G.R. No.

L-7988 January 19, 1916

THE YOUNG MEN'S CHRISTIAN ASSOCIATION OF MANILA, plaintiff-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Facts:

The city of Manila, contending that the property is taxable, assessed it and levied a tax
thereon. It was paid under protest and this action begun to recover it on the ground that
the property was exempt from taxation under the charter of the city of Manila. The
decision was for the city and the association appealed.

The Young Men’s Christian Association came to the Philippine with the army of
occupation in 1898. When the large body of troops in Manila was removed to
permanent quarters at Fort William McKinley in February, 1905, an independent
association for Manila was organized under the direction of the Army and navy
departments. Shortly after the organization of the association the directors made a
formal request to the international committee of the Young Men’s Christian Association
in New York City for the assistance and cooperation of its foreign department. A site for
the new building was selected on Calle Concepcion, Ermita, and the building contract
was let on the 8th of January following. The cornerstone was laid with appropriate
ceremonies on July 10, 1908, and the building was formally dedicated on October 20,
1909.

The purposes of the association, as set forth in its charter and constitution, are:

To develop the Christian character and usefulness of its members, to improve the
spiritual, intellectual, social and physical condition of young men, and to acquire, hold,
mortgage, and dispose of the necessary lands, buildings and personal property for the
use of said corporation exclusively for religious, charitable and educational purposes,
and not for investment or profit.

The purposes of this association shall be exclusively religious, charitable and

educational, in developing the Christian character and usefulness of its members and in
improving the spiritual, mental, social and physical condition of young men.

Issue:

Whether or not the building and grounds of the Young Men’s Christian Association of
Manila are subject to taxation exemption?

Held:

Yes. While the court is aware that there are many decisions holding that institutions of
this character are not exempt from taxation; but, on investigation, the court finds that the

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majority of them are based on statutes much narrower than the one under consider and
that in all probability the decisions would have been otherwise if the court had been
passing on a statute similar to ours. On the other hand, there are many decisions of the
courts in the United States founded on statutes like the Philippine statute which hold
that associations of this class are exempt from taxation. The court have examined all of
the decisions, both for and against, with care and deliberation, and is convinced that the
weight of authority sustains the positions it takes in this case.

There is no doubt about the correctness of the contention that an institution must
devote itself exclusively to one or the other of the purpose mentioned in the
statute before it can be exempt from taxation; but the statute does not say that it
must be devoted exclusively to any one of the purposes therein mentioned. It
may be a combination of two or three or more of those purposes and still be
entitled to exempt. The Young Men's Christian Association of Manila cannot be
said to be an institution used exclusively for religious purposes, or an institution
used exclusively for charitable purposes, or an institution devoted exclusively to
educational purposes; but the court believes it can be truthfully said that it is an
institution used exclusively for all three purposes, and that, as such, it is entitled
to be exempted from taxation.

The judgment appealed from is reversed and the cause remanded with instructions to
enter a judgment against the city of Manila and in favor of the Young Men's Christian
Association of Manila in the sum of P6,221.35.

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G.R. No. L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial

Assessor, petitioner,
vs.
HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of
Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF
BANGUED, INC., represented by Bishop Odilo etspueler and Reverend Felipe
Flores, respondents.

FACTS:

The Province of Abra sought to tax the properties of The Roman Catholic Bishop of
Bangued, Inc. Desirous of being exempted from a real estate tax, the latter filed a
petition for declaratory relief on the ground that other than being exempted from
payment of real estate taxes, its properties are also “being actually, directly and
exclusively used for religious or charitable purposes as sources of support for the
bishop, the parish priest and his helpers.” After conducting a summary hearing,
respondent Judge Hernando granted the exemption without hearing the side of
petitioner. The petitioner then filed a motion to dismiss but the same was denied.
Hence, this present petition for certiorari and mandamus alleging denial of procedural
due process.

ISSUE: Whether or not the properties of the church in this case is exempt from taxes.

HELD:

The 1935 and the 1973 Constitutions differ in language as to the exemption of religious
property from taxes as they should not only be “exclusively” but also “actually” and
“directly” used for religious purposes. Herein, the judge accepted at its face the
allegation of the Bishop instead of demonstrating that there is compliance with
the constitutional provision that allows an exemption. There was an allegation of
lack of jurisdiction and of lack of cause of action, which should have compelled the
judge to accord a hearing to the province rather than deciding the case immediately in
favor of the Bishop. Exemption from taxation is not favored and is never presumed,
so that if granted, it must be strictly construed against the taxpayer. There must
be proof of the actual and direct use of the lands, buildings, and improvements
for religious (or charitable) purposes to be exempted from taxation.

