
out the policy does not involve an exercise or use of the right of the
London Company to do business in the Philippine Islands under its
license, because the policy covers fire risks no property within the
Philippine Islands which may require adjustment and the activities of
agents in the Philippine Islands with respect to settlement of losses
arising thereunder. This we think must be answered affirmatively under
Equitable Life Assur. Soc. v. Pennsylvania, 238 U.S., 143 Law. ed.,
1239, 35 Sup. Ct. Rep., 829. The case is a close one, but in deference
to the conclusion we reached in the latter case, we affirm the judgment
of the court below in respect to the tax upon the premium paid to the
London Company.
The ruling in the Paris Company case is obviously not applicable in the instant
one, for there, not only was the contract executed in a foreign country, but the
merchandise insured was in transit from the Philippines to Spain, and nothing
was to be done in the Philippines in pursuance of the contract. However, the rule
laid down in connection with the London Company may, by analogy, be applied
in the present case, the essential facts of both cases being similar. Here, the
insured is a corporation organized under the laws of the Philippines, its principal

office and place of business being in the City of Manila. The New York
Insurance Company and the United States Guaranty Company may be said to
be doing policies issued by them cover risks on properties within the Philippines,
which may require adjustment and the activities of agents in the Philippines with
respect to the settlement of losses arising thereunder. For instance, it is therein
stipulated that "the insured, as often as may be reasonably required, shall
exhibit to any person designated by the company all the remains of any property
therein described and submit to examination under oath by any person named
by the company, and as often as may be reasonably required, shall exhibit to
any person designated by the company all the remains of any property therein
described and submit to an examination all books of accounts . . . at such
reasonable time and place as may be designated by the company or its
representative." And, in case of disagreement as to the amount of losses or
damages as to require the appointment of appraisers, the insurance contract
provides that "the appraisers shall first select a competent umpire; and failure for
fifteen days to agree to such umpire, then, on request of the insured or of the
company, such umpire shall be selected by a judge of the court of record in the
state in which the property insured is located.".
True it is that the London Company had a license to do business in the
Philippines, but this fact was not a decisive factor in the decision of that case, for
reliance was therein placed on the Equitable Life Assurance Society v.
Pennsylvania, 238 U.S., 143, 59 Law. ed., 1239, 35 Sup. Ct. Rep., 829, wherein
it was said that "the Equitable Society was doing business in Pennsylvania when
it was annually paying the dividends in Pennsylvania or sending an adjuster into
the state in case of dispute or making proof of death," and therefore "the
taxpayer had subjected itself to the jurisdiction of Pennsylvania in doing
business there." (See Compaia General de Tabacos v. Collector of Internal
Revenue, 275 U.S., 87, 72 Law. ed., 177, 182.)
The controlling consideration, therefore, in the decision of the London Company
case was that said company, by making and carrying out policies covering risks
located in this country which might require adjustment or the making of proof of
loss therein, did business in the Philippines and subjected itself to its jurisdiction,
a rule that can perfectly be applied in the present case to the new York
Insurance Company and the United States Guaranty Company.
It is argued, however, that the sending of an unjuster to the Philippines to fix the
amount of losses, is a mere contingency and not an actual fact, as such, it
cannot be a ground for holding that the insurance companies subjected
themselves to the taxing jurisdiction of the Philippines. This argument could
have been made in the London Company case where no adjuster appears to
have ever been sent to the Philippines nor any adjustment ever made, and yet
the stipulations to that effect were held to be sufficient to bring the foreign
corporation within the taxing jurisdiction of the Philippines.

In epitome, then, the whole question involved in this appeal is whether or not the
disputed tax is one imposed by the Commonwealth of the Philippines upon a
contract beyond its jurisdiction. We are of the opinion and so hold that where the
insured against also within the Philippines, the risk insured against also within
the Philippines, and certain incidents of the contract are to be attended to in the
Philippines, such as, payment of dividends when received in cash, sending of an
unjuster into the Philippines in case of dispute, or making of proof of loss, the
Commonwealth of the Philippines has the power to impose the tax upon the
insured, regardless of whether the contract is executed in a foreign country and
with a foreign corporation. Under such circumstances, substantial elements of
the contract may be said to be so situated in the Philippines as to give its
government the power to tax. And, even if it be assumed that the tax imposed
upon the insured will ultimately be passed on the insurer, thus constituting an
indirect tax upon the foreign corporation, it would still be valid, because the
foreign corporation, by the stipulations of its contract, has subjected itself to the
taxing jurisdiction of the Philippines. After all, Commonwealth of the Philippines,
by protecting the properties insured, benefits the foreign corporation, and it is
but reasonable that the latter should pay a just contribution therefor. It would
certainly be a discrimination against domestic corporations to hold the tax valid
when the policy is given by them and invalid when issued by foreign
corporations.
Judgment affirmed, with costs against appellant.
Avancea, C.J., Villa-Real, Imperial, Diaz, Laurel and Concepcion, JJ., concur.