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LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and
CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City
Principles:
- To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be
considered include the statute creating the enterprise, its
corporate purposes, its constitution and by-laws, the methods
of administration, the nature of the actual work performed,
the character of the services rendered, the indefiniteness of
the beneficiaries, and the use and occupation of the
properties.
- A charitable institution does not lose its character as such and
its exemption from taxes simply because it derives income
from paying patients, whether out-patient, or confined in the
hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons managing
or operating the institution.
- Under the 1973 and 1987 Constitutions and Rep. Act No. 7160
in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it
is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes.
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the
use of the income from the real property that is determinative
of whether the property is used for tax-exempt purposes.
LONG DIGEST:
FACTS:
The petitioner Lung Center of the Philippines is a non-stock and non-
profit entity. It is the registered owner of a parcel of land, Erected in the
middle of the aforesaid lot is a hospital known as the Lung Center of the
Philippines. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics for
their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the Elliptical
Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders
medical services to out-patients, both paying and non-paying. Aside
from its income from paying patients, the petitioner receives annual
subsidies from the government.
Both the land and the hospital building of the petitioner were assessed
for real property taxes the City Assessor of Quezon City. The petitioner
filed a Claim for Exemption from real property taxes with the City
Assessor, predicated on its claim that it is a charitable institution. The
petitioner’s request was denied, and a petition was, thereafter, filed
before the Local Board of Assessment Appeals of Quezon City. The
petitioner alleged that under Section 28, paragraph 3 of the 1987
Constitution, the property is exempt from real property taxes. It averred
that a minimum of 60% of its hospital beds are exclusively used for
charity patients and that the major thrust of its hospital operation is to
serve charity patients. The petitioner contends that it is a charitable
institution and, as such, is exempt from real property taxes. The QC-
LBAA rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes
It was affirmed on appeal by the Central Board of Assessment Appeals of
Quezon City (CBAA) which ruled that the petitioner was not a charitable
institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled to
real property tax exemption under the constitution and the law. The
petitioner sought relief from the Court of Appeals, which rendered
judgment affirming the decision of the CBAA.
Petitioner’s side:
The petitioner avers that it is a charitable institution within the context
of Section 28(3), Article VI of the 1987 Constitution. It asserts that its
character as a charitable institution is not altered by the fact that it
admits paying patients and renders medical services to them, leases
portions of the land to private parties, and rents out portions of the
hospital to private medical practitioners from which it derives income to
be used for operational expenses. The petitioner points out that for the
years 1995 to 1999, 100% of its out-patients were charity patients and
of the hospital’s 282-bed capacity, 60% thereof, or 170 beds, is allotted
to charity patients. It asserts that the fact that it receives subsidies from
the government attests to its character as a charitable institution. It
contends that the "exclusivity" required in the Constitution does not
necessarily mean "solely." Hence, even if a portion of its real estate is
leased out to private individuals from whom it derives income, it does
not lose its character as a charitable institution, and its exemption from
the payment of real estate taxes on its real property. The petitioner
further contends that even if P.D. No. 1823 does not exempt it from the
payment of real estate taxes, it is not precluded from seeking tax
exemption under the 1987 Constitution.
Respondent’s side:
Respondents aver that the petitioner is not a charitable entity. The
petitioner’s real property is not exempt from the payment of real estate
taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the
said property is actually, directly and exclusively used for charitable
purposes. The respondents noted that in a newspaper report, it appears
that graft charges were filed with the Sandiganbayan against the
director of the petitioner, its administrative officer, and Zenaida Rivera,
the proprietress of the Elliptical Orchids and Garden Center, for entering
into a lease contract over 7,663.13 square meters of the property in
1990 for only P20,000 a month, when the monthly rental should
be P357,000 a month as determined by the Commission on Audit; and
that instead of complying with the directive of the COA for the
cancellation of the contract for being grossly prejudicial to the
government, the petitioner renewed the same on March 13, 1995 for a

monthly rental of only P24,000. They assert that the petitioner uses the
subsidies granted by the government for charity patients and uses the
rest of its income from the property for the benefit of paying patients,
among other purposes. They aver that the petitioner failed to adduce
substantial evidence that 100% of its out-patients and 170 beds in the
hospital are reserved for indigent patients. The respondents further
assert, thus:
13. That the claims/allegations of the Petitioner LCP do not
speak well of its record of service. That before a patient is
admitted for treatment in the Center, first impression is that it
is pay-patient and required to pay a certain amount as deposit.
That even if a patient is living below the poverty line, he is
charged with high hospital bills. And, without these bills being
first settled, the poor patient cannot be allowed to leave the
hospital or be discharged without first paying the hospital bills
or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that
even the remains of deceased poor patients suffered the same
fate. Moreover, before a patient is admitted for treatment as
free or charity patient, one must undergo a series of
interviews and must submit all the requirements needed by
the Center, usually accompanied by endorsement by an
influential agency or person known only to the Center. These
facts were heard and admitted by the Petitioner LCP during
the hearings before the Honorable QC-BAA and Honorable
CBAA. These are the reasons of indigent patients, instead of
seeking treatment with the Center, they prefer to be treated
at the Quezon Institute. Can such practice by the Center be
called charitable?
ISSUES:
1. Whether the petitioner is a charitable institution within the
context of Presidential Decree No. 1823 and the 1973 and
1987 Constitutions and Section 234(b) of Republic Act No.
7160;
2. Whether the real properties of the petitioner are exempt from
real property taxes.
SC Ruling:
1. The petitioner is a charitable institution within the context of
the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute
creating the enterprise, its corporate purposes, its constitution
and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use
and occupation of the properties.
A charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite
number of persons, either by bringing their minds and hearts under
the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of
government. It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces
the improvement and promotion of the happiness of man. The
word "charitable" is not restricted to relief of the poor or sick. The
test of a charity and a charitable organization are in law the same.
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The test whether an enterprise is charitable or not is whether it
exists to carry out a purpose reorganized in law as charitable or
whether it is maintained for gain, profit, or private advantage.
The petitioner is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be administered
by the Office of the President of the Philippines with the Ministry of
Health and the Ministry of Human Settlements. It was organized for
the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the
Philippines.
The purposes for which the petitioner was created are spelled
out in its Articles of Incorporation, (help people, develop…
etc….noble and public purposes.. too many to enumerate)
Hence, the medical services of the petitioner are to be
rendered to the public in general in any and all walks of life
including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the poor,
may fall sick or be injured or wounded and become a subject of
charity.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or
confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve;
and no money inures to the private benefit of the persons
managing or operating the institution.
The money received by the petitioner becomes a part of the
trust fund and must be devoted to public trust purposes and cannot
be diverted to private profit or benefit.
Under P.D. No. 1823, the petitioner is entitled to receive
donations. The petitioner does not lose its character as a charitable
institution simply because the gift or donation is in the form of
subsidies granted by the government.
The petitioner adduced substantial evidence that it spent its
income, including the subsidies from the government for 1991 and
1992 for its patients and for the operation of the hospital.
2. Those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are
not actually, directly and exclusively used for charitable
purposes.
The settled rule in this jurisdiction is that laws granting
exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from
tax payments must be clearly shown and based on language in the
law too plain to be mistaken.

Section 2 of Presidential Decree No. 1823, relied upon by the
petitioner, specifically provides that the petitioner shall enjoy the
tax exemptions and privileges:
SEC. 2. TAX EXEMPTIONS AND PRIVILEGES.
x x x from such taxes. On the other hand, the portions of the land occupied
The Lung Center of the Philippines shall be exempt from the
payment of taxes, charges and fees imposed by the
Government or any political subdivision or instrumentality
thereof with respect to equipment purchases made by, or for
the Lung Center.
It is plain as day that under the decree, the petitioner does not
enjoy any property tax exemption privileges for its real properties as
well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumerate==on of
tax exempt privileges.
Section 28(3), Article VI of the 1987 Philippine Constitution provides,
thus:
(3) Charitable institutions, churches and parsonages or
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt
from taxation.
The tax exemption under this constitutional provision
covers property taxes only.. The Constitutional Commission explained
that what is exempted is not the institution itself . . .; those exempted
from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational
purposes."
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160
in order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as possessed and enjoyed to the
exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege
exclusively." If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purposes but is
subject to taxation. The words "dominant use" or "principal use" cannot
be substituted for the words "used exclusively" without doing violence
to the Constitutions and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the
charitable institution is organized. It is not the use of the income from
the real property that is determinative of whether the property is used
for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively used for
charitable purposes. While portions of the hospital are used for the
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treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased
to private individuals for their clinics and a canteen.
The portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt
by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
The respondent Quezon City Assessor is hereby DIRECTED to
determine, after due hearing, the precise portions of the land and the
area thereof which are leased to private persons, and to compute the
real property taxes due thereon as provided for by law.
QUICK DIGEST:
FACTS:
The petitioner Lung Center of the Philippines is a non-stock and non-
profit entity. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics for
their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon
Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for
commercial purposes to a private enterprise known as the Elliptical
Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders
medical services to out-patients, both paying and non-paying. Aside
from its income from paying patients, the petitioner receives annual
subsidies from the government.
When they were assessed for real property taxes, they claimed for tax
exemption which was denied in all proceedings they underwent.
Petitioner’s side:
The petitioner avers that it is a charitable institution within the context
of Section 28(3), Article VI of the 1987 Constitution. It asserts that the
fact that it receives subsidies from the government attests to its
character as a charitable institution. It contends that the "exclusivity"
required in the Constitution does not necessarily mean "solely." Hence,
even if a portion of its real estate is leased out to private individuals
from whom it derives income, it does not lose its character as a
charitable institution, and its exemption from the payment of real estate
taxes on its real property. The petitioner further contends that even if
P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987
Constitution.
Respondent’s side:
Respondents aver that the petitioner is not a charitable entity. The
petitioner’s real property is not exempt from the payment of real estate
taxes under P.D. No. 1823 and even under the 1987 Constitution
because it failed to prove that it is a charitable institution and that the