The case was remanded to the lower court for a trial on merits.

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G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner,

vs.
HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,
Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued,
Abra; HEIRS OF PATERNO MILLARE, respondents.

Facts:

Petitioner, filed a complaint in the court a quo to annul and declare void the “Notice of
Seizure’ and the “Notice of Sale” of its lot and building located at Bangued, Abra, for
non-payment of real estate taxes and penalties. The “Notice of Sale” was caused to be
served upon the petitioner by the respondent treasurers for the sale at public auction of
said college lot and building, which sale was held on the same date. Dr. Paterno Millare,
then Municipal Mayor of Bangued, Abra, offered the highest bid which was duly
accepted. the respondent filed through counsel a motion to dismiss the complaint.
Nonetheless, the trial court disagreed because of the use of the second floor by the
Director of petitioner school for residential purposes. He thus ruled for the government
and rendered the assailed decision. Hence petitioner instead availed of the instant
petition for review on certiorari with prayer for preliminary injunction before the Supreme
Court. Adrian Avilado Antazo

Issue:

Whether the Educational Institution Properties which is not exclusively used for
educational purposes is not eligible for tax exemption.

Held:

Yes, Under the 1935 Constitution, the trial court correctly arrived at the conclusion that
the school building as well as the lot where it is built, should be taxed, not because the
second floor of the same is being used by the Director and his family for residential
purposes, but because the first floor thereof is being used for commercial purposes.
However, since only a portion is used for purposes of commerce, it is only fair that half
of the assessed tax be returned to the school involved. Moreover, the exemption in
favor of property used exclusively for charitable or educational purposes is ‘not limited
to property actually indispensable’ therefor but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said purposes. But it must be
stressed however, that while the court allows a more liberal and non-restrictive
interpretation of the phrase “exclusively used for educational purposes”, reasonable
emphasis has always been made that exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main purposes.

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Otherwise stated, the use of the school building or lot for commercial purposes is
neither contemplated by law, nor by jurisprudence, The lease of the first floor thereof to
the Northern Marketing Corporation cannot by any stretch of the imagination be
considered incidental to the purpose of education.
G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to

assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of
Tax Appeals (CTA) in En Banc Case No. 622.

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division
(CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case
No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841
and 198941 both stemmed from CTA En Banc Case No. 671 filed by DLSU to also
challenge CTA Case No. 7303

Facts:

In 2004, the Bureau of Internal Revenue (BIR) issued a letter authorizing it’s revenue
officers to examine the book of accounts of and records for the year 2003 De La Salle
University (DLSU) and later on issued a demand letter to demand payment of tax
deficiencies for:

Income tax on rental earnings from restaurants/canteens and bookstores operating

within the campus;

Value-added tax (VAT) on business income; and Documentary stamp tax (DST) on
loans and lease contracts for the years 2001,2002, and 2003, amounting to
P17,303,001.12.

DLSU protested the assessment that was however not acted upon, and later on filed a
petition for review with the Court of Tax Appeals (CTA). DLSU argues that as a non-
stock, non-profit educational institution, it is exempt from paying taxes according to
Article XIV, Section 4 (3) of the Constitution (All revenues and assets of non-stock, non-
profit educational institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties.)

The CTA only granted the removal of assessment on the load transactions. Both CIR
and DLSU moved for reconsideration, the motion of the CIR was denied. The CIR
appealed to the CTA en banc arguing that DLSU’s use of its revenues and assets for
non-educational or commercial purposes removed these items from the exemption, that

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a tax-exempt organization like DLSU is exempt only from property tax but not from
income tax on the rentals earned from property. Thus, DLSU’s income from the leases
of its real properties is not exempt from taxation even if the income would be used for
educational purposes.

DLSU on the other hand offered supplemental pieces of documentary evidence to prove
that its rental income was used actually, directly and exclusively for educational
purposes and no objection was made by the CIR.