said property is actually, directly and exclusively used for charitable
purposes.
ISSUES:
1. Whether the petitioner is a charitable institution within the
context of Presidential Decree No. 1823 and the 1973 and
1987 Constitutions and Section 234(b) of Republic Act No.
7160;
2. Whether the real properties of the petitioner are exempt from
real property taxes.
SC RULING:
1. The petitioner is a charitable institution within the context of
the 1973 and 1987 Constitutions. To determine whether an
enterprise is a charitable institution/entity or not, the
elements which should be considered include the statute
creating the enterprise, its corporate purposes, its constitution
and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use
and occupation of the properties.
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because
it derives income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
2. Those portions of its real property that are leased to private
entities are not exempt from real property taxes as these are
not actually, directly and exclusively used for charitable
purposes.
The settled rule in this jurisdiction is that laws granting
exemption from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception.
It is plain as day that under the law, the petitioner does not
enjoy any property tax exemption privileges for its real properties as
well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax
exempt privileges.
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160
in order to be entitled to the exemption, the petitioner is burdened to
prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes.
What is meant by actual, direct and exclusive use of the
property for charitable purposes is the direct and immediate and actual
application of the property itself to the purposes for which the
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charitable institution is organized. It is not the use of the income from
the real property that is determinative of whether the property is used
for tax-exempt purposes.
LUZON STEVEDORING CORPORATION vs.CTA and the HONORABLE
COMMISSIONER OF INTERNAL REVENUE
Note: 3 pages case ni sa full text… very short. And I think mao ni ang
crux sa case. No need to put long/quick digest. Kamo na bahala og pa
shorten sa digest by deleting some paragraphs.
Principle:
- The general rule is that any claim for exemption from the tax
statute should be strictly construed against the taxpayer.
- In order that the importations in question may be declared
exempt from the compensating tax, it is indispensable that the
requirements of the amendatory law be complied with,
namely: (1) the engines and spare parts must be used by the
importer himself as a passenger and/or cargo, vessel; and (2)
the said passenger and/or cargo vessel must be used in
coastwise or oceangoing navigation.
- Republic Act No. 3176 limit tax exemption from the
compensating tax to imported items to be used by the
importer himself as operator of passenger and/or cargo vessel.
FACTS:
Herein petitioner-appellant, in 1961 and 1962, for the repair and
maintenance of its tugboats, imported various engine parts and other
equipment for which it paid, under protest, the assessed compensating
tax. Unable to secure a tax refund from the Commissioner of Internal
Revenue, it filed a Petition for Review with the CTA, praying among
others, that it be granted the refund. The CTA denied the various claims
for tax refund.
Petitioner contends that tugboats are embraced and included in the
term cargo vessel under the tax exemption provisions. He argues that in
legal contemplation, the tugboat and a barge loaded with cargoes with
the former towing the latter for loading and unloading of a vessel in
part, constitute a single vessel. It concludes that the engines, spare parts
and equipment imported by it and used in the repair and maintenance
of its tugboats are exempt from compensating tax
Respondents-appellees counter that petitioner-appellant's "tugboats"
are not "Cargo vessel" because they are neither designed nor used for
carrying and/or transporting persons or goods by themselves but are
mainly employed for towing and pulling purposes. As such, it cannot be
claimed that the tugboats in question are used in carrying and
transporting passengers or cargoes as a common carrier by water, either
coastwise or oceangoing and, therefore, not within the purview of the
Tax Code.
ISSUE:

Whether or not petitioner's tugboats" can be interpreted to be included
in the term "cargo vessels" for purposes of the tax exemption provided
for in Section 190 of the National Internal Revenue Code, as amended by
Republic Act No. 3176.
SC RULING:
No.
Said law provides:
Sec. 190. Compensating tax. — ... And Provided further, That
the tax imposed in this section shall not apply to articles to be
used by the importer himself in the manufacture or
preparation of articles subject to specific tax or those for
consignment abroad and are to form part thereof or to articles
to be used by the importer himself as passenger and/or cargo
vessel, whether coastwise or oceangoing, including engines
and spare parts of said vessel. ....
The general rule is that any claim for exemption from the tax statute
should be strictly construed against the taxpayer.
In order that the importations in question may be declared exempt from
the compensating tax, it is indispensable that the requirements of the
amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or cargo,
vessel; and (2) the said passenger and/or cargo vessel must be used in
coastwise or oceangoing navigation.
Republic Act No. 3176 limit tax exemption from the compensating tax to
imported items to be used by the importer himself as operator of
passenger and/or cargo vessel.
A tugboat is defined as follows:
a strongly built, powerful steam or power vessel, used for towing and,
now, also used for attendance on vessel; a diesel or steam power vessel
designed primarily for moving large ships to and from piers for towing
barges and lighters in harbors, rivers and canals; a steam vessel built for
towing, synonymous with tugboat.
Under the foregoing definitions, petitioner's tugboats clearly do not fall
under the categories of passenger and/or cargo vessels. Thus, it is a
cardinal principle of statutory construction that where a provision of law
speaks categorically, the need for interpretation is obviated, no plausible
pretense being entertained to justify non-compliance
The CTA found that no evidence was adduced by petitioner-appellant
that tugboats are passenger and/or cargo vessels used in the shipping
industry as an independent business. On the contrary, petitioner-
appellant's own evidence supports the view that it is engaged as a
stevedore, that is, the work of unloading and loading of a vessel in port;
and towing of barges containing cargoes is a part of petitioner's
undertaking as a stevedore. In fact, even its trade name is indicative that
its sole and principal business is stevedoring and lighterage, taxed under
the National Internal Revenue Code as a contractor, and not an entity
which transports passengers or freight for hire which is taxed.
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The Court will not set aside the conclusion reached by an agency such as
the CTA, which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has
necessarily developed an expertise on the subject unless there has been
an abuse or improvident exercise of authority, which is not present in
the instant case.
Petition is DISMISSED.
LUTZ VS. ARANETA
Principle:
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.”
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.
FACTS:
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.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 Sec.3 of the Act, 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 constitutionally levied. The action has been dismissed by
the Court of First Instance.

ISSUE:
Whether or not the tax imposed is constitutional.
RULING:
Yes.
The act is primarily an exercise of the police power. It is shown in the Act
that the tax is levied with a regulatory purpose, to provide means for the
rehabilitation and stabilization of the threatened sugar industry. 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.” The funds raised under the Act
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; but the legislature is not required
by the Constitution to adhere to a policy of “all or nones.”
PHILEX MINING VS CIR
Principle:
a taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and
debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.
FACTS:
BIR sent a letter to Philex asking it to settle its tax liabilities amounting
to P123,821,982.52. Philex protested the demand for payment stating
that it has pending claims for VAT input credit/refund amounting to
P119,977,037.02 plus interest. Citing the ruling in Commissioner of
Internal Revenue v. Itogon-Suyoc Mines, Inc. claims for tax credit/refund
should be applied against the tax liabilities, In reply, the BIR, in a letter
found no merit in Philexs position. Since these pending claims have not
yet been established or determined with certainty, it follows that no
legal compensation can take place.
In view of the BIRs denial of the offsetting of Philexs claim for VAT input
credit/refund against its exercise tax obligation, Philex raised the issue
to the Court of Tax Appeals.In the course of the proceedings, the BIR
issued a Tax Credit Certificate SN 001795 in the amount of
P13,144,313.88 which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latters tax obligation of
P110,677,688.52.Despite the reduction of its tax liabilities, the CTA still
ordered Philex to pay the remaining balance of P110,677,688.52 plus
interest, elucidating its reason, to wit: Thus, for legal compensation to
take place, both obligations must be liquidated and demandable.( The
case for refund was still pending)Aggrieved with the decision, Philex
appealed the case before the Court of Appeals.Nonetheless, on April 8,
Page |6
1996, the Court of Appeals affirmed the Court of Tax Appeals
observation. Philex filed a motion for reconsideration which was,
nevertheless, denied.However, a few days after the denial of its motion
for reconsideration, Philex was able to obtain its VAT input credit/refund
.In view of the grant of its VAT input credit/refund, Philex now contends
that, off-set its excise tax liabilities since both had already become due
and demandable, as well as fully liquidated, legal compensation can
properly take place.
ISSUE:
WON there should be offsetting?
RULING:
No.A taxpayer may not offset taxes due from the claims that he may
have against the government. Taxes cannot be the subject of
compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off.Further,
Philexs reliance on our holding in Commissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc., wherein we ruled that a pending refund may
be set off against an existing tax liability even though the refund has not
yet been approved by the Commissioner, is no longer without any
support in statutory law. It is important to note that the premise of our
ruling in the aforementioned case was anchored on Section 51(d) of the
National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the
Itogon-Suyoc pronouncement was based was omitted. Accordingly, the
doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex.
Finally, Philex asserts that the BIR violated Section 106(e)[30] of the
National Internal Revenue Code of 1977, which requires the refund of
input taxes within 60 days, when it took five years for the latter to grant
its tax claim for VAT input credit/refund.In the instant case, the VAT
input taxes were paid between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996. Obviously, had the BIR
been more diligent and judicious with their duty, it could have granted
the refund earlier. We need not remind the BIR that simple justice
requires the speedy refund of wrongly-held taxes.Fair dealing and
nothing less, is expected by the taxpayer from the BIR in the latter's
discharge of its function. As aptly held in Roxas v. Court of Tax Appeals.
Short digest.
Philex mining incured an excise tax liabiity worth P123,821,982.52 at the
same time Philex has a pending case of a VAT tax credit/refund of
P119,977,037.02. Philex argues that it should be set-off or compensated.
BIR denies such contention since the case is still pending legal
compensation cannot take affect because both credits should be legally
due and demandable at time of the compensation. Philex files a case in
the CTA but was dismissed( same reason as BIR ). Philex files a petition
to the CA but was denies, then it files an MR to the CA but it was
subsequently denied also. Days after th denial of the MR Philex was
granted the tax credit/refund. Philex now contends that since the refund
is already due and demandable offset can set-in.

ERNESTO MACEDA V. HON. CATALINO MACARAIG
FACTS:
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a
public corporation to undertake the development of hydraulic power
and the production of power from other sources.
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty
exemption privileges
On September 10, 1971, Republic Act No. 6395 revised the charter of
the NPC wherein Congress declared as a national policy the total
electrification of the Philippines through the development of power
from all sources to meet the needs of industrial development and rural
electrification which should be pursued coordinately and supported by
all instrumentalities and agencies of the government, including its
financial institutions.
On January 22, 1974, Presidential Decree No. 380 amended section 13,
paragraphs (a) and (d) of Republic Act No. 6395 by specifying, among
others, the exemption of NPC from such taxes, duties, fees, imposts and
other charges imposed "directly or indirectly," on all petroleum products
used by NPC in its operation. Presidential Decree No. 938 dated May 27,
1976 further amended the aforesaid provision by integrating the tax
exemption in general terms under one paragraph.
The Tax exemption was later on withdrew by Presidential Decree No.
1931which withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their
subsidiaries. 4 However, said law empowered the President and/or the
then Minister of Finance, upon recommendation of the FIRB to restore,
partially or totally, the exemption withdrawn, or otherwise revise the
scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution
No. 10-85 restoring the tax and duty exemption privileges of NPC from
June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued
resolution No. 1-86 indefinitely restoring the NPC tax and duty
exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again
withdrew all tax and duty incentives granted to government and private
entities which had been restored under Presidential Decree Nos. 1931
and 1955 but it gave the authority to FIRB to restore, revise the scope
and prescribe the date of effectivity of such tax and/or duty exemptions.
Page |7
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's
tax and duty exemption privileges effective March 10, 1987. On October
5, 1987, the President, through respondent Executive Secretary
Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.
NPC instituted this petition to claim for refunds of taxes and duties
originally paid by respondents Caltex, Petrophil and Shell for specific
and ad valorem taxes to the BIR; and for Customs duties and ad valorem
taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its
crude oil importation.
ISSUE:
Whether or not the respondent NPC has ceased to enjoy indirect tax and
duty exemption with the enactment of P.D. No. 938 on May 27, 1976
which amended P.D. No. 380, issued on January 11, 1974.
RULING:
NO.
It may be useful to make a distinction, for the purpose of this
disposition, between a direct tax and an indirect tax. A direct tax is a tax
for which a taxpayer is directly liable on the transaction or business it
engages in. Examples are the custom duties and ad valorem taxes paid
by the oil companies to the Bureau of Customs for their importation of
crude oil, and the specific and ad valorem taxes they pay to the Bureau
of Internal Revenue after converting the crude oil into petroleum
products.
On the other hand, "indirect taxes are taxes primarily paid by persons
who can shift the burden upon someone else ." 13 For example, the
excise and ad valorem taxes that oil companies pay to the Bureau of
Internal Revenue upon removal of petroleum products from its refinery
can be shifted to its buyer, like the NPC, by adding them to the "cash"
and/or "selling price."
The NPC is a non-profit public corporation created for the general good
and welfare 23 wholly owned by the government of the Republic of the
Philippines. 24 From the very beginning of its corporate existence, the
NPC enjoyed preferential tax treatment 25 to enable the Corporation to
pay the indebtedness and obligation and in furtherance and effective
implementation of the policy enunciated in Section one of "Republic Act
No. 6395" 26which provides:
Sec. 1. Declaration of Policy—Congress hereby declares that
(1) the comprehensive development, utilization and
conservation of Philippine water resources for all beneficial
uses, including power generation, and (2) the total
electrification of the Philippines through the development of
power from all sources to meet the need of rural
electrification are primary objectives of the nation which shall
be pursued coordinately and supported by all instrumentalities
and agencies of the government including its financial
institutions.
From the changes made in the NPC charter, the intention to strengthen
its preferential tax treatment is obvious.

The preamble of P.D. No. 938 states—
WHEREAS, in the application of the tax exemption provision of
the Revised Charter, the non-profit character of the NPC has
not been fully utilized because of restrictive interpretations of
the taxing agencies of the government on said provisions. . . .
(Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that
the said provisions of P.D. No. 938 shall be construed strictly against
NPC. On the contrary, the law mandates that it should be interpreted
liberally so as to enhance the tax exempt status of NPC.
SSS V. CITY OF BACOLOD
FACTS:
Petitioner, Social Security System, maintains a number of regional
offices, one of which is the five-storey building, known as SSS Building in
Bacolod City, occupying four parcels of land. In 1970, said lands and
building were assessed for taxation at P1,744,840.00.
For petitioner's failure to pay the realty taxes for the years 1968, 1969
and 1970 which, including penalties, amounted to P104,956.06,
respondent city sometime in early 1970 levied upon said lands and
building; and on April 3, 1970, it declared said properties forfeited in its
favor.
In protest, petitioner addressed a letter dated July 27, 1970 to the City
Mayor of Bacolod, through respondent city treasurer, seeking
reconsideration of the forfeiture proceedings on the ground that
petitioner, being a government-owned and controlled corporation, is
exempt from payment of real estate taxes.
No action was taken, therefore, petitioner filed an action in the Court of
First Instance of Negros Occidental for nullification of the forfeiture
proceedings.
The Court rendered a decision declaring that SSS is not exempt from tax.
Hence, this petition.
ISSUE:
Page |8
Whether or not SSS is exempt from taxation.
RULING:
YES.
Section 29 of the Commonwealth Act No. 326, otherwise known as the
Charter of the City of Bacolod, provides that lands and buildings owned
by the United States of America, the Commonwealth of the Philippines,
the City of Bacolod, the Province of Occidental Negros, and cemeteries,
churches and their adjacent parsonages and convents, and lands,
buildings and improvements used exclusively for religious, charitable,
scientific or educational purposes, and not for profit, shall be exempt
from taxation; but such exemptions shall not extend to lands or
buildings held for investment, though the income therefrom be devoted
to religious, charitable, scientific or educational purposes.
We hold that under Section 29 of the Charter of the City of Bacolod they
are so exempt.
It bears emphasis that the said section does not contain any
qualification whatsoever in providing for the exemption from real estate
taxes of "lands and buildings owned by the Commonwealth or Republic
of Philippines." Hence, when the legislature exempted lands and
buildings owned by the government from payment of said taxes, what it
intended was a broad and comprehensive application of such mandate,
regardless of whether such property is devoted to governmental or
proprietary purpose.
Villegas vs Hiu Chiong
Facts:
The Municipal Board of Manila enacted Ordinance 6537 requiring aliens
(except those exempted by law) to procure the requisite mayor’s permit
as requirement to be employed or engage in trade in the City of Manila.
The permit fee is P50, and the penalty for the violation of the ordinance
is 3 to 6 months imprisonment or a fine of P100 to P200, or both.
The respondent, a foreigner employee, assailed the Ordinance arguing
that as a revenue measure imposed on aliens, it is discriminatory and a
violation of the rule of the uniformity in taxation;
Petitioner Manila Mayor Villegas argues that Ordinance No. 6537 violate
the rule on uniformity of taxation because the rule applies only to purely
tax or revenue measures and that Ordinance No. 6537 is not a tax or
revenue measure but is an exercise of the police power of the state, it
being principally a regulatory measure in nature.

Issue: Whether the ordinance imposes a regulatory fee or a tax.
Ruling:
The contention that Ordinance No. 6537 is not a purely tax or revenue
measure because its principal purpose is regulatory in nature has no
merit. While it is true that the first part which requires that the alien
shall secure an employment permit from the Mayor involves the
exercise of discretion and judgment in the processing and approval or
disapproval of applications for employment permits and therefore is
regulatory in character the second part which requires the payment of
P50.00 as employee's fee is not regulatory but a revenue measure.
There is no logic or justification in exacting P50.00 from aliens who have
been cleared for employment. It is obvious that the purpose of the
ordinance is to raise money under the guise of regulation.
The ordinance’s purpose is clearly to raise money under the guise of
regulation by exacting P50 from aliens who have been cleared for
employment. The amount is unreasonable and excessive because it fails
to consider difference in situation among aliens required to pay it, i.e.
being casual, permanent, part-time, rank-and-file or executive.
[ The Ordinance was declared invalid as it is arbitrary, oppressive and
unreasonable, being applied only to aliens who are thus deprived of
their rights to life, liberty and property and therefore violates the due
process and equal protection clauses of the Constitution. Further, the
ordinance does not lay down any criterion or standard to guide the
Mayor in the exercise of his discretion, thus conferring upon the mayor
arbitrary and unrestricted powers.]
Victorias Milling vs Municipality of Victorias
Doctrine:
Facts:
Ordinance 1 (1956) was approved by the municipal council of Victorias
by way of an amendment to 2 municipal ordinances separately imposing
license taxes on operators of sugar centrals and sugar refineries.
The changes were: (1) with respect to sugar centrals, by increasing the
rates of license taxes; and (2) as to sugar refineries, by increasing the
rates of license taxes as well as the range of graduated schedule of
annual output capacity.
Victorias Milling questioned the validity of Ordinance 1 on the ground
that it is discriminatory since it singles out plaintiff which is the only
operator of a sugar central and a sugar refinery within the jurisdiction of
defendant municipality
Issue: Was Ordinance No. 1, series of 1956, passed by defendant's
municipal council as a regulatory enactment or as a revenue measure?
Ruling: A revenue measure.
Page |9
Ordinance No. 1, series of 1956, is but an amendment of Ordinance No.
18, series of 1947, in reference to refineries, and Ordinance No. 25,
series of 1953, covering sugar centrals. Ordinance No. 18 imposes
"municipal taxes on persons, firms or corporations operating refinery
mills in this municipality." Ordinance No. 25 speaks of municipal taxes
"relative to the output of the sugar centrals." Ordinance 1 does not
impose any regulation upon which the imposition of payment.
We accordingly say that the designation given by the municipal
authorities does not decide whether the imposition is properly a license
tax or a license fee. The determining factors are the purpose and effect
of the imposition as may be apparent from the provisions of the
ordinance. 22 Thus, "[w]hen no police inspection, supervision, or
regulation is provided, nor any standard set for the applicant 23 to
establish, or that he agrees to attain or maintain, but any and all persons
engaged in the business designated, without qualification or hindrance,
may come, and a license on payment of the stipulated sum will issue, to
do business, subject to no prescribed rule of conduct and under no
guardian eye, but according to the unrestrained judgment or fancy of
the applicant and licensee, the presumption is strong that the power of
taxation, and not the police power, is being exercised." 24
Precisely because of these considerations the present imposition must
be treated as a levy for revenue purposes. A quick glance at the big
amount of maximum annual tax set forth in the ordinance, P40,000.00
for sugar centrals, and P40,000.00 for sugar refineries, will readily
convince one that the tax is really a revenue tax. And then, we read in
the ordinance nothing which would as much as indicate that the tax
imposed is merely for police inspection, supervision or regulation.
NITAFAN v. CIR, GR 78780, July 23, 1987
PRINCIPLE:
The imposition of income tax upon the salary of judges is NOT a
diminution and therefore does not violate the constitution prescribing
that, during the continuance of the office of judges, their salary shall not
be decreased.
FACTS:
Petitioners, the duly appointed and qualified Judges seek to prohibit
and/or perpetually enjoin respondents, the Commissioner of Internal
Revenue and the Financial Officer of the Supreme Court, from making
any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their emoluments
or compensation as judicial officers constitutes a decrease or diminution
of their salaries, contrary to the provision of Section 10, Article VIII of
the 1987 Constitution mandating that "(d)uring their continuance in
office, their salary shall not be decreased," even as it is anathema to the
Ideal of an independent judiciary envisioned in and by said
Constitution."

ISSUE:
Whether or not taxes on the salary of judges constitutes a “decrease”
thereof, in violation of the constitution.
HELD:
NO.
The debates, interpellations and opinions expressed regarding the
constitutional provision in question until it was finally approved by the
Commission disclosed that the true intent of the framers of the 1987
Constitution, in adopting it, was to make the salaries of members of the
Judiciary taxable. The ascertainment of that intent is but in keeping with
the fundamental principle of constitutional construction that the intent
of the framers of the organic law and of the people adopting it should be
given effect.10 The primary task in constitutional construction is to
ascertain and thereafter assure the realization of the purpose of the
framers and of the people in the adoption of the Constitution.11 it may
also be safely assumed that the people in ratifying the Constitution were
guided mainly by the explanation offered by the framers.
PHILIPPINE RURAL ELECTRIC COOPERATIVE (PHILRECA) v. SECRETARY OF
DILG
FACTS:
PHILRECA is an association of 119 electric cooperatives in the country,
all are organized and existing under P.D. 296 or the National
Electrification Administration Decree
Section 39 of PD 296 state, inter alia:
a. Provided that it operates in conformity with the purposes and
provisions of this Decree, cooperatives (1) shall be
permanently exempt from paying income taxes
b. The cooperatives shall be exempt from the payment (a) of all
National Government, local government and municipal taxes
and fees, including franchise, filing, recordation, license or
permit fees or taxes and any fees, charges, or costs involved
in any court or administrative proceeding in which it may be
a party, and (b) of all duties or imposts on foreign goods
acquired for its operations
In the meantime, in order to finance the projects envisioned under PD
296, NEA entered into loan agreements with the USA. The loan
agreement states among other things that the loan provided (USD 28M)
the principal and interest payment shall be made without any deduction
and free from any taxation or fees imposed.
Petitioners contend that pursuant to the provisions of P.D. No. 269, as
amended, and the above-mentioned provision in the loan agreements,
they are exempt from payment of local taxes, including payment of real
property tax.
With the passage of the Local Government Code, however, they allege
that their tax exemptions have been invalidly withdrawn. In particular,
P a g e | 10
petitioners assail Sections 193 and 234 of the Local Government Code
on the ground that the said provisions discriminate against them, in
violation of the equal protection clause. Further, they submit that the
said provisions are unconstitutional because they impair the obligation
of contracts between the Philippine Government and the United States
Government.
ISSUES:
Whether or not a.) the withdrawal of PHILMECA’s tax exemption is in
violation of equal protection clause, and b) that it impairs the obligation
of contract between the Philippine government and the USA.
HELD:
Equal Protection
NO.
We hold that there is reasonable classification under the Local
Government Code to justify the different tax treatment between electric
cooperatives covered by P.D. No. 269, as amended, and electric
cooperatives under R.A. No. 6938.
The pertinent parts of Sections 193 and 234 of the Local Government
Code provide:
Section 193. Withdrawal of Tax Exemption Privileges.—Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including
government-owned and controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.
….
Section 234. Exemptions from real property tax.—The following are
exempted from payment of the real property tax:
….
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938
Petitioners alleged that said provisions unduly discriminate against
petitioners who are duly registered cooperatives under P.D. No. 269, as
amended, and not under R.A. No. 6938 or the Cooperative Code of the
Philippines. They stress that cooperatives under PD 269 is deliberately
singled out.
First, substantial distinctions exist between cooperatives under P.D. No.
269, as amended, and cooperatives under R.A. No. 6938. These
distinctions are manifest in at least two material respects which go into
the nature of cooperatives envisioned by R.A. No. 6938 and which
characteristics are not present in the type of cooperative associations
created under P.D. No. 269
 P a g e | 11

Firstly, as to contribution. Under RA 6938 the members of the
cooperatives are required to contribute pro rata with other members
before being qualified as such. On the other hand, under PD 269, it is
mostly the government thru NEA that funds the electric cooperatives.
Secondly, on the extent of control of the government. Under RA 6938,
the Cooperative Code adheres to the principle of subsidiarity. Pursuant
to this principle, the government may only engage in development
activities where cooperatives do not posses the capability nor the
resources to do so and only upon the request of such cooperatives.
Whereas, PD 269 is replete with provisions wherein NEA takes over the
management of the cooperatives in certain cases.
shall be without deduction of any tax or fee that may be payable under
Philippine law as such tax or fee will be absorbed by the borrower with
funds other than the loan proceeds.
Thus, the withdrawal by the Local Government Code under Sections 193
and 234 of the tax exemptions previously enjoyed by petitioners does
not impair the obligation of the borrower, the lender or the beneficiary
under the loan agreements as in fact, no tax exemption is granted
therein.

Second, the classification of tax-exempt entities in the Local

Government Code is germane to the purpose of the law. The G.R. No. 134062 April 17, 2007
Constitutional mandate that every local government unit shall enjoy
local autonomy, does not mean that the exercise of power by local COMMISSIONER OF INTERNAL REVENUE, Petitioner,
governments is beyond regulation by Congress. Thus, while each vs.
government unit is granted the power to create its own sources of BANK OF THE PHILIPPINE ISLANDS, Respondent.
revenue, Congress, in light of its broad power to tax, has the discretion
to determine the extent of the taxing powers of local government units
Basic Principle/s:
consistent with the policy of local autonomy.23

Section 193 of the Local Government Code is indicative of the legislative
intent to vest broad taxing powers upon local government units and to
limit exemptions from local taxation to entities specifically provided
therein
Finally, Sections 193 and 234 of the Local Government Code permit
reasonable classification as these exemptions are not limited to existing
conditions and apply equally to all members of the same class.
Exemptions from local taxation, including real property tax, are granted
to all cooperatives covered by R.A. No. 6938 and such exemptions exist
for as long as the Local Government Code and the provisions therein on
local taxation remain good law.
Sec. 228. Protesting of Assessment. — When the [CIR] or his duly
authorized representative finds that proper taxes should be assessed,
he shall first notify the taxpayer of his findings: Provided, however,
That a preassessment notice shall not be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void.
Facts:

Non-impairment clause
There is no violation of the non-impairment clause
A law which changes the terms of a legal contract between parties,
either in the time or mode of performance, or imposes new conditions,
or dispenses with those expressed, or authorizes for its satisfaction
something different from that provided in its terms, is law which impairs
the obligation of a contract and is therefore null and void.
This is a petition for review on certiorari1 of a decision2 of the Court of
Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which
reversed and set aside the decision3 and resolution4 of the Court of Tax
Appeals (CTA) dated November 16, 1995 and May 27, 1996,
respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of
Internal Revenue (CIR) assessed respondent Bank of the Philippine
Islands’ (BPI’s) deficiency percentage and documentary stamp taxes for
the year 1986 in the total amount of P129,488,656.63:

Petitioners contend that the withdrawal by the Local Government Code 1986 – Deficiency Percentage Tax
of the tax exemptions of cooperatives under P.D. No. 269, as amended,
is an impairment of the tax exemptions provided under the loan
agreements. Petitioners argue that as beneficiaries of the loan proceeds, Deficiency percentage tax P 7, 270,892.88
pursuant to the above provision, "[a]ll the assets of petitioners, such as
lands, buildings, distribution lines acquired through the proceeds of the Add: 25% surcharge 1,817,723.22
Loan Agreements … are tax exempt."31 20% interest from 1-21-87 to 10-28-88 3,215,825.03

A plain reading of the provision quoted above readily shows that it does 15,000.00
Compromise penalty
not grant any tax exemption in favor of the borrower or the beneficiary
either on the proceeds of the loan itself or the properties acquired TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13
through the said loan. It simply states that the loan proceeds and the
principal and interest of the loan, upon repayment by the borrower,