Thereafter, DLSU filed a separate petition for review with the CTA En Banc on the
following grounds:

The entire assessment should have been cancelled because it was based on an invalid
LOA;
Assuming the LOA was valid, the CTA Division should still have cancelled the entire
assessment because DLSU submitted evidence similar to those submitted by Ateneo
De Manila University (Ateneo) in a separate case where the CTA cancelled Ateneo’s tax
assessment; and

The CTA Division erred in finding that a portion of DLSU’s rental income was not proved
to have been used actually, directly and exclusively for educational purposes.
That under RMO No.43-90, LOA should cover only 1 year, the LOA issued by CIR is
invalid for covering the years 2001-2003

The CTA en banc ruled that the case of Ateneo is not applicable because it involved
different parties, factual settings, bases of assessments, sets of evidence, and
defenses, it however further reduced the liability of DLSU to P2,554,825.47

CIR argued that the rental income is taxable regardless of how such income is derived,
used or disposed of. DLSU’s operations of canteens and bookstores within its campus
even though exclusively serving the university community do not negate income tax
liability. Article XIV, Section 4 (3) of the Constitution must be harmonized with Section
30 (H) of the Tax Code, which states among others, that the income of whatever kind
and character of [a non-stock and non-profit educational institution] from any of [its]
properties, real or personal, or from any of (its] activities conducted for profit regardless
of the disposition made of such income, shall be subject to tax imposed by this Code.
that a tax-exempt organization like DLSU is exempt only from property tax but not from
income tax on the rentals earned from property. Thus, DLSU’s income from the leases
of its real properties is not exempt from taxation even if the income would be used for
educational purposes.

DLSU argued that Article XIV, Section 4 (3) of the Constitution is clear that all
assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes
and duties. Under the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force

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and effect. Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a non- stock and non-profit educational
institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should
be declared without force and effect in view of the constitutionally granted tax
exemption on “all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes.“

that it complied with the requirements for the application of Article XIV, Section 4 (3) of
the Constitution.

Issue:

I. Whether DLSU is taxable as a non-stock, non-profit educational

institution whose income have been used actually, directly and
exclusively for educational purposes.

II. Whether the entire assessment should be void because of the defective LOA.

Held:

First issue:

A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not
require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of
revenues. Thus, so long as the revenues and income are used actually, directly
and exclusively for educational purposes, then said revenues and income shall
be exempt from taxes and duties.

The court find it helpful to discuss at this point the taxation of revenues versus the
taxation of assets.

Revenues consist of the amounts earned by a person or entity from the conduct of
business operations. It may refer to the sale of goods, rendition of services, or the return
of an investment. Revenue is a component of the tax base in income tax, VAT, and
local business tax (LBT).

Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity. It may refer to real estate, cash deposit in a bank, investment in the
stocks of a corporation, inventory of goods, or any property from which the person or
entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT).
Also, the landed cost of imported goods is a component of the tax base in VAT on

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importation and tariff duties. Thus, when a non-stock, non-profit educational institution
proves that it uses its revenues actually, directly, and exclusively for educational
purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand,
when it also shows that it uses its assets in the form of real property for educational
purposes, it shall be exempted from RPT.

The last paragraph of Section 30 of the Tax Code without force and effect for
being contrary to the Constitution insofar as it subjects to tax the income and
revenues of non-stock, non-profit educational institutions used actually, directly
and exclusively for educational purpose. The court make this declaration in the
exercise of and consistent with this duty to uphold the primacy of the Constitution.

The court holds that the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt from duties and
taxes.

Second Issue:

No. “A Letter of Authority LOA should cover a taxable period not exceeding one taxable
year. The practice of issuing LOAs covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the LOA.”
The requirement to specify the taxable period covered by the LOA is simply to inform
the taxpayer of the extent of the audit and the scope of the revenue officer’s authority.
Without this rule, a revenue officer can unduly burden the taxpayer by demanding
random accounting records from random unverified years, which may include
documents from as far back as ten years in cases of fraud audit.

The assessment for taxable year 2003 is valid because this taxable period is specified
in the LOA. DLSU was fully apprised that it was being audited for taxable year 2003.
While the assessments for taxable years 2001 and 2002 are void for having been
unspecified on separate LOAs as required under RMO No. 43-90.

The court DENIED the petition of the Commissioner of Internal Revenue in G.R.
No. 196596 and AFFIRM the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals En Banc in CTA En Banc Case No. 622 ,
except for the total amount of deficiency tax liabilities of De La Salle University, Inc.,
which had been reduced.

The court also DENIED both the petition of De La Salle University, Inc. in G.R. No.
198841 and the petition of the Commissioner of Internal Revenue in G.R. No. 198941
and thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the
Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with the MODIFICATION
that the base for the deficiency income tax and VAT for taxable year 2003 is
₱343,576.70.

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