1986 – Deficiency Documentary Stamp Tax
Deficiency percentage tax P93,723,372.40
Add: 25% surcharge 23,430,843.10
15,000.00
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.5
BPI, in their answer, contended that these are not assessments and
requested that the examiner concerned be required to state, even in the
briefest form, why he believes the taxpayer has a deficiency
documentary and percentage taxes, and as to the percentage tax, it is
important that the taxpayer be informed also as to what particular
percentage tax the assessment refers to.
BPI received a letter from CIR indicating that the former’s letter failed to
qualify as a protest under Revenue Regulations No. 12-85 and this
constitutes the final decision on the matter.
BPI requested a reconsideration of the assessments which was denied
by the CIR.
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a
decision dated November 16, 1995, the CTA dismissed the case for lack
of jurisdiction since the subject assessments had become final and
unappealable. The CTA ruled that BPI failed to protest on time under
Section 270 of the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125.12 It denied
reconsideration in a resolution dated May 27, 1996.
On appeal, the CA reversed the tax court’s decision and resolution and
remanded the case to the CTA14 for a decision on the merits.15 It ruled
that the October 28, 1988 notices were not valid assessments because
they did not inform the taxpayer of the legal and factual bases therefor.
It declared that the proper assessments were those contained in the
May 8, 1991 letter which provided the reasons for the claimed
deficiencies.16 Thus, it held that BPI filed the petition for review in the
CTA on time.17 The CIR elevated the case to this Court.
Issue/s:
Whether or not the October 28, 1988 notices19 were valid assessments
so that BPI could be liable for the said taxes.
Held:
Yes.
BPI’s contention has no merit. The present Section 228 of the NIRC
provides:
Sec. 228. Protesting of Assessment. — When the [CIR] or his duly
authorized representative finds that proper taxes should be assessed,
he shall first notify the taxpayer of his findings: Provided, however,
That a preassessment notice shall not be required in the following cases:
P a g e | 12
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void.
Admittedly, the CIR did not inform BPI in writing of the law and facts on
which the assessments of the deficiency taxes were made. He merely
notified BPI of his findings, consisting only of the computation of the tax
liabilities and a demand for payment thereof within 30 days after
receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of
the former Section 270 prior to its amendment by RA 8424 (also known
as the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and
the facts on which the assessment of estate taxes had been made. She
was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229 prior to its amendment by
[RA] 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on
protesting an assessment. The old requirement of merely notifying the
taxpayer of the CIR's findings was changed in 1998 to informing the
taxpayer of not only the law, but also of the facts on which an
assessment would be made; otherwise, the assessment itself would be
invalid.
It was on February 12, 1998, that a preliminary assessment notice was
issued against the estate. On April 22, 1998, the final estate tax
assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required under
the old law was no longer sufficient under the new law.25 (emphasis
supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former
Section 270, the only requirement was for the CIR to "notify" or inform
the taxpayer of his "findings." Nothing in the old law required a written
statement to the taxpayer of the law and facts on which the
assessments were based. The Court cannot read into the law what
obviously was not intended by Congress. That would be judicial
legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments
contain a computation of tax liabilities, the amount the taxpayer was to
pay and a demand for payment within a prescribed period.26 Everything
considered, there was no doubt the October 28, 1988 notices
sufficiently met the requirements of a valid assessment under the old
law and jurisprudence.
QUICK DIGEST:
Facts:
In two notices dated October 28, 1988, petitioner Commissioner of
Internal Revenue (CIR) assessed respondent Bank of the Philippine
 P a g e | 13

Islands’ (BPI’s) deficiency percentage and documentary stamp taxes for Sec. 228. Protesting of Assessment. — When the [CIR] or his duly
the year 1986 in the total amount of P129,488,656.63: authorized representative finds that proper taxes should be assessed,
he shall first notify the taxpayer of his findings: Provided, however,
1986 – Deficiency Percentage Tax That a preassessment notice shall not be required in the following cases:

xxx xxx xxx

Deficiency percentage tax P 7, 270,892.88

Add: 25% surcharge
20% interest from 1-21-87 to 10-28-88
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13
1986 – Deficiency Documentary Stamp Tax
Deficiency percentage tax
Add: 25% surcharge
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
1,817,723.22 The taxpayer shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
3,215,825.03 void.
15,000.00
Accordingly, when the assessments were made pursuant to the former
Section 270, the only requirement was for the CIR to "notify" or inform
the taxpayer of his "findings." Nothing in the old law required a written
statement to the taxpayer of the law and facts on which the
assessments were based. The Court cannot read into the law what
obviously was not intended by Congress. That would be judicial
legislation, nothing less.
P93,723,372.40
Jurisprudence, on the other hand, simply required that the assessments
23,430,843.10
contain a computation of tax liabilities, the amount the taxpayer was to
15,000.00 pay and a demand for payment within a prescribed period.26 Everything
considered, there was no doubt the October 28, 1988 notices
sufficiently met the requirements of a valid assessment under the old
P117,169,215.50. 5
law and jurisprudence.

BPI, in their answer, contended that these are not assessments and
requested that the examiner concerned be required to state, even in the
briefest form, why he believes the taxpayer has a deficiency
documentary and percentage taxes, and as to the percentage tax, it is
important that the taxpayer be informed also as to what particular
percentage tax the assessment refers to. G.R. No. L-31156 February 27, 1976

CIR indicated that the former’s letter failed to qualify as a protest under PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-
Revenue Regulations No. 12-85 and this constitutes the final decision on appellant,
the matter. vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET
AL., defendant appellees
BPI requested a reconsideration of the assessments which was denied
by the CIR.
Basic Principle/s:
BPI filed a petition for review in the CTA which was dismissed for lack of
jurisdiction since the subject assessments had become final and 1. The power of taxation is an essential and inherent attribute of
unappealable. The CTA ruled that BPI failed to protest on time under sovereignty, belonging as a matter of right to every
Section 270 of the National Internal Revenue Code (NIRC) of 1986. It independent government, without being expressly conferred
denied reconsideration. by the people.

The case was elevated to CA and reversed the decision of the CTA. 2. The plenary nature of the taxing power thus delegated,
contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In
Issue/s:
delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said
Whether or not the October 28, 1988 notices19 were valid assessments that the taxing power may be delegated to municipalities and
so that BPI could be liable for the said taxes. the like, it is meant that there may be delegated such measure
of power to impose and collect taxes as the legislature may
Held: deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not
Yes. deemed wise to tax for more general purposes.

Facts:
BPI’s contention has no merit. The present Section 228 of the NIRC
provides:

This is an appeal from the decision of the Court of First Instance of Leyte
in its Civil Case No. 3294, which was certified to Us by the Court of
Appeals on October 6, 1969, as involving only pure questions of law,
challenging the power of taxation delegated to municipalities under the
Local Autonomy Act (Republic Act No. 2264, as amended, June 19,
1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling
Company of the Philippines, Inc., commenced a complaint with
preliminary injunction before the Court of First Instance of Leyte for that
court to declare Section 2 of Republic Act No. 2264. 1 otherwise known
as the Local Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23 and 27, series
of 1962, of the municipality of Tanauan, Leyte, null and void.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on
September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle
of soft drink corked."
2.
On the other hand, Municipal Ordinance No. 27, which was approved on
October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax
of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity."
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered
judgment "dismissing the complaint and upholding the constitutionality
of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27
legal and constitutional; ordering the plaintiff to pay the taxes due under
the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed
to the Court of Appeals, which, in turn, elevated the case to Us pursuant
to Section 31 of the Judiciary Act of 1948, as amended.
Issue/s:
1. — Whether or not Section 2, Republic Act No. 2264 an undue
delegation of power, confiscatory and oppressive.
2. — Whether or not ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes.
Held:
1. No.
The plenary nature of the taxing power thus delegated,
contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said
that the taxing power may be delegated to municipalities and
the like, it is meant that there may be delegated such measure
of power to impose and collect taxes as the legislature may
P a g e | 14
deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not
deemed wise to tax for more general purposes
There is no validity to the assertion that the delegated
authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. 13 The reason
is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted
as part thereof the injunction against double taxation found in
the Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the
same purpose, 16 but not in a case where one tax is imposed
by the State and the other by the city or municipality.
No.
As earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a
centavo for .every bottle corked, irrespective of the volume
contents of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume contents
of the bottle and still pay the same tax rate, the Municipality
of Tanauan enacted Ordinance No. 27, approved on October
28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The intention of the Municipal Council of
Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23,
and operates as a repeal of the latter, even without words to
that effect.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within
the ambit of the general rule, pursuant to the rules
of exclucion attehus and exceptio firmat regulum in cabisus
non excepti 19
Nor can the tax levied be treated as a specific tax. Specific
taxes are those imposed on specified articles, such as distilled
spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured
oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. 22 Soft drink is not one of those
specified.

Quick Digest:
Facts:
Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance
of Leyte for that court to declare Section 2 of Republic Act No.
2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as
an undue delegation of taxing authority as well as to declare Ordinances
Nos. 23 and 27, series of 1962, of the municipality of Tanauan, Leyte,
null and void.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on
September 25, 1962, levies and collects "from soft drinks producers and
manufacturers a tax of one-sixteenth (1/16) of a centavo for every bottle
of soft drink corked."
On the other hand, Municipal Ordinance No. 27, which was approved on
October 28, 1962, levies and collects "on soft drinks produced or
manufactured within the territorial jurisdiction of this municipality a tax
of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity."
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as
"municipal production tax.'
The Court of First Instance of Leyte rendered judgment "dismissing the
complaint and upholding the constitutionality of [Section 2, Republic Act
No. 2264] declaring Ordinance Nos. 23 and 27 legal and constitutional;
ordering the plaintiff to pay the taxes due under the oft the said
Ordinances; and to pay the costs.
Issue/s:
1. — Whether or not Section 2, Republic Act No. 2264 an undue
delegation of power, confiscatory and oppressive.
2. — Whether or not ordinances Nos. 23 and 27 constitute double
taxation and impose percentage or specific taxes.
Held:
1. No.
The plenary nature of the taxing power thus delegated,
contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said
that the taxing power may be delegated to municipalities and
the like, it is meant that there may be delegated such measure
of power to impose and collect taxes as the legislature may
deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not
deemed wise to tax for more general purposes
There is no validity to the assertion that the delegated
authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating
P a g e | 15
authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. 13 The reason
is that the State has exclusively reserved the same for its own
prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted
as part thereof the injunction against double taxation found in
the Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the
same purpose, 16 but not in a case where one tax is imposed
by the State and the other by the city or municipality.
2. No.
As earlier quoted, Ordinance No. 23, which was approved on
September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a
centavo for .every bottle corked, irrespective of the volume
contents of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume contents
of the bottle and still pay the same tax rate, the Municipality
of Tanauan enacted Ordinance No. 27, approved on October
28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a
centavo for every bottle corked; in Ordinance No. 27, it is one
centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of
volume capacity. The intention of the Municipal Council of
Tanauan in enacting Ordinance No. 27 is thus clear: it was
intended as a plain substitute for the prior Ordinance No. 23,
and operates as a repeal of the latter, even without words to
that effect.
Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those
which are mentioned therein." As long as the text levied under
the authority of a city or municipal ordinance is not within the
exceptions and limitations in the law, the same comes within
the ambit of the general rule, pursuant to the rules
of exclucion attehus and exceptio firmat regulum in cabisus
non excepti 19
Nor can the tax levied be treated as a specific tax. Specific
taxes are those imposed on specified articles, such as distilled
spirits, wines, fermented liquors, products of tobacco other
than cigars and cigarettes, matches firecrackers, manufactured
oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and
other habit-forming drugs. 22 Soft drink is not one of those
specified.
G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal
Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of
First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the
late Walter Scott Price,respondents.
FACTS:
This case pertains to the inheritance tax, charges and penalties
amounting to P40,058.55 on the estate of Walter Scott Price which the
court ordered as paid because of the receivable of the estate against the
government. It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final
and executory the order for the payment by the estate of the estate and
inheritance taxes. In order to enforce the claims against the estate the
fiscal presented a petition dated June 21, 1961, to the court below for
the execution of the judgment. The petition was, however, denied by
the court which held that the execution is not justifiable as the
Government is indebted to the estate under administration in the
amount of P262,200. There is already an existing appropriation under
Republic Act No. 2700 appropriating the sum of P262.200.00 for the
payment to the Leyte Cadastral Survey, Inc., represented by the
administratrix Simeona K. Price.
The Court orders that the payment of inheritance taxes in the
sum of P40,058.55 due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in accordance with
the order of the Supreme Court promulgated July 30, 1960 in
G.R. No. L-14674, be deducted from the amount of
P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government
to her without further delay. (Order of August 20, 1960)
ISSUE:
Whether compensation of inheritance tax against the claim of
the estate against the government proper?
HELD:
Yes.
The court having jurisdiction of the estate had found that the claim of
the estate against the Government has been recognized and an amount
of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances,
both the claim of the Government for inheritance taxes and the claim of
the intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes
place by operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279
are present, compensation takes effect by operation of law,
and extinguished both debts to the concurrent amount, even
P a g e | 16
though the creditors and debtors are not aware of the
compensation.
It is clear, therefore, that the petitioner has no clear right to execute the
judgment for taxes against the estate of the deceased Walter Scott
Price.
G.R. No. 165109 December 14, 2009
MANUEL N. MAMBA, RAYMUND P. GUZMAN and LEONIDES N.
FAUSTO, Petitioners,
vs.
EDGAR R. LARA, JENERWIN C. BACUYAG, WILSON O. PUYAWAN,
ALDEGUNDO Q. CAYOSA, JR., NORMAN A. AGATEP, ESTRELLA P.
FERNANDEZ, VILMER V. VILORIA, BAYLON A. CALAGUI, CECILIA MAEVE
T. LAYOS, PREFERRED VENTURES CORP., ASSET BUILDERS CORP., RIZAL
COMMERCIAL BANKING CORPORATION, MALAYAN INSURANCE CO.,
and LAND BANK OF THE PHILIPPINES,Respondents.
PRINCIPLE:
For a taxpayer’s suit to prosper, two requisites must be met: (1) public
funds derived from taxation are disbursed by a political subdivision or
instrumentality and in doing so, a law is violated or some irregularity is
committed and (2) the petitioner is directly affected by the alleged act.
FACTS:
On May 20, 2002, the majority of the members of the Sangguniang
Panlalawigan of Cagayan approved Ordinance No. 19-2002, 8 authorizing
the bond flotation of the provincial government in an amount not to
exceed P500 million to fund the construction and development of the
new Cagayan Town Center. The Resolution likewise granted authority to
Gov. Lara to negotiate, sign and execute contracts and agreements
necessary and related to the bond flotation subject to the approval and
ratification by the Sangguniang Panlalawigan.
On October 20, 2003, the Sangguniang Panlalawigan approved
Resolution No. 350-2003 9 ratifying the Cagayan Provincial Bond
Agreements entered into by the provincial government, represented by
Gov. Lara, to wit:
a. Trust Indenture with the Rizal Commercial Banking
Corporation (RCBC) – Trust and Investment Division and
Malayan Insurance Company, Inc. (MICO).
b. Deed of Assignment by way of security with the RCBC and
the Land Bank of the Philippines (LBP).
c. Transfer and Paying Agency Agreement with the RCBC –
Trust and Investment Division.
d. Guarantee Agreement with the RCBC – Trust and
Investment Division and MICO.

e. Underwriting Agreement with RCBC Capital Corporation.
On even date, the Sangguniang Panlalawigan also approved Resolution
No. 351-2003, ratifying the Agreement for the Planning, Design,
Construction, and Site Development of the New Cagayan Town Center.
On May 20, 2003, Gov. Lara issued the Notice of Award to Asset Builders
Corporation, giving to the latter the planning, design, construction and
site development of the town center project for a fee
of P213,795,732.39.
On December 12, 2003, petitioners filed a Petition for Annulment of
Contracts and Injunction with prayer for a Temporary Restraining
Order/Writ of Preliminary Injunction. The petition was dismissed for lack
of cause of action.
Petitioners filed a Motion for Reconsideration to which respondents
filed their respective Oppositions. Petitioners then filed a Motion to
Inhibit, which the court granted. Accordingly, the case was re-raffled to
Branch 1 of the RTC of Tuguegarao City.
On August 20, 2004, Branch 1 of the RTC of Tuguegarao City issued a
Resolution denying petitioners’ plea for reconsideration. The court
found the motion to be a mere scrap of paper as the notice of hearing
was addressed only to the Clerk of Court in violation of Section 5, Rule
15 of the Rules of Court. As to the merits, the court sustained the
findings of Branch 5 that petitioners lack legal standing to sue and that
the issue involved is political.
ISSUE:
Whether or not taxpayer’s suit is proper.
HELD:
YES.
A taxpayer is allowed to sue where there is a claim that public funds
are illegally disbursed, or that the public money is being deflected to
any improper purpose, or that there is wastage of public funds through
the enforcement of an invalid or unconstitutional law. 39 A person suing
as a taxpayer, however, must show that the act complained of directly
involves the illegal disbursement of public funds derived from
taxation. 40 He must also prove that he has sufficient interest in
preventing the illegal expenditure of money raised by taxation and that
he will sustain a direct injury because of the enforcement of the
questioned statute or contract. 41 In other words, for a taxpayer’s suit
to prosper, two requisites must be met: (1) public funds derived from
taxation are disbursed by a political subdivision or instrumentality and
in doing so, a law is violated or some irregularity is committed and (2)
the petitioner is directly affected by the alleged act. 42
A taxpayer need not be a party to the contract to challenge its
validity. 43 As long as taxes are involved, people have a right to question
contracts entered into by the government.
In this case, although the construction of the town center would be
primarily sourced from the proceeds of the bonds, which respondents
insist are not taxpayer’s money, a government support in the amount
P a g e | 17
of P187 million would still be spent for paying the interest of the
bonds. 44 In fact, a Deed of Assignment 45 was executed by the governor
in favor of respondent RCBC over the Internal Revenue Allotment (IRA)
and other revenues of the provincial government as payment and/or
security for the obligations of the provincial government under the Trust
Indenture Agreement dated September 17, 2003. Records also show
that on March 4, 2004, the governor requested the Sangguniang
Panlalawigan to appropriate an amount of P25 million for the interest of
the bond. 46Clearly, the first requisite has been met.
As to the second requisite, the court, in recent cases, has relaxed the
stringent "direct injury test" bearing in mind that locus standi is a
procedural technicality. 47 By invoking "transcendental importance",
"paramount public interest", or "far-reaching implications", ordinary
citizens and taxpayers were allowed to sue even if they failed to show
direct injury. 48 In cases where serious legal issues were raised or where
public expenditures of millions of pesos were involved, the court did not
hesitate to give standing to taxpayers. 49
TIU VS CA
CREBA VS ROMULO
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF
BENIGNO P. TODA, JR., Represented by Special Co-
administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
Principles:
Tax avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the taxpayer
in good faith and at arms length.
Tax evasion, on the other hand, is a scheme used outside of
those lawful means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities. Tax
evasion connotes the integration of three factors:
1. The end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is
due;
2. An accompanying state of mind which is described as
being evil, in bad faith, willfull,or deliberate and not
accidental; and
3. A course of action or failure of action which is
unlawful.

Facts:
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President
and owner of 99.991% of its issued and outstanding capital stock, to sell
the Cibeles Building and the two parcels of land on which the building
stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100
million to Rafael A. Altonaga, who, in turn, sold the same property on
the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the
same day by the same notary public.[5]For the sale of the property to
RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax
return[7] for the year 1989, declaring, among other things, its gain from
the sale of real property in the amount of P75,728.021. After crediting
withholding taxes of P254,497.00, it paid P26,341,207[8] for its net
taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le
Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares
of Stocks.[9] On 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an
assessment notice[10] and demand letter to the CIC for deficiency income
tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for reconsideration, asserting that the
assessment should be directed against the old CIC, and not against the
new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings
and the CIC free from all tax liabilities for the fiscal years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr.,
represented by special co-administrators Lorna Kapunan and Mario Luza
Bautista, received a Notice of Assessment[12] dated 9 January 1995 from
the Commissioner of Internal Revenue for deficiency income tax for the
year 1989 in the amount of P79,099,999.22. The Estate thereafter filed a
letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner
dismissed the protest, stating that a fraudulent scheme was deliberately
perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the
change in the income structure of the proceeds of the sale of the two
parcels of land and the building thereon to an individual capital gains,
thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review. In his
Answer[16] and Amended Answer,[17] the Commissioner argued that the
two transactions actually constituted a single sale of the property by CIC
to RMI, and that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The additional gain
of P100 million (the difference between the second simulated sale
for P200 million and the first simulated sale for P100 million) realized by
CIC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CIC.
The income tax return filed by CIC for 1989 with intent to evade
payment of the tax was thus false or fraudulent.
In its decision[18] of 3 January 2000, the CTA held that the
Commissioner failed to prove that CIC committed fraud to deprive the
government of the taxes due it. It ruled that even assuming that a pre-
conceived scheme was adopted by CIC, the same constituted mere tax
avoidance, and not tax evasion.
P a g e | 18
The CTA denied[20] the motion for reconsideration, prompting the
Commissioner to file a petition for review[21] with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals
affirmed the decision of the CTA, reasoning that the CTA, being more
advantageously situated and having the necessary expertise in matters
of taxation, is better situated to determine the correctness, propriety,
and legality of the income tax assessments assailed by the Toda
Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the
Commissioner filed the present petition.
Issue:
Whether or not the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an
assessment of deficiency income tax.
Ruling:
YES.
Tax avoidance and tax evasion are the two most common ways
used by taxpayers in escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax evasion,
on the other hand, is a scheme used outside of those lawful means and
when availed of, it usually subjects the taxpayer to further or additional
civil or criminal liabilities.[23]Tax evasion connotes the integration of
three factors:
1. the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is due;
2. an accompanying state of mind which is described as
being evil, in bad faith, willfull,or deliberate and not
accidental; and
3. a course of action or failure of action which is
unlawful.[24]
All these factors are present in the instant case. It is significant to
note that as early as 4 May 1989, prior to the purported sale of the
Cibeles property by CIC to Altonaga on 30 August 1989, CIC receivedP40
million from RMI,[25] and not from Altonaga. That P40 million was
debited by RMI and reflected in its trial balance[26] as other inv. Cibeles
Bldg. Also, as of 31 July 1989, another P40 million was debited and
reflected in RMIs trial balance as other inv. Cibeles Bldg. This would
show that the real buyer of the properties was RMI, and not the
intermediary Altonaga. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale to him
was part of the tax planning scheme of CIC. That admission is borne by
the records.
Tax planning is by definition to reduce, if not eliminate altogether, a tax.
Surely petitioner [sic] cannot be faulted for wanting to reduce the tax
from 35% to 5%.[29]
The scheme resorted to by CIC in making it appear that there were
two sales of the subject properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate tax planning.
Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything
calculated to deceive, including all acts, omissions, and concealment

involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonagas sole purpose
of acquiring and transferring title of the subject properties on the same
day was to create a tax shelter. Altonaga never controlled the property
and did not enjoy the normal benefits and burdens of ownership. The
sale to him was merely a tax ploy, a sham, and without business purpose
and economic substance. Doubtless, the execution of the two sales was
calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of
Altonaga, which was prompted more on the mitigation of tax liabilities
than for legitimate business purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income tax
incidence only when it is consummated.[32] The incidence of taxation
depends upon the substance of a transaction. The tax consequences
arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title. Rather,
the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is
relevant. A sale by one person cannot be transformed for tax purposes
into a sale by another by using the latter as a conduit through which to
pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would
seriously impair the effective administration of the tax policies of
Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale
was made through another and distinct entity when it is proved that the
latter was merely a conduit is to sanction a circumvention of our tax
laws. Hence, the sale to Altonaga should be disregarded for income tax
purposes.[34] The two sale transactions should be treated as a single
direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24
of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of
1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on
domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each
taxable year from all sources by every corporation
organized in, or existing under the laws of the
Philippines, and partnerships, no matter how
created or organized but not including general
professional partnerships, in accordance with the
following:
Twenty-five percent upon the amount by which the
taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the
taxable net income exceeds one hundred thousand
pesos.
P a g e | 19
CIC is therefore liable to pay a 35% corporate tax for its taxable net
income in 1989. The 5% individual capital gains tax provided for in
Section 34 (h) of the NIRC of 1986[35] (now 6% under Section 24 (D) (1) of
the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for
the deficiency income tax issued by the BIR must be upheld.
Short Digest:
Facts:
CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of
its issued and outstanding capital stock, to sell the Cibeles Building and
the two parcels of land on which the building stands for an amount of
not less than P90million. 30 August 1989, Toda purportedly sold the
property for P100million to Altonaga, who, in turn, sold the same
property on the same day to Royal Match Inc. (RMI) for P200 million.
These two transactions were evidenced by Deeds of Absolute Sale
notarized on the same day by the same notary public .For the sale of the
property to RMI, Altonaga paid capital gains tax in the amount of P10
million. On 16 April 1990, CIC filed its corporate annual income tax
return for the year 1989, declaring, among other things, its gain from
the sale of real property in the amount of P75,728.021.After crediting
withholding taxes of P254,497.00, it paidP26,341,207 for its net taxable
income of P75,987,725.On 12 July 1990, Toda sold his entire shares of
stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a
Deedof Sale of Shares of Stocks.
SMART COMMUNICATIONS, INC., PETITIONER,
VS.
THE CITY OF DAVAO, REPRESENTED HEREIN BY ITS MAYOR HON.
RODRIGO DUTERTE, AND THE SANGGUNIANG PANLUNSOD OF DAVAO
CITY, RESPONDENTS.
G.R. NO. 155491 JULY 21, 2009
Principle:
Tax exemptions are highly disfavored and that a tax exemption
must be expressed in the statute in clear language that leaves
no doubt of the intention of the legislature to grant such
exemption. And, even in the instances when it is granted, the
exemption must be interpreted in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.
The power to tax by local government units emanates from
Section 5, Article X of the Constitution which empowers them
to create their own sources of revenues and to levy taxes, fees
and charges subject to such guidelines and limitations as the
Congress may provide. The imposition of local franchise tax is
not inconsistent with the advent of the VAT, which renders
functus officio the franchise tax paid to the national
government. VAT inures to the benefit of the national
government, while a local franchise tax is a revenue of the
local government unit.
Facts:

On February 18, 2002, Smart filed a special civil action for declaratory
relief for the ascertainment of its rights and obligations under the Tax
Code of the City of Davao, which imposes a franchise tax on businesses
enjoying a franchise within the territorial jurisdiction of Davao. Smart
avers that its telecenter in Davao City is exempt from payment of
franchise tax to the City.
On July 19, 2002, the RTC rendered a Decision denying the petition.
Smart filed a motion for reconsideration, which was denied by the trial
court in an Order dated September 26, 2002. Smart filed an appeal
before this Court, but the same was denied in a decision dated
September 16, 2008. Hence, the instant motion for reconsideration
raising the following grounds:
1. the "in lieu of all taxes" clause in Smart’s franchise, Republic
Act No. 7294 (RA 7294), covers local taxes; the rule of strict
construction against tax exemptions is not applicable;
2. the "in lieu of all taxes" clause is not rendered ineffective by
the Expanded VAT Law;
3. Section 23 of Republic Act No. 79254 (RA 7925) includes a tax
exemption; and
4. the imposition of a local franchise tax on Smart would violate
the constitutional prohibition against impairment of the
obligation of contracts.
Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in
issue. Section 9 of Smart’s legislative franchise contains the contentious
"in lieu of all taxes" clause. The Section reads:
Section 9. Tax provisions. — The grantee, its successors or
assigns shall be liable to pay the same taxes on their real
estate buildings and personal property, exclusive of this
franchise, as other persons or corporations which are now or
hereafter may be required by law to pay. In addition thereto,
the grantee, its successors or assigns shall pay a franchise tax
equivalent to three percent (3%) of all gross receipts of the
business transacted under this franchise by the grantee, its
successors or assigns and the said percentage shall be in lieu
of all taxes on this franchise or earnings thereof: Provided,
That the grantee, its successors or assigns shall continue to be
liable for income taxes payable under Title II of the National
Internal Revenue Code pursuant to Section 2 of Executive
Order No. 72 unless the latter enactment is amended or
repealed, in which case the amendment or repeal shall be
applicable thereto.
Section 23 of RA 7925, otherwise known as the most favored treatment
clause or equality clause, contains the word "exemption," viz.:
SEC. 23. Equality of Treatment in the Telecommunications
Industry — Any advantage, favor, privilege, exemption, or
immunity granted under existing franchises, or may hereafter
be granted, shall ipso facto become part of previously granted
telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such
franchises: Provided, however, That the foregoing shall neither
apply to nor affect provisions of telecommunications
franchises concerning territory covered by the franchise, the
life span of the franchise, or the type of the service authorized
by the franchise.6
Issue:
P a g e | 20
Whether or not Smart Communications is still liable
to pay the local franchise tax under the Tax Code of
the City of Davao, which imposes a franchise tax on
businesses enjoying a franchise within the territorial
jurisdiction of Davao.
Ruling:
YES.
In PLDT v. City of Davao, wherein the Court, speaking through Mr.
Justice Vicente V. Mendoza, held that in approving Section 23 of RA No.
7925, Congress did not intend it to operate as a blanket tax exemption
to all telecommunications entities. Section 23 cannot be considered as
having amended PLDT’s franchise so as to entitle it to exemption from
the imposition of local franchise taxes. The Court further held that tax
exemptions are highly disfavored and that a tax exemption must be
expressed in the statute in clear language that leaves no doubt of the
intention of the legislature to grant such exemption. And, even in the
instances when it is granted, the exemption must be interpreted in
strictissimi juris against the taxpayer and liberally in favor of the taxing
authority.
The Court also clarified the meaning of the word "exemption" in Section
23 of RA 7925: that the word "exemption" as used in the statute refers
or pertains merely to an exemption from regulatory or reporting
requirements of the Department of Transportation and Communication
or the National Transmission Corporation and not to an exemption from
the grantee’s tax liability.
Aside from the national franchise tax, the franchisee is STILL LIABLE TO
PAY the local franchise tax, UNLESS it is expressly and unequivocally
exempted from the payment thereof under its legislative franchise.
The "in lieu of all taxes" clause in a legislative franchise should
categorically state that the exemption applies to both local and national
taxes; otherwise, the exemption claimed should be strictly construed
against the taxpayer and liberally in favor of the taxing authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law,"
did not remove or abolish the payment of local franchise tax. It merely
replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten
percent (10%) VAT in accordance with Section 108 of the Tax Code. VAT
replaced the national franchise tax, but it did not prohibit nor abolish
the imposition of local franchise tax by cities or municipaties.
The power to tax by local government units emanates from Section 5,
Article X of the Constitution which empowers them to create their own
sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide. The imposition
of local franchise tax is not inconsistent with the advent of the VAT,
which renders functus officio the franchise tax paid to the national
government. VAT inures to the benefit of the national government,
while a local franchise tax is a revenue of the local government unit.

PHILIPPINE BANK OF COMMUNICATIONS
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and
COURT OF APPEALS
PRINCIPLE:
 "taxes are the lifeblood of the nation." Thus, courts will not
countenance administrative issuances that override, instead of
remaining consistent and in harmony with the law they seek to
apply and implement.
 Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC)
provides that any excess of the total quarterly payments over
the actual income tax computed 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. These remedies are in the
alternative, and the choice of one precludes the other.
FACTS:
Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its
quarterly income tax returns for the first and second quarters of 1985,
reported profits, and paid the total income tax of P5,016,954.00.
Subsequently, however, PBCom suffered losses so that when it filed its
Annual Income Tax Returns for the year-ended December 31, 1986, the
petitioner likewise reported a net loss of P14,129,602.00, and thus
declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of P5,016,954.00 representing
the overpayment of taxes in the first and second quarters of 1985.
But only after 3 years thereafter or on 1988 that petitioner filed a claim
for refund of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
petitioner instituted a Petition for Review on November 18, 1988 before
the Court of Tax Appeals (CTA).
CTA’s decision:
On May 20, 1993, the CTA rendered a decision which, as stated on the
outset, denied the request of petitioner for a tax refund or credit in the
sum amount of P5,299,749.95, on the ground that it was filed beyond
the two-year reglementary period provided for by law. The petitioner's
claim for refund in 1986 amounting to P234,077.69 was likewise denied
on the assumption that it was automatically credited by PBCom against
its tax payment in the succeeding year.
the Court of Appeals affirmed in toto the CTA's resolution dated July 20,
1993. Hence this petition now before us.
Petitioner’s contention:
P a g e | 21
its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985 by the BIR. The circular states that overpaid
income taxes are not covered by the two-year prescriptive period under
the tax Code and that taxpayers may claim refund or tax credits for the
excess quarterly income tax with the BIR within ten (10) years under
Article 1144 of the Civil Code.
ISSUE:
Whether or not the Court of Appeals erred in denying the plea for tax
refund or tax credits on the ground of prescription, despite petitioner's
reliance on RMC No. 7-85, changing the prescriptive period of two years
to ten years?
RULING:
No.
Basic is the principle that "taxes are the lifeblood of the nation." The
primary purpose is to generate funds for the State to finance the needs
of the citizenry and to advance the common weal. 13 Due process of law
under the Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon taxation that the
government chiefly relies to obtain the means to carry on its operations
and it is of utmost importance that the modes adopted to enforce the
collection of taxes levied should be summary and interfered with as little
as possible.
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of
excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing,
the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
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. 20 Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent
and in harmony with the law they seek to apply and implement. 21
Further, fundamental is the rule that the State cannot be put in estoppel
by the mistakes or errors of its officials or agents. 24 As pointed out by
the respondent courts, the nullification of RMC No. 7-85 issued by the
Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for
being contrary to the express provision of a statute. Hence, his
interpretation could not be given weight for to do so would, in effect,
amend the statute.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax
computed 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
(by marking the option box provided in the BIR form) its intention,
whether to request for a refund or claim for an automatic tax credit for
the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one
precludes the other.
that petitioner had indeed availed of and applied the automatic tax
credit to the succeeding year, hence it can no longer ask for refund, as
to [sic] the two remedies of refund and tax credit are alternative.
PETITION IS DENIED.
Quick digest:
Philippine Bank of Communications (PBCom), a commercial banking
corporation duly organized under Philippine laws petitioner requested
the Commissioner of Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the first and
second quarters of 1985.
But only after 3 years thereafter or on 1988 that petitioner filed a claim
for refund of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
However, CTA denied the request of petitioner for a tax refund or credit
in the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law.
Petitioner’s contention:
its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985 by the BIR. The circular states that overpaid
income taxes are not covered by the two-year prescriptive period under
the tax Code and that taxpayers may claim refund or tax credits for the
excess quarterly income tax with the BIR within ten (10) years under
Article 1144 of the Civil Code.
ISSUE:
Whether or not the Court of Appeals erred in denying the plea for tax
refund or tax credits on the ground of prescription, despite petitioner's
reliance on RMC No. 7-85, changing the prescriptive period of two years
to ten years?
RULING:
No.
"taxes are the lifeblood of the nation." Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent
and in harmony with the law they seek to apply and implement.
P a g e | 22
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of
excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing,
the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.
Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax
computed 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. These remedies are in the alternative, and the
choice of one precludes the other.
that petitioner had indeed availed of and applied the automatic tax
credit to the succeeding year, hence it can no longer ask for refund, as
to [sic] the two remedies of refund and tax credit are alternative.
[G.R. No. 136975. March 31, 2005]
COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING
CO., INC., respondent.
Principle:
the best evidence obtainable under Section 16 of the 1977 NIRC, as
amended, does not include mere photocopies of records/documents.
Mere photocopies of the Consumption Entries have no probative weight
if offered as proof of the contents thereof. The reason for this is that
such copies are mere scraps of paper and are of no probative value as
basis for any deficiency income or business taxes against a taxpayer.
FACTS:
The respondent is a corporation duly organized and existing under the
laws of the Philippines. Being engaged in the sale of plastic products, it
imports synthetic resin and other chemicals for the manufacture of its
products. For this purpose, it is required to file an Import Entry and
Internal Revenue Declaration (Consumption Entry) with the Bureau of
Customs under Section 1301 of the Tariff and Customs Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-
Intelligence Division of the Economic Intelligence and Investigation
Bureau (EIIB), received confidential information that the respondent had
imported synthetic resin amounting to P115,599,018.00 but only
declared P45,538,694.57.
Thus, Hantex receive a subpoena to present its books of
account which it failed to do. The bureau cannot find any
original copies of the productsHantex imported since the originals
were eaten by termites. Thus, the Bureau relied on the certified
copies of the respondent’s Profit and Loss Statement for 1987
and1988 on file with the SEC, the machine copies of the Consumption

Entries, Series of 1987, submitted by the informer, as well as
excerpts from the entries certified by Tomas and Danganan. The
case was submitted to the CTA which ruled that Hantex have tax
deficiency and is ordered to pay, per investigation of the
Bureau.
CA’s decision:
The income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import
entries relied upon in computing the deficiency tax of the respondent
were not duly authenticated by the public officer charged with their
custody, nor verified under oath by the EIIB and the BIR investigators.
The CA added that the CTA should not have just brushed aside the legal
requisites provided for under the pertinent provisions of the Rules of
Court in the matter of the admissibility of public documents, considering
that substantive rules of evidence should not be disregarded.
ISSUE:
Whether the December 10, 1991 final assessment of the petitioner
against the respondent for deficiency income tax and sales tax for the
latters 1987 importation of resins and calcium bicarbonate is based on
competent evidence and the law.
RULING:
NO.
Section 16 of the NIRC of 1977, as amended, provides
that the Commissioner of I n t e r n a l R e v e n u e h a s t h e
power to make assessments and prescribe additional
requirements for tax administration and enforcement. Among such
powers are those provided in paragraph (b), which provides that “Failure
to submit required returns, statements, reports and other documents. –
When a report required by law as a basisfor the assessment of any
national internal revenue tax shall not be forthcoming within
the time fixed by law or regulation or when there is reason to believe
that any such report is false, incomplete or erroneous, the
Commissioner shall assess the p r o p e r t a x o n t h e b e s t
evidence obtainable.” This provision applies when the
Commissioner of Internal Revenue undertakes to perform her
administrative duty of assessing the proper tax against a taxpayer, to
make a return in case of a taxpayer’s failure to file one, or to amend a
return already filed in the BIR. The “best evidence” envisaged in Section
16 of the 1977 NIRC, as amended, includes the corporate and
accounting records of the taxpayer who is the subject of the assessment
process, the a c c o u n t i n g r e c o r d s o f o t h e r t a x p a y e r s
e n g a g e d i n t h e s a m e l i n e o f b u s i n e s s , including their
gross profit and net profit sales. Such evidence also includes
data, record, paper, document or any evidence gathered by internal
revenue officers from other taxpayers who had personal transactions or
from whom the subject taxpayer received any income; and
record, data, document and information secured from
government offices or agencies, such as the SEC, the Central Bank of the
Philippines the Bureau of Customs, and the Tariff and Customs
Commission.
However, the best evidence obtainable under Section 16 of
the 1977 NIRC, as amended, does not include mere photocopies of
P a g e | 23
records/documents. The petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot anchor the said
assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if
offered as proof of the contents thereof. The reason for this is that such
copies are mere scraps of paper and are of no probative value as basis
for any deficiency income or business taxes against a taxpayer.
QUICK DIGEST:
FACTS:
The respondent is a corporation duly organized and existing under the
laws of the Philippines. Being engaged in the sale of plastic products, it
imports synthetic resin and other chemicals for the manufacture of its
products. For this purpose, it is required to file an Import Entry and
Internal Revenue Declaration (Consumption Entry) with the Bureau of
Customs under Section 1301 of the Tariff and Customs Code.
(EIIB) received confidential information that the respondent had
imported synthetic resin amounting to P115,599,018.00 but only
declared P45,538,694.57.
Thus, Hantex receive a subpoena to present its books of
account which it failed to do. T he bureau cannot find any
original copies of the productsHantex imported since the originals
were eaten by termites. Thus, the Bureau relied on the certified
copies of the respondent’s Profit and Loss Statement for 1987
and1988 on file with the SEC.
ISSUE:
Whether the December 10, 1991 final assessment of the petitioner
against the respondent for deficiency income tax and sales tax for the
latters 1987 importation of resins and calcium bicarbonate is based on
competent evidence and the law.
RULING:
NO.
Section 16 of the NIRC of 1977, as amended, provides that
the Commissioner of I n t e r n a l R e v e n u e h a s t h e p o w e r t o
m a k e a s s e s s m e n t s a n d p r e s c r i b e a d d i t i o n a l requirements
for tax administration and enforcement. Among such powers are those
provided in paragraph (b), which provides that “Failure to submit
required returns, statements, reports and other documents. – When a
report required by law as a basisfor the assessment of any
national internal revenue tax shall not be forthcoming within
the time fixed by law or regulation or when there is reason to believe
that any such report is false, incomplete or erroneous, the
Commissioner shall assess the p r o p e r t a x o n t h e b e s t
evidence obtainable.”
The “best evidence” envisaged in Section 16 of the 1977 NIRC,
as amended, includes the corporate and accounting records of the
taxpayer who is the subject of the assessment process, the
accounting records of other taxpayers engaged in
 P a g e | 24

t h e s a m e l i n e o f b u s i n e s s , including their gross profit

and net profit sales.

However, the best evidence obtainable under Section 16 of

the 1977 NIRC, as amended, does not include mere photocopies of
records/documents. The petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot anchor the said
assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if
offered as proof of the contents thereof. The reason for this is that such
copies are mere scraps of paper and are of no probative value as basis
for any deficiency income or business taxes against a taxpayer